Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions

(Promulgated by the Ministry of Foreign Trade and Economic Cooperation, the State Administration of Taxation, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange on March 7 2003 and effective as of April 12 2003.)

Article 1: These Provisions have been formulated pursuant to laws and administrative regulations for foreign-invested enterprises and other related laws and administrative regulations in order to promote and regulate investments in China by foreign investors, introduce advanced foreign technology and management expertise, make more effective use of foreign investment, realize the rational allocation of resources, ensure employment and safeguard fair competition and the economic security of the State.

Article 2: For the purposes of these Provisions, the phrase "acquisition of domestic enterprises by foreign investors" means a foreign investor's purchase by agreement of the equity of a shareholder in an enterprise other than a foreign-invested enterprise (a Domestic Company) or subscription to a Domestic Company's capital increase, resulting in the conversion of the Domestic Company into a newly established foreign-invested enterprise (an Equity Acquisition); or a foreign investor's establishment of a foreign-invested enterprise and purchase by agreement, through such enterprise, of the assets of a domestic enterprise and operation of such assets, or a foreign investor's purchase by agreement of the assets of a domestic enterprise and use of such assets to invest in and establish a foreign-invested enterprise to operate such assets (an Asset Acquisition).

Article 3: When a foreign investor acquires a domestic enterprise, it shall abide by Chinese laws, administrative regulations and departmental rules and regulations and adhere to the principles of fairness, reasonableness, compensation of equal value and good faith. It may not cause over-concentration to eliminate or restrict competition, disturb the socio-economic order or damage the public interest.

Article 4: A foreign investor that acquires a domestic enterprise shall satisfy the requirements of Chinese laws, administrative regulations and departmental rules and regulations concerning investor qualifications and industrial policy.

An acquisition may not result in a foreign investor owning all of the equity in an enterprise in an industry in which, pursuant to the Foreign Investment Industrial Guidance Catalogue, a foreign investor is not permitted to operate by way of a wholly foreign-owned enterprise. After the acquisition of an enterprise in an industry in which the Chinese party is required to have a controlling interest or a relative controlling interest, the Chinese party shall continue to have a controlling interest or relative controlling interest in the enterprise. A foreign investor may not acquire an enterprise engaged in an industry closed to foreign investors.

Article 5: When a foreign investor acquires a domestic enterprise and establishes a foreign-invested enterprise, it shall obtain the approval of the examination and approval authority in accordance herewith and carry out the procedures for amendment of registration or establishment registration with the registration administration authority. In general the foreign investor's contribution to the registered capital of the foreign-invested enterprise established after the acquisition shall account for not less than 25% thereof. In the event that the foreign investor's capital contribution accounts for less than 25%, examination, approval and registration shall be carried out in accordance with current procedures for the examination, approval and registration of the establishment of foreign-invested enterprises, unless otherwise specified in laws or administrative regulations; in such circumstances, when the examination and approval authority issues the foreign-invested enterprise approval certificate, it shall add the words "foreign investment ratio less than 25%" thereto, and when the registration administration authority issues the foreign-invested enterprise's business licence, it shall add the words "foreign investment ratio less than 25%" thereto.

Article 6: The examination and approval authority specified herein is the Ministry of Foreign Trade and Economic Cooperation of the People's Republic of China (MOFTEC) or the provincial level authority in charge of foreign trade and economic cooperation (the Provincial Level Examination and Approval Authority). The registration administration authority is the State Administration for Industry and Commerce of the People's Republic of China (SAIC) or the local administrations for industry and commerce authorized thereby.

The Provincial Level Examination and Approval Authorities shall forward to MOFTEC for examination and approval the application documents for foreign-invested enterprises to be established after acquisitions that, pursuant to laws, administrative regulations or departmental rules or regulations, are of a particular type or in a particular industry that requires the examination and approval of MOFTEC. The decision whether or not to grant approval shall be made by MOFTEC, in accordance with the law.

Article 7: If a foreign investor carries out an Equity Acquisition, the foreign-invested enterprise established after the acquisition shall succeed to the claims and debts of the acquired Domestic Company.

If a foreign investor carries out an Asset Acquisition, the domestic enterprise that sold the assets shall bear its existing claims and debts.

The foreign investor, the domestic enterprise to be acquired, creditors and/or other parties may otherwise agree on the disposal of the claims and debts of the domestic enterprise to be acquired, provided that such agreement does not prejudice the interests of a third party or the public. An agreement on the disposal of claims and debts shall be submitted to the examination and approval authority.

A domestic enterprise that sells its assets shall dispatch a notice to its creditors and publish an announcement in a provincial or higher level newspaper distributed nationally within 10 days after the date on which the resolution to sell its assets is passed. Creditors have the right, within 10 days after receipt of the notice or publication of the announcement, to demand that the domestic enterprise selling its assets provide commensurate security.

Article 8: The parties to an acquisition shall determine the transaction price on the basis of the value of the equity to be transferred or the value of the assets to be sold as appraised by an asset appraisal institution. The parties to the acquisition may agree on an asset appraisal institution established in China in accordance with the law. The asset appraisal shall be conducted in accordance with common international appraisal methods.

If the acquisition of a domestic enterprise by a foreign investor will lead to a change to the equity resulting from an investment of State assets or a transfer of title to State-owned assets, an appraisal shall be conducted in accordance with provisions on the administration of State-owned assets in order to determine the transaction price.

It is forbidden to assign equity or sell assets at a price that is manifestly lower than the appraisal result in order to transfer capital abroad in a covert manner.

Article 9: When a foreign investor acquires a domestic enterprise and establishes a foreign-invested enterprise, it shall pay the entire amount of the consideration to the shareholder that transferred the equity or the domestic enterprise that sold the assets within three months after the date of issuance of the foreign-invested enterprise's business licence. In special circumstances requiring an extension, and subject to the approval of the examination and approval authority, the foreign investor shall pay at least 60% of the consideration within six months after the date of issuance of the foreign-invested enterprise's business licence and pay the balance in full within one year, and its share of the gains shall be proportional to the capital contribution it has actually paid in.

If, when a foreign investor carries out an Equity Acquisition, the foreign-invested enterprise to be established after the acquisition and conversion is to increase its capital, the investors shall specify the time limits for making the capital contributions in the contract for and the articles of association of the foreign-invested enterprise that is to be established upon the conversion. If the capital contributions are to be paid in full in one payment, they shall make payment in full within six months after the date of issuance of the foreign-invested enterprise's business licence. If the capital contributions are to be paid in instalments, each investor's first instalment may not be less than 15% of the capital contribution to which it has subscribed and the balance shall be paid in full within three months after the date of issuance of the foreign-invested enterprise's business licence.

When a foreign investor carries out an Asset Acquisition, the investors shall specify the time limits for making the capital contributions in the contract for and the articles of association of the foreign-invested enterprise that is to be established. If a foreign-invested enterprise is to be established and the assets of a domestic enterprise are to be purchased by agreement and operated by such foreign-invested enterprise, then that part of the capital contribution that is equivalent to the consideration payable for the assets shall be paid in by the investors within the time limit for the payment of consideration specified in the first paragraph of this Article. The time limit for payment of the balance of the capital contribution shall be agreed upon in accordance with the method specified in the second paragraph of this Article.

If a foreign investor acquires a domestic enterprise and establishes a foreign-invested enterprise and its capital contribution accounts for less than 25%, and if the investors are to make capital contributions in the form of cash, they shall make payment in full within three months after the date of issuance of the foreign-invested enterprise's business licence; if the investors are to make capital contributions in kind or in the form of industrial property, etc., they shall make payment in full within six months after the date of issuance of the foreign-invested enterprise's business licence.

The method by which consideration is paid shall comply with relevant State laws and administrative regulations. If the foreign investor is to make payment in the form of stock that it has the right to dispose of or in the form of renminbi assets that it lawfully owns, it shall require the approval of the foreign exchange control authority.

Article 10: After a foreign investor has purchased the equity of a shareholder in a Domestic Company by agreement and such Domestic Company has been converted into a foreign-invested enterprise, the registered capital of such foreign-invested enterprise shall be the registered capital of the original Domestic Company and the percentage of the foreign investor's capital contribution shall be the percentage of the original registered capital accounted for by the equity purchased by it. If a Domestic Company acquired by way of an Equity Acquisition also increases its capital, the registered capital of the foreign-invested enterprise established after the acquisition shall be the sum of the original Domestic Company's registered capital and the amount of the capital increase; the foreign investor and the existing investors in the acquired Domestic Company shall determine the percentages of their respective contributions to the foreign-invested enterprise's registered capital on the basis of the appraisal of the assets of the Domestic Company.

After a foreign investor subscribes to the capital increase of a Domestic Company and the Domestic Company is converted into a foreign-invested enterprise, the registered capital of such foreign-invested enterprise shall be the sum of the original Domestic Company's registered capital and the amount of the capital increase. The foreign investor and the existing shareholders of the acquired Domestic Company shall determine the percentages of their respective contributions to the foreign-invested enterprise's registered capital on the basis of the appraisal of the assets of the Domestic Company.

If a Chinese natural person shareholder in a Domestic Company acquired by way of an Equity Acquisition was a shareholder of the original company for not less than one year, he may, subject to approval, continue to be one of the Chinese investors in the foreign-invested enterprise established after the conversion.

Article 11: When a foreign investor carries out an Equity Acquisition, the upper limit on the total amount of investment of the foreign-invested enterprise established after the acquisition shall be determined in accordance with the following percentages:

(1) if the registered capital is less than US$2.1 million, the total amount of investment may not exceed 70% of the registered capital;

(2) if the registered capital is US$2.1 million or more but less than US$5 million, the total amount of investment may not exceed 2 times the registered capital;

(3) if the registered capital is US$5 million or more but less than US$12million, the total amount of investment may not exceed 2.5 times the registered capital;

(4) if the registered capital is US$12 million or more, the total amount of investment may not exceed 3 times the registered capital.

Article 12: When a foreign investor carries out an Equity Acquisition, the investors shall submit the documents set forth below to the examination and approval authority whose competence corresponds to the total amount of investment of the foreign-invested enterprise established after the acquisition:

(1) in the case of a domestic limited liability company targeted for acquisition: the unanimous shareholders' resolution in favour of the Equity Acquisition by the foreign investor; in the case of a domestic company limited by shares targeted for acquisition: the resolution of the shareholders' general meeting in favour of the Equity Acquisition by the foreign investor;

(2) an application to convert the Domestic Company targeted for acquisition into a newly established foreign-invested enterprise in accordance with the law;

(3) the contract for and the articles of association of the foreign-invested enterprise to be established after the acquisition;

(4) the agreement for the purchase of the equity of the shareholder in the Domestic Company or the subscription to the Domestic Company's capital increase by the foreign investor;

(5) a financial audit report for the most recent fiscal year of the Domestic Company to be acquired;

(6) the investors' identification documents or certificates of commencement of business and certificates of creditworthiness;

(7) details of the enterprises invested in by the Domestic Company to be acquired;

(8) (duplicates of) the business licences of the Domestic Company to be acquired and the enterprises in which it has invested;

(9) the arrangements made for the staff and workers of the Domestic Company to be acquired; and

(10) the documents to be submitted pursuant to Articles 7 and 19 hereof.

If the scope or scale of business of, or the acquisition of land use rights by, the foreign-invested enterprise to be established after the acquisition requires permission from other relevant government authorities, the relevant permission documents shall be submitted together with the aforementioned documents.

The scopes of business of the companies originally invested in by the Domestic Company shall comply with the requirements of policies on foreign investment in industry. Those that do not comply shall be adjusted.

Article 13: The equity purchase agreement and the agreement for increasing the capital of a Domestic Company specified in Article 12 hereof shall be governed by Chinese law and shall include the following main provisions:

(1) the particulars of the parties to the agreement, including their names and domiciles, the names, positions and nationalities of their legal representatives, etc.;

(2) the share and price of the equity to be purchased or of the capital increase to be subscribed to;

(3) the term and method of performance of the agreement;

(4) the rights and obligations of the parties;

(5) liability for breach of contract and resolution of disputes; and

(6) the date and place of execution of the agreement.

Article 14: When a foreign investor carries out an Asset Acquisition, the total amount of investment of the proposed foreign-invested enterprise shall be determined in accordance with the transaction price of the assets purchased and the actual scale of production and operation. The ratio of the proposed foreign-invested enterprise's registered capital to its total amount of investment shall comply with relevant provisions.

Article 15: When a foreign investor carries out an Asset Acquisition, the investors shall submit the documents set forth below to the examination and approval authority whose competence corresponds to the total amount of investment and enterprise type of the proposed foreign-invested enterprise and the industry it is to engage in, pursuant to laws, administrative regulations and departmental rules and regulations on the establishment of foreign-invested enterprises:

(1) the resolution in favour of the asset sale passed by the owner of the title to, or the organ of authority of, the domestic enterprise;

(2) an application for the establishment of a foreign-invested enterprise;

(3) the contract for and the articles of association of the proposed foreign-invested enterprise;

(4) the asset purchase agreement executed by the proposed foreign-invested enterprise and the domestic enterprise or by the foreign investor and the domestic enterprise;

(5) (duplicates of) the articles of association and the business licence of the domestic enterprise to be acquired;

(6) certification of the fact that the domestic enterprise to be acquired has notified, and published an announcement for, its creditors;

(7) the investors' identification documents or certificates of commencement of business and certificates of creditworthiness;

(8) the arrangements made for the staff and workers of the domestic enterprise to be acquired; and

(9) the documents to be submitted pursuant to Articles 7 and 19 hereof.

If the purchase and operation of the assets of a domestic enterprise in accordance with the provisions of the preceding paragraph require permission from other relevant government authorities, the relevant permission documents shall be submitted together with the aforementioned documents.

When a foreign investor purchases the assets of domestic enterprise by agreement and uses such assets to invest in and establish a foreign-invested enterprise, it may not carry on business with such assets before the establishment of the foreign-invested enterprise.

Article 16: The asset purchase agreement specified in Article 15 hereof shall be governed by Chinese law and shall include the following main provisions:

(1) the natural particulars of the parties to the agreement, including their names and domiciles, the names, positions and nationalities of their legal representatives, etc.

(2) the list and price of the assets to be purchased;

(3) the term and method of performance of the agreement;

(4) the rights and obligations of the parties;

(5) liability for breach of contract and resolution of disputes; and

(6) the date and place of execution of the agreement.

Article 17: When a foreign investor acquires a domestic enterprise and establishes a foreign-invested enterprise, the examination and approval authority shall, in accordance with the law, render its decision on whether to grant approval within 30 days after the date of receipt of the entire set of prescribed documents, unless otherwise specified in Article 20 hereof. If it decides to grant its approval, it shall issue a foreign-invested enterprise approval certificate.

When an examination and approval authority grants its approval to the purchase by agreement of the equity of a shareholder in a Domestic Company by a foreign investor, it shall send copies of the relevant approval document to the foreign exchange control authorities of the places where the transferor of the equity and the Domestic Company are located. The foreign exchange control authority of the place where the transferor of the equity is located shall carry out the registration procedures for the receipt of foreign investment-related foreign exchange for the transferor and shall issue a foreign investment-related foreign exchange registration certificate attesting that the foreign investor has paid in the consideration for the Equity Acquisition.

Article 18: When a foreign investor carries out an Asset Acquisition, the investors shall apply for registration of establishment to the registration administration authority within 30 days after the date of receipt of the foreign-invested enterprise approval certificate, and obtain a foreign-invested enterprise business licence from the said administration.

When a foreign investor carries out an Equity Acquisition, the Domestic Company to be acquired shall apply for amendment of registration to its original registration administration authority in accordance herewith and obtain a foreign-invested enterprise business licence. If its original registration administration authority is not competent to register the change, it shall, within 10 days after the date of receipt of the application documents, transfer the case together with the Domestic Company's registration file to the competent registration authority for handling. When applying for amendment of registration, the Domestic Company to be acquired shall submit the documents set forth below and shall be liable for their truthfulness and validity:

(1) an application for amendment of registration;

(2) the resolution of the shareholders' (general) meeting of the Domestic Company to be acquired concerning the equity transfer or capital increase passed in accordance with the PRC Company Law and the company's articles of association;

(3) the agreement under which the foreign investor purchases the equity of the shareholder in the Domestic Company or subscribes to the Domestic Company's capital increase;

(4) the company's amended articles of association or the proposed amendments to the original articles of association and the contract for the foreign-invested enterprise that needs to be submitted in accordance with the law;

(5) the foreign-invested enterprise approval certificate;

(6) the foreign investor's identification document or certificate of commencement of business and certificate of creditworthiness;

(7) the amended list of directors, a document specifying the names and domiciles of the new directors and the instruments of appointment of the new directors; and

(8) other relevant documents and certificates specified by the SAIC.

If State-owned equity is being transferred or if a foreign investor is subscribing to the capital increase of a company with State-owned equity, the approval document of the authority in charge of economic relations and trade shall also be submitted.

The investors shall carry out registration procedures with relevant authorities such as those for taxation, customs, land administration and foreign exchange control within 30 days after the date of receipt of the foreign-invested enterprise business licence.

Article 19: When a foreign investor's acquisition of a domestic enterprise involves any of the following circumstances, the investors shall report the same to MOFTEC and the SAIC:

(1) any of the parties to the acquisition had a turnover in the Chinese market during the current year exceeding Rmb1.5 billion;

(2) the foreign investor acquired more than 10 enterprises in related industries in China in one year;

(3) any of the parties to the acquisition already controls not less than 20% of the Chinese market; or

(4) the acquisition will cause the Chinese market share of any of the parties thereto to reach 25%.

At the request of a competing domestic enterprise or the relevant functional authority or trade association, if MOFTEC or the SAIC is of the opinion that the acquisition by the foreign investor would involve a very large market share or that other important factors that would affect market competition or the people's livelihood and national economic security, etc. are present, it may nevertheless require the foreign investor to file a report, even if the criteria in the preceding paragraph are not met.

The aforementioned "any of the parties to the acquisition" includes affiliates of the foreign investor.

Article 20: If the acquisition of a domestic enterprise by a foreign investor involves any of the circumstances specified in Article 19 hereof and MOFTEC and the SAIC are of the opinion that it may result in over-concentration, thereby harming legitimate competition and damaging the interests of consumers, they shall, within 90 days after the date of receipt of the entire set of prescribed documents, jointly, or after consultations, individually convene the relevant authorities, agencies, enterprises and other materially interested parties for the purpose of conducting hearings and decide, in accordance with the law, whether to grant their approval.

Article 21: If a foreign acquisition is characterized by any of the circumstances set forth below, the acquiring party shall submit the acquisition plan to MOFTEC and the SAIC before it publicly announces such plan or at the same time as it submits the same to the authority in charge in the country where it is located. MOFTEC and the SAIC shall examine whether such acquisition will result in over-concentration in the domestic market, thereby harming legitimate competition and damaging the interests of consumers, and render their decision on whether to give their consent:

(1) any of the parties to the foreign acquisition has assets in China valued at not less than Rmb3 billion;

(2) any of the parties to the foreign acquisition had a turnover in the Chinese market during the current year of not less than Rmb1.5 billion;

(3) any of the parties to the foreign acquisition and its affiliates already control not less than 20% of the Chinese market;

(4) the foreign acquisition will cause the Chinese market share of any of the parties to the foreign acquisition and its affiliates to reach 25%; or

(5) the foreign acquisition will cause the number of foreign-invested enterprises in related industries in China in which any of the parties to the foreign acquisition has a direct or indirect equity interest to exceed 15.

Article 22: If an acquisition is characterized by any of the circumstances set forth below, any of the parties to the acquisition may apply to MOFTEC and the SAIC for exemption from examination:

(1) it can improve the conditions for fair market competition;

(2) it will restructure a loss-making enterprise and ensure employment;

(3) it will introduce advanced technology, bring in management talent and can enhance the international competitiveness of the enterprise; or

(4) it can improve the environment.

Article 23: When submitting documents, the investors shall classify the documents in accordance with provisions and include a list of the documents. All of the prescribed documents shall be written in Chinese.

Article 24: These Provisions shall apply to the acquisition of domestic enterprises by investment companies established in China in accordance with the law by foreign investors.

Equity Acquisitions of foreign-invested enterprises in China by foreign investors shall be governed by current laws and administrative regulations on foreign-invested enterprises and the Changes in the Equity Interests of Shareholders of Foreign-invested Enterprises Several Provisions. Any matters not provided for in such laws and regulations shall be handled with reference to these Provisions.

Article 25: The acquisition by investors from the Hong Kong Special Administrative Region, the Macao Special Administrative Region and Taiwan of enterprises elsewhere in China shall be handled with reference to these Provisions.

Article 26: These Provisions shall be implemented as of April 12 2003.