Legal Analysis of Asset Acquisition by Foreign Investors

Examples of assets include land use rights, factory buildings, warehouses, production facilities and office furniture. As these assets are clearly severable from the company's liabilities, a foreign investor can acquire these assets independent of the liabilities of the company. By doing so, the foreign investor is shielded from falling into a debt trap.

No Guarantee of Relief From All Financial Burdens

Although avoidance of a debt trap ensures that a target company's existing debts are not transferred to the foreign investor, it does not follow that the acquired assets are absolutely free from financial burden. For instance, if the target company has previously mortgaged an asset which they own (typically a piece of property), and the foreign investor subsequently acquires this mortgaged property, the investor will then become liable for the mortgage. The result is the same even if the target company represented to the foreign investor (whether fraudulently or otherwise) that the asset was free of any mortgage or charge. Such misrepresentation would not prevent the mortgagee from enforcing his legal rights under the mortgage.

To guard against uncertain risks, foreign investors are advised to carefully check the status of the assets of the target company before proceeding with any asset acquisition. Generally, information on the status of immovable property and land can easily be obtained from the relevant government authorities.

More Complicated Transaction Procedures

Unlike stock purchase, asset acquisition involves title transfer and delivery of the target company's assets, including fixed assets, current assets and outward investment, which may lead to more complicated procedures. For example, the transfer of any license, permit, trademark, franchising and other intangible assets of a target company may need to go through corresponding change of registration procedures and notifying or obtaining consent from the third party concerned. The Provisions further stipulate that “a domestic enterprise that sells its assets shall dispatch a notice to its creditors and publish an announcement in a provincial or national level newspaper distributed nationally”.

Ability to Selectively Acquire Assets

Another advantage of asset acquisition, as compared to stock purchase, is that the foreign investor can selectively acquire only the favourable or useful assets of the target company. Many foreign investors, especially large multinational corporations, are usually not interested in acquiring the entire stake in a target company when looking to expand their operations. Instead, what these investors really want is to specifically acquire only the relevant operations within a target company.

At the current stage of economic growth, there are many publicly listed companies and private enterprises in China with high turnover and profitability, which make these companies good candidates for asset acquisition by foreign investors. In contrast, state-owned enterprises and larger public companies often have more complicated operations, the acquisition of which through stock purchase involves a high degree of difficulty as it requires an extremely large amount of capital. Furthermore, an equity or share acquisition may not be desirable as many aspects of the operations in these large enterprises are irrelevant to the area of business of the foreign investor.

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