Chinese Company’s Mergers and Acquisitions

If you are finding out the way, details procedure and requirement for mergering and acquiring a Chinese domestic corporation owned by Chinese citizens or an existed local company, you should read and get referance from this guidance.

Accepting institution and the range

According to the investment laws of Chinese foreign enterprises, all acquistion and merger activities have to be approved by Chinese Ministry of Commerce in terms of foreign invested enterprises laws on business registration and corporate register rules.

Conditions of mergering and acquiring domestic companies

Situation 1:
Equity merger and acquisition, means foreign investors ( foreign owners, shareholders or oversea existed corporations, enterprises, companies ) want to acquire a domestic company ( existed domestic corporation or registered Chinese enterprise ), and intend to change the corporate type from domestic owned company to foreign invested enterprise.

Situation 2:
Asset acquisition, means foreign investors ( foreign owners, shareholders or oversea existed corporations, enterprises, companies ), run and operate assets through agreement of acquiring assets from domestic existed corporation.

Foreign investors have to understand below conditions:

1. All mergers and acquistions operations and application of changing corporate type have to accord with the industries on Chinese national policies in terms of industrial guidance catalogues of foreign investment, and the policies do not allow 100 % owned by foreign investors ( foreign owners, shareholders or oversea existed corporations, enterprises, companies ) and mergers and acquistions can not wholly owned by foreign shareholders, and should be controled or relative controled by Chinese shareholders ( individual owners, existed corporations, enterprises ).

2. Ratio of investments of foreign investors, after the mergers and acquistions of business
activities, foreign shareholders ( owners ) have to set up the ownership interest more than 25%, besides of the laws regulations.

3. Disposition of claims and debts. In the case of equity merger and acquisition by a foreign investor, the foreign-invested enterprise established after the merger and acquisition inherits the creditor’s rights and debts of the merged domestic company; Where the assets of a foreign investor are acquired, the domestic enterprise selling the assets shall assume its original creditor’s rights and debts. The foreign investor, the merged domestic enterprise, the creditors and other parties may reach a separate agreement on the disposition of the creditor’s rights and debts of the merged domestic enterprise, provided that the agreement shall not prejudice the interests of the third party or the public interest. The agreement on the disposition of claims and debts shall be submitted to the examination and approval authority.

4. Transaction price payment and term. The parties to a merger or acquisition shall take the appraisal results of the equity value to be transferred or the assets to be sold by the asset appraisal institution as the basis for determining the transaction price, and it is prohibited to transfer equity or sell assets at a price significantly lower than the appraisal result, thereby transferring capital abroad in a disguised way.

If a foreign investor purchases a domestic enterprise to establish a foreign-invested enterprise, the foreign investor shall, within three months from the date of issuance of the business license of the foreign-invested enterprise, pay the full consideration to the shareholder who transfers the equity or the domestic enterprise which sells the assets. If the extension is necessary under special circumstances, it shall, upon approval by the examining and approving organ, pay more than 60% of the total consideration within 6 months from the date of issuance of the business license of the foreign-invested enterprise, pay all the consideration within 1 year, and distribute the income according to the proportion of the contribution actually paid.

Foreign investors subscribed capital increase of domestic companies and limited liability companies and in a way to set up the domestic shareholders of a company limited by shares shall, in the company to apply for a foreign investment enterprise business license when pay not less than 20% of new registered capital, the rest of the paid time should comply with the company law, the relevant foreign investment laws and the provisions of the “regulations on the administration of company registration. Where other laws or administrative regulations provide otherwise, such provisions shall prevail.

When a joint stock limited company issues new shares for the purpose of increasing its registered capital, the shareholders shall subscribe for the new shares in accordance with the relevant provisions on the payment of share funds for the establishment of a joint stock limited company.

In case of assets acquisition by a foreign investor, the investor shall stipulate the time limit for capital contribution in the contract and articles of association of the foreign-funded enterprise to be established. If an enterprise with foreign investment is established and the assets of a domestic enterprise are purchased and operated through the enterprise agreement, the investor shall pay the investment equal to the asset consideration within the prescribed period of consideration; The capital contribution of the remaining part shall comply with the relevant provisions on capital contribution of the establishment of foreign-invested enterprises.

If the proportion of contribution by the foreign investor is less than 25% of the registered capital of the enterprise, the investment made by the foreign investor in cash shall be fully paid within 3 months from the date of issuance of the business license of the foreign- invested enterprise. If the investor makes investment in kind or industrial property rights, the amount shall be paid within 6 months from the date of issuance of the business license of the foreign-invested enterprise.

5. Antitrust review. In accordance with the provisions of the anti-monopoly law, if a foreign investor acquires a domestic enterprise that meets the declaration standards stipulated in the provisions of the state council on the standards for the declaration of concentration of business operators, it shall report to the ministry of commerce in advance.

6. Safety review. Foreign investors acquire domestic military and military supporting enterprises, enterprises around key and sensitive military facilities, and other units related to national defense and security; Mergers and acquisitions in relation to national security of agricultural products, important energy and resources, infrastructure, important transportation services, key technology and major equipment enterprise, and the actual control may be obtained by foreign investors, the investment direction of the ministry of commerce, to the need for m&a security review, mergers and acquisitions of domestic enterprises by foreign investors security clearance joint inter-ministerial meeting to review, review opinions written notice to the applicant by the ministry of commerce

As a means of payment for merger and acquisition consideration, it should comply with relevant national laws and administrative regulations. Foreign investors who use their legally owned RMB assets as a means of payment shall be approved by the foreign exchange administration agencies.

Approval of Application and Procedure

1. Foreign invested enterprises shall submit application materials for merger and acquisition to the administrative authority of the pilot zone.

2. The administrative authority of the pilot zone shall make a decision whether to approve or not according to relevant provisions. If it approves, it shall issue the approval certificate for foreign-invested enterprises or the approval certificate for enterprises invested by overseas Chinese from Taiwan, Hong Kong and Macao; In case of disapproval, the reasons shall be given in writing.

3. Merger and acquisition with equity as payment means, establishment of special purpose companies abroad to merge and acquire domestic companies, and merger and acquisition of domestic companies in the name of companies legally established or controlled by domestic companies, enterprises or natural persons in the name of companies legally established or controlled abroad to merge and purchase related domestic companies (i.e. return merger and acquisition) shall be submitted to the ministry of commerce for approval.

Details list of required documents

Situation 1: equity merger and acquisition

1. Application report;
2. The shareholders of the merged domestic limited liability company unanimously agree to the resolution of the equity merger of the foreign investor, or the resolution of the general meeting of shareholders of the merged domestic limited liability company agreeing to the equity merger of the foreign investor;
3. Agreements for foreign investors to purchase equity of shareholders of domestic companies or subscribe for capital increase of domestic companies;
4. The articles of association of the foreign-invested enterprise signed by the legal representative or authorized representative of the investor (the sole proprietorship enterprise only needs to submit the articles of association);
5. Notarized and certified qualification certificate or identification certificate of overseas investor and Chinese translation document;
6. Bank credit certificate and Chinese translation of the overseas investor;
7. Business license (copy) and bank credit certificate of the domestic investor;
8 identity certificate of legal representative or authorized representative of the investor (copy);
9 letter of appointment of board member (or executive director) board member (or supervisor) issued by the investor, identification certificate of director and supervisor (copy);
10. Approval documents or filing documents issued by the state-owned assets management department (projects involving state-owned assets shall be provided in accordance with the relevant provisions of state-owned assets management);
11 assets appraisal report and latest annual audit report of the acquired domestic company;
12. A situation statement of the enterprise invested by the acquired domestic company;
13. Business license of the acquired domestic company and its invested enterprise (copy);
14. The employee placement plan signed by the legal representative or authorized representative of the investor of the acquired domestic company and the chairman of the trade union (if any);
15. Agreement on the disposal of creditor’s rights and debts of the merged domestic enterprise by foreign investors and other parties;
16. The statement of the parties to the merger and acquisition on whether there is any correlation between the parties to the merger and acquisition;
17. Relevant administrative license documents shall be provided for the business matters of foreign-funded enterprises established after the merger and acquisition involving administrative license;
18. Power of attorney for service of legal documents;
19. If an intermediary agency is entrusted with the declaration, the agency agreement and the agency business license (copy) shall be provided;
20. In case of authorized signature, the original letter of authorization and identity certificate of legal representative or authorized representative (photocopy) shall be presented.

Situation 2: asset acquisition:

1. Application report;
2. The resolution of the domestic enterprise property right holder or authority agreeing to sell assets;
3. The asset purchase agreement signed between the foreign-funded enterprise to be established and the domestic enterprise, or the asset purchase agreement signed between the foreign investor and the domestic enterprise;
4. The articles of association of the foreign-invested enterprise signed by the legal representative or authorized representative of the investor (the sole proprietorship enterprise only needs to submit the articles of association);
5. Notarized and certified qualification certificate or identification certificate of overseas investor and Chinese translation document;
6. Bank credit certificate and Chinese translation of the overseas investor;
7. Business license (copy) and bank credit certificate of the domestic investor;
8. Identity certificate of legal representative or authorized representative of the investor (copy);
9. Letter of appointment of board member (or executive director) board member (or supervisor) issued by the investor, identification certificate of director and supervisor (copy);
10. The articles of association of the domestic enterprise acquired (copy);
11. Certificates of creditors notified and announced by the merged domestic enterprise and explanations on whether the creditors raise objections;
12. Assets appraisal report and latest annual audit report of the acquired domestic enterprise;
13. The situation statement of the enterprise invested by the acquired domestic enterprise;
14. Business license (copy) of the acquired domestic enterprise and its invested enterprise;
15. The employee placement plan signed by the legal representative or authorized representative of the investor of the acquired domestic company and the chairman of the trade union (if any);
16. Agreement on the disposal of creditor’s rights and debts of the merged domestic enterprise by foreign investors and other parties;
17. Relevant approval documents or filing documents issued by state-owned assets management departments (projects involving state-owned assets shall be provided in accordance with relevant provisions of state-owned assets management);
18. The statement of the parties to the merger and acquisition on whether there is any correlation between the parties to the merger and acquisition;
19. A notice issued by a domestic enterprise selling assets to its creditors and a notice published in a national newspaper at or above the provincial level;
20. Where the purchase and operation of assets of domestic enterprises involves the approval of other relevant government departments, the licensing documents shall be issued;
21 power of attorney for service of legal documents;
22. If an intermediary agency is entrusted with the declaration, the agency agreement and the agency business license (copy) shall be provided;
23. In case of the authorized signature document, the original power of attorney and the identity certificate of the legal representative or authorized representative (photocopy) shall be presented;
24. Other documents required by the examination and approval authorities.

Legal Ground Requirement and Documents of Acquiring Chinese Enterprises

1. Anti-monopoly law of the People’s Republic of China (2007).
2. Regulations on acquisition of domestic enterprises by foreign investors (ministry of commerce no. 6, 2009).
3. Notice of the general office of the state council on establishing the security review system for foreign investors to acquire domestic enterprises (guoba [2011] no.6).

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