Foreign investors in China are increasingly using shares in
existing domestic companies to acquire an interest in other
domestic companies. But they should be aware of certain
restrictions be¬fore contemplating such a move. PRC law allows
a shareholder of a limited liability company or a company limited
by shares ("Invested Company") to make
capital contribution in the form of equity held in another domestic
company ("Equity Company"), provided
that the sum of the equity and other non-monetary property
contributions of all shareholders does not exceed 70% of the
registered capital of the Invested Company.
Contributed equity must have clear title and be legally
transferable and appraised by a qualified appraisal institution,
which includes all of the "Big Four". Equity may not be
used as a capital contri¬bution under any of the following
circumstances: the registered capital of the Equity Company has not
been fully paid up; the equity has been pledged or frozen; the
equity is non-transferable by law or according to its articles of
association; or the contributor fails to obtain any statutorily
required approval for the equity transfer.
The law treats the period for equity contributions more strictly
than for other kinds of contributions. An investor who makes an
equity capital contribution when a company is formed, for example,
must make payment within one year after the Invested Company is
established. In contrast, the payment of an equity capital
con¬tribution that is made when increasing the registered
capital of a company must take place before the Invested Company
applies for a capital increase. This is intended to shorten the
period in which the investor has a dual stockholder capacity in the
Equity Company and the Invested Company and to reduce risk and
uncertainty during this period.
Different procedures are followed at the time of capital
contribu¬tion, depending on the corporate form of the Equity
Company. An Equity Company that is a limited liability company must
apply to the registration authority to register the Invested
Company as a new shareholder. If the Equity Company is a company
limited by shares listed on the stock exchange, it must conduct the
share transfer and undergo transfer registration formalities at
respec¬tive stock exchanges and securities depository and
clearing institutions. Some equity transfers, such as those of an
Equity Company that is a foreign-invested enterprise, are subject
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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