Overview of Interim Provisions on Equity Contribution in FIEs Go back »
2012-12-03 | Nanjing
After a long time waiting and public discussion, the MOFCOM (China’s Ministry of Commerce) finally took a key step to standardize the equity contributions of FIEs (foreign invested enterprises) and promote foreign investment by issuing the “Interim Provisions on Equity Contribution in Foreign-Invested Enterprises” (hereinafter referred to as “Provisions”) on September 21 of 2012 and effective as of October 22 of 2012.
As provided by Company Law in 2005 and Administrative Measures on the Registration of Capital Contributions with Equity Interests by SAIC (State Administration of Industry and Commerce) in 2009, domestic, equity contribution has been available for domestic investment, which allows investors to use equity interests in an existing PRC company as consideration for their investment in another PRC company.
And now, MOFCOM clarifies that equity contribution can also be permitted to FIEs in the Provisions. Some key information extracted from the Provisions will be discussed hereby.
1. Applicable Scopes
It is provided by the Provisions that domestic and foreign investors (hereinafter collectively referred to as “Equity Contributor”) can make their contributions with the equities in the domestic Chinese enterprises they hold (hereinafter collectively referred to as “Equity Enterprise”) to establish and make any change to FIEs, as better specified, including:
- To establish a new FIE;
- To increase the registered capital of an existing domestic-funded enterprise so the domestic-funded enterprise shifts to become a FIE after the capital increase;
- To increase the registered capital of an existing FIE, leading to a change in the equity interest.
It is a pity that the Provisions does not mention if investors can contribute with equities they hold in a foreign registered companies, which is provided in the Regulation on Foreign Investors Merging and Acquiring Domestic Enterprises 2006. It is speculated that in a short time, equities in foreign registered companies will not be allowed to be contributed in China to invest.
2. Equity Contribution Conditions
As for the positive conditions, it is the same as provided in Administrative Measures on the Registration of Capital Contributions with Equity Interest that the equity shall have a clear and compete title and must be transferrable.
However, the Provisions also set up negative conditions that equity may not be used as capital contributions if:
l The registered capital of the Equity Enterprise has not been fully paid up;
l The equity interest is subject to a pledge;
l The equity interest has been legally frozen;
l The articles of association of the Equity Enterprise prohibit transfer of the equity interest;
l The Equity Enterprise does not participate in or fails to pass the annual inspection of a foreign-invested enterprise;
l The Equity Enterprise is a foreign-invested holding company or a foreign-invested venture capital investment (equity investment) enterprise;
l Prior approval has not been granted;
l Other scenarios proscribed in laws or regulations apply.
3. Evaluation
Prior to use as a capital contribution, the equity interest must be evaluated by an appraisal firm that is duly established in China. Based on that firm's appraisal, the Equity Contributor and shareholder(s) of the invested enterprise or other investors may determine through consultation the value of the equity interest that is to be contributed.
As provided by Company Law, the sum of the value of all contributed equity interests and the value of non-monetary assets contributed as capital may not exceed 70 percent of the Invested Enterprise's registered capital.
The equity interest contribution must be verified by a duly established accounting firm, and a capital verification report is required.
4. Approval Procedure
MOFCOM and its provincial offices are the approval authorities for capital contributions with equity interests. The whole procedure can be divided into three steps:
l Invested company applies to change to FIE and get the Establishment approval certificate from MOFCOM;
l Change Equity Enterprise’s shareholder and get new business license to register invested company as new shareholder;
l Invested company applies for new business and register Equity Contributor as new Shareholder.
5. Other Key Provisions
After the contribution of equity interest, the business scope of the Equity Enterprise, the Invested Enterprise, and their affiliates having direct or indirect shareholding links must be compliant with the Provisions on Guiding Foreign Investment Direction enacted by the State Council in 2002, the Foreign Investment Industrial Guidance Catalogue, and other relevant provisions regarding foreign investment. If non-compliance occurs, relevant assets or equity interests must be divested before the equity interest contribution is made.
Also, the Provisions mandate that legal opinion from lawyers to verify the compliance of equity contribution is necessary.
6. Conclusion
As a result, foreign investors may enjoy more flexibility in structuring their businesses and investments in China, because they will be allowed to make additional investments in China by contributing equity interests instead of cash; stock-for-stock takeovers, for example, may be feasible.
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