China: 2006 M&A Rules: Regulations On Mergers And Aquisitions Of Domestic Enterprises By Foreign Investors In The People´s Republic Of China - Part 2

Last Updated: 1 November 2006
Article by Thomas Shoesmith

Examples Of Transactions (After 2006 Rules)

1. Overview Of Transaction Timeline For Acquisitions

(a) Negotiations—a target is identified and negotiations begin for an acquisition

The parties decide whether the buyer will acquire equity of the Chinese company or assets

  1. If the buyer will acquire equity, then no new PRC entity is required; the domestic company will be converted to a "foreign-invested enterprise" after the acquisition
  2. If the buyer will acquire assets, then the buyer will need to use a new or existing FIE to hold the assets in China; if a new FIE is contemplated, the parties should allow an additional 4-8 weeks to establish one

The parties decide whether the buyer will pay cash or use equity

  1. If the buyer will use cash, the approval process will be relatively simple
  2. If the buyer wants to use equity, it must consider whether the new rules permit it to do so (it must be listed on a major exchange, have a stable trading history for the past year, etc.)

If the PRC company is State-owned (an "SOE") or a PRC listed company, then additional approvals will be required.

(b) Appraisals—in all cases, at least one and perhaps two appraisals will be required, and the purchase price may not be "obviously lower" than the appraised value:

  1. an appraisal by a PRC "asset appraisal institution" is required in all cases—these are not always Chinese firms; some foreign firms are licensed to perform appraisals. The parties can choose the appraisal institution
  2. in cases where equity is used, the parties must also engage a PRC "acquisition consultant" who will prepare an independent report on the value of the equity to be paid to the Chinese seller

(c) Transaction documents—the transaction documents may be negotiated in English, but they must be governed by Chinese law and eventually must be submitted for approval in Chinese. Since the governing language may be Chinese, the translation is key

(d) Application package—a detailed package of documents will have to be submitted to obtain approval for the transaction; the parties should start early to assemble this package

(e) Notice to creditors—in an asset deal, notice to creditors must be given and a notice published in a national newspaper before the approval process begins; this should be planned for in advance

(f) Signing and closing; timing of payment —the transaction documents are not effective until they are approved by MOFCOM. The parties must submit the signed purchase agreement when applying for approval, but it may take four to six weeks, or longer, to obtain approvals. This has a number of implications:

  1. the purchase agreement should contemplate a "sign-and-close" structure—that is, the parties sign now, and the closing occurs at a later date after government approvals have been obtained
  2. the buyer should negotiate covenants relating to the conduct of the business prior to "closing" (which will occur after the approvals are obtained), including negative covenants to prevent the Chinese company from adversely affecting its value before closing
  3. the buyer should negotiate closing conditions which permit it to refuse to close if there have been material adverse changes to the target business since the signing date
  4. often the seller will ask for payment of part or all of the purchase price at signing—not at closing. The buyer obviously should resist this since the purchase agreement is not yet effective. Foreign exchange laws make a bridge loan difficult, so this can be a serious issue for the parties.
  5. once approvals are obtained, the entire purchase price must be paid within a relatively short time, which makes holdbacks and indemnification escrows difficult

(g) Approval process—this is often complicated and always time-consuming

(h) Closing—once the necessary approvals are obtained the parties can close. The equity or assets are transferred to the buyer, and the buyer pays at least part of the consideration

(i) Risk of unwinding—if the buyer uses equity, there is a six-month drop-dead provision in the new Rules which requires that the transaction be completed within six months of the issuance of the unconditional business license (see Arts. 35-36). Thus if the parties sign the documents, get their approvals, and then the deal falls through (either because of failure to satisfy closing conditions or otherwise), all the documents are automatically reversed out.

2. Acquisition Of Domestic Company (Stock Or Assets) For Cash

This is the traditional foreign M&A scenario.

If the foreign investor is acquiring equity, it will either (a) purchase the entire domestic company and convert it to a WFOE; or (b) acquire part of the domestic company either from the existing owners or by an increase to registered capital, converting the domestic company to an equity joint venture (Art. 2)

If the foreign investor is acquiring assets, it will either (a) establish a new FIE, probably a WFOE, which purchases and operates the assets; or (b) purchase the assets and inject them into a new or existing FIE (Art. 2)

(a) Overview

  1. the 2006 Rules cover this acquisition (Art. 2)
  2. approvals from the Beijing level will not be required because the consideration is cash rather than stock (Art. 32)
  3. MOFCOM approval in Beijing will be required if a "key industry" is involved, where the acquisition might have an impact on "national economic security" or result in a transfer of actual control of a domestic enterprise that owns a well-known trademark or historic Chinese brand name (Art. 12)
  4. an appraisal must be conducted by a Chinese "asset appraisal institution" (Art. 14) but no valuation from the new PRC "acquisition consultant" because the consideration is cash rather than stock (Arts. 30-31)
  5. the approval system is essentially the same as under prior law—as opposed to the new, complex process required where equity is used as the acquisition consideration (Arts. 21-26)
  6. in the case of an asset deal, notice to creditors and publication in a national newspaper is required (Art. 13)
  7. the entire transaction price must be paid within certain time periods set in the new Rules—3 months (extendable to 12) in the case of equity acquisitions; in accordance with the parties’ agreement and FIE establishment rules in the case of asset acquisitions (Art. 16)
  8. if the transaction does not complete within six months of the issuance of the business license, it is possible the transaction will be unwound (Art. 36)47
  9. any relationship among the parties, de facto or otherwise, will have to be disclosed (Art. 15)
  10. antitrust clearance from MOFCOM in Beijing may be required if certain thresholds are met (Arts. 50-54).

(b) Procedure and timeline

(i) Summary

  • before or during the negotiation process, an "asset appraisal institution" in China must be retained to conduct an appraisal of the equities or assets to be sold, and the transaction price may not be "obviously lower" than reflected in the appraisal report
  • after the transaction documents are negotiated, the foreign investor and the PRC target company or shareholders will cooperate to assemble the package of documents for the application—note that all documents must be translated into Chinese—this can take a number of weeks
  • the application package is then submitted to MOFCOM, which will act within 30 days—the acquisition document is not legally effective until approved by MOFCOM
  • MOFCOM will send the approval certificate automatically to SAFE for registration—once SAFE issues its foreign exchange certificate, the consideration may be paid
  • the parties have 30 days after the MOFCOM approval is received to register with SAIC to obtain a new or amended business license for the new foreign-invested entity
  • within 30 days after issuance of the business license, the foreign investor must register with the tax bureau, customs, land use bureau, and other relevant departments
  • the process therefore can be expected to take 4 to 8 weeks at a minimum, and probably longer

(ii) Application package—the parties begin by putting together a package of documents for submission to the examination and approval authority (MOFCOM at the appropriate level, depending on the size and nature of the investment).

All documents must be in Chinese (Art. 56)

(iii) Equity acquisitions—in the case of an equity acquisition, recall that the foreign investor will either (a) purchase the entire domestic company and convert it to a WFOE; or (b) acquire part of the domestic company either from the existing owners or by an increase to registered capital, converting the domestic company to an equity joint venture (Art. 2). In this case the documents include:48

  • the equity purchase agreement or subscription agreement, which must cover certain subjects, including the transaction price and amount of equity to be purchased (Art. 22)49
  • an application for converting the domestic company
  • the target domestic company’s financial and audit report for the most recent fiscal year
  • notarized identity and creditworthiness documents for the foreign investor
  • a resettlement plan for the staff and workers of the domestic company
  • any agreement between the parties as to allocation of debts and liabilities, required by Art. 13
  • the appraisal report required by Art. 14
  • a report of any relationship among the parties required by Art. 15

(iv) Asset acquisitions—in the case of an asset acquisition, recall that the foreign investor will either (a) establish a new FIE, probably a WFOE, which purchases and operates the assets; or (b) purchase the assets and inject them into a new or existing FIE (Art. 2). In this case, the documents to be submitted must include:50

  • the asset purchase agreement, which must cover certain subjects (Art. 24)51
  • an application for the establishment of the FIE
  • the JV contract and articles of association
  • proof of notice to creditors and publication in a national newspaper, required by Art. 13, and a statement as to whether any creditors have raised objections
  • a resettlement plan for the staff and workers of the domestic company
  • any agreement between the parties as to allocation of debts and liabilities, required by Art. 13
  • the appraisal report required by Art. 14
  • a report of any relationship among the parties required by Art. 15
  • any licenses required for the operation of the assets

(v) MOFCOM approval—MOFCOM (at the appropriate level) must review and act on the application within 30 days (Art. 25). If the application is approved, it will issue an "approval certificate." (Art. 25)

(vi) SAFE registration—in the case of an equity acquisition, MOFCOM will send a copy of the approval certificate to the SAFE branch where the seller and the target domestic company are located. SAFE will then issue a "certificate of foreign investment-related foreign exchange registration of foreign exchange receipts from equity transfer" (Art. 25).52 This certificate is definitive evidence of payment in full by the foreign party.

(vii) SAIC approval

  • Asset acquisition—in an asset acquisition, the foreign investor must apply to SAIC for registration of the establishment of the FIE and to obtain a foreign-invested business license within 30 days after receipt of the MOFCOM approval certificate (Art. 26)
  • Equity acquisition—in an equity acquisition, the procedure is more complicated. Oddly, the Rules are silent as to when registration with the SAIC must take place (Art. 26). However, the Rules require the domestic company (not the foreign investor) to submit a number of documents, including the following, and obtain an "amendment registration" of its existing business license, indicating it is now foreign-invested:
  • an application
  • the purchase agreement
  • amended articles for the company and any JV contract
  • identification of the new board of directors and appointment documents (Art. 26)

(viii) Other registrations—within 30 days after the business license is issued, the foreign investor (the new owner) must register with the tax bureau, customs, etc.

3. Acquisition Of A PRC Company Using Equity Of The Foreign Party (Not An SPV)

Before the 2006 M&A Rules, the law did not specifically prohibit the use of foreign equity as acquisition currency in China, but applications to do so were regularly refused. The new Rules explicitly permit the use of equity, but only by companies listed on recognized exchanges (not including OTCBB) and subject to a complicated conditional approval process.

This example assumes there is no pre-existing relationship between the foreign investor and the owners of the Chinese company

Note that the 2006 Rules permit the use of equity to acquire the equity of a PRC company, but do not explicitly contemplate the use of equity to acquire assets; the latter structure might not be approved by the authorities before clarifying regulations are promulgated

(a) Overview

  1. the 2006 Rules cover the use of equity to acquire PRC equity (stock swaps) (Art. 2)
  2. only a buyer listed on a recognized exchange, not including OTCBB, may use equity for a PRC acquisition (Arts. 28-29)
  3. the buyers’ stock price must have been "stable" for the previous year (Arts. 28-29)
  4. approval from MOFCOM in Beijing is required in all cases where equity is used as acquisition consideration (Art. 32)
  5. additional approvals from MOFCOM in Beijing will be required if a "key industry" is involved, where the acquisition might have an impact on "national economic security" or result in a transfer of actual control of a domestic enterprise that owns a well-known trademark or historic Chinese brand name (Art. 12)
  6. an appraisal from an "asset appraisal institution" in China will be required; the transaction price may not be "obviously lower" than the value reflected in the report (Art. 14)
  7. a report from a PRC "acquisition consultant" will be required (Arts. 30-31)
  8. in the case of an asset deal, notice to creditors and publication in a national newspaper is required (Art. 13)
  9. the new complex system of approvals will be required, see below (Arts. 21-26 and 32-35)
  10. any relationship among the parties, de facto or otherwise, will have to be disclosed (Art. 15)
  11. using equity permits higher leverage in the target company after the acquisition (Arts. 19-20)
  12. antitrust clearance from MOFCOM in Beijing may be required if certain thresholds are met (Arts. 50-54)
  13. if the transaction is not completed within six months of the issuance of the business license, it is subject to being unwound (Art. 36)

(b) Procedure and timeline

(i) Summary

  • before or during the negotiation process, two different consultants must be retained and reports produced:
  • an "asset appraisal institution" in China must be retained to conduct an appraisal of the equities or assets to be sold, and the transaction price may not be "obviously lower" than reflected in the appraisal report; and
  • a PRC "acquisition consultant" must be retained to conduct a valuation of the equity to be used in the transaction and to report on the foreign acquirer
  • the parties negotiate and sign the relevant transaction documents
  • the parties assemble the detailed application package (Arts. 22, 32)
  • the application package is submitted to MOFCOM, which must act within 30 days; if MOFCOM approves, it will issue a conditional approval certificate good for six months (Art. 33)
  • the domestic company then has 30 days to register with SAIC and SAFE, who will issue annotated documents good for 8 months (Arts. 34-35)
  • the domestic company must also file pre-signed documents that can be used to unwind the transaction if it does not complete within six months after receiving the non-annotated business license from SAIC (Arts. 34-35)
  • within six months of receiving the annotated SAIC and SAFE documents, the domestic company must re-apply to both MOFCOM to obtain a non-annotated foreign investment approval certificate (Art. 35)
  • within 30 days after receiving the MOFCOM final approval certificate, the domestic company apply to SAIC and SAFE for a final, non-annotated business license and foreign exchange registration certificate (Art. 35)
  • if the transaction is not thereafter completed within six months, the entire structure will be unwound, using the pre-executed documents earlier filed with SAIC (Art. 36)

(ii) Application package—in addition to the documents required by Arts. 21 and 22, additional documents must be submitted for approval by MOFCOM (Art. 32). The documents required by Arts. 21 and 22 include:53

  • the equity purchase agreement or subscription agreement, which must cover certain subjects, including the transaction price and amount of equity to be purchased (Art. 22)54
  • an application for converting the domestic company
  • the equity purchase or subscription agreement
  • the target domestic company’s financial and audit report for the most recent fiscal year
  • notarized identity and creditworthiness documents for the foreign investor
  • a resettlement plan for the staff and workers of the domestic company
  • any agreement between the parties as to allocation of debts and liabilities, required by Art. 13
  • the appraisal report required by Art. 14
  • a report of any relationship among the parties required by Art. 15

In addition, Part Four of the new Rules requires the following additional documents (Art. 32):

  • report of the acquisition consultant
  • list showing all 5%+ shareholders in the overseas company
  • most recent audited annual financial report
  • share trading report for most recent six months

(iii) MOFCOM conditional approval good for six months—MOFCOM in Beijing will act within 30 days to approve or reject the application. If it approves, it will issue an annotated (conditional) certificate good for six months: an "approval certificate with an annotation of ‘acquisition of domestic company by foreign investor using equity, valid for six months from date of issuance’’" (Art. 33)

(iv) SAIC and SAFE registration—conditional business license and foreign exchange certificate good for eight months

The domestic target must register with SAIC and SAFE within 30 days of the annotated approval certificate (Art. 35)

The SAIC and SAFE will issue a "foreign-invested enterprise business license and a foreign exchange registration certificate respectively with the words ‘valid for eight months from the date of issue’ annotated thereon’" (Art. 34)

The domestic company must file at the same time an "advanced submission of the documents designed to restore the equity structure, such as application for change in equity, amendment to the articles of association of the company and equity transfer agreement, which shall be signed by the legal representative of the Domestic Company" (Art.34).

(v) MOFCOM final approval

Within six months after issuance of the annotated business license by SAIC, the domestic company or its shareholders must apply to MOFCOM and SAFE to obtain non-annotated certificates (Art.35)55

The earlier-issued certificates must be submitted in addition to those required by applicable regulations56

On approval, MOFCOM will issue an "approval certificate for overseas investment by Chinese enterprise"57 replacing the annotated foreign-invested enterprise approval certificate

(vi) SAIC and SAFE final approval

Within 30 days after obtaining the non-annotated foreign-invested enterprise approval certificate from MOFCOM, the domestic company must apply to SAIC and SAFE for replacement of non-annotated foreign-invested enterprise business license and foreign exchange registration certificate (Art. 35)

(vii) Transaction must complete within six months or be unwound—if the domestic company and the overseas company do not complete the "procedures for change of equity" within six months of the issuance of the non-annotated business license, then:

  • MOFCOM’s previously issued annotated approval certificate and non-annotated approval certificate for overseas investment will automatically become void, and
  • SAIC will register the pre-filed "unwinding documents" and "have the equity structure of the domestic company restored to the status before the Equity Acquisition" (Art. 36)58

If the "issuance of new shares" by the overseas company "fails to materialize," the domestic company must reduce its registered capital and make an announcement to that effect in a newspaper, before SAIC completes the unwinding process

If the domestic company does not take the actions required in Art. 36, the SAIC will take action on its own (Arts. 35-36)

(viii) Limitation on distribution of profits—the domestic company may not distribute any profits or make any capital account transactions until the non-annotated certificates are issued (Art. 37)

4. Restructuring A PRC Company Into An Offshore Holding Company Structure

It is almost always a prerequisite for a Chinese company’s ability to access international capital markets that it restructure itself into an offshore holding company structure. Typically the owners of the domestic company form a new offshore company (the "SPV") which acquires all or a majority of the equity of the domestic company. Foreign capital is then attracted into the offshore SPV, either in private placements or through a public offering.

(a) Overview

  1. the 2006 Rules cover the formation of SPVs, the subsequent acquisition of a domestic company, and the going-public transaction by which the SPV enters the international capital markets (Arts. 39-49)
  2. SPVs are narrowly defined (Art. 39)
  3. the acquisition transaction in the restructuring must be an equity swap—leaving an interesting question as to whether an SPV that uses cash to acquire the domestic company can escape the reach of the new Rules (Art. 39)
  4. MOFCOM approval is required for the formation of the SPV; compliance with SAFE Circular 75 is required as well
  5. a report from a PRC "acquisition consultant" will be required, including an appraisal of "the issue price of the shares of the SPV to be listed overseas in the future" (Art. 44)
  6. Note that the "total value of the issue price for the shares of the SPV to be listed shall not be less than the value of the corresponding equity of the target Domestic Company as appraised by a relevant asset appraisal institution of China" (Art. 43). It is not clear exactly what this means, but at a minimum it indicates the regulators will intrude themselves into every aspect of the pricing of these types of deals

  7. a valuation by an "asset appraisal institution" of China will also be required for the acquisition by the SPV of the domestic company (Art. 14)
  8. a business plan for the SPV’s overseas listing must be submitted
  9. the approval process for the equity swap restructuring includes everything that is required for a foreign equity acquisition (see example above) plus additional steps—this makes the approval process for SPVs and subsequent listings extremely time-consuming and complicated (Arts. 42-47)
  10. if the SPV does not complete its overseas listing within one year, the entire transaction will be unwound (Arts. 47-48)
  11. the proceeds of the financing do not need to be repatriated immediately, but the parties must file, and comply with, a repatriation plan filed with SAFE

(b) Definition of SPV—an "SPV" is carefully defined in the Rules as "an overseas company59 directly or indirectly controlled by a Chinese domestic company or natural person for the purpose of realizing the overseas listing [going public transaction] of the interests it actually owns in a domestic company." (Art. 39). Therefore there are three elements of the definition; an SPV must be:

  1. an overseas company;60
  2. directly or indirectly controlled by a Chinese person or entity;
  3. for the purpose of realizing the offshore listing of interests it (the SPV) owns in the domestic company.

(c) Scope of Section Three—the procedures for SPVs and going-public transactions in the new Rules are likely to be burdensome, so there has been a great deal of speculation as to how transactions might be structured to fall outside the scope of the new Rules.

Consideration of this question begins by examining the scope of Section Three. On its face, Section Three applies where the shareholders of an SPV use the equity they hold in that entity, or the SPV uses newly issued shares, to acquire the shareholder’s equity in a domestic company, or the newly issued shares of a domestic company, for the purpose of realizing an overseas listing (Art. 39). Thus, the following elements must be present for Section Three to apply:

  1. equity of an SPV must be used to acquire equity in a domestic company61
  2. the acquirer must be either the SPV’s shareholders or the SPV itself
  3. the equity being acquired must be held by the SPV’s shareholders or be newly issued by the domestic entity
  4. the purpose of the restructuring acquisition must be to "realize an overseas listing" of the SPV itself or another entity which "holds an interest" in the SPV

On its face, the language of Art. 39 has some interesting implications and limitations, which may be clarified in subsequent regulations:

(i) if the shares used for the domestic acquisition (restructuring) are held by persons other than the domestic company’s shareholders, arguably it would remove the transaction from the scope of Section Three. N.B., however, that the general provisions of Art. 15 prohibit parties from circumventing the requirement to disclose relatedness "by trust, holding through a third party or other means"

(ii) on its face, Art. 39 appears to limit the scope of Section Three to instances in which equity is used for the restructuring—thus a cash transaction would fall outside the scope of Section Three

(iii) if the SPV uses equity to acquire assets and inject them into a new domestic company, it is possible this would fall outside the scope of Section Three; but see the caveat based on a reading of Art. 43, below at p. 15

(iv) if the offshore company were not held by Chinese persons or entities at the time of the acquisition of the domestic company, then:

  • if it wanted to use cash for the acquisition, presumably the use of cash itself would remove it from the scope of Section Three; but
  • it would be prohibited from using equity because unless it were an SPV it could not use equity without meeting the requirements of Arts. 28-29

(v) if the offshore entity were already public at the time that it became an "SPV"—for example, if the Chinese persons acquired an already-public company and used that to acquire the domestic company or assets—it might fall outside the scope of Section Three, or least outside the scope of the requirement for CSRC approval, see below

(d) Procedures and timeline

For purposes of this example, we will assume that the entity to be formed fits the definition of an SPV, and that the subsequent restructuring and going-public transactions are captured by the scope of Section Three of the new Rules (Arts. 39-49)

(i) Summary

  • a PRC asset appraisal institution as well as an "acquisition consultant" will have to be retained at the beginning of the process; the Consultant’s report will be required to form the SPV
  • an application package must be submitted to MOFCOM to obtain approval to form the SPV; if that approval is obtained, SAFE registration will also be required
  • once the SPV is organized, a very detailed application package must be prepared and submitted to MOFCOM—this package is basically a combination of all the documents required for simpler transactions, plus some additional items
  • if the company that eventually will go public will be a parent of the SPV, then information about that company must also be provided
  • MOFCOM will issue an approval "in principle" which must be used to obtain CSRC approval—no one knows what criteria CSRC will use although a notice issued in October 2006 listed the application documents to be submitted
  • if CSRC approves, MOFCOM will issue a conditional approval good for one-year, on the strength of which the parties obtain conditional approvals from SAIC and SAFE
  • as in a normal equity swap acquisition, the domestic company must file pre-executed unwinding documents with SAIC
  • once CSRC approval is obtained, listing of the SPV must be completed within one year
  • after the listing is complete, the domestic company must report back to MOFCOM and apply for final approval certificates
  • the domestic company must also file a plan for the repatriation of the financing proceeds
  • if the listing is not completed with an year, or if the domestic company fails to report back to MOFCOM, the SAIC will use the pre-executed documents to unwind the transaction

(ii) Application package—formation of the SPV—MOFCOM and SAFE

MOFCOM approval is required for the formation of the SPV (Art. 42). Compliance with SAFE Circular 75 is required as well.

Art. 42 appears to contemplate only formation of SPVs by domestic companies, but elsewhere in the Rules the formation of SPVs by domestic natural persons is also mentioned. This may be clarified in subsequent regulations.

The documents to be submitted to MOFCOM for approval to form an SPV include:

  • identity documents of the "ultimate controlling person of the SPV"
  • a business plan for the overseas listing of the SPV
  • an appraisal report prepared by the acquisition consultant "on the issue price of the shares of the SPV to be listed in the future"

If MOFCOM approves, it will issue a certificate approving the formation of the SPV.

The founder or controlling person then must apply to the local SAFE branch for a foreign exchange registration certificate for the overseas investment (Art. 42)

(iii) Application package—restructuring and going-public transactions

Once the SPV is organized, it will proceed to acquire most or all of the equity of the domestic company, and then access international capital markets through an IPO, reverse acquisition transaction, etc.

The parties must assemble and prepare an application package which includes the items required for any equity swap transaction by Art. 32, which are repeated here from a previous example

Art. 32 requires the submission of the documents required by Arts. 21 and 22, which include:62

  • the equity purchase agreement or subscription agreement, which must cover certain subjects, including the transaction price and amount of equity to be purchased (Art. 22)63
  • an application for converting the domestic company to an FIE
  • the equity purchase or subscription agreement
  • the target domestic company’s financial and audit report for the most recent fiscal year
  • notarized identity and creditworthiness documents for the foreign investor
  • a resettlement plan for the staff and workers of the domestic company
  • any agreement between the parties as to allocation of debts and liabilities, required by Art. 13
  • the appraisal report required by Art. 14
  • a report of any relationship among the parties required by Art. 15
  • In addition, Article 32 requires the following additional documents:
  • report of the acquisition consultant (this is mentioned again in the SPV-specific documents required by Art. 44);
  • a list showing all 5%+ shareholders in the overseas company (here, the SPV)
  • most recent audited annual financial report
  • share trading report for most recent six months (logically, this should not be required since the SPV probably is not a trading entity)

Finally, Art. 44 requires the following documents in the case of equity swaps by SPVs:

  • the "approval document and certificate for overseas investment in establishment of enterprises" issued at the time of establishment of the SPV
  • the "foreign exchange registration of overseas investment of the SPV"
  • "the identity document or the document for commencement of operation and articles of association of the ultimate controlling person" of the SPV64
  • a business plan for the overseas listing of the SPV—this was previously filed
  • an appraisal report prepared by the acquisition consultant on the issue price of the shares of the special purpose company to be listed overseas in the future—this was also previously filed

If the company to be taken public is a parent of the SPV ("holds an interest in the SPV") then the following documents must also be submitted (Art. 44):

  • charter documents for the parent
  • a "detailed explanation on the trading arrangement and discount method in respect of the equity of the target Domestic Company between the special purpose company and such overseas company"

(iv) MOFCOM approval in principle—if MOFCOM approves the documents submitted in accordance with Art. 44, it will issue an "approval-in-principle reply letter" (Art. 45)

(v) CSRC approval—on the strength of the MOFCOM reply letter, the domestic company must submit the "listing application documents"65 to the CSRC "on the strength of the reply letter." The CSRC must decide whether to approve or reject the application within 20 working days.66 (Art. 45)

(vi) MOFCOM conditional approval good for one year—after the CSRC approval is received, the domestic company then applies again to MOFCOM for an "approval certificate" bearing the annotation, "equity held by overseas special purpose company, valid for one year from the date of issue of the business license"67

(vii) SAFE registration—if the acquisition leads to a change in the equity of the SPV, the "domestic company or natural person that holds equity in the SPV" must apply to MOFCOM for verification and approval of the "change of overseas investment in establishment of enterprise" and amend its (the company’s or the person’s) foreign exchange registration of foreign investment

(viii) SAIC and SAFE registrations; issuance of annotated business license and foreign investment certificate valid for 14 months —within 30 days of receiving the annotated approval certificate from MOFCOM, "the domestic company"68 must process an amendment with SAIC and SAFE, who will issue a "foreign-invested enterprise business licence and a foreign exchange registration certificate respectively with the words ‘valid for 14 months from the date of issue’ annotated thereon" (Art. 46)

The domestic company must also submit documents pre-signed by its legal representative that can be used to unwind the transaction, as required for all equity acquisitions, see discussion of Art. 34 at p. 11

(ix) Final approval process—the approval process is finalized according to the following steps (Art. 47):

  • within 30 days of completing the overseas listing of the SPV, the domestic company must:
  • report the status of the listing and financing proceeds repatriation plan69 to MOFCOM
  • apply for replacement of the annotated foreign invested enterprise certificate with a non-annotated certificate
  • report the status of the overseas listing and file relevant documents with the CSRC
  • file the financing proceeds repatriation plan with SAFE, and implement the plan under the supervision of SAFE
  • within 30 days of obtaining the non-annotated foreign invested enterprise approval certificate from MOFCOM, the domestic company must apply to SAIC and SAFE for replacement of the annotated foreign-invested enterprise business licence and foreign exchange registration certificate

(x) Unwinding the transaction—the annotated MOFCOM certificate will automatically become void and the equity structure of the domestic company will be unwound and will "restore to the status before the Equity Acquisition" (see discussion of Art. 36, p. 11):

  • if the domestic company fails to report the transaction within the 30-day period (Art. 47); or
  • if the domestic company fails to obtain the non-annotated MOFCOM approval certificate within one year of issuance of the business license (Art. 48)

(xi) Financing proceeds—the financing proceeds from the overseas listing70 must be repatriated back to China pursuant to the repatriation plan filed with SAFE. The repatriation may be accomplished in the following ways (Art. 48):

  • loans to the domestic company;
  • establishing a new FIE in China;
  • acquiring a domestic enterprise.

(xii) Repatriation of dividends, etc.—the Chinese shareholders of the SPV must repatriate back to China within 6 months all "profits, dividends and foreign exchange income from capital change" (Art. 48)

(xiii) Follow-on acquisitions—acquisitions of PRC companies following the completion of the overseas listing using shares of the SPV will be subject to Sections One and Two of Part Four of the Rules.71

Footnotes

47. The uncertainty arises in the case of acquisitions of assets, which do not seem to be covered by Art. 36.

48. The documents required by Art. 21 are:

  1. the resolution by which the shareholders of the target domestic limited liability company unanimously consent to the Equity Acquisition by the foreign investor or the resolution of the shareholders' general meeting of the target domestic company limited by shares consenting to the Equity Acquisition by the foreign investor;
  2. the application of the target Domestic Company for conversion and re-establishment as a foreign-invested enterprise according to law;
  3. the contract and articles of association of the foreign-invested enterprise to be established upon acquisition;
  4. the agreement for purchase of the shareholder’s equity of the Domestic Company or for subscription for the capital increase of the Domestic Company by the foreign investor;
  5. the financial and audit report of the target Domestic Company for the most recent financial year;
  6. the identity document, registration certificate and creditworthiness document of the investor that have been notarized or certified according to law;
  7. the details of the enterprises in which the target Domestic Company invests;
  8. the (copies of) business licences of the target Domestic Company and the enterprises it invests in;
  9. the resettlement plan for the staff and workers of the target Domestic Company; and
  10. the documents required to be submitted according to Articles 13, 14 and 15 hereof.

49. Art. 22 lists the following topics:

  1. the particulars of the parties to the agreement, including their names and domiciles, and the names, positions and nationalities of their legal representatives, etc.;
  2. the amount and price of the equity to be purchased or the capital increase to be subscribed for;
  3. the time limit and method of the performance of the agreement;
  4. the rights and obligations of all parties to the agreement;
  5. liabilities for breach of contract and resolution of disputes; and
  6. the date and place of execution of the agreement.

50. Art. 23 requires the following documents:

  1. the resolution of the owner of enterprise property rights or the authority body of the domestic enterprise consenting to the sale of the assets;
  2. the application for establishment of the foreign-invested enterprise;
  3. the contract and articles of association of the foreign-invested enterprise to be established;
  4. the asset purchase agreement concluded between the foreign-invested enterprise to be established and the domestic enterprise, or the asset purchase agreement concluded between the foreign investor and the domestic enterprise;
  5. the articles of association and (copies of) the business licence of the target domestic enterprise;
  6. proof of notification and announcement to the creditors by the target domestic enterprise and statement on whether the creditors have raised any objection;
  7. the identity document or certificate for commencement of operation and the creditworthiness document of the investor that have been notarized or certified in accordance with the law;
  8. the resettlement plan for the staff and workers of the target domestic enterprise; and
  9. the documents required to be submitted according to Articles 13, 14 and 15 hereof.If the purchase and operation of the assets of the domestic enterprise pursuant to the preceding paragraph requires li censes from other relevant government departments, such relevant licensing documents shall be submitted together with the above documents.

51. Specifically, Art. 24 requires the asset purchase agreement to cover the following subjects:

  1. the particulars of all parties to the agreement, including their names and domiciles, and the names, positions, nationalities, etc. of their legal representatives;
  2. a list of the assets to be purchased and their prices;
  3. the time limit and method of the performance of the agreement;
  4. the rights and obligations of all parties to the agreement;
  5. liabilities for breach of contract and resolution of disputes; and
  6. the date and place of execution of the agreement.

52. This certificate is the proof of payment in full by the foreign party (Art. 25).

53. See list at n. 48.

54. Art. 22 lists the following topics:

  1. the particulars of the parties to the agreement, including their names and domiciles, and the names, positions and nationalities of their legal representatives, etc.;
  2. the amount and price of the equity to be purchased or the capital increase to be subscribed for;
  3. the time limit and method of the performance of the agreement;
  4. the rights and obligations of all parties to the agreement;
  5. liabilities for breach of contract and resolution of disputes; and
  6. the date and place of execution of the agreement.

55. The language of Art. 35 is ""for completion of the verification and approval, and registration procedures of overseas investment in establishment of enterprises in connection with their holding of equity in the overseas company".

56. Specifically, Verification and Approval Items Relevant to Investment in and Establishment of Enterprises Outside China.

57. Presumably if it is individuals who are the recipients of the overseas company’s equity, the approval certificate will refer to "persons" rather than "enterprise."

58. It is not clear how this provision would apply to an acquisition of assets using foreign equity.

59. See definition above.

60. Defined in Art. 29, see p. 9.

61. Therefore, the use of cash to acquire equity, or the use of either cash or equity to acquire assets, appears not to be captured by Art. 39.

62. See list at n. 48.

63. Art. 22 lists the following topics:

  1. the particulars of the parties to the agreement, including their names and domiciles, and the names, positions and nationalities of their legal representatives, etc.;
  2. the amount and price of the equity to be purchased or the capital increase to be subscribed for;
  3. the time limit and method of the performance of the agreement;
  4. the rights and obligations of all parties to the agreement;
  5. liabilities for breach of contract and resolution of disputes; and
  6. the date and place of execution of the agreement.

64. For the first time, this suggests that the SPV might be controlled by an individual, not only a PRC company.

65. It is not clear what the "listing application documents" are.

66. This is the CSRC approval referred to in Art. 40.

67. Art. 45 does not seem to allow MOFCOM any discretion at this stage; evidently, if CSRC approval is obtained, MOFCOM must issue the annotated approval certificate.

68. Again, no reference to natural persons here.

69. These "financing proceeds" appear to refer to the proceeds of the going-public transaction, which presumably includes a concurrent PIPE. The required "financing plan" might not cover a Black Box offering, however.

70. These "financing proceeds" appear to refer to the proceeds of the going-public transaction, which presumably includes a concurrent PIPE. The required "financing plan" might not cover a Black Box offering, however.

71. Art. 50 only refers to subsequent "acquisitions of Domestic Companies" using the shares of the SPV. Parts One and Two only cover acquisitions using equity.

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