Payment Schedules in Acquisitions: Contractual or Statutory?

An increasing number of foreign investors now make investments in China by acquiring an equity interest in existing enterprises. The government has encouraged such acquisitions by promoting more accountability and transparency in these transactions through recent legislation. But how to further liberalize foreign investment while at the same time imposing effective regulation over foreign participation in China's economy remains a tricky issue. For the PRC government, this may be a balancing act even the most nimble Chinese gymnast would find tough to maintain.

The Acquisition of Domestic Enterprises by Foreign Investors Tentative Provisions(外国投资者并购境内企业暂行规定) (issued on March 7 2003) build a transparent legal and regulatory regime for M&A transactions involving foreign investors (hereafter Foreign M&A) in China. The authorities, however, still maintain tight control over Foreign M&A. The strict payment schedule required in these transactions is a good example. Article 9 of the Tentative Provisions requires that the purchase consideration should be paid in full within three months and only under special circumstances and subject to specific approvals may the payment schedule be extended, with 60% payable within six months of issuance of the business licence, and the balance payable within one year. Similar provisions can also be found in the Issues Relevant to Strengthening the Administration of the Examination, Approval, Registration, Foreign Exchange Issues and Taxation of Foreign-invested Enterprises Circular(关于加强外商投资企业审批、登记、外汇及税收管理有关问题的通知) (the Circular, issued on December 30 2002).

Indeed, the above payment schedule provisions set out in the Tentative Provisions and the Circular derive from the Supplementary Provisions (the Supplementary Provisions), issued on September 29 1997. The only difference is that the Tentative Provisions adopt the concept "purchase consideration", which undoubtedly is a more expansive term than "purchase price" as provided in the Supplementary Provisions and the Circular.