In a move welcomed by both domestic and foreign investors, the
State Administration of Industry and Commerce ("SAIC")
promulgated the "Administrative Measures for Registration of
Capital Contribution by Equity Stock" on 14 January 2009
("Measures") and the Measures became effective on 1 March
The Measures liberalizing the use of equity in capital
contributions are expected to encourage new investments in the
People's Republic of China ("PRC") with the use of
less cash. Corporate restructuring should also be facilitated
especially in the light of the current international credit
Currently, Article 27 of the PRC Company Law only allows capital
contribution in cash or in kind such as physical property,
intellectual property, land use rights which can be valued and
freely transferable. The Article is also subject to restrictions
under the other laws or other administrative regulations. The
Measures are supplemental to Article 27 and provide the legal basis
for capital contribution by the equity interests of another
According to Article 2 of the Measures, only shares or equity of
limited liability companies ("LLC") or joint stock
companies ("JSC") incorporated in PRC can be used for
capital contribution in another company in PRC ("the Investee
Company"). Foreign invested enterprises appear not to be
excluded from the application of the Measures.
Article 3 of the Measures requires that the title of shares to
be used for capital contribution shall be free from encumbrance,
complete and transferable under the law. Shares of the following
categories are prohibited from being used as capital contribution :
Shares of an equity company which registered capital has not
been fully paid;
The transfer of such shares are prohibited under the Articles
of Association of the company concerned;
Failure to obtain approval for the transfer of such shares
required under any laws, administrative regulations or orders of
the State Council; and
Any other situations prohibiting the transfer of shares under
any laws, administrative regulations or orders of the State
In line with Article 27 of the PRC Company Law, the total
shareholding used for capital contribution shall not exceed 70% of
the registered capital of the Investee Company. The shareholding
should also be appraised by a qualified valuation agency.
Procedures of using shares in capital contribution
Under Article 6 of the Measures, the transfer of shares for
capital contribution shall be completed within 1 year of the
establishment of the Investee Company. As for using shares to pay
for the increased registered capital of the Investee Company, the
transfer of shares should be completed before applying for the
increase in the registered capital.
If shares are to be used as capital contribution in the Investee
Company, the LLC concerned shall file an application with the SAIC
to change the owner(s) of such shares to the Investee Company.
Similarly, if the shares of a JSC registered with any securities
registration and clearing institution are used as capital
contribution, the JSC shall arrange for the share assignment and
transfer to be made through the relevant security registration and
clearing institution. For other equity stocks used for capital
contribution, the share transfer shall comply with the law in order
to vest such equity interest with the Investee Company.
According to Article 9 of the Measures, if equity stocks are to
be used as capital contribution in the setting up of an Investee
Company, details of the time schedule, amount and transfer of the
shares for capital contribution in the Investee Company shall be
provided to the SAIC when the Investee Company is set up. As usual,
capital verification is required after completion of the transfer
of such shares to the Investee Company.
Relevant approvals are still required
It is reiterated in Article 7 of the Measures that approval for
the share transfer that may be required under any other laws,
administrative regulations or orders of the State Council is still
necessary for the purpose of capital contribution under the
Measures. Therefore, if the shares of foreign invested enterprises
are used as capital contribution, approval(s) of the Ministry of
Commerce or their provincial equivalent departments to transfer the
shares to the Investee Company will still be necessary. For foreign
enterprises or domestic enterprises in the restricted industries,
still further approval(s) will be required.
If you have any question about the above Measures or other
issues on foreign direct investments, joint ventures, mergers and
acquisitions in Mainland China, experienced lawyers in our China
Business Department will be happy to assist you.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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