Legal Articles
The
Procedure for Purchase of a PRC Company
by Sole Foreign Investor
By Wang Xuanjun
The
exact provisions on the procedure for purchase of a PRC company (“target
company”) by a sole foreign investor are provided by:
a.
The law of the People’s Republic of China on Sole
Foreign Investment Enterprises (“SFIE Law”) adopted
12 April 1986 at the 4th Session of the 6th National
People’s Congress;
b.
Detailed Rules for the Implementation of the SFIE Law
(“Detailed Rules”) Approved 28 October 1990 by the State Council and
issued 12 December 1990 by the Ministry of Foreign Economic Relations and Trade
(“MOFERT”);
c.
An Explanation of Several Terms Used in the Details
Rules (“Explanation”) Issued 6 December 1991 by MOFERT.
d.
Provisional Regulations on Foreign Investment
Guidelines (“Guidelines”) Promulgated 27 June 1995 by the State Planning
Commission;
e.
Company law of the People’s Republic of China (“Company Law”) adopted
29 December 1993 at the 5th Session of the 11th National
People’s Congress.
On
the base of aforesaid provisions, we list the procedure for purchase of a PRC
company by sole foreign investor as follows:
1.
Check and determine what categories of projects (encouraged projects,
permitted projects, restricted projects and prohibited projects) the target
comapny is (Article 4 of “Guidelines”).
If the target company is not prohibited from operation by sole foreign invest,
then continues.
2.
A resolution passed by the board of shareholders of the target
company on the sale of the target company shall require the approval of a
two-thirds majority of the voting rights of shareholders in order to be valid.
(Article 39, 106 and 182 of “Company
Law”)
The sale of the target company which is a company
limited by shares or state-owned company shall be subject to approval by the
State-authorised department or the People's Government at provincial level.
(Article 183 of “Company Law”)
3.
When purchasing, the
various parties to the purchase shall sign a purchase agreement and a balance
sheet and property inventory of the target company shall be drawn up.
Within 10 days of the proposing of a resolution on company purchase, the
target company shall notify the various creditors and a public announcement
shall be made in the newspapers at least three times within 30 days.
The various creditors shall, within 30 days of receipt of notice or
within 90 days of the first announcement where creditors have not received
notice, have the right to request the target company to settle its debts payable
or provide relevant guarantee. Where
the target company fails to settle its debts payable or to provide relevant
guarantee, the purchase shall not be undertaken.
The
purchaser as the result of a purchase shall assume the debts receivable and
debts payable of any of the parties to the target company.(Article 184 of “Company Law”)
4.
If, when applying to purchase the target company by a sole foreign
investor, related products are subject to export licenses, export quotas, import
licenses or are State-restricted imports, prior approval shall be obtained from
Ministry of Foreign Trade and Economic Cooperation (“MOFTEC”) (Note: MOFERT
was renamed as MOFTEC in 1993) in accordance with the relevant provisions on
administrative jurisdiction. (Article 9 of “Detailed Rules”)
5.
When applying to purchase the target company by a sole foreign investor,
a foreign investor shall submit an application to the examining and approving
authorities through the local people’s government at county level or above in
the locality of the target company, together with the following documents:
(1)
an application to purchase the target company by a sole foreign
investor;
(2)
a feasibility study report;
(3)
articles of association of the sole foreign investment enterprise;
(4)
a list of legal representatives (or candidates for membership of the
board of directors) of the sole foreign investment enterprise;
(5)
testimony of the foreign investor’s legal certification and credit
standing (Note: These documents refer primarily to the foreign investor’s
certificate of registration of its status as a legal person in its country or
region of domicile, a list of members of the Board of Directors, the credentials
of the legal representative and balance sheets for the previous three years. If
the foreign investor is subscribing investment in the name of a natural person,
information on such matters as the said person’s nationality, status, personal
details and financial standing shall also be required. If the examining and
approving authority considers it necessary, it may request that the foreign
investor has the aforesaid testimonies and material notarized in the country or
region of domicile of the investor.(Point 3 of “Explanation”)
);
(6)
a detailed list of goods and materials needed to be imported;
(7)
other necessary documents.
Items
(1) and (3) of the aforesaid list of documents must be written in Chinese.
Items (2) ,(4) and (5) may be written in a foreign language, but a
Chinese version of the text shall need to be attached.
If
two or more foreign investors apply jointly to purchase the target company, a
copy of the contract concluded between these parties shall be submitted to the
examining and approving authorities.(Article 11 of “Detailed
Rules”)
Note:
A foreign investor may commission one of China’s foreign investment enterprise
service organizations or another economic entity to act as its agent in
completing the provisions of Point 4 and Point 5 of this List, but shall be
required to sign a contract of engagement. (Article 14 of “Detailed
Rules”)
6.
The examining and approving authorities shall
decide whether or not to approve an application to purchase the target
company by a sole foreign investor within 90 days of receiving all the required
documents. If the aforesaid documents are found to be incomplete or
inappropriate, the examining and approving authorities may require a
supplementary submission or amendment within a specified period. (Article 6 of “SFIE
Law”, Article 12 of “Detailed
Rules”)
After
an application to purchase the target company by a sole foreign investor has
been examined and approved by MOFTEC, a document of approval shall be issued.
The
State Council shall entrust the people’s governments of the various provinces,
autonomous regions, directly administered municipalities, municipalities with
independent plans and special economic zones to examine and approve applications
to purchase the target company by a sole foreign investor in the following
circumstances:
(1)
The total amount of investment is within the examination and approval
jurisdiction stipulated by the State Council.
(2)
No additional allocations of raw materials by the State are required and
the nation’s overall balance with regard to fuel, power, transportation and
foreign trade export quotas is not affected.
A document of approval shall be issued after the approval of an
application.
Those
people’s governments of the various provinces, autonomous regions, directly
administered municipalities, municipalities with independent plans and special
economic zones which are authorized by the State Council shall, after approving
the purchase of the target company by a sole foreign investor, report the
details to MOFTEC within 15 days for its records.
(MOFTEC and the people’s governments of the various provinces,
autonomous regions, directly administered municipalities, municipalities with
independent plans and special economic zones hereinafter shall be jointly
referred to as examining and approving authorities.) (Article 8 of “Detailed
Rules”)
Note:
At the time of its purchase, the total amount of investment of a sole foreign
investment enterprise shall be within the foreign investment enterprise
examination and approval jurisdiction of the local people’s government as
stipulated by the State Council. (Point 1 of “Explanation”)
7.
Where registered items are changed as a result of a purchase of target
company, application shall be made to the Administrative Bureau for Industry and
Commerce and tax authorities to register the amendment in accordance with the
law. (Article 188 of “Company Law”)
8. The articles of association of a sole foreign investment enterprise shall become valid after their approval by relevant examining and approving authorities and similarly when amendments are made. A division, merge or significance transfer of capital due to other reasons by a sole foreign investment enterprise must be approved by examining and approving authorities and a public accountant registered in China must be engaged to examine the details and issue a capital inspection report. Procedures to register such a change shall be undertaken with the relevant Administrative Bureau for Industry and Commerce subject to approval by the examining and approving authorities. (Article 17 and Article 18 of “Detailed Rules”).
Kind Suggestion:
All investors, who are to invest in China, are suggested to retain a sound law firm to
check and confirm all points related to the legal affairs before material decisions are made.