China

I. BACKGROUND

1. Introduction

Statistic released by the Ministry of Commerce (“MOFCOM”) stated that by the end of 2008, the total amount invested in 2008 was US$ 92.395billion, 23.58 % more than in 2007. China’s accession to the World Trade Organisation has unleashed unprecedented foreign investment.

Over the past few years, multinational manufacturers have expanded production within China, aiming to streamline costs, increase profit margins and expand into one of the world’s fastest growing consumer markets. The classic route for foreign investors was to establish an equity joint venture, a co-operative joint venture or a wholly foreign owned enterprise.

Instead of launching start-ups, many foreign investors are now considering acquisitions, while traditional joint ventures are increasingly rejected in favour of majority shareholdings, if not full ownership. As well as low labour costs, foreign investors are placing greater emphasis on goodwill, supply of raw materials and the distribution networks, all of which enable them to lift market share more quickly.

However, there have always been legal issues for foreign investors to overcome. China was lack of systematic law on mergers and acquisitions and there were limited provisions in Chinese company law, contract law, administrative regulations and notices to facilitate the establishment of Sino-foreign activities within China.

Now, the legal climate has changed. Certain M&A-related regulations, including the Provisional Regulations on Reforming State Owned Enterprises with Foreign Investment (effective January 2003), the Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors (effective September 2006) and the Provisional Regulations on Transfer of State Ownership of Chinese Enterprises (effective February 2004), are all now in place. These rules increase disclosure, transparency and certainty in the M&A regulatory regime and seek to ensure that state assets are not sold or transferred at below what the PRC Government regards as their proper value. They make it possible for mergers and acquisitions to be structured with more certainty. These regulations provide foreign investors with broader opportunities to acquire shares in State-owned enterprises and domestic enterprises and to acquire legal person shares of listed companies. On the other hand, the PRC government strengthens the control of mergers and acquisitions activities in particular, activities in relation to special purpose vehicles.

2. PRC Government Policy

Current PRC government policies indicate strong support for the mergers and acquisitions market. The PRC Government policies enhance the privatisation of the State-owned sector, one of the examples is the recent announcement of the restructuring of State assets of 117 State-owned enterprises totalling RMB 22.7 billion through M&A in Changchun, the capital of northeast China’s Jilin province.

3. World Trade Organisation (“WTO”)

China’s integration into the world economy has already accelerated upon China’s entry into WTO. To meet the challenges of being a member country of WTO, China is readjusting its foreign investment policies, shifting the emphasis from traditional joint and cooperative ventures to transnational purchases.
 

II. Common Types of Mergers and Acquisitions in China

1. Direct Equity Acquisition

A foreign investor may directly purchase all or part of the non-listed equity interest of a target company from one or more of the existing investors. Alternatively, the foreign investor can subscribe for increased capital of a target company.

Direct acquisitions are subject to the approval of the Chinese authorities. This type of acquisition tends to be more preferred for PRC State vendors since this type of acquisition will assist them to divest themselves out of the liabilities as well as the assets of the enterprise.

2. Indirect Acquisitions

A foreign investor can acquire or increase control a target company by purchasing some or all of the offshore shares held by the target company’s foreign parent(s). However, this type of acquisition is only available if the PRC target company has foreign investors’ equity.

As the transaction can be completed entirely offshore, it does not require approval of the PRC authorities. Also, from a PRC regulatory point of view, it is not necessary to obtain consent from any other shareholders of the PRC target company or from the board of directors of the PRC target company.

3. Asset Acquisition

A foreign investor can use a newly established foreign-funded enterprise or an existing foreign-funded enterprise as an acquiring vehicle to purchase directly some or all of the business and assets of a target company. A definite advantage of asset acquisitions is that a foreign investor can select its preferred assets and businesses of the target company. All the existing obligations, liabilities or restrictions of the target company will therefore remain with the target company.

The foreign investor is required to establish a registered office/agent in China in the form of a foreign-funded enterprise to acquire and operate domestic assets. Separate approvals from the PRC authorities are required for a foreign-funded enterprise which is established for the purpose of acquiring the assets of the PRC target company.

4. Acquisition of Corporation with State-owned Interests

Interests in State-owned enterprises in China can be acquired by direct equity acquisition or by the asset acquisition as mentioned above. Certain special regulations govern acquisitions of State-owned interests, in particular the State-owned Enterprise Restructuring Regulations (effective from 1 January 2003) and the Provisional Regulations on Transfer of State ownership of Chinese Enterprises (effective from 1 February 2004), together with the Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (effective from 12 April 2003), are all now in place.
 

III. Laws and Regulations of Mergers and Acquisitions in China

There are two important regulations governing the acquisition of assets and shares of State-owned enterprises and wider general regulations on mergers and acquisitions by foreign investors in China:

1. Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors (“M&A Rules”)

On 8 August 2006, MOFCOM, State Assets Supervision and Administration Commission of the State Council (“SASAC”), the State Administration of Taxation (“SAT”), the State Administration of Industry and Commerce (“SAIC”), the China Securities Regulatory Commission (“CSRC”) and the State Administration of Foreign Exchange (“SAFE”) jointly issued the M&A Rules, which became effective on 8 September 2006. The M&A Rules regulate all types of mergers and acquisitions involving foreign investment under the supervision of the MOFCOM.

This is one of the most important regulations in relation to mergers and acquisitions by foreign investors in China. The key features of the M&A Rules are:

(A) Scope

Article 2 of the M&A Rules provides that they are applicable to acquisitions of domestic non-foreign-funded PRC enterprises (hereinafter referred to as “domestic company”) by foreign investors. They apply to:

(a) Share Acquisitions (“equity-based takeover”)

  1. To transform a domestic company into a foreign-funded enterprise by acquiring equities of shareholders in a domestic company by agreement entered into between the domestic company and the foreign investor ; or
  2. to transform a domestic company into a foreign-funded enterprise by subscribing of additional registered capital in a domestic company by the foreign investor.

(b) Asset Acquisition (“asset-based takeover”)

  1. To establish a new foreign-funded enterprise and purchase assets in a domestic company by agreement entered into between the domestic company and the newly established foreign-funded enterprise and to operate the assets in the domestic company through the newly established foreign-funded enterprise; or
  2. to purchase assets in a domestic company by agreement entered into between the domestic company and the foreign investor and to invest those assets into a newly established foreign-funded enterprise for operating the assets in the domestic company.

MOFCOM takes the view that the M&A Rules shall apply to any target company incorporated as a company under PRC Company Law. Therefore, the M&A Rules apply to limited liability companies and companies limited by shares, including State-owned enterprises incorporated as limited liability companies and companies limited by shares.

(B) Foreign Investors Qualifications

The M&A Rules do not replace any existing foreign investment laws and regulations, in fact, the M&A Rules provide guidance and implementation techniques in mergers and acquisitions. Along with other foreign investment laws and regulations in the PRC, all foreign investments must follow guidelines provided in the Catalogue of Industries for Guiding Foreign Investment (“Industry Catalogue”) which delineate the categories of encouraged, permitted, restricted and prohibited industries for foreign investment. An enterprise engaged in an “encouraged” business, for example, development and production of food for baby, elderly and functional food may qualify for local (and generally more lenient) approval processes. The M&A Rules do not serve as an exception to the Industry Catalogue, which means that no acquisitions of either shares or assets are allowed if the target industry falls within the prohibited category and there are different restrictions set upon the acquisition if the target industry falls within the restricted category.

(C) A New Type of Foreign Invested Enterprise

Article 9 of the M&A Rules provides that in the event a foreign investor’s contribution falls below 25%, this will be noted as a remark on the approval certificate, business licence and a Foreign Exchange Register Certificate of the foreign-funded enterprise. Such type of foreign-funded enterprise would not be able to take advantage of any preferential treatment available to a foreign-funded enterprise with 25% or more of contribution by the foreign investor.

(D) Asset Assessment

Article 14 of the M&A Rules provides that the acquisition price of the equities to be transferred or the assets to be sold, must be based on an asset assessment given by an asset assessment institution. In order to reflect the government’s sensitivity to tax evasion and prohibit diversion of any capital abroad in any disguised form, the M&A Rules expressly prohibit setting an acquisition price significantly below the assessed value of the equities to be transferred or the assets to be sold. Within these boundaries, existing laws and regulations generally allow the parties to freely negotiate the transfer price. However, transactions involving state-owned equity interests or assets must comply with special regulations on the management of state-owned assets. There are also separate regulations governing the disposal of assets of state-owned interests.

Under the M&A Rules, an asset assessment institution which is lawfully established within the PRC may be used. However what often happens is that a foreign investor will also appoint an international assessment institution to provide a benchmark for the value of the assets and to assist in the negotiations with the domestic asset assessment institution.

(E) Creditors’ Rights

Under the M&A Rules, a disposal of shares does not affect the creditors’ rights of a domestic enterprise. Article 13 of the M&A Rules provides that for a share-based takeover, the foreign-funded enterprise established after takeover will succeed to all the credits and debts of the domestic company.

For an asset-based takeover, the domestic company shall undertake its former debts and credits. In addition, the domestic company is required to send a notice to its creditors and publish an announcement in a newspaper circulated nationwide not later than 15 days before the foreign investor submits the application documents for approval. The foreign investor, the domestic company, creditors and other parties concerned can enter into separate contractual agreements regarding the disposition of the obligations and creditors’ rights of the domestic company provided that these agreements do not impair the interests of any third party or the public interest. These agreements must also be submitted to the approval authorities in the PRC.
 

(F) Payment of Consideration

Article 16 of the M&A Rules provides that the purchaser must pay the vendor the whole amount of consideration within three (3) months after issuance of the business licence to the newly established foreign-funded enterprise after the equity-based takeover or asset-based takeover. However, an extension may be granted subject to approval, so that 60% is payable within six (6) months after issuance of the business licence, and the remaining balance of the consideration is payable within one year.

In the case of the foreign investor subscribes for the increased capital in an equity-based takeover, at least 20% of the newly increased registered capital shall be paid when the domestic company applies for a business licence for a newly established foreign-funded enterprise. The time to pay the other newly increased registered capital shall be in line with the company law, the laws on foreign investments and the Regulation on the Administration of Company Registration.

(G) Registered Capital Share

According to Article 18 of the M&A Rules, in the case of an equity-based takeover, the registered capital of the newly established foreign-funded enterprise shall be the same as that of the original domestic company. On the other hand, if a foreign investor subscribing for the increased portion of registered capital of the newly established foreign-funded enterprise, the registered capital of the foreign-funded enterprise will be the sum of the registered capital of the domestic company and the newly subscribed capital by the foreign investor. The relative ownership percentages between the foreign investor and the existing shareholders of the domestic company are determined on the basis of the assessed value of the assets of the domestic company.

(H) Ratios Between Registered Capital And Total Investment

Article 19 of the M&A Rules also set out the upper limits of the total investments to the foreign-funded enterprises after takeovers. Unless otherwise stated, the upper limits shall be determined according to the following rates:

  1. if registered capital is US$2.1 million or less, the total amount of investment shall not exceed 10/7 of registered capital;
  2. if registered capital is more US$2.1 million and less than US$5 million (including US$5 million), the total amount of investment shall not exceed two times of the registered capital;
  3. if registered capital is more than US$5 million but less than US$12 million (including US$12 million), the total amount of investment shall not exceed 2.5 times of the registered capital; and
  4. if registered capital is more than US$12 million, the total amount of investment shall not exceed three times of the registered capital.

(I) Application, Examination and Approval Procedures

For both an equity-based takeover and asset-based takeover, a foreign investor shall submit the following documents in accordance with the laws, regulations and rules on the establishment of a foreign-funded enterprise to the to the authorities for approval:

  1. shareholders’ resolutions of the domestic company for passing the equity-based takeover or a resolution of the person or authority who is entitled to the right of the assets of the domestic company for the consent of the sale of assets;
  2. an application for the establishment of the foreign-funded enterprise;
  3. an contract and the articles of association of the foreign-funded enterprise to be established after takeover;
  4. an agreement on the foreign investor’s acquisition of equities of shareholders of the domestic company or on the foreign investor’s subscription of the capital increase of the domestic company or an asset agreement signed by the foreign-funded enterprise to be established or the foreign investor and the domestic company;
  5. for equity-based takeover, the previous year financial audit report of the domestic company;
  6. the notarised and certified documents of the identity, registration and credit standing of the foreign investor;
  7. for asset-based takeover, the notice of the takeover and the announcement to the creditors of the domestic company and the statement of non-rejections raised by the creditors in respect of the takeover;
  8. for equity-based takeover, the duplicates of the business licence of the domestic company; and for asset-based takeover, the articles of association and duplicates of the business licence of the domestic company;
  9. the proposal of the arrangement of employees in the domestic company; and
  10. the documents as referred in Articles 13, 14 and 15 of the M&A Rules.

If the business scope, scale, land-use right of a foreign-funded enterprise established after takeover are subject to the licence of the relevant government departments, the relevant licencing documents shall be submitted along with the documents as listed above.

The decision for approval or disapproval of the takeover shall be made within 30 days after the approval authority receives the whole set of documents as required.

(J) Anti-Competition

Article 51 of the M&A Rules set out an anti-competition framework relating to foreign investment.

If any of the following situations is present in a proposed acquisition of a domestic company, the foreign investor should file a report with the MOFCOM and SAIC:

  1. turnover of any party to the takeover in the China market exceeds RMB 1.5 billion in the current year;
  2. the foreign investor has cumulatively acquired more than 10 domestic enterprises in related industries;
  3. the China market share of any party to the takeover has reached 20%; or
  4. The takeover will result in the China market share of any party reaching 25%.

The aforesaid party includes the connected enterprise of the foreign investor.

If a transaction does not involve any of the above four sets of circumstances, it may still be subject to anti-competition review. If MOFCOM or SAIC believes that a transaction may result in excessive market concentration, harm to legitimate competition or damage to consumer interests, they have the discretion to call hearings involving relevant departments, institutions, enterprises and other interested parties, and may disapprove the transaction on the basis of such hearings.

(K) Equity-payment-based Merger and Acquisition

The PRC government regulates a new type of merger and acquisition that shall be done by an overseas listed company or a Special-purpose Vehicle (“SPV”). The “equity-payment-based takeover of a domestic enterprise by a foreign investor” means that the shareholders of an overseas company purchase the equities or the increased capital of a domestic company by paying the equities of the overseas company it holds, or that an overseas company purchases the equities or the increased capital of a domestic company by paying its increased shares.

a. According to Article 29 of the M&A Rules, the equities of the domestic and overseas company involved in the equity-based takeover of a domestic company by a foreign investor shall meet the following conditions:

  1. the shares are lawfully held by the shareholders and may be transferred in accordance with the law;
  2. there is no dispute over their ownership, they are not held in pledge and they are not subject to any other limit of right;
  3. the equities of an overseas company shall be listed publicly in an overseas lawful securities exchange market (excluding the over-counter exchange market); and
  4. the transaction price of the equities of the overseas company in the recent 1 year remains stable.
    The Items (iii) and (iv) are inapplicable to SPVs.

b. According to Article 39 of the M&A Rules, SPV refers to an overseas company which a domestic company or natural person directly or indirectly controls for the purpose of making its actual domestic company equities get listed abroad.

According to Article 41 of the M&A Rules, the domestic company with its equities listed abroad shall satisfy the following conditions:

  1. its property right is clear. There is no dispute or potential dispute over its property right;
  2. it has a complete business system and a good sustainable operation capacity;
  3. it has a sound corporate governance structure and internal management system; and
  4. the company and its main shareholders have no record of serious violation of any law or regulation in recent 3 years.

According to Article 44 and Article 32 of the M&A Rules, where a SPV intends to take over a domestic company by equities, the domestic company shall apply for the approval by the MOFCOM and submit not only the documents as required in Chapter III of the M&A Rules, but also the following documents:

  1. A statement of the changes of equities and important changes of assets of the domestic company within the recent 1 year;
  2. A takeover consultant’s report;
  3. The business opening certifications or identity certification documents of the relevant domestic and overseas companies and their shareholders;
  4. Descriptions about the equities held by the shareholders of the overseas company, and the name list of the shareholders who hold 5 % or more of the equities of the overseas company;
  5. The articles of association of the overseas company and a description about the guaranties it provides to outsiders; and
  6. The recent annual financial statements upon audit and a report on the stock dealings of the overseas company in the recent half year.
  7. The approval documents and certificate for the investor to run an enterprise abroad at the time of establishment of the special-purpose company;
  8. The foreign exchange register form for the overseas investments of the special-purpose company;
  9. The identity certification documents or the business opening certification and articles of association of the final controller of the special-purpose company;
  10. The business plan on the overseas listing of the special-purpose company; and
  11. The assessment report made by the takeover consultant on the price of the stocks to be issued by the special-purpose company to get listed abroad in the future.

And if the parties concerned makes an overseas company, which holds the equities of a special-purpose company, serve as a subject to get listed abroad, the domestic company shall, apart from the aforesaid documents, submit the following documents:

  1. The business opening certification and the articles of association of the overseas company; and
  2. The arrangement of the special-purpose company and the overseas company for the transaction of the equities of the domestic company taken over, as well as the detailed descriptions of the method to convert the equities to money.

According to Article 45 of the M&A Rules, the approval certificate issued by the MOFCOM for the SPV’s merger and acquisition only extends 1 year, which means that the SPV shall complete the listing overseas within one year; otherwise, the domestic entity’s equity structure will resume to the state prior to the equity-based takeover. Therefore, since the implementation of this new M&A Rules, seldom red-chip listings were successful.
 

2. The Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors (the “Strategic Investment Measures”)

The new M & A rule regulates the strategic purchase of the listed equity. Following this rule, the MOFCOM, CSRC, SAT, SAIC, and SAFE on 31 December 2005 jointly released the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors and the Strategic Investment Measures became effective on 31 January 2006.

(A) Strategic Investor Qualification

An investor shall satisfy following qualification for making strategic investment:

  1. It is a foreign legal person or other organization that is established and operated according to law, with sound finance, good credit standing, and mature management experiences;
  2. Its total overseas paid-in capital shall be no less than USD 100 million or the total overseas paid-in capital under its management shall be no less than USD 500 million; or the total overseas paid-in capital of its overseas parent company is no less than USD 100 million or the total overseas paid-in capital under the management of its parent company shall be no less than USD 500 million;
  3. It has sound governance structure and sound internal control system, and criterions for management acts; and
  4. It (including its parent company) has no records of grave penalties by any regulatory institution both home and abroad within the past three years.

And when making strategic investment, an investor shall also comply with the following requirements:

  1. The A share stock of a listed company is obtained by way of transfer under an agreement or directional issuance of new shares by the listed company or by any other means as prescribed by any state law or regulation;
  2. The investment may be made by stages, the proportion of shares obtained by it after completing initial investment shall be no lower than 10% of the shares having been issued by the company, unless there are special provisions in a special industry or it is approved by the competent departments;
  3. The A share stock of a listed company obtained by the investor shall not be transferred within 3 years;
  4. For the industry for which there are clear provisions by any law or regulation on the proportion of shares held by a foreign investor, the proportion of shares of the aforesaid industries held by an investor shall comply with the relevant provisions; for any fields to which foreign investment is prohibited by any law or regulation, the investor shall not make investment in any listed company in the aforesaid field; and
  5. In case any state-owned shareholder of a listed company is involved, it shall comply with the relevant provisions on state-owned assets administration.

(B) Procedures and Documents

The investor may make strategic investment by way of directional issuance of a listed company or transfer under an agreement.

In the case of the strategic investment is made by way of directional issuance of a listed company, it shall be handled in light of the following procedures:

  1. The board of directors of the listed company adopts the resolutions on directional issuance of new shares to investors and amendments of the draft of the articles of association of the company;
  2. The shareholders’ meeting of the listed company adopts the resolutions on directional issuance of new shares to investors and amendments of the articles of association of the company;
  3. The listed company enters into a directional issuance contract with the investor;
  4. The listed company submits the relevant application documents to the MOFCOM in accordance with Article 12 of the Strategic Investment Measures, if there is any special provision, it shall be followed;
  5. After obtaining the approval letter in principle from the MOFCOM for the strategic investment in the listed company by an investor, the listed company shall submit the application documents for directional issuance to CSRC, and CSRC shall grant approval according to law; and
  6. After completing the directional issuance, the listed company shall obtain the certificate of approval for foreign-funded enterprises from the MOFCOM, and proceed with the alteration in registration at the Administrative Department of Industry and Commerce upon receipt of the certificate of approval.

However, in the case of any strategic investment is made by way of transfer under an agreement, it shall be handled in light of the following procedures:

  1. The board of directors of a listed company adopts the resolutions on the strategic investment of an investor by way of transfer under an agreement;
  2. The shareholders’ meeting of a listed company adopts the resolutions on the strategic investment of an investor by way of transfer under an agreement;
  3. The transferor enters into a share transfer agreement with the investor;
  4. The investor submits the relevant application documents to the MOFCOM in accordance with Article 12 of the Strategic Investment Measures, if there is any special provision, it shall be followed;
  5. If an investor takes stake in a listed company, he/she shall proceed with the procedures for confirmation of share transfer at the Securities Exchange upon the approval of the aforesaid application. An investor shall also proceed with account transfer registration at the Securities Depository and Clearing institution. The documentation as aforementioned shall be sent to CSRC for filing; and
  6. After the completion of the transfer under an agreement, the listed company shall obtain the certificate of approval for foreign-funded enterprises from the MOFCOM, and proceed with alteration in registration at the Administrative Department of Industry and Commerce upon the receipt of certificate of approval.
  7. In case an investor intends to actually control a listed company by way of transfer under an agreement, it shall, after obtaining the approval in light of the procedures of items (i) through (iv) abovementioned, submit the report on the acquisition of a listed company and the relevant documents to the CSRC, and comply with the formalities for confirmation of the share transfer at the Stock Exchange after the CSRC has made examination and has no dissent, then apply for registration and transfer at the Securities Depository and Clearing institution. After completing the aforesaid formalities, the investor shall proceed with the procedure set out in item (vi) abovementioned.

A listed company or investor shall also submit the following documents to the MOFCOM:

  1. Application Letter for Strategic Investment;
  2. Strategic Investment Scheme;
  3. Directional issuance contract or share transfer agreement;
  4. Opinions of a recommendation institution (in case of a directional issuance) or legal opinions;
  5. The letter of commitment for holding shares incessantly by the investor;
  6. Statements of the investor on its having no records of grave punishment by any regulatory institution both home and abroad within three years, and statements on whether it has any other record of non-grave penalties;
  7. The registration certificate of the investor that has been notarized and certified according to law, and the identity certificate of the legal representative (or the authorized representative);
  8. The statements of assets and liabilities of the investor in recent three years, which have been audited by a certified accountant;
  9. The documents to be submitted as prescribed in the aforesaid items (1), (2), (3), (5), and (6) shall be signed by the legal representative of the investor or its authorized representative, if the documents are signed by the authorized representative, the power of attorney signed by the legal representative and the corresponding notarized or certified documents shall be submitted; and
  10. Other documents as prescribed by the MOFCOM.

The MOFCOM shall give approval letter in principle within 30 days after the receipt of all the aforesaid documents, and the valid period of the approval letter in principle shall be 180 days.

3. Interim Provisions on Restructuring State Owned Enterprises with Foreign Investment (“SOE Restructuring Provisions”)

The SOE Restructuring Provisions were issued jointly by the State Economic and Trade Commission, the Ministry of Finance, SAIC and SAFE and became effective on 1 January 2003.

(A) Applicability and Scope

With reference to Article 3 of the SOE Restructuring Provisions, there are five methods of restructuring State Owned Enterprise (“SOE”) using foreign capital:

  1. foreign investors may restructure a SOE into a foreign-funded enterprise by acquiring all or part of the State interest in a SOE;
  2. foreign investors may restructure a SOE or a company-based enterprise consisting of state-owned shares (“state-owned company”) into a Foreign-funded enterprise by acquiring all or part of the shares in a SOE;
  3. foreign investors may acquire from domestic creditors, debt owed to them by the SOE and restructure such enterprise into a foreign-funded enterprise;
  4. foreign investors may acquire all or the majority of the assets of a SOE or a state-owned company and subsequently establish a foreign-funded enterprise jointly with that SOE and state-owned company separately from the assets purchased from that SOE and state-owned company; and
  5. foreign investors may subscribe for increased registered capital including new/additional shares of a SOE or a state-owned company, and subsequently convert such enterprise into a foreign-funded enterprise.

(B) Foreign Investor Qualifications

Foreign investors wishing to take part in the restructuring of a SOE must meet the following criteria:

  1. having the management qualifications and technical skills required by the restructured enterprise;
  2. having good business credit standing and management skills; and
  3. having good financial standing and economic strengths;

As is often the case with foreign investor qualifications set out in PRC legislation, these qualifications are highly subjective, and it is unclear from the SOE Restructuring Provisions how or by whom such conditions will be defined.

(C) Required Reorganisation Plan

A reorganization plan, which is in many respects similar to the “feasibility study report” required for all foreign-funded enterprises, must be submitted by the reorganising party of the SOE, highlighting information about the foreign investor, its financial status, its business scope and equity structure, and plan for settlement of staff. In addition, it appears from the SOE Restructuring Provisions that, in permitting foreign investment in the restructuring of SOEs, one of the State’s requirements is the introduction of sound corporate governance into the target SOE. Article 5 of the SOE Restructuring Provisions specifically requires foreign investors to provide plans to improve the enterprise’s corporate governance structure and promote sustained growth of the SOE. Such a restructuring plan must also include measures for strengthening corporate management and a plan of investment, and provide for the introduction and development of new products and technology. The submission of a reorganisation plan is a new requirement for foreign investors.
 

(D) Employee Protection

The SOE Restructuring Provisions specifically impose requirements for ensuring the welfare of SOE employees and require the SOE being reorganized to first seek the opinions of the employees’ congress of the SOE. Also, in the event that a controlling interest in the SOE will pass to the foreign investor upon acquisition, or if all or the main business assets of the SOE will be sold to the foreign investor, the reorganising party of the SOE must formulate a plan for settling the staff and such plan is subject to the approval of the employees’ congress of the SOE.

While these specific employee protection requirements are new to foreign investors, the absorption of, and responsibility for, the staff of their Chinese partners is not. However, the effect of these new requirements may be that SOEs will have more leverage in negotiations with foreign investors over the number of employees to be absorbed by a foreign-funded enterprise after completion of an acquisition.

The reality is that personnel are the key to a successful transaction. Consultation with staff is often beneficial in any event in China to allay unrest. Otherwise, this will delay the process considerably. In many cases, management are the key to a successful acquisition. They have access to information about the business necessary to carry out a due diligence process. Their support in agreeing the terms of the transaction and obtaining local government support can be crucial. The reality is that foreign investors buying SOEs in most cases need to agree incentive packages with existing management regarding their retention and remuneration after the acquisition to achieve a successful transaction. Having management on side can be one of the main means of reducing acquisition risk by ensuring a higher level of knowledge and transparency regarding the business operations before acquisition.

(E) Approvals and Procedures

The approval thresholds and procedures under the SOE Restructuring Provisions mirror in many respects existing foreign investment rules. According to Article 9, the reorganisation plan must be submitted to the State Economic and Trade Commission for examination (Commissions and departments under the State Council undergone a systematic reform during 2003 and a new commission, SASAC, was established to overtake the function of state assets supervision under the previous State Economic and Trade Commission.). Therefore, the relevant reorganisation plan should be submitted to SASAC for approval at present. The same US$30 million threshold used in establishing a foreign-funded enterprise is used for determining the level of approval required under the SOE Restructuring Provisions.

Upon receipt of an official reply from the SASAC regarding the reorganisation plan, an acquisition agreement entered into by the reorganising party of the SOE and the foreign investor must be submitted for approval in accordance with the provisions of the Circular on Issuing the Provisional Regulations on the Enterprises’ State Owned Assets and Financial Administration (No. 325, 2001, Caiqi) issued by the Ministry of Finance. Several documents are required to be submitted along with the acquisition agreement:

  1. the registration certificate of state owned property rights;
  2. information of the ratification or record filing of the auditing and assets evaluation reports of the reorganising party;
  3. a staff and worker settlement program;
  4. an agreement for settling claims and debts;
  5. a restructuring plan;
  6. resolutions of the reorganizing party and the SOE; and
  7. the opinions or resolution of the congress of the staff and workers of the SOE.

Upon receipt of approval of the reorganising plan and the acquisition agreement, the reorganising party or the SOE must then proceed with the examination and approval procedures for foreign-funded enterprises in accordance with the relevant foreign-funded enterprises rules and the PRC Company Law. While it is not explicitly stated in the SOE Restructuring Provisions, MOFCOM has confirmed its jurisdiction over this examination and approval for the establishment of foreign-funded enterprises, and as such it will be the final authority for approval.

Upon completion of these approval procedures, registration procedures must be followed in accordance with the Industry Catalogue and other applicable laws, and foreign investors must pay for the acquisitions in freely convertible currency from abroad. However, similar to other acquisitions in China by foreign investors, foreign investors may use their RMB profits derived from their existing operations in China to purchase their interests.

4. Interim Measures for the Management of the Transfer of the State-owned Property Right of Enterprises (“Measures on Property Transfer”)

SASAC has issued Measures on Property Transfer in relation to the sale of any state-owned interests, effective from 1 February 2004. These are the latest issue of regulations and provide for certain procedural and other formalities regarding the transfer of state owned assets.

(A) Approval Procedures and Documents

The documents which need to be submitted to the SASAC in relation to any transfer of State-owned assets for approval are as follows:

  1. relevant resolutions relating to the transfer of State-owned assets;
  2. proposal on transfer of State-owned assets (normally including basic information of the target company, contents of announcement of the transfer, proposal on the treatment of revenues resulting from the transfer, etc.);
  3. State-owned Assets Registration Certificate of the vendor and the target company;
  4. legal opinion from a PRC lawyer;
  5. documents related to the basic requirements of the purchaser; and
  6. any other documents requested by the relevant approval authorities.

(B) Procedures on Transfer of State-owned Assets

The Measures on Property Transfer set forth certain procedures for transferring State-owned assets. Although the Measures on Property Transfer do not only relate to acquisitions by foreign investors, some of the procedural requirements for transferring State-owned assets set out therein are very important in the context of acquisitions of SOEs or any assets with State-owned interests by foreign investors. The following are the highlights of the more important procedures in the Measures on Property Transfer:

  1. adequate research on the feasibility on transfer of State-owned assets to be carried out in accordance with any internal regulations;
  2. obtain the approval or decision to transfer the state-owned property rights;
  3. a domestic asset appraisal should be conducted and the result shall form the basis of the consideration of the transfer. In the event that during the course of the transaction the consideration is lower than 90% of the asset appraisal, the transaction shall be suspended until approval from the relevant approving authorities is obtained;
  4. the vendor of State-owned assets shall announce the transfer in the press and the website of the assets and disclose the details of the transfer in order to induce potential purchasers of such assets. The vendor can set out certain criteria for inviting potential purchasers such as financial situation, goodwill and management capability;
  5. in the event that there are two or more potential purchasers interested in the relevant State-owned assets, the vendor shall discuss with the relevant authorities and shall according to the situation of the target company organize auctions or bids to determine the purchaser;
  6. generally, the consideration shall be paid in a one-off payment. However, the payment can be by instalments. The first tranche of the payment must be at least 30% of the total consideration and shall be made within five days from the effective date of the sale and purchase agreement. The purchaser must provide a legally binding guarantee for the outstanding consideration and pay interest to the vendor in accordance with the lending rate at that time. All the remaining consideration has to be paid within one year.

The Measures on Property Transfer include complicated procedures and formalities for transferring State-owned assets by the government.

Translations (for reference only) of the M&A Rules, the SOE Restructuring Provisions and the Provisional Regulations on Transfer are included in the Schedule hereto.

Please note that this memorandum is for general information purposes only. Specific legal advice should be sought in relation to any particular situation..

February 2009
 

Schedule 1

Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors

(NB: This is not a definitive translation)

(The Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors, which amended and adopted at the 7th executive meeting of the Ministry of Commerce of the People’s Republic of China, are hereby promulgated and shall come into force as of September 8, 2006.)

Chapter I General Provisions

Article 1 For the purposes of promoting and regulating foreign investors’ investments in China, absorbing advanced technologies and management experiences from abroad, improving the level of utilizing foreign investments, realizing the reasonable allocation of resources, ensuring employment, as well as maintaining fair competition and state economic security, these provisions are formulated in accordance with the laws and administrative regulations on foreign-funded enterprises, the Company Law and other relevant laws and administrative regulations.

Article 2 The phrase “takeover of a domestic enterprise by a foreign investor” as mentioned in the present provisions means that the foreign investor purchases by agreement the equities of the shareholders of a domestic non-foreign-funded enterprise (hereinafter referred to as “domestic company”) or subscribes to the increased capital of a domestic company, and thus changes the domestic company into a foreign-funded enterprise (hereinafter referred to as “share right takeover”); or, a foreign investor establishes a foreign-funded enterprise, and through which it purchases by agreement the assets of a domestic enterprise and operates its assets, or, a foreign investor purchases by agreement the assets of a domestic enterprise, and then invest such assets to establish a foreign-funded enterprise and operate the assets (hereinafter referred to as “asset takeover”).

Article 3 To take over a domestic enterprise, a foreign investor shall abide by the laws, administrative regulations, and rules of China, comply with the principles of fairness, reasonableness, making compensation for equal value, as well as good faith, and shall not cause excessive centralization, exclude or limit competition, or disturb the social economic order, or damage the public benefits, or result in any loss to the state-owned assets.

Article 4 To take over a domestic enterprise, a foreign investor shall satisfy the requirements of the laws, administrative regulations, and rules of China concerning the qualifications of investors, and shall comply with the policies on the industry, land, environmental protection, etc.

For the industries where solely foreign-owned operation is not permitted by the “Catalog of Industries for the Guidance of Foreign Investment”, the takeover shall not lead to the consequence of a foreign investor’s holding all the equity rights of the enterprise; for the industries where it is required for a Chinese party to control or relatively control the shares, the Chinese party shall, after an enterprise in such industries is taken over, still control or relatively control the shares of the enterprise; for the industries where foreign investors are prohibited from operation, no foreign investor shall take over any enterprise in such industries.

The business scope of any enterprise invested by the domestic enterprise prior to the takeover shall meet the requirements in the industrial policies on foreign investments. If it does not, adjustment shall be made.

Article 5 If the takeover of a domestic enterprise by a foreign investor involves the transfer of state-owned property rights of the enterprise and management of state-owned property rights of listed companies, the relevant provisions on the management of state-owned assets shall be followed.

Article 6 Where a foreign investor intends to establish a foreign-funded enterprise by merging a domestic enterprise, it shall, in accordance with these Provisions, be subject to the approval of the examination and approval organ and modify the registration or go through the establishment registration in the registration administrative organ.

If the enterprise to be taken over is a domestic listed company, it shall, pursuant to the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors, go through the relevant formalities in the securities regulatory institution of the State Council.

Article 7 All parties concerned to the takeover of a domestic enterprise by a foreign investor shall pay taxes under Chinese tax laws and accept the supervision of the tax organs.

Article 8 All parties concerned to the takeover of a domestic enterprise by a foreign investor shall abide by the laws and administrative regulations of China on the administration of foreign exchange. They shall timely go through the approval, register, archival filing and modification formalities in the foreign exchange control organs.
 

Chapter II Basic System

Article 9 For a foreign-funded enterprise established after takeover by a foreign investor, if the foreign investor’s proportion of investments exceeds 25% of the registered capital of this enterprise, this enterprise shall be entitled to enjoy the treatments to foreign-funded enterprises.

For a foreign-funded enterprise established after takeover by a foreign investor, if the foreign investor’s proportion of investments is less than 25% of the registered capital of this enterprise, this enterprise shall not enjoy the treatments to foreign-funded enterprises unless it is otherwise provided for by any law or administrative regulation. It shall follow the relevant provisions on borrowing foreign loans by non-foreign-funded enterprises when it borrows foreign loans. The examination and approval organ shall issue to it a Foreign-funded Enterprise Approval Certificate (hereinafter referred to as the Approval Certificate”) with the remark “The proportion of foreign investments is less than 25%”. The registration administrative organ and the foreign exchange control organ shall respectively issue to it a Foreign-funded Enterprise Business License and a Foreign Exchange Register Certificate with the remark “The proportion of foreign investments is less than 25%”.

Where a domestic company, enterprise or natural person takes over a domestic affiliated company in the name of an overseas company it lawfully established or controls, the foreign-funded enterprise so established shall not enjoy the treatments to foreign-funded enterprises, except that this overseas company subscribes to the increased capital of the domestic company or that it increases the capital of the enterprise established after takeover and the proportion of the capital increase exceeds 25% of the registered capital of the enterprise so established. For a foreign-funded enterprise established in either of the forms as mentioned in this paragraph, if the proportion of investments made by a foreign investor, who is not its actual controller, exceeds the 25% of its registered capital, it shall be entitled to enjoy the treatments to foreign-funded enterprises.

The treatments to a foreign-funded enterprise which is established after a foreign investor takes over a domestic listed company shall be governed by the relevant provisions of the state.

Article 10 The term “examination and approval organ” as mentioned in these Provisions refers to the Ministry of Commerce of the People’s Republic of China (hereinafter referred to as the MOFCOM) or the provincial commerce administrative departments (hereinafter referred to as the provincial examination and approval organs”). The term “registration administrative organ” refers to the State Administration for Industry and Commerce (hereinafter referred to as the SAIC) or its authorized local administrations for industry and commerce. The term “foreign exchange control organ” refers to the State Administration of Foreign Exchange (hereinafter referred to as the SAFE) or its branches.

Under the provisions of laws, administrative regulations, and rules, if a foreign-funded enterprise established after takeover falls within any special category or sector of foreign-funded enterprises which are subject to the examination and approval of the Ministry of Commerce (hereinafter referred to as the MOFCOM), the provincial examination and approval organ shall forward the application materials to the MOFCOM for examination and approval. The MOFCOM shall make a decision of approval or disapproval in pursuance of law.

Article 11 Where a domestic company, enterprise or natural person intends to take over its domestic affiliated company in the name of a company which it lawfully established or controls, it shall be subject to the examination and approval of the MOFCOM.

The parties concerned shall not dodge the aforesaid requirements by making investments within China through the foreign-funded enterprise, or by other ways.

Article 12 Where a foreign investor intends to obtain the actual controlling power of a domestic enterprise it plans to take over, and if any important industry is concerned, or if it has an impact on or may have an impact on the national economic security, or it will lead to the transfer of the actual controlling power of a domestic enterprise which holds a famous trademark or China Time-honored Brand, the parties concerned shall file an application with the MOFCOM.

If the parties concerned fail to do so, but its takeover has had or may have a serious impact on the national economic security, the MOFCOM may, jointly with the relevant departments, demand the parties concerned to terminate the transaction or transfer the relevant equities / assets or take other effective measures to eliminate the takeover’s impact on the national economic security.

Article 13 For an equity-based takeover by a foreign investor, the foreign-funded enterprise established after takeover shall succeed to the credits and debts of the domestic company it takes over.

For an asset-based takeover by a foreign investor, the domestic enterprise which sells its assets shall undertake its former credits and debts.

The foreign investor, the domestic enterprise to be taken over, the creditors and other parties concerned may enter into a separate agreement on the disposal of the credits and debts of the domestic enterprise to be taken over, provided that this agreement shall not impair the interests of any third party or public interests. An agreement on the disposal of credits and debts shall be submitted to the examination and approval organ.

A domestic enterprise to sell assets shall, not later than 15 days before the investor submits the application documents to the examination and approval organ, send a notice to the creditors and shall publish an announcement on a provincial newspaper or above, which is circulated nationwide.

Article 14 The parties to a takeover shall determine the transaction price on the basis of the assessment result of the equities to be transferred or of the assets to be sold, which is given by an asset assessment institution. The parties to a takeover may agree on an asset assessment institution lawfully established within China. A common international assessment method shall be adopted for the asset assessment. It is prohibited to divert any capital abroad in any disguised form by transferring any equities or selling assets at a price which is obviously lower than the assessment result.

The takeover of a domestic enterprise by a foreign investor, which may cause the modification of any equity formed by investments to state-owned assets or transfer of the property right of state-owned assets, shall satisfy the relevant provisions on the management of state-owned assets.

Article 15 The parties to a takeover shall state whether there is a connected relationship between the parties to the takeover. If both parties belong to a same actual controller, the parties shall disclose their actual controller to the examination and approval organ and make an explanation about whether the purpose of takeover and the assessment result conform to the fair value of the market. The parties shall not dodge the aforesaid requirements by trust, holding shares on behalf of others, or by other means.

Article 16 To establish a foreign-funded enterprise by taking over a domestic enterprise, a foreign investor shall, within 3 months from the date of issuance of business license to the foreign-funded enterprise, pay all the considerations to the shareholders who transfer the equities or to the domestic enterprise which sells the assets. In the case of any particular circumstance under which it is necessary to extend the time limit, the foreign investor shall, upon the approval of the examination and approval organ, pay 60% or more of the consideration within 6 months as of the date of issuance of the business license to the foreign-funded enterprise, and pay off the balance of consideration within one year, and distribute the proceeds according to the proportion of investments it has actually contributed.

Where a domestic company subscribes to the increased capital of a domestic company, the shareholders of the limited liability company or of the domestic joint stock limited company established by way of promotion shall pay at least 20% of the newly increased registered capital when the company applies for a business license for foreign-funded enterprise. The time to pay the other newly increased registered capital shall be in line with the Company Law, the laws on foreign investments and the Regulation on the Administration of Company Registration. If it is provided for in any other law or administrative regulation, such law or administrative regulation shall prevail. Where a joint stock limited company increase the registered capital by issuing new stocks, the shareholders shall subscribe to the new stocks in accordance with the relevant provisions on the payment for shares in the establishment of a joint stock limited company.

Where a foreign investor carries out an asset takeover, it shall stipulate the time limit for contribution of investments in the contract and articles of association of the foreign-funded enterprise to be established. Where the foreign investor establishes a foreign-funded enterprise, and through which purchases the assets of a domestic enterprise and operates such assets, it shall contribute the investments equivalent to the consideration of the assets within the time limit for payment of consideration as provided for in Paragraph 1 of the present Article. As for the remaining investments, the time limit for contribution shall satisfy the relevant provisions on the capital contribution for the establishment of foreign-funded enterprise.

Where a foreign investor establishes a foreign-funded enterprise by merging a domestic enterprise, if its investment proportion is less than 25 % of the registered capital of the enterprise and if it plans to make investments in cash, it shall make full contribution within 3 months from the day when a business license is issued to the foreign-funded enterprise; if it plans to make investments in kind or industrial property, it shall make full contribution within 6 months from the day when a business license is issued to the foreign-funded enterprise.

Article 17 The means of payment for the consideration shall conform to the relevant laws and administrative regulations of the state. If the foreign investor uses the Renminbi assets it lawfully owns as a means of payment, it shall obtain the approval of the department of foreign exchange control. If the foreign investor uses the shares over which it has the right of disposition, it shall comply with Article 4 of these Provisions.

Article 18 After a foreign investor purchases the equities of a domestic company by agreement, and the domestic company has been modified into a foreign-funded enterprise, the foreign-funded enterprise’s registered capital shall be the registered capital of the original domestic company, and the proportion of investments contributed by the foreign investor shall be the proportion of the purchased equities in the original registered capital.

Where a foreign investor subscribes to the capital increase of a domestic limited liability company, the registered capital of a foreign-funded enterprise established after the takeover shall be the summation of the registered capital of the former domestic company and the amount of capital increase. As to the foreign investor and other shareholders of the former domestic company it takes over, their respective proportion of capital contributions to the foreign-funded enterprise shall be determined on the basis of the assessment of the assets of the domestic company.

Where a foreign investor subscribes the capital increase of a domestic joint stock limited company, the registered capital shall be determined under the Company Law.

Article 19 For an equity-based takeover by a foreign investor, the upper limits on the total investments to the foreign-funded enterprise after takeover shall be determined according to the following rates, unless the state provides otherwise:

  1. If the registered capital is less than US$ 2.1 million, the total investments shall not exceed 10/7 of the registered capital;
  2. If the registered capital is not less than US$ 2.1 million but not more than US$ 5 million, the total investments shall not exceed two times the registered capital;
  3. If the registered capital is not less than US$ 5 million but not more than US$ 12 million, the total investments shall not exceed 2.5 times the registered capital; and
  4. If the registered capital is more than US$ 12 million, the total investments shall not exceed 3 times the registered capital.

Article 20 For an asset-based takeover, the foreign investor shall, according to the transaction price for the purchased assets and the actual production and operation scale, determine the total investments to the foreign-funded enterprise to be established. The proportion between the registered capital and total investments of the foreign-funded enterprise to be established shall conform to the relevant provisions.

Chapter III Examination, Approval and Registration

Article 21 For an equity-based takeover, a foreign investor shall, pursuant to the total investments of the foreign-funded enterprise to be established after the takeover, the type of the enterprise and the industry it engages in, submit the following documents to the competent examination and approval organ in accordance with the laws, administrative regulations, and rules on the establishment of foreign-funded enterprises:

  1. A resolution of the shareholders of the domestic limited liability company or of the domestic joint stock limited company on the full consent to the equity-based takeover or asset-based takeover by the foreign investor;
  2. An application for the establishment of the foreign-funded enterprise;
  3. An contract and the articles of association of the foreign-funded enterprise to be established after takeover;
  4. An agreement on the foreign investor’s acquisition of equities of shareholders of the domestic company or on the foreign investor’s subscription of the capital increase of domestic companies;
  5. The previous-year financial audit report of the domestic company taken over;
  6. The certification documents for the identity, registration and credit standing of the investor that have been notarized and certified according to law;
  7. The descriptions about the enterprises invested by the domestic enterprise taken over;
  8. The (duplicates) of the business licenses of the domestic company taken over and enterprises it invests in;
  9. The proposal on the settlement of employees domestic enterprise taken over;
  10. The documents to be submitted as required by Articles 13 through 15 of the present provisions.

If the business scope, scale, obtainment of land use right of a foreign-funded enterprise established after takeover are subject to the license of the relevant government departments, the relevant licensing documents shall be submitted along with the documents as listed in the preceding Paragraph.

Article 22 An equity purchase agreement, or domestic company capital increase agreement shall be governed by Chinese law and shall contain the following contents:

  1. The status of each party to the agreement, including The status of each party to the agreement, including the name and domicile of each party, the name, position and nationality of each legal representative;
  2. The proportion of price of the equities purchased or capital increase subscribed;
  3. The time period of the agreement, and the method of execution thereof;
  4. The rights and obligations of each party to the agreement;
  5. The liabilities for breach of contract, and settlement of disputes; and
  6. The time and place for the conclusion of agreement.

Article 23 For an asset-based takeover, the foreign investor shall, pursuant to the total investments of the foreign-funded enterprise to be established after the takeover, the type of the enterprise and the industry it engages in, submit the following documents to the competent examination and approval organ in accordance with the laws, administrative regulations, and rules on the establishment of foreign-funded enterprises:

  1. A resolution of the property right holders or power authority of the domestic enterprise on the consent to the sale of assets;
  2. An application for the establishment of a foreign-funded enterprise;
  3. A contract and the articles of association of the foreign-funded enterprise to be established;
  4. An asset purchase agreement signed by the foreign-funded enterprise to be established and the domestic enterprise, or by the foreign investor and the domestic enterprise;
  5. The articles of association and the business license (duplicate) of the domestic enterprise it has taken over;
  6. The notice of the domestic enterprise taken over, certifications of the creditors announced, and statement about whether the creditors have raised any objections;
  7. The certification documents for the identity, registration and credit standing of the investor that have been notarized and certified according to law;
  8. The proposal on the settlement of employees of the domestic enterprise that is taken over; and
  9. The documents as required by Articles 13 through 15 if these Provisions.

If the business scope, scale, obtainment of land use right of a foreign-funded enterprise establishment after takeover involve licensing of the relevant government departments, the relevant licensing documents shall be submitted along with the documents as listed in the preceding Paragraph.

Where a foreign investor purchases the assets of a domestic enterprise by agreement and invests such assets in establishing a foreign-funded enterprise, it shall not, prior to the establishment of the foreign-funded enterprise, carry out any business activities with such assets.

Article 24 The agreement on the purchase of assets shall be governed by Chinese law and shall contain the following main contents:

  1. The status of each party to the agreement, including the name and domicile of each party, the name, position and nationality of each legal representative;
  2. A list of the assets to be purchased and the price thereof;
  3. The time period and method for the execution of the agreement;
  4. The rights and obligations of each party to the agreement;
  5. The liabilities for breach of contract, and settlement of disputes;
  6. The time and place for the conclusion of the agreement.

Article 25 Where a foreign investor intends to establish a foreign-funded enterprise by taking over a domestic enterprise, unless it is otherwise provided for in these Provisions, the examination and approval organ shall, within 30 days after the examination and approval organ receives the complete set of documents as required, it shall make a decision of approval or disapproval. If it decides to make a decision of approval, the examination and approval organ shall issue to the foreign investor an approval certificate.

For a foreign investor which intends to purchase the equities of a domestic company by agreement, if the examination and approval organ makes a decision of approval, it shall simultaneously send a copy of the relevant approval documents to the foreign exchange control departments of the places where the equity transferor and the domestic company are located, respectively. The foreign exchange control department of the place where the equity transferor is located shall handle the foreign exchange registration for equity-transfer-based foreign investments, which indicates that the consideration to the foreign investor’s equity takeover has been fully paid.

Article 26 For an asset-based takeover, the foreign investor shall, within 30 days after it receives the approval document, apply to the registration administrative organ for establishment registration so as to fetch a foreign-funded enterprise business license.

For an equity-based takeover by a foreign investor, the domestic company taken over shall apply to the original registration administrative organ for modifying its registration in accordance with these Provisions. If the original registration administrative organ has registration jurisdiction, it shall, within 10 days after it receives the application documents, transfer these application documents to the competent registration administrative organ and simultaneously accompany them by the registration files of the domestic company. When the domestic company taken over applies for modifying the registration, it shall submit the following documents and shall be responsible for their genuineness and validity:

  1. An application for modifying registration;
  2. An agreement on the purchase of equities of the domestic company or on the subscription of increased capital of a domestic company by a foreign investor;
  3. The post-revision articles of association or revisions to the original articles of association, and the foreign-funded enterprise contract which shall be submitted in pursuance of law;
  4. The foreign-funded enterprise approval document;
  5. The certification for the qualifications of the foreign investor as the subject, or the identity certification of the foreign investor as a natural person;
  6. The post-revision name list of the members of the board of directors, the documents which state the name and domicile of the newly increased directors, and the documents on the appointment of the newly increased directors;
  7. Other relevant documents and certificates as required by the State Administration for Industry and Commerce.

The investor shall, within 30 days after it receives a foreign-funded enterprise business license, go through the registration formalities in the tax, customs, land administration and foreign exchange administration departments.

Chapter IV Equity-payment-based Takeover of Domestic Companies by Foreign Investors

Section 1 Conditions for Equity-payment-based Takeover

Article 27 The term “equity-payment-based takeover of a domestic enterprise by a foreign investor” means that the shareholders of an overseas company purchase the equities of a domestic company by paying the equities of the overseas company it holds, or that an overseas company purchases the increased capital of a domestic company by paying its increased shares.

Article 28 The term “overseas company” as mentioned in this Chapter shall be a lawfully established company, there is a sound system of company law in its registration place, and the company and its management level have no record of punishment by the regulatory institution within recent 3 years. Except for special-purpose companies as mentioned in Section 3 of this Chapter, an overseas company shall be a listed company and there shall be a sound securities dealing system in the place where it gets listed.

Article 29 The equities of the domestic and overseas companies involved in the equity-based takeover of a domestic company by a foreign investor shall meet the following conditions:

  1. They are lawfully held by the shareholders and may be transferred in accordance with the law;
  2. There is no dispute over their ownership, they are not held in pledge and they are not subject to any other limit of right;
  3. The equities of an overseas company shall be listed publicly in an overseas lawful securities exchange market (excluding the over-counter exchange market); and
  4. The transaction price of the equities of the overseas company in the recent 1 year remains stable.

The Items (3) and (4) of the preceding Paragraph is inapplicable to the special-purpose companies as mentioned in Section 3 of this Chapter.

Article 30 For an equity-based takeover of a domestic company by a foreign investor, the overseas company or its shareholders shall hire an intermediary institution registered within China to serve as a consultant (hereinafter referred to as the “takeover consultant”). The takeover consultant shall make duteous investigations to the genuineness of the takeover application documents, the financial status of the overseas company as well as whether the takeover meets the requirements of Articles 14, 28 and 29 of these Provisions, shall make a takeover consultant report and shall put forward express professional opinions on each of the aforesaid items.

Article 31 A takeover consultant shall satisfy the following conditions:

  1. Having a good reputation and having relevant practicing experiences;
  2. Having no record of serious violation of any law or regulation; and
  3. Being capable of investigating and analyzing the legal systems of the registration place of the overseas company and the place where the overseas company is get listed, as well as the financial status of the overseas company.

Section 2 Application Documents and Procedures

Article 32 An equity-based takeover of a domestic company by a foreign investor shall be subject to the examination and approval of the MOFCOM. The domestic company shall not only submit the documents as required in Chapter III of these Provisions, but also the following documents:

  1. A statement of the changes of equities and important changes of assets of the domestic company within the recent 1 year;
  2. A takeover consultant’s report;
  3. The business opening certifications or identity certification documents of the relevant domestic and overseas companies and their shareholders;
  4. Descriptions about the equities held by the shareholders of the overseas company, and the name list of the shareholders who hold 5 % or more of the equities of the overseas company;
  5. The articles of association of the overseas company and a description about the guaranties it provides to outsiders; and
  6. The recent annual financial statements upon audit and a report on the stock dealings of the overseas company in the recent half year.

Article 33 The MOFCOM shall, within 30 days after it receives a complete set of documents, examine a takeover application. If the relevant requirements are satisfied, it shall issue to the applicant an approval document, which is given the remark that “For the equity-based takeover of a domestic company by a foreign investor, it will be valid for 6 months as of the date of issuance of a business license.”

Article 34 The overseas company shall, within 30 days after it receives an aforesaid approval document, it shall modify the registration in the registration administrative organ and the foreign exchange control organ. The registration administrative organ and the foreign exchange control organ shall respectively issue to it a foreign-funded enterprise business license and a foreign exchange register certificate which are giventhe remark that “To be valid for 8 months as of the date of issuance”.

When a domestic company goes through the registration modification formalities in the registration administrative organ, it shall, in advance, submit an equity change application, the revised articles of association, the equity transfer agreement and other documents signed by the legal representative of the domestic company, which are aimed to resume the structure of equities.

Article 35 Within 6 months as of the date of issuance of a business license, the domestic company and its shareholders shall, in regard to the matters relating to the overseas company’s equities it plans to hold, apply to the MOFCOM and the foreign exchange control organ for going through the formalities for the examination, approval and registration of investments to run an enterprise abroad .

The parties concerned shall not only submit to the MOFCOM the documents as required in the Provisions on the Examination and Approval of Investment to Run Enterprises Abroad, but also a foreign-funded enterprise approval certificate with the said remark and a foreign-funded enterprise business license with the said remark. After the MOFCOM examines and approves the overseas company’s equities to be held by the domestic company or its shareholders, it shall issue to the applicant a Chinese enterprise overseas investment approval certificate and replace the foreign-funded enterprise approval certificate with a remark by one with no remark.

After a domestic company obtains a foreign-funded enterprise approval certificate without a remark, it shall, within 30 days, apply to the registration administrative organ and the foreign exchange control organ, for replacing the foreign-funded enterprise business license and the foreign exchange register certificate with a remark by new ones with no remark.

Article 36 With 6 months as of the date of issuance of a business license, if the domestic and overseas companies fail to finish the equity modification formalities, the approval certificate with a remark and the Chinese enterprise overseas investment approval certificate shall be invalidated automatically. The registration administrative organ shall, according to the equity modification registration application documents submitted by the domestic company in advance, examine and approve the modification registration and shall make the equity structure of the domestic company resume to the state prior to the takeover of equities.

In the case of failure to acquire the shares increased by a domestic company, before the registration administrative organ examines and approves the modification registration under the preceding Paragraph, the domestic company shall, pursuant to the Company Law, reduce the registered capital correspondingly and publish an announcement on a newspaper.

If the domestic company fails to go through the relevant registration formalities according to the preceding Paragraph, the registration administrative organ shall punish it in accordance with the Regulation on the Administration of Company Registration.

Article 37 After a domestic company obtains a foreign-funded enterprise approval certificate with a remark and a foreign exchange register certificate with a remark, it shall not distribute its profits to its shareholders, nor provide a guaranty to any connected company, nor make any payment to any outsider for the capital items such as the equity transfer, capital decrease or liquidation.

Article 38 A domestic company or its shareholders may, upon the strength of approval document with no remark and the business license with no remark issued by the MOFCOM and the registration administrative organ, go through the tax modification registration in the tax organ.

Section 3 Special Provisions on Special-purpose Companies

Article 39 The term “special-purpose company” refers to an overseas company which a domestic company or natural person directly or indirectly controls for the purpose of making its actual domestic company equities get listed abroad.

The provisions of this Section shall apply to a special-purpose company, which, for the purpose of getting listed abroad, its shareholders or the special-purpose company purchase (purchases) the equities of the shareholders of a domestic company or the share increase of a domestic company by paying with the equities of the special-purpose company it holds or by paying with the share-increase of the special-purpose company.

If the parties concerned makes an overseas company, which holds any equities of a special-purpose company, serve as a subject to get listed abroad, this overseas company shall satisfy the relevant requirements for the special-purpose company as described in this Section.

Article 40 The transaction for the overseas listing of a special-purpose company shall be subject to approval of the securities regulatory institution of the State Council.

The country or region where the special-purpose company gets listed shall have sound legal and regulatory systems, and securities regulatory institution of this country or region shall have signed a memorandum of cooperation and understanding with the securities regulatory institution of the State Council of China and keep an effective cooperation in the regulatory work.

Article 41 A domestic company with its equities listed abroad as mentioned in this Section shall satisfy the following conditions:

  1. Its property right is clear. There is no dispute or potential dispute over its property right;
  2. It has a complete business system and a good sustainable operation capacity;
  3. It has a sound corporate governance structure and internal management system; and
  4. The company and its main shareholders have no record of serious violation of any law or regulation.

Article 42 To set up a special-purpose company abroad, an overseas company shall apply to the MOFCOM for going through the examination and approval formalities. When doing so, the domestic company shall not only submit to the MOFCOM the documents as required in the Provisions on the Examination and Approval of Investment to Run Enterprises Abroad, but also the following documents:

  1. The identity certification documents on the final controller of the special-purpose company;
  2. The business plan on the overseas listing of the special-purpose company; and
  3. The assessment report made by the takeover consultant on the price of the stocks to be issued by the special-purpose company to get listed abroad in the future.

After the party who establishes or controls a special-purpose company obtains approval document for Chinese enterprise to make overseas investment, it shall apply to the foreign exchange control organ of the place where it is located for going through the formalities for the register of overseas investments.

Article 43 The total value of the stocks of a special-purpose company listed abroad shall not be lower than the value of the equities of the domestic company upon the assessment of the relevant asset assessment institution.

Article 44 Where a special-purpose company intends to take over a domestic company by equities, the domestic company shall not only submit to the MOFCOM the documents as required in Article 32 of these Provisions, but also the following documents:

  1. The approval documents and certificate for the investor to run an enterprise abroad at the time of establishment of the special-purpose company;
  2. The foreign exchange register form for the overseas investments of the special-purpose company;
  3. The identity certification documents on the final controller of the special-purpose company, or the business opening certification or articles of association of the special-purpose company;
  4. The business plan on the overseas listing of the special-purpose company; and
  5. The assessment report made by the takeover consultant on the price of the stocks to be issued by the special-purpose company to get listed abroad in the future.

If the parties concerned makes an overseas company, which holds the equities of a special-purpose company, serve as a subject to get listed abroad, the domestic company shall, apart from the aforesaid documents, submit the following documents:

  1. The business opening certification and the articles of association of the overseas company; and
  2. The arrangement of the special-purpose company and the overseas company for the transaction of the equities of the domestic company taken over, as well as the detailed descriptions of the method to convert the equities to money.

Article 45 If the MOFOCOM approves the documents as required in Article 44 of these Provisions upon preliminary examination, it shall issue a letter of in-principle approval. The domestic company shall, upon the strength of the letter of in-principle approval, submit to the securities regulatory institution of the State Council the application documents for getting listed. The securities regulatory institution of the State Council shall make a decision of approval or disapproval within 20 working days.

After the domestic company obtains an approval, it shall apply to the MOFCOM for an approval certificate. The MOFCOM shall issue to it an approval certificate with the remark “For holding equities of overseas special-purpose company, it shall be valid for 1 year as of the issuance of a business license”.

If the takeover causes the change of equities of the special-purpose company, the domestic company or natural person holding the equities of the special-purpose company shall, upon the strength of the foreign-funded enterprise approval certificate with a remark, apply to the MOFCOM for going through the formalities for the examination and approval of the change of the overseas investment to run an enterprise abroad and shall apply to the local foreign exchange control organ for modifying the foreign exchange register of overseas investments.

Article 46 The domestic company shall, within 30 days after it receives an approval document with a remark, apply to the registration administrative organ and the foreign exchange control organ for modifying the registration. The registration administrative organ and the foreign exchange control organ shall respectively issue to a foreign-funded enterprise business license and a foreign exchange register certificate with a remark “To be valid for 14 months as of the date of issuance”.

When the domestic company handles the modification registration in the registration administrative organ, it shall, in advance, submit the equity change application, the revised articles of association, the equity transfer agreement and other documents signed by the legal representative of the domestic company, which are aimed to resume the structure of equities.

Article 47 The domestic company shall, within 30 days after the special-purpose company or its connected overseas company realizes the overseas listing, report to the MOFOCOM about the information about the overseas listing and its plan on the transfer-back of the raised funds and apply for a unremarked foreign-funded enterprise approval certificate. At the same time, it shall, within 30 days after the realization of overseas listing, report to the securities regulatory institution of the State Council the information about the overseas listing and provide it with the relevant documents for archival purposes. It shall also submit to the foreign exchange control organ its plan on the transfer-back of the raised funds and execute this plan under the supervision of the foreign exchange control organ. It shall, within 30 days after it receives an unremarked approval certificate, apply to the registration administrative organ and foreign exchange control organ for replaying its foreign-funded enterprise business license and foreign exchange register certificate with a remark by a new unremarked one.

If the domestic company fails to report to the MOFCOM within the aforesaid time limit, its approval certificate with a remark shall be invalidated automatically, its equities structure will resume to the state prior to the equity-based takeover and it shall go through the formalities for modifying the registration in accordance with Article 36 of these Provisions.

Article 48 The funds of a special-purpose company raised from overseas listing shall, according to the transfer-back plan submitted to the foreign exchange control organ for archival purposes, be transferred back into China according to the existing foreign exchange control provisions. The raised funds may be transferred back into China by:

  1. providing commercial loans to the domestic company;
  2. setting up a new foreign-funded enterprise within China; and
  3. taking over a domestic enterprise.

To transfer back the funds of a special-purpose company raised overseas under the aforesaid circumstances, the relevant parties shall abide by the laws and administrative regulations on the administration of foreign investments and on foreign debts. If, as a consequence of the transfer-back of the funds a special-purpose company raised overseas, the domestic company or natural person who holds more equities of the special-purpose company or the net assets of the special-purpose company increase, the parties concerned shall faithfully disclose the relevant information and apply for examination and approval. After it finishes the examination and approval formalities, it shall go through the formalities for modifying the foreign exchange register of foreign investments and the register of overseas investments.

The profit, bonus and capital change income in a foreign currency obtained by the domestic company or natural person from the special-purpose company shall be transferred back to China within 6 months after the date of obtainment. The profit or dividends may enter into the foreign exchange account for current items or may be converted into RMB. The capital change income in a foreign currency may, upon the examination and approval of the foreign exchange control organ, be deposited in a special capital account opened for it or be converted into RMB.

Article 49 Within 1 year after the date of issuance of a business license, if the domestic company fails to obtain an unremarked approval certificate, the approval certificate with a remark shall be invalidated automatically. The domestic company shall go through the formalities for modifying the registration.

Article 50 After the special-purpose company has realized the overseas listing and the domestic company has obtained an approval certificate and a business license with no remark, if the relevant party concerned continues to take over this domestic company by paying its equities, the provisions of Sections 1 and 2 of this Chapter shall apply to this case.

Chapter V Antitrust Review

Article 51 If the takeover of a domestic company by a foreign investor is under any of the following circumstances, the investor shall report the relevant information to the MOFCOM and the State Administration for Industry and Commerce (hereinafter referred to as the SAIC):

  1. The current-year business volume of any party to the takeover in the Chinese market exceeds RMB 1.5 billion yuan;
  2. The foreign investor has accumulatively taken over more than 10 enterprises in the domestic relevant industries;
  3. The market share of any party to the takeover has reached 20% in China; and
  4. The takeover leads to the fact that the market share of the party to the takeover has reached 25% in China.

When the foreign investor fails to meet the conditions as mentioned in the preceding Paragraph, but upon request of a domestic enterprise of competitive relationship, a relevant functional department or industrial association, the MOFCOM or the SAIC believes that the takeover by the foreign investor involves a huge market share, or that there are other major factors which seriously impact market competition, it may also demand the foreign investor to prepare a report.

The aforesaid merging party includes the connected enterprises of the foreign investor.

Article 52 If the takeover of a domestic company by a foreign investor is under any of the circumstances as mentioned in Article 51 and if the MOFCOM and the SAIC believe that it may lead to excessive concentration, hamper fair competition or impair the interests of the consumer, they shall, within 90 days as of the receipt of all the documents as required, either solely convene through negotiation or jointly convene the relevant departments, institutions, enterprises and other interested parties and hold a hearing, and shall make a decision of approval or disapproval in accordance with the law.

Article 53 Where an overseas takeover is under any of the following circumstances, the parties to the takeover shall, before announcing the takeover proposal or when submitting the said proposal to the competent authority in the country of its locality, submit the takeover proposal to the MOFCOM and the SAIC. The MOFCOM and the SAIC shall examine whether it will lead to excessive centralization in the domestic market, hinder domestic fair competition, or damage the domestic consumers’ benefits, and shall make a decision on whether approve the proposal or not:

  1. The overseas party to the takeover owns more than RMB 3 billion Yuan of assets inside the territory of China;
  2. The business volume of the overseas party to the takeover in the Chinese market is more than RMB 1.5 billion yuan in the current year;
  3. The market share of the overseas party to the takeover and its connected enterprises in China has reached 20%;
  4. The market share of the overseas party to the takeover and its connected enterprises in China has reached 25% due to the overseas takeover; or
  5. Due to the overseas takeover, there will be more than 15 foreign-funded enterprises in the relevant domestic industries with direct or indirect shares of the foreign-funded enterprises.

Article 54 Where a takeover is under any of the following circumstances, the parties to the takeover may apply to the MOFCOM and the SAIC for exemption of examination:

  1. The takeover may improve the conditions for fair competition in the market;
  2. A loss-making enterprise is taken over and the employment is ensured;
  3. The takeover helps the absorption of advanced technologies and management personnel and is able to improve the enterprise’s international competitiveness; or
  4. The takeover may improve the environment.

Chapter VI Supplementary Provisions

Article 55 Where an investment company established by a foreign investor within China intends to take over a domestic enterprise, it shall be governed by these Provisions.

Where a foreign investor intends to purchase the equities of a foreign-funded enterprise within China or to subscribe to the increased capital of a foreign-funded enterprise within China, it shall be governed by the existing laws and administrative regulations on foreign-funded enterprises as well as the relevant provisions on changes of equities of investors of foreign-funded enterprise; if any matter is not covered by the aforesaid laws, administrative regulations or provisions, it shall be governed by these Provisions.

Where a foreign investor intends to combine with or take over a domestic enterprise through a foreign-funded enterprise established by it within China, it shall be governed by the relevant provisions on the combination and split-up of foreign-funded enterprises and the relevant provisions on domestic investments of foreign-funded enterprise; if any matter is not covered by the aforesaid provisions, it shall be governed by these Provisions.

Where a foreign investor takes over a domestic limited liability company, if it transforms it into a joint stock limited company, or if the domestic company is a joint stock limited company, it shall be governed by the relevant provisions on the establishment of a joint stock limited company; if any matter is not covered by the aforesaid provisions, it shall be governed by these Provisions.

Article 56 For the submission of documents, an applicant or declarer shall classify the documents into different categories under these Provisions and accompany them with a list of documents. All documents required to be submitted shall be written in Chinese.

Article 57 A Chinese natural-person shareholder of a domestic company taken over by equities may, upon approval, continue to be a Chinese investor of the foreign-funded enterprise established after modification.

Article 58 If a natural-person shareholder of a domestic company changes his nationality, the enterprise nature of the company will remain unchanged.

Article 59 The functionaries of the government organs shall be duteous, shall perform their duties in pursuance of the law, shall not seek any improper benefit by taking the advantage of their positions, and shall keep confidential the commercial secrets they have access to.

Article 60 Where an investor from Hong Kong Special Administrative Region, Macao Special Administrative Region or Taiwan Region intends to take over a domestic enterprise of any other region, it shall be governed by these Provisions.

Article 61 These Provisions shall come into force as of September 8, 2006.
 

Schedule 2

The Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors

(The Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors, which have been formulated by the Ministry of Commerce, China Securities Regulatory Commission, State Administration of Taxation, State Administration for Industry and Commerce, and State Administration of Foreign Exchange, are hereby promulgated, and shall come into force after 30 days as of the promulgation.)

Article 1 With a view to regulating the strategic investment of foreign investors in A share listed companies (hereinafter referred to as the listed companies) after share-trading reform, maintaining the order of securities market, introducing advanced overseas management experiences, technologies and capital, and improving the corporate governance of the listed companies, as well as protecting the lawful rights and interests of the listed companies and their shareholders, the present Measures are formulated in light of the requirements of the Guiding Opinions on Share-trading Reform of Listed Companies, and in accordance with the state laws and regulations on the supervision over foreign-funded companies and listed companies, as well as the Interim Provisions for Foreign Investors to Merge Domestic Enterprises.

Article 2 The present Measures shall be applicable to the acts of foreign investors (hereinafter referred to as the investors), who obtain the A share stock of the listed companies that have completed the share-trading reform and the newly listed companies after the share-trading reform through a scale of medium and long-term strategic merger investment (hereinafter referred to as the strategic investment).

Article 3 The investors may make strategic investment in the listed companies in accordance with the present Measures upon the approval of the Ministry of Commerce.

Article 4 The following principles shall be followed in the strategic investment:

  1. Abiding by the state laws, regulations, and the relevant industrial policies, and not impairing national economic security and public interests;
  2. Sticking to the principle of openness, justness and fairness, maintaining the lawful rights and interests of the listed companies and their shareholders, and accepting the supervision of the government and the general public, and the judicial and arbitration jurisdictions of China;
  3. Encouraging medium and long-term investment, and maintaining the normal order of the securities market, not making sensationalism; and
  4. Not obstructing fair competition, or resulting in excessive concentration of the relevant products markets, or elimination or restriction of competition.

Article 5 An investor shall comply with the following requirements when making strategic investment:

  1. It obtains the A share stock of a listed company by way of transfer under an agreement or directional issuance of new shares by the listed company or by any other means as prescribed by any state law or regulation;
  2. The investment may be made by stages, the proportion of shares obtained by it after completing initial investment shall be no lower than 10% of the shares having been issued by the company, unless there are special provisions in a special industry or it is approved by the competent departments;
  3. The A share stock of a listed company obtained by it shall not be transferred within 3 years;
  4. For the industry for which there are clear provisions by any law or regulation on the proportion of shares held by a foreign investor, the proportion of shares of the aforesaid industries held by an investor shall comply with the relevant provisions; for any fields to which foreign investment is prohibited by any law or regulation, the investor shall not make investment in any listed company in the aforesaid field; and
  5. In case any state-owned shareholder of a listed company is involved, it shall comply with the relevant provisions on state-owned assets administration.

Article 6 An investor shall comply with the following requirements:

  1. It is a foreign legal person or other organization that is established and operated according to law, with sound finance, good credit standing, and mature management experiences;
  2. Its total overseas paid-in capital shall be no less than USD 100 million or the total overseas paid-in capital under its management shall be no less than USD 500 million; or the total overseas paid-in capital of its overseas parent company is no less than USD 100 million or the total overseas paid-in capital under the management of its parent company shall be no less than USD 500 million;
  3. It has sound governance structure and sound internal control system, and criterions for management acts; and
  4. It (including its parent company) has no records of grave penalties by any regulatory institution both home and abroad within the past three years.

Article 7 In case the strategic investment is made by way of directional issuance of a listed company, it shall be handled in light of the following procedures:

  1. The board of directors of the listed company adopts the resolutions on directional issuance of new shares to investors and amendments of the draft of the articles of association of the company;
  2. The shareholders’ meeting of the listed company adopts the resolutions on directional issuance of new shares to investors and amendments of the articles of association of the company;
  3. The listed company signs a directional issuance contract with the investor;
  4. The listed company submits the relevant application documents to the Ministry of Commerce in accordance with Article 12 of the present Measures, if there is any special provision, it shall be followed;
  5. After obtaining the letter of principle reply of the Ministry of Commerce for the strategic investment in the listed company by an investor, the listed company shall submit the application documents for directional issuance to China Securities Regulatory Commission (hereinafter referred to as the CSRC), and the CSRC shall grant approval according to law; and
  6. After completing the directional issuance, the listed company shall obtain the certificate of approval for foreign-funded enterprises at the Ministry of Commerce, and go through alteration registration at the administrative department of industry and commerce upon the certificate of approval.

Article 8 In case any strategic investment is made by way of transfer under an agreement, it shall be handled in light of the following procedures:

  1. The board of directors of a listed company adopts the resolutions on the strategic investment of an investor by way of transfer under an agreement;
  2. The shareholders’ meeting of a listed company adopts the resolutions on the strategic investment of an investor by way of transfer under an agreement;
  3. The transferor signs a share transfer agreement with the investor;
  4. The investor submits the relevant application documents to the Ministry of Commerce in accordance with Article 12 of the present Measures, if there is any special provision, it shall be followed;
  5. If any investor takes stake in a listed company, it shall go through the formalities for confirmation of share transfer at the securities exchange after it has obtained the aforesaid approval, and apply for going through registration and transfer formalities at the securities depository and clearing institution, and report to the CSRC for archival filing; and
  6. After completing the transfer under an agreement, the listed company shall obtain the certificate of approval for foreign-funded enterprises at the Ministry of Commerce, and go through alteration registration at the administrative department of industry and commerce upon the certificate of approval.

Article 9 In case an investor intends to actually control a listed company by way of transfer under an agreement, it shall, after obtaining the approval in light of the procedures of items (1) through (4) of Article 8, submit the report on the acquisition of a listed company and the relevant documents to the CSRC, and go through the formalities for confirmation of the share transfer at the stock exchange after the CSRC has made examination and has no dissent, and apply for going through formalities for registration and transfer at the securities depository and clearing institution. After completing the aforesaid formalities, it shall make handling in accordance with item (6) of Article 8.

Article 10 An investor shall, when making strategic investment in listed companies, fulfill its obligations of report, announcement, and other statutory obligations in accordance with the Securities Law and the relevant provisions of the CSRC.

Article 11 If an investor continues making strategic investment in the listed companies in which it holds shares, it shall handle it in light of the ways and procedures as prescribed in the present Measures.

Article 12 A listed company or investor shall submit the following documents to the Ministry of Commerce:

  1. Application Letter for Strategic Investment (For the format, please see Annex I);
  2. Strategic Investment Scheme (For the format, please see Annex II);
  3. Directional issuance contract or share transfer agreement;
  4. Opinions of a recommendation institution (in case of a directional issuance) or legal opinions;
  5. The letter of commitment for holding shares incessantly by the investor;
  6. Statements of the investor on its having no records of grave punishment by any regulatory institution both home and abroad within three years, and statements on whether it has any other record of non-grave penalties;
  7. The registration certificate of the investor that has been notarized and certified according to law, and the identity certificate of the legal representative (or the authorized representative);
  8. The statements of assets and liabilities of the investor in recent three years, which have been audited by a certified accountant;
  9. The documents to be submitted as prescribed in the aforesaid items (1), (2), (3), (5), and (6) shall be signed by the legal representative of the investor or its authorized representative, if the documents are signed by the authorized representative, the power of attorney signed by the legal representative and the corresponding notarized or certified documents shall be submitted; and
  10. Other documents as prescribed by the Ministry of Commerce.

    Except the documents as listed in items (7) and (8) in the preceding paragraph, the originals of the Chinese versions of other documents shall also be submitted, and the original and Chinese translation of the documents as listed in items (7) and (8) shall also be submitted.

    The Ministry of Commerce shall give principle reply within 30 days after it has received all the aforesaid documents, and the valid period of the principle reply shall be 180 days.

Article 13 Any foreign company (parent company) meeting the provisions of Article 6 of the present Measures may make strategic investment through its wholly owned overseas subsidiaries (investors), the investors shall, apart from submitting the documents as listed in Article 9 of the present Measures, submit the letter of irrevocable commitment of the parent company on assuming joint and several liabilities for the investment acts of the investors to the Ministry of Commerce.

Article 14 An investor shall open a foreign exchange account within 15 days from the day of principle reply of the Ministry of Commerce according to the relevant provisions on foreign investment and merger. For the foreign exchange capital remitted from overseas by an investor for the use of strategic investment, the investor shall, in accordance with the relevant provisions on foreign exchange control, open a special foreign exchange account (of the category of merger) for the use of foreign investor at the foreign exchange administration at the place of registration of the listed company, the formalities for settlement of foreign exchange on the capital within the account and the write-off of the account shall be handled in accordance with the relevant provisions on foreign exchange control.

Article 15 An investor may go through the relevant formalities at the securities depository and clearing institution upon the strength of the document of approval of the Ministry of Commerce for strategic investment in listed companies by it and its effective identity certificate.

For the non-tradable shares held by an investor before the share-trading reform of a listed company or the shares held by it before the listed company makes public issuance for the first time, the securities depository and clearing institution may open a securities account for the investor upon its application.

A securities depository and clearing institution shall formulate the corresponding provisions in accordance with the present Measures.

Article 16 An investor shall start up its strategic investment act within 15 days from the date of settling the foreign exchange for the capital, and shall complete the strategic investment within 180 days from the day of principle reply.

If an investor fails to complete the strategic investment in light of the strategic investment scheme within the prescribed time limit, the principle reply of the examination and approval organ shall be invalidated automatically. The investor shall, within 45 days from the day when the principle reply is invalidated, purchase foreign exchange for the RMB capital obtained from exchange settlement upon the approval of the foreign exchange administration and remit it out of China.

Article 17 After completing strategic investment, a listed company shall obtain the certificate of approval for foreign-funded enterprises at the Ministry of Commerce upon the strength of the following documents within 10 days:

  1. Application letter;
  2. Letter of principle reply of the Ministry of Commerce;
  3. The shareholding certificate issued by the securities depository and clearing institution;
  4. Business license of the listed company and the identity certificate of its legal representative; and
  5. Articles of association of the listed company.

    The Ministry of Commerce shall, within 5 days from the day of receiving all the aforesaid documents, issue the certificate of approval for foreign-funded enterprises, with the “foreign-funded joint stock company (merger of A shares) ”noted in it.

    If an investor obtains 25% or more shares of a single listed company and promises to hold no less than 25% shares within 10 years, the Ministry of Commerce shall note the “foreign-funded joint stock company (merger of A shares of 25% or more)” in its certificate of approval for foreign-funded enterprises issued by it.

Article 18 A listed company shall, within 30 days from the day of issuance of the certificate of approval for a foreign-funded enterprise, apply for handling alteration registration on the type of company to the administrative department of industry and commerce, and submit the following documents:

  1. The application letter for alteration signed by the legal representative of the company;
  2. The certificate of approval for foreign-funded enterprises;
  3. The shareholding certificate issued by the securities depository and clearing institution;
  4. The lawful business opening certificate that has been notarized and certified; and
  5. Other documents that shall be submitted as prescribed by the State Administration for Industry and Commerce.

    In case the listed company makes alteration upon approval, the administrative department of industry and commerce shall note “foreign-funded joint stock company (merger of A shares)” in the column of enterprise type of the business license, if an investor makes strategic investment and obtains 25% or more shares of a single listed company and promises to hold no less than 25% shares within 10 years, it shall note “foreign-funded joint stock company (merger of A shares of 25% or more)”.

Article 19 A listed company shall, within 30 days from the day of issuance of the business license of a foreign-funded enterprise, go through the relevant formalities at the departments of taxation, customs, foreign exchange control, and other relevant departments. The administrative department of foreign exchange shall note “foreign-funded joint stock company (merger of A shares)” in the foreign exchange registration certificate issued by it. If an investor makes strategic investment and obtains 25% or more shares of a single listed company and promises to hold no less than 25% shares within 10 years, the administrative department of foreign exchange shall note “foreign-funded joint stock company (merger of A shares of 25% or more)” in the foreign exchange registration certificate.

Article 20 Apart from the following circumstances, an investor shall not make securities trading (excluding B share trading):

  1. The A share stock of a listed company held by the investor for making strategic investment may be sold after the expiry of shareholding period in its promise;
  2. In case the investor makes purchase by offer in accordance with the relevant provisions of the Securities Law, it may purchase the shares sold by A share shareholders of the listed company within the period of the offer;
  3. The non-tradable shares held by the investor before the share-trading reform of a listed company may be sold after the share-trading reform is completed and the expiration of the time limit for sale prohibition;
  4. The shares held by the investor before the public issuance of a listed company for the first time may be sold after the expiration of the time limit for sale prohibition; and
  5. Before the expiry of the share holding period as promised by an investor, if there is necessity to transfer its shares due to its bankruptcy, liquidation, or mortgage, or other special reasons, it may transfer its shares upon the approval of the Ministry of Commerce.

Article 21 In case an investor reduces its shares, which makes the foreign capital share of a listed company less than 25%, the listed company shall make archival filing within 10 days to the Ministry of Commerce, and go through the relevant formalities for alteration of the certificate of approval for foreign-funded enterprises.

In case an investor reduces its shares, which makes the foreign capital share of a listed company less than 10%, and the investor is not a single largest shareholder, the listed company shall put it on archives at the examination and approval organ and go through the relevant formalities for writing off the certificate of approval for foreign-funded enterprises within 10 days.

Article 22 In case an investor reduces its shares, which makes the foreign capital share of a listed company less than 25%, the listed company shall go through alteration registration at the administrative department of industry and commerce within 30 days from the day when the certificate of approval for foreign-funded enterprises is altered, and the administrative department of industry and commerce shall change the enterprise type in the business license into “foreign-funded joint stock company (merger of A shares)”. The listed company shall go through registration on foreign exchange alteration at the administrative department of foreign exchange within 30 days from the day when the business license is altered, and the administrative department of foreign exchange shall note “foreign-funded joint stock company (merger of A shares)” in the foreign exchange registration certificate.

In case an investor reduces its shares, which makes the foreign capital share of a listed company less than 10%, and the investor is not a single largest shareholder, the listed company shall go through alteration registration at the administrative department of industry and commerce within 30 days from the day when the certificate of approval for foreign-funded enterprises is written off, and the enterprise type shall be altered into a joint stock company. The listed company shall go through formalities for writing off its foreign exchange registration at the administrative department of foreign exchange within 30 days from the day when the business license is altered.

Article 23 In case a parent company makes strategic investment through its wholly-owned overseas subsidiaries and completes the investment on schedule, it shall report to the Ministry of Commerce before it transfers the aforesaid overseas subsidiaries, and file an application in light of the procedures as listed in the present Measures. The new transferee shall still comply with the conditions as prescribed in the present Measures, undertake all the rights and obligations of the parent company and its subsidiaries in the listed company, and fulfill its obligations of reporting to the CSRC, making public notice, and other statutory obligations.

Article 24 In case an investor assigns the shares of a listed company held by it through A share market, it may make application for remitting out the foreign exchange it has purchased to the administration of foreign exchange at the place of registration of the listed company upon the strength of the following documents:

  1. Written application;
  2. The documents of approval for exchange settlement approved by the administration of foreign exchange on the capital within the special foreign exchange account (category of merger) opened for the use of a foreign investor to make strategic investment;
  3. The document of approval issued by the Ministry of Commerce for alteration of the stock right structure of the listed company; and
  4. The certificate documents of relevant securities transaction issued by a securities brokerage institution.

Article 25 A listed company in which an investor holds less than 25% of its shares shall follow the relevant provisions on borrowing foreign loans by domestic Chinese-funded enterprises when it borrows foreign loans.

Article 26 The functionaries of the relevant government organizations shall be dedicated to their work, fulfill their obligations according to law, and shall not seek for improper interests by taking advantage of their duties, and shall have the obligation of keeping confidential the business secrets they know.

Article 27 The present Measures shall be referred to as analogy for the strategic investment made by the investors of Hong Kong Special Administrative Region, Macao Special Administrative Region, and Taiwan Region.

Article 28 The present Measures shall be implemented 30 days as of the date of promulgation

Schedule 3

Interim Provisions on Restructuring State Owned Enterprises (“SOEs”) with Foreign Investment

(NB: This is not a definitive translation)

Promulgated by the State Economic and Trade Commission, Ministry of Finance, the State General Administration of Industry and Commerce, and the State Administration of Foreign Exchange.

Article 1. This set of Regulations, formulated in line with the Corporate Law of the People’s Republic of China, the Contract Law of the People’s Republic of China, and the related laws and regulations of the State on foreign investment and on management of state assets, is designed to instruct and standardize the acts of reforming State owned enterprises with foreign investment, to promote the strategic reformation in the national economy, accelerate the pace of establishing a modern enterprise system for the SOEs, and safeguard social stability.

Article 2. This set of Regulations shall be applied to acts of reforming SOEs or corporate companies in which the State has stakes (excluding financial enterprises and publicly listed companies) or transforming them into foreign funded enterprises in the form of companies with foreign investment (hereinafter referred to as reforming SOEs with foreign investment).

Article 3. Reforming SOEs with foreign investment mentioned in this set of Regulations include:

  1. State stake holders of SOEs transferring all or part of the stakes to foreign companies, enterprises or other economic organizations or individuals (hereinafter referred to as foreign investors) and the enterprises being reformed into foreign invested ones;
  2. State stake holders of corporate enterprises transferring all or part of the stakes held to foreign investors, and the enterprises being reformed into foreign invested ones;
  3. Domestic creditors of SOEs transferring creditors’ rights to foreign investors and the enterprises being reformed into foreign invested ones;
  4. SOEs or corporate enterprises in which the State has stakes selling all or a major part of their assets to foreign investors and foreign investors setting up foreign invested enterprises independently with the assets purchased or jointly with the sellers;
  5. SOEs or corporate enterprises in which the State has stakes attracting foreign investment through expanding the quantity of their shares and the enterprises being reformed into foreign invested ones.

Article 4. SOEs and corporate enterprises mentioned in items 1, 2, 3, and 5 of article 3 of this set of Regulations are termed as reformed enterprises.

State owned property rights within SOEs and State owned stakes in corporate enterprises are termed as State owned property rights and holders of State owned property rights and of state owned stakes are termed as holders of State owned property rights.

Holders of State owned property rights refer to departments authorized by the State or institutions authorized by the State to make investment, or enterprises holding State owned assets and other economic organizations.

Holders of State owned property rights, creditors of SOEs transferring creditors’ rights, and enterprises selling assets are termed as the reforming party.

Article 5. The reforming party shall select foreign investors meeting the following terms and conditions:

  1. Having operational qualifications and technological level required by the reformed enterprises;
  2. Having sound business reputation and management capacity;
  3. Having sound financial status and economic strength.

The reforming party shall request foreign investors to propose their regrouping programme to improve the corporate management structure and promote the sustainable development of the enterprises and the programme shall include development of new products, technological renovation and related investment plan, and Regulations to be adopted to strengthen enterprise management.

Article 6. The following principles shall be observed in reforming SOEs with foreign investment:

  1. Abiding by the State laws and regulations and safeguarding national economic security;
  2. Conforming to the requirements of the industrial policies of the State. Foreign investors are not allowed to participate in the reforming of enterprises (including enterprises directly or indirectly owned by them) whose business scopes fall within the prohibited categories for foreign investment. Enterprises whose shares are controlled directly or indirectly by the Chinese sides shall remain so after being reformed.
  3. Conducive to the economic structural adjustment and to promoting the optimized allocation of State owned assets;
  4. Stressing the introduction of advanced technologies and managerial experiences, establishing a standard corporate management structure, and promotion of technological advance and structural upgrading of enterprises;
  5. Adhering to the principles of being open, fair, just, honest and faithful, prevention of wastage of State owned assets, avoiding, evading or abandoning the creditors’ rights of banks and other creditors; not harming the lawful benefits of workers, and protecting the lawful benefits of foreign investors;
  6. Promoting fair competition and not contributing to market monopoly;

Article 7. In cases where the property rights of a SOE or a wholly state owned company are transferred, or two or more SOEs are transferred, or the state owned stakes within limited liability companies, set up by two or more state owned investors, are transferred, the reforming party shall solicit opinions from the congress of workers and staff of the to-be reformed enterprises in advance. In cases of transferring state owned stakes of a corporate enterprise, consent should be obtained from the shareholders of the to-be reformed enterprise. In cases of transferring creditors’ rights of a SOE, consent from the holder of the state owned property rights of the to-be reformed enterprise should be obtained. In the case of an enterprise selling all or a major part of its assets, consent should be obtained from the holders of the state owned assets within the enterprise or from the shareholders meeting, and creditors shall be informed to that effect.

Article 8. The following terms and conditions shall be satisfied when reforming a SOE with foreign investment:

  1. Prior to reforming the SOE, holders of the state owned assets within the enterprise shall organize the to-be reformed enterprise to check the assets, identify the property rights, disentangle the creditors’ rights and debts, hire qualified intermediaries to conduct financial auditing, and conduct assets evaluations in line with the provisions of Regulations Governing the Evaluation of State Assets (No. 91 Order of the State Council), Regulations on the Issues of the Administration of State Assets Evaluation (No. 14 Decree of the Ministry of Finance), and other relevant regulations;
  2. In cases where the right to control the enterprise is transferred or all or a major part of the operational assets are to be sold to foreign investors after reformation, the reforming party and the reformed enterprise shall formulate an appropriate programme for disposing of workers, which shall be reviewed and adopted by the congress of workers and staff. The reformed enterprise shall pay off the salaries owed to the workers, funds raised having not been reimbursed, social securities fee owed and other fees with the existing assets. Two-way choices shall be offered by the reformed enterprise to the workers and staff. Workers retained shall sign or modify their labour contracts according to laws. Compensation shall be paid to workers whose labour contracts have been terminated. Social securities fees shall be paid off in one lump-sum for workers that are to be transferred to social securities institutions, and the capital needed for this, shall be deducted from the net assets of the reformed enterprise before reform takes place, or paid as a priority from the earnings obtained by holders of the state owned property rights from transferring the state owned property rights.
  3. In cases where reform is undertaken by means of selling assets, the creditors rights and liabilities of the enterprise shall be borne by the original enterprise. Where other means are adopted for the reform, the enterprise’s creditors’ rights and liabilities shall be borne by the enterprise reformed. In cases where mortgaged or pledged state owned property rights or assets are transferred, the relevant provisions of the Guarantee Law of the People’s Republic of China shall be observed. The successor of the debt shall sign an agreement on the disposal of creditors rights and liabilities with creditors.
  4. The reforming party shall publicize the information of its reforming, solicit foreign investors extensively, and investigate into the qualifications, reputation, financial status, management capacity, safeguard for payment, and quality of operators of foreign investors. Middle and long-term investors that could bring advanced technologies, managerial experiences and have highly industrial relevance shall be selected as a priority.

    The reforming party and foreign investors shall, upon request from each other, provide relevant information honestly and in a detailed manner, and no misleading and cheating activities are allowed. In addition, they also have an obligation to maintain confidentiality.

  5. In cases where reform is conducted by means of transferring state owned property rights or selling assets, the reforming party shall prioritize the method of public bidding in identifying foreign investors and transfer price. In cases where public bidding is adopted in the transfer, relevant formalities shall be honoured according to the law. Relevant information concerning the state owned property rights to be transferred or assets to be sold shall be publicized. Open operation is also requested for contractual transfer.

    The reforming party and foreign investors shall, irrespective of the way of transfer, sign transfer agreements according to the relevant provisions of the State and this set of Regulations. The transfer agreement shall include the basic information of the transfer of State owned property rights, disposal of workers, disposal of creditors’ rights and liabilities, transfer ratio, transfer price, ways and terms of payment, delivery of property rights, reform of enterprise, and clauses to that effect.

Article 9. The following procedures shall be followed in reforming SOEs with foreign investment:

  1. The reforming party (a reforming party shall be identified if there are more than two reforming parties) shall file application with the economic and trade administration at the same level for reforming. The reforming application documents shall include feasibility studies, information of the reforming party and the reformed enterprises, information of foreign investors (including the financial report of the latest three years audited by a certified public accountant and market shares of products or services of similar enterprises under the actual control of the foreign investors inside China), reforming plan (including disposal of workers, disposal of creditors’ rights and liabilities, and enterprise reforming plan), business scope and structure of stock rights of the to-be reformed enterprises (including enterprises directly or indirectly owned).

    The economic and trade administration, upon receiving applications, shall conduct examination and verification according to the power delegated by the Rules Governing Direction of Foreign Investment and related laws and regulations. In cases where the enterprises are under the direct control of the Central Government and their wholly owned or controlled enterprises are being reformed, or the reformed enterprises hold stocks of publicly listed companies directly or indirectly, or the total enterprise’s assets are no less than US$30 million after being reformed, the application for reforming shall be examined and verified by the economic and trade administration under the State Council. A hearing shall be conducted in cases where there is the likelihood of causing a monopoly or hindering fair competition.

    The economic and trade administration shall make a decision on whether or not to approve the application within 45 days upon receiving the application for reform. In cases where a hearing is requested, the decision shall be made in three months.

    In cases where the State has other provisions concerning the utilization of foreign investment by industries, within which the reformed enterprises or enterprises directly or indirectly owned by the reformed enterprises fall, and changes to the nature of state stakes are triggered by the changes in the property rights of holders of state stakes in publicly listed companies, the provisions shall be abided by.

  2. Transfer agreement signed between the reforming party and foreign investors shall be submitted for approval according to the relevant provisions of the Circular on Issuing the Provisional Regulations on the Enterprises’ State Owned Assets and Financial Administration (No. 325, 2001, Caiqi) issued by the Ministry of Finance.

    The transfer agreement shall be accompanied by the registration certificate of state owned property rights, information of the ratification or record filing of the auditing and assets evaluation reports of the reformed enterprises, disposal plan of workers, agreement on creditors’ rights and liabilities, plan of enterprise reform, related decisions made by the reforming party and the reformed enterprises, opinion or decision made by the congress of workers and staff of the reformed enterprises.

  3. The reforming party or the reformed enterprises shall handle the examination and approval procedures of foreign invested enterprises according to laws on the strength of the approval documents of the reforming application and transfer agreement. In cases where the enterprises are reformed into limited stock companies, the relevant provisions of the Corporate Law of the People’s Republic of China shall be followed when handling the relevant formalities.
  4. After being reformed, the enterprises or the investors shall go to the original registration authority with power to register foreign invested enterprises, or the local registration authority with power to register foreign invested enterprises, with the approval documents mentioned in paragraphs 1 and 3 of this article, to handle the registration formalities. In cases where the enterprises are reformed into limited stock companies, the relevant provisions of the Corporate Law of the People’s Republic of China shall be followed when handling the relevant formalities.
  5. The reforming party shall, on the strength of the approval documents for reforming application and transfer agreement, registration proof for foreign investment and foreign exchange, and other related documents, handle the formalities involved in the delivery of state owned property rights and in the registration of modification to the state owned property rights, in line with the relevant regulations. It should entrust a certified public accountant to produce a capital assessment report according to the law. In cases where the land used by the enterprises was previously transferred by the State to the enterprises, the enterprises shall handle the examination and approval and transfer formalities of land use right according to the law.
  6. Foreign exchange income of the reforming party from transferring State owned property rights, creditors’ rights or selling assets may be settled according to the approval documents for the reforming application and transfer agreement and other relevant documents, subject to approval by the foreign exchange administration.

    In cases where the reformed enterprises are reformed with foreign investment by means of issuing more shares and expanding their capital, the enterprises may, subject to approval by the foreign exchange administration, open foreign exchange capital account to retain the foreign capital inputted by foreign investors.

  7. The reforming application, transfer agreement and their approval documents involving key State enterprises, debt-to-equity enterprises approved by the State, and enterprises categorized as restricted types in the Guiding Catalogue of Industries for Foreign Investment, whose registered capital is below a certain level and which are to be examined and approved by the local economic and trade administration and financial administration, shall be submitted to the economic and trade administration and the financial administration under the State Council respectively for record filing.

Article 10. Foreign investors shall pay the transfer money or contribute capital with freely convertible currencies remitted in from overseas or other lawful property rights. They may also use the net profits in RMB obtained within China from their investment or other lawful property rights to pay the transfer money or contribute capital, subject to approval by the foreign exchange administration. Other lawful property rights, mentioned above, include:

  1. Property from the foreign investors obtained from other foreign invested enterprises established inside China due to the enterprises’ liquidation, transfer of stock rights, pre-recovered investment, and reduction in investment;
  2. State owned property rights or assets purchased by foreign investors from SOEs or corporate enterprises in which the State has stakes;
  3. Creditors’ rights purchased by foreign investors from the creditors of SOEs;
  4. Other means of capital contribution specified in laws and regulations.

When conducting capital assessment for foreign investors, certified public accountants shall follow the capital assessment procedures and issue capital assessment reports according to the provisions of the Circular on Further Strengthening the Work of Capital Assessment of Foreign Invested Enterprises and the Registration System Governing Foreign Investment and Foreign Exchange (No. 1017, 2002, Caikuai) issued by the Ministry of Finance and the State Administration of Foreign Exchange.
 

Article 11. In cases where reform is undertaken through transfer, foreign investors shall normally pay off the total money requested within three months starting from the day of receiving the business license of the foreign invested enterprises. If they have difficulties in so doing, they are requested to pay 60% of the total money specified within six months upon receiving the business license and provide a guarantee for the remainder, according to law and pay it off within one year.

Article 12. In cases where the right to control an enterprise has been transferred after transferring the State owned property rights, or all or the major assets of an enterprise have been sold to foreign investors, the reforming party is entitled to the right to find out and monitor the production and operation and financial status of the enterprises reformed before the foreign investors have paid off the total money requested. Foreign investors and reformed enterprises shall provide convenience to the reforming party accordingly.

Article 13. Earnings from transferring State owned property rights and assets shall be collected by the reforming party and managed and used according to the related provisions of the financial administration under the State Council.

Article 14. Foreign investors may remit the net profits earned from the reformed enterprises, earnings from transferring stakes, money obtained at the expiration or termination of the business term of enterprises, and other lawful incomes abroad according to the law. They may also reinvest the money earned inside China, subject to approval by the foreign exchange administrations.

Article 15. In the course of reforming SOEs with foreign investment, taxation policies shall be implemented according to the provisions of the taxation laws and administrative regulations of the State, and fee charging policies according to the Circular on the Reduction and Exemption of Relevant Fees to be Collected in the Course of Implementing Reform and Regrouping of Enterprises issued jointly by the State Economic and Trade Commission, the Ministry of Inspection, Ministry of Finance, Ministry of Audit, and the Office in Charge of Combating Malpractices under the State Council (No. 1077 of 1998 Jijiafei).

Article 16. In cases where the reforming party and staff of the reformed enterprises go beyond their power, neglect their duties, or collaborate with foreign investors, embezzle money and engage in corrupt practices, and harm the lawful benefits of the State, creditors and workers, the related competent departments shall impose administrative punishments on them according to the law. In cases where the violation has constituted a crime, the criminal responsibilities shall be investigated.

Article 17. In cases where governmental staff in charge of examination and approval violate this set of Regulations, approve without permission or abuse their powers to seek personal gain, harm the lawful benefits of the State creditors and workers, the related competent departments shall investigate into the administrative liabilities of the persons directly responsible for the violation and the persons held liable according to the delegated power for administration of officials. In cases where the violation has constituted a crime, the criminal responsibilities shall be investigated.

Article 18. This set of Regulations shall be referred to in cases of investment from Hong Kong SAR, Macao SAR, and Taiwan Region and enterprises set up by them participating in the reformation of SOEs.

Article 19. The State Economic and Trade Commission, Ministry of Finance, the State General Administration of Industry and Commerce, and the State Administration of Foreign Exchange are entitled to the interpretation right of this set of Regulations.

Article 20. This set of Regulations shall enter into force as of January 1, 2003.
 

Schedule 4

Interim Measures for the Management of the Transfer of the State-owned Property Right of Enterprises

(NB: This is not a definitive translation)

Chapter 1 General Provisions

Article 1 With a view to standardizing the transfer of State-owned property rights of enterprises, strengthening the supervision and management of the transactions of State-owned property rights of enterprises, promoting the reasonable flow of State assets for enterprises and the strategic adjustment of the layout and structure of the economy of State-owned enterprises and preventing the loss of State assets for/of enterprises, these regulations are enacted in accordance with the Provisional Regulations on Supervision and Management of State-owned Assets of Enterprises and relevant national laws and administrative regulations.

Article 2 These regulations shall apply to the transfer of State-owned property rights of enterprises by the State assets supervisory authorities and enterprises holding state-owned capital (hereinafter collectively referred to as “the Transferor”) to legal persons, natural persons or other organizations within the territory of China (hereinafter collectively referred to as “the Transferee”) upon payment.

As for the transfer of State-owned property rights of enterprises by enterprises in the financial sector and listed companies, relevant national regulations shall apply.

The State-owned property rights of enterprises herein refer to the rights and interests formed by multiform investment of the State in enterprises, enjoyable rights and interests formed by various investments of State-owned enterprises and those held by the State and other rights and interests held to be State-owned according to law.

Article 3 The transfer of State-owned property rights of enterprises shall be subject to national laws, administrative regulations and policies, contribute to the strategic adjustment of the layout and structure of State-owned economy, promote the optimal allocation of state-owned capital, and be carried out according to the principles of openness, fairness and impartiality and shall protect the lawful rights and interests of the State and other parties concerned.

Article 4 The transfer of State-owned property rights of enterprises shall be publicly carried out by property right transaction agencies established according to law and not be restricted by region, industry, capital contribution or subordinate relationship. Where national laws and administrative regulations otherwise provide, such provisions shall apply.

Article 5 The transfer of State-owned property rights of enterprises may be carried out by auction, competitive tendering, agreement and in other manners specified by national laws and administrative regulations.

Article 6 The ownership of the transferred State-owned property rights of enterprises shall be clear. The State-owned property rights of enterprises whose ownership is not clear or involves any dispute shall not be transferred. The transfer of State-owned property rights of enterprises taken as security interest shall be subject to the relevant provisions of the Guarantee Law of the People’s Republic of China.

Article 7 State assets supervisory authorities shall be responsible for the supervision and management of the transfer of State-owned property rights of enterprises.

Chapter 2 Supervision and Management of Transfer of State-owned property rights of enterprises

Article 8 State assets supervisory authorities shall perform the following responsibilities for the supervision of the transfer of State-owned property rights of enterprises:

  1. To formulate regulations on the supervision of transfer of State-owned property rights of enterprises according to the provisions of relevant national laws and administrative regulations;
  2. To decide on or approve the transfer of State-owned property rights of enterprises of the Invested Enterprises, review and examine the transfer of important property rights and report to the people’s government of the same level for approval;
  3. To select and confirm the property right transaction agency engaged in the transactions of State-owned property rights of enterprises;
  4. To supervise and inspect the transactions of State-owned property rights of enterprises;
  5. To collect, consolidate, analyze and report the information about the transfer of State-owned property rights of enterprises;
  6. Other supervision responsibilities assigned by the government of the same level.

The Invested Enterprises herein refer to the enterprises for which State assets supervisory authorities perform the responsibilities of investor under the authorization of the State Council, the people’s governments of provinces, autonomous regions and municipalities directly under central government and the people’s governments at the level of the city divided into districts or autonomous prefecture.

Article 9 The Invested Enterprises shall perform the following responsibilities in respect of the transfer of State-owned property rights of enterprises:

  1. To formulate the regulations on the transfer of State-owned property rights of enterprises of affiliated enterprises according to the relevant national regulations and submit such to State assets supervisory authorities for record;
  2. To decide whether the transfer of State-owned property rights of enterprises contributes to the enhancement of core competitiveness of enterprises, promotes their sustainable development and maintain social stabilization;
  3. To review and examine the transfer of important State-owned property rights of enterprises of important subsidiaries and decide on the transfer of State-owned property rights of enterprises of other subsidiaries;
  4. To report the transfer of State-owned property rights of enterprises to State assets supervisory authorities.

Article 10 For the transfer of State-owned property rights of enterprises, a property right transaction agency may be chosen according to the following basic qualifications:

  1. Complying with the relevant national laws, administrative regulations, rules and policies on the transactions of State-owned property rights of enterprises;
  2. Performing the responsibilities of property right transaction agency and strictly examining the qualification and eligibility of transaction subjects of State-owned property rights of enterprises;
  3. Openly disclosing information about property right transactions according to the relevant national regulations and being able to regularly report the particulars about the transactions of State-owned property rights of enterprises to State assets supervisory authorities;
  4. Having corresponding trading venue, channels for releasing of information and profession personnel and being able to satisfy the requirements of the transactions of State-owned property rights of enterprises;
  5. The property right transaction is standardized and there are neither consecutive transactions following the splitting of State-owned property rights of enterprises for three consecutive years nor there are other records of violation of laws or regulations.

Chapter 3 Procedure of Transfer of State-owned property rights of enterprises

Article 11 Before the transfer of State-owned property rights of enterprises, feasibility study shall be properly conducted. The proposal for the transfer of State-owned property rights of enterprises shall be examined according to internal decision making procedures and a written resolution shall be adopted.

The proposal for the transfer of property rights of wholly State-owned enterprises shall be examined at the general manager’s work meeting. The proposals for the transfer of property rights of wholly State-owned companies shall be examined by their boards of directors. Where no board of director is established, such proposals shall be examined at the general manager’s work meeting. Where lawful rights and interests of employees are involved, the opinions of the staff and workers’ congress of the enterprises holding the subject matter of transfer shall be heard. The proposals for the matters including the placement of staff and workers shall be discussed and adopted at staff and workers’ congress.

Article 12 After the transfer of State-owned property rights of enterprises is approved or decided upon according to the approval procedure specified in these regulations, the Transferor shall organize appraisal of properties and funds of the enterprises holding the subject matter of the transfer according to relevant regulations, prepare balance sheet and detailed list of assets to be handed over according to the result of the appraisal of properties and funds and entrust certified public accountants with full audit (including the audit of the legal representatives of the enterprises holding the subject matter of transfer for their vacating posts according to the relevant national regulations). The losses of assets shall be determined and written off after verification according to the relevant national regulations.

Where the Transferor no longer has controlling position as the result of the transfer of the State-owned property rights of the Invested Enterprises, the State assets supervisory authorities at the same level shall organize the appraisal of properties and funds and entrust intermediary organizations with relevant services.

Intermediary organizations shall provide services independently and justly according to law. Enterprises and individuals shall not interfere with the normal works of intermediary organizations.

Article 13 On basis of the appraisal of properties and funds and account audit, the Transferor shall entrust an asset appraisal agency that has relevant qualification with asset appraisal in accordance with the relevant national regulations. After being approved or put on records, the appraisal report shall be taken as the reference for determining the price of the transferred State-owned property rights of enterprises.

When the transaction price is lower than 90% of the appraisal report during property right transaction, the transaction shall be suspended and shall not be proceeded until the consent of relevant property right transfer approval authority is obtained.

Article 14 The Transferor shall entrust a property right transaction agency with publishing the announcement of transfer of property rights on publicly issued economic or financial newspapers and periodicals at provincial level or above and the website of the property right transaction agency, openly disclose the information about the transfer of State-owned property rights of enterprises and extensively solicit transferees. The period of announcement of transfer of property rights shall be 20 working days.

The information about the transfer of State-owned property rights of enterprises disclosed by the Transferor shall include the following contents:

  1. The basic information about the subject matter of transfer;
  2. The composition of the property right of the enterprise holding the subject matter of transfer;
  3. The internal decision on and approval of the transfer of property rights;
  4. The main audited financial indicators of the enterprise holding the subject matter of transfer for the recent period;
  5. The information about the approval of the asset appraisal of the enterprise holding the subject matter of transfer or the submission of asset appraisal report for record;
  6. The basic qualification that the Transferee should have;
  7. Other matters needed to be disclosed.

Article 15 When soliciting the Transferee, the Transferor may specify prerequisites of transfer in respect of the qualification, business reputation, operation, financial position, management ability and asset scale of the Transferee.

The Transferee shall generally have the following qualifications:

  1. Having good financial position and paying ability;
  2. Having good commercial standing;
  3. Where the Transferee is a natural person, it shall have complete capacity for discharging civil obligations;
  4. Other qualification specified by national laws and administrative regulations.

Article 16 Where the Transferee is a legal person, natural person or other organization in foreign countries, Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan, its acquisition of State-owned property rights of enterprises shall be subject to the Regulations on Guide to Foreign Investment Direction promulgated by the State Council and other relevant regulations.

Article 17 Where two or more transferees are found to be interested through public solicitation, the Transferor shall consult with the property right transaction agency and carry out property right transaction by auction or competitive tendering according to the actual conditions of the subject matter of transfer.

Where State-owned property rights of enterprises are transferred by auction, the transfer shall be carried out in accordance with the Auction Law of the People’s Republic of China and relevant regulations.

Where State-owned property rights of enterprises are transferred by competitive tendering, the transfer shall be carried out in accordance with the relevant national regulations.

After the transfer of State-owned property rights of enterprises is concluded, the Transferor and the Transferee shall enter into the contract for the transfer of property rights and obtain the certificate of property right transaction issued by the property right transaction agency.

Article 18 Where only one transferee is found to be interested through open and public solicitation or the approval of State assets supervisory authorities is obtained in accordance with the relevant regulations, the manner of transfer on basis of agreement may be adopted.

Where the manner of transfer on basis of agreement is adopted, the Transferor shall fully consult with the Transferee, initial the contract for the transfer of property rights after properly handling relevant matters involved in the transfer according to law and conduct examination according to the procedure specified in Article 11 hereof.

Article 19 The contract for the transfer of State-owned property rights of enterprises shall include the following main contents:

  1. The name and domicile of the Transferor and the Transferee;
  2. The basic information about the State-owned property rights of the enterprise holding the subject matter of transfer;
  3. The proposal for the placement of the concerned employees of the enterprise holding the subject matter of transfer;
  4. The proposal for the disposal of the concerned creditor’s rights and debts of the enterprise holding the subject matter of transfer;
  5. The transfer manner, transfer price, payment time and mode and payment terms;
  6. Matters concerning the delivery of property rights;
  7. Relevant expenses and taxes incurred by the transfer;
  8. The manner of settlement of contractual disputes;
  9. The liability for breach of contract of the parties to the contract;
  10. The conditions for the modification and termination of the contract;
  11. Other terms deemed by the Transferor and Transferee as necessary.

Where the Transferor no longer has the controlling position as the result of the transfer of State-owned property rights of enterprises, the Transferor shall consult with the Transferee and offer proposal for reorganization of the enterprise, including the proposal for the prior placement of the employees of the enterprise holding the subject matter of transfer under same conditions, when entering into the contract for the transfer of property rights.

Article 20 The Transferee shall make full payment for the transfer of State-owned property rights of enterprises according to the terms of the contract for the transfer of property rights.

In principle, the payment for the transfer shall be made in one lump sum. Where the amount is relatively large and it is really difficult to make payment in one lump sum, the manner of payment by installments may be adopted. Where the manner of payment by installments is adopted, the first installment shall not be less than 30% of the total price and shall be paid within 5 working days from the effective date of the contract. The Transferee shall provide legal guarantee for the balance and pay the Transferor the interest accrued in the payment period at the rate of bank loan in the same period. The payment period shall not exceed one year.

Article 21 Where the transfer of State-owned property rights of enterprises is related to the transfer of State-owned land use right or the right of prospecting Mineral deposits or the right of mining formed by the State capital contribution, relevant formalities shall be separately follow through in accordance with the relevant national regulations.

Article 22 Where the Transferor no longer has controlling position as the result of the transfer of State-owned property rights of enterprises, the Transferor shall properly handle the labour relationship with staff and workers, settle the wages of staff and workers, social insurance premiums and other relevant expenses defaulted by the enterprise holding the subject matter of transfer and ensure the continuation of social insurance relationship of the enterprise’s staff and workers according to the relevant policies and regulations.

Article 23 The net proceeds from the transfer of State-owned property rights of enterprises shall be disposed in accordance with the relevant national regulations.
 

Article 24 After the transfer of State-owned property rights of enterprises is concluded, the Transferor and the Transferee shall timely go through relevant formalities of property right registration in accordance with the relevant national regulations by presenting the certificate of property right transaction issued by the property right transaction agency.

Chapter 4 Approval Procedure of the transfer of State-owned property rights of enterprises

Article 25 State assets supervisory authorities shall decide on the transfer of State-owned property rights of enterprises of the Invested Enterprises. Where the State no longer has controlling position as the result of the transfer of State-owned property rights of enterprises, such transfer shall be subject to the approval of the people’s government at the same level.

Article 26 The Invested Enterprises shall decide on the transfer of State-owned property rights of enterprises of their subsidiaries. The transfer of important State-owned property rights of important subsidiaries shall be subject to the countersigning of State assets supervisory authorities at the same level and the approval of relevant financial department. Where any matter concerning social, public administration subject to governmental examination and approval is involved, the transfer shall be reported to relevant governmental department for examination and approval in advance.

Article 27 Where the transfer of State-owned property rights of enterprises is related to the change of the nature of the State-owned shares of listed companies or the transfer of their actual control, such transfer shall be subject to national laws and administrative regulations and the regulations of relevant supervisory department at the same time.

Where the State otherwise provides for the management of the transfer of state-owned equity of non-listed joint stock limited companies, such provisions shall apply.

Article 28 Before deciding on or approving the transfer of State-owned property rights of enterprises, the following written documents shall be examined:

  1. The resolution document about the transfer of State-owned property rights of enterprises;
  2. The proposal for the transfer of State-owned property rights of enterprises;
  3. The registration certificates of property rights of State assets of the Transferor and the enterprise holding the subject matter of transfer;
  4. The legal opinion issued by an law office;
  5. The basic qualification that the Transferee should have;
  6. Other documents required by the approval authority.

Article 29 The proposal for the transfer of State-owned property rights of enterprises shall contain the following:

  1. The basic information about the State-owned property rights of the enterprise holding the subject matter of transfer;
  2. Relevant feasibility study materials of the transfer of State-owned property rights of the enterprise;
  3. The proposal for the placement of the staff and workers of the enterprise holding the subject matter of transfer that has been examined by local labour guarantee administrative department;
  4. The proposal for the disposal of the concerned creditor’s rights and debts of the enterprise holding the subject matter of transfer, including the debts owed to staff and workers;
  5. The proposal for disposition of the proceeds from the transfer of State-owned property rights of enterprises;
  6. The main content of the announcement of the transfer of State-owned property rights of enterprises.

Where the Transferor no longer has the controlling position as the result of the transfer of State-owned property rights of enterprises, relevant creditor’s rights and debts agreement consented to by the financial institution and the resolution of staff and workers’ congress in respect of the proposal for the placement of staff and workers shall be attached.

Article 30 Where the Transferee is subject to special requirements in key industries and fields of national economy, an enterprise may transfer State-owned property rights of enterprises to its affiliated enterprises on basis of agreement during asset reorganization after the approval of State assets supervisory authorities at provincial level or above.

Article 31 Where the Transferor and the Transferee adjust the proportion of the transfer of property rights or there is material change of the proposal for the transfer of State-owned property rights of enterprises after the transfer of State-owned property rights of enterprises is approved or decided on, the application for transfer shall be submitted again for approval according to the relevant regulations.
 

Chapter 5 Legal Liability

Article 32 Where the Transferor, the enterprise holding the subject matter of transfer or the Transferee commits one of the following acts during the transfer of State-owned property rights of enterprises, State assets supervisory authorities or relevant approval authorities of the transfer of State-owned property rights of enterprises shall require the Transferor to terminate the transfer of property rights. When necessary, such authorities shall bring an action in the people’s court according to law to confirm the invalidity of the transfer:

  1. Failure to carry out transaction in property right transaction agency according to the relevant provisions of these regulations;
  2. The Transferor or the enterprise holding the subject matter of transfer fails to implement corresponding internal decision making procedure and approval procedure or transfers State-owned property rights of enterprises beyond its authority or without permission;
  3. The Transferor or the enterprise holding the subject matter of transfer intentionally conceals the assets to be included in the appraisal scope or provides intermediary organization with false accounting information so as to cause the distortion of the result of audit and appraisal and its failure of audit and appraisal causes the loss of State assets;
  4. The Transferor and the Transferee collude and transfer State-owned property rights of enterprises at low price so as to cause the loss of State assets;
  5. The Transferor or the enterprise holding the subject matter of transfer fails to properly place staff and workers, continue social insurance relationship, settle the debts owed to staff and workers and pay the social insurance premiums in arrears and infringe upon the lawful rights and interests of staff and workers;
  6. The Transferor fails to settle the creditor’s rights and debts of the enterprise holding the subject matter of transfer, illegally transfers creditor’s rights or avoid the responsibility for debt settlement. Where State-owned property rights of enterprises are taken as security, the State-owned property rights of enterprises are transferred without the consent of the security right owner.
  7. The Transferee affects the choice of the Transferor and the signing of the contract for the transfer of property rights by means of fraud, concealment, etc.;
  8. The Transferees maliciously collude and force down price during bidding and auction for the transfer of property rights so as to cause the loss of State assets.

State assets supervisory authorities or relevant enterprise shall give warning to the persons directly in charge and other persons directly responsible of the Transferor or the enterprise holding the subject matter of transfer that has committed any of the above acts according to the authority of personnel management. If the circumstances are serious, such persons shall be given disciplinary punishment. In case of loss of State assets, such persons shall bear liability for compensation. Where the Transferee is liable for the loss of State assets, it shall compensate the Transferor for economic loss according to law. If a crime is constituted, such persons shall be transferred to judicial authorities and investigated for criminal liability according to law.

Article 33 Where an intermediary organization practices against the relevant regulations during the audit, appraisal and legal services in respect of the transfer of State-owned property rights of enterprises, national assets supervisory authorities shall notify its industrial authorities in charge of relevant information and suggest the imposition of corresponding penalty. If the circumstances are serious, State assets supervisory authorities may require relevant enterprise no longer to entrust such intermediary organization with the services in respect of the transfer of State-owned property rights of enterprises.

Article 34 Where a property right transaction agency practices fraud or neglect its duties during any transaction of State-owned property rights of enterprises and harms national interest or the lawful rights and interests of the parties to the transaction, the persons directly responsible shall be held liable according to law. State assets supervisory authorities shall no longer appoint such agency to provide services in respect of the transaction of State-owned property rights of enterprises.

Article 35 Where the approval authorities in charge of the transfer of State-owned property rights of enterprises and their relevant personnel approve any transfer of State-owned property rights of enterprises against these regulations and without permission or abuse their power for personal gains in approval and cause the loss of State assets, relevant department shall give them disciplinary punishment within cadre administration authority. If a crime is constituted, they shall be transferred to judicial authorities and investigated for criminal liability according to law.

Chapter 6 Supplementary Provisions

Article 36 Regulations on the transfer of State-owned property rights of enterprises of overseas enterprises shall be separately enacted.

Article 37 The transfer of State-owned property rights of enterprises held by an entity that has not separated governmental functions from corporate ones and other entities shall be subject to the approval of the financial department in charge with reference to these regulations for implementation.

Article 38 The State-owned Assets Supervision and Administration Commission under the State Council shall be responsible for the interpretation of these regulations. Where relevant department is involved, relevant department of the State-owned Assets Supervision and Administration Commission shall be responsible for the interpretation.

Article 39 These regulations shall be effective as of 1 February, 2004.

February 2009

Please note that this memorandum is for general information purposes only. Specific legal advice should be sought in relation to any particular situation.

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