Corporate Restructuring: An Alternative in Corporate Restructuring

Before restructuring, B may acquire shares from C's existing shareholder(s), resulting in C becoming a subsidiary of B. With a merger, B may either merge C into B (absorption) or merge together with C to create a newly incorporated FIE, D (incorporation). As a result, A will hold shares in B (with C's assets) or hold shares in D (with B and C's assets). Shareholder(s) of C may be paid in cash or shares in B or D as consideration of the merger. In case of shares, B (or D) may become a joint venture between A and C's original shareholder(s).

In comparison to a share acquisition, merger affords two key benefits. First, it enables the creation of a group structure with fewer layers of companies. Also, if the consideration of the merger comprises shares in B or D, such shares will be free of income tax.

Case Study: Asset acquisition vs. Merger

Merger could also be an alternative to asset acquisition. In the above scenario, as part of A's corporate restructuring, assets from C are to be consolidated into A's group of companies.

In an asset acquisition, A may acquire the assets using B or incorporate a new FIE, D, to acquire the assets. Alternatively, C may use the assets to set up a wholly-owned subsidiary, E, followed by a merger between B and E. As a result, A will hold shares in B (with E's assets) or shares in a newly incorporated FIE, F (with B and E's assets). If the consideration paid to C is in the form of shares, B or F will become a joint venture between A and C.

Where the assets comprise equipment, facilities and real properties, relevant PRC taxes (including income tax, value-added tax, business tax, etc.) will be levied on C for their sale. In a merger acquisition, however, C will not be subject to value-added tax and business tax, and if the consideration comprises shares in B or F, such consideration will be free of income tax.

Statutory Procedures

A merger must be conducted in accordance with procedures provided in the Merger and Division Regulations. A merger of another company by an FIE requires approvals from relevant PRC authorities. The FIE will have to apply to the original approving authority for preliminary approval. Upon obtaining this, the FIE must notify its creditor(s) of the merger and give three notices within 30 days in a newspaper on how its outstanding debts will be dealt with. After 90 days from the first announcement, unless any creditor files a rejection, the FIE may apply to the same authority for final approval; once granted, the merger can take place and the FIE must update its records with the State Authority of Industry and Commerce or its local branches as well as with other government authorities in charge of tax, customs, etc.

Conclusion

Merger offers certain benefits over traditional share or asset acquisitions, and certain shortcomings: the procedure to obtain approvals is onerous and may take longer than for share or asset acquisitions; in a merger, all liabilities of the entities that will be wound up will be assumed by the company surviving or incorporated after the merger; employees of companies to be wound up need to be properly dealt with before the preliminary approval for the merger will be granted (typically the surviving or new entity is required to assume such employees' employment, or provide compensation).