Foreign investors allowed to use capital contributions
November 02, 2012 | BY
clpstaff &clp articles &The latest Provisions from the Ministry of Commerce allow foreign investors looking to use equity interests to invest in another FIE, but questions over pricing and approval authorities remain
The Ministry of Commerce (MOFCOM) issued the Tentative Provisions Involving Equity Investments of Foreign-invested Enterprises (商务部关于涉及外商投资企业股权出资的暂行规定) on September 21. They became effective on October 22.
The Provisions lay out how foreign investors can use equity interests in a Chinese company to invest in another foreign-invested enterprise (FIE). They also prevent certain foreign investors from restricted industries from investing in another FIE.
“These Provisions have paved the road for capital contribution in the form of equity interest by general foreign investors,” said David Yu, managing partner at Llinks Law Firm in Shanghai.
In 2005, the PRC Company Law (中华人民共和国公司法) began to allow company shareholders to make capital contributions using non-cash assets. The State Administration of Industry and Commerce (SAIC) then issued the Measures for the Administration of the Registration of Capital Contribution in the Form of Equity (股权出资登记管理办法) in 2009 detailing the requirements for capital contribution by equity interests of domestic companies.
Until now, there was no similar legislation from MOFCOM, so it was expected that the Ministry would follow the SAIC in issuing provisions, which are expected to have a positive impact in corporate restructuring and corporate transactions.
“Foreign investors can now take advantage of the equity contribution in their onshore and offshore equity or business restructurings, merger and acquisitions and when optimising tax structures of corporate groups,” said Yu.
The Provisions were expected, but stakeholders are disappointed that they specify some procedural details, but fail to touch on practical issues.
Article 3 of the Provisions states that the central branch of MOFCOM or provincial-level Ministries of Commerce are required to give approval, but it is unclear how shareholders should deal with each authority when there are both equity interest contributions and other capital contributions like cash or intellectual property.
“It is specified that the pricing of the equity interests shall be based on the appraisal value, but it is unclear if the appraisal value shall be a maximum amount or a basic amount,” said William Liu, a partner at Boss & Young in Shanghai. Without any kind of definition it will be hard for the parties concerned to reach a mutual agreement on the value of the equity interests.
There is also ambiguity over the required legal opinion when making an application, as there are no details on what the opinion should cover regarding the annual inspection report and the appraisal report.
“There are other grey areas in both legal and practical aspects. It is expected that MOFCOM will issue more detailed rules to clarify many issues in the future” said Liu.
The Provisions follow the Company Law in that the total amount of investment in the form of equity and non-monetary property in the FIE may not be more than 70% of the FIE's registered capital. The purpose of this is to ensure that that company has enough working capital when investing.
Certain foreign-invested enterprises like property, holding companies, venture capital and private equity enterprises cannot use their equity to invest in another FIE. “This is a new restriction in the Provisions and it comes from current rules and regulations already in place for these enterprises,” said Yu.
Until MOFCOM issues further guidelines, foreign investors should ensure they understand the requirements of provincial-level approval authorities. They should also consult with the target company and the invested company to control the process and schedule.
A full text translation of the Provisions will be available online next week and will appear in the November/December issue of China Law & Practice.
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