Restructuring made simpler

Multiple registrations at one time

In the restructuring process, the restructuring companies may survive or be dissolved, and new companies may be incorporated after the restructuring. Each of these companies should register such changes with the relevant AIC: the new company should file an application for incorporation, the surviving company should update its registered information, the dissolved company should file an application for deregistration, and so on. For a restructuring project involving a merger or a split, there are multiple registrations to be completed before it can be finally closed. When the restructuring involves companies located in areas under different registration jurisdictions, the registration formalities will have to be completed with various AICs of diverse administrative levels located in different geographic areas. As a result, it is often very time-consuming and costly to complete all these registrations for such a restructuring project.

It is now permitted under the Opinions that all registrations relating to a restructuring company may be handled at the same time. The Opinions also emphasise that all the AICs at different levels or in different jurisdictions must work together and coordinate with each other during the registration process.

Flexibility in determining the registered capital

In China, a company will have its registered capital which is contributed by its shareholder(s) according to the Articles of Association and in compliance with the law. Normally, in case of combination of companies, the registered capital of the surviving company will be the total of the registered capitals of all the combined companies; in case of a split, the total registered capital of the companies split from the original one will equal the registered capital of the original company.

The Opinions provide more flexibility for the restructuring parties to determine the registered capital for the surviving company: the parties can agree on the registered capital and share percentages at their own discretion by mutual agreement. The surviving company or the newly-incorporated company after the combination can have the registered capital as agreed by the original shareholders, provided, however, that such registered capital does not exceed those of the companies combined into it; the surviving company or the newly-incorporated company after a split can have the registered capital as agreed by the original shareholders, provided, however, the total registered capital of these companies does not exceed that of the original company.

Furthermore, the shareholders could also determine by agreement their share percentages in the surviving or newly-incorporated company after the combination or split, as well as any further contribution to the registered capital.

Survival of branch companies

Under the previous practices, if a dissolving company or a company to be split has branch companies, these branch companies should be deregistered in the process of the restructuring. This requirement could cause problems for many companies which run their business through several dependent branch companies instead of independent subsidiaries. For certain special industries, such as retail shops which are normally registered as branch companies under an operating company, if the operating company is to be restructured, all these branches would have to be closed, liquidated and, if necessary, re-established by the new company that survives the restructuring. This would certainly lead to interruption of operations as well as unnecessary costs.

To tackle this problem, the new Opinions offer a solution by giving the restructuring companies the right to decide the future of these branch companies. If the branch companies are to be transferred to the surviving or newly-incorporated company, they may be registered under the designated company through the company name change procedure.

Succession of the equity interests

When a company is to be dissolved and it holds the equity interests of another company, the company can be dissolved without liquidating these equity interests. Before the Opinions were issued, however, it was uncertain whether such equity interests could be transferred to the dissolved company's successor.

The Opinions clarify for the first time that the equity interests owned by the dissolved company can be acquired by the surviving company or the newly-incorporated company. Furthermore, such as acquisition will not be deemed as a share transfer between the two companies, but as a succession of equity interests by the surviving company from the dissolving company together with all the other related rights and obligations.

As such, these equity interests are permitted to be registered under the name of the successor of the dissolved company. Nevertheless, the change to the shareholder information of these equity interests must be filed with the competent AIC.

New shareholder to join the restructuring

Generally speaking, the parties to a merger or a split will be the target companies. Therefore, the merger or split must be carried out among these companies and their original shareholders without involving any third party. It is not uncommon, though, that the restructuring of a company or a group of companies would probably include the task of adding new shareholders and new investments. In the past, the AIC would probably request the company to complete the restructuring as a first step, to be followed by the registration of another round of investment with new shareholders.

To facilitate this type of restructuring with the introduction of new shareholders, the new Opinions provide that the changes to shareholding structure, the registered capital and other matters of the restructuring companies may be registered simultaneously with the competent AIC, as long as these changes are in compliance with the law.

Restructuring made easier

By clarifying a number of practical and common issues in connection with registration formalities to restructure a company in China, the SAIC's new Opinions will certainly facilitate the restructuring process for Chinese companies. It is not yet clear, however, whether the rules will be equally applicable to foreign-invested enterprises; but if the restructuring of a foreign-invested enterprise results in the establishment of domestic companies, those domestic companies may rely on the new rules to simplify the registration formalities.

David Dai and Joanne Cao, MWE China Law Offices, Shanghai