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Article 1. The present provisions are formulated in accordance with the laws and administrative regulations on foreign-funded enterprises and other relevant laws and administrative regulations with a view to promoting and regulating foreign investors' investments in China, absorbing advanced technologies and management experiences from abroad, improving the level of utilizing foreign investments, realizing reasonable allocation of resources, ensuring employment, as well as maintaining fair competition and state economic security. Article 2. The merger of a domestic enterprise by a foreign investor, which is mentioned in the present provisions, shall mean that the foreign investor purchases by agreement the share rights of the shareholders of a domestic non-foreign-funded enterprise (hereinafter referred to "domestic company") or subscribes a domestic company to increase the capital, and thus modifying the domestic company to establish a foreign-funded enterprise (hereinafter referred to "share right merger"). A foreign investor establishes a foreign-funded enterprise, and through which purchases by agreement the assets of a domestic enterprise and operates its assets, or, a foreign investor purchases by agreement the assets of a domestic enterprise, and then invest such assets to establish a foreign-funded enterprise and operates the assets (hereinafter referred to "asset merger"). Article 3. Foreign investors shall, when merging domestic enterprises, abide by Chinese laws, administrative regulations and departmental rules, comply with the principles of fairness, reasonableness, making compensation for equal value, honesty and credibility, and shall not cause excessive market centralization, exclude or limit competitions, or disturb the social economic order or damage the public benefits. Article 4. Foreign investors shall, when merging domestic enterprises, conform to the requirements in Chinese laws, administrative regulations and departmental rules on the investors' qualification and industrial policies. For the industries where solely foreign-owned operation is not permitted by the "Catalog for the Guidance of Foreign Investment Industries", the merger shall not lead to a consequence that a foreign investor holds the enterprise's whole share rights. For the industries where a Chinese party needs to control or relatively control the shares, the Chinese party shall, after an enterprise in such industries is merged, still controls or relatively controls the shares of the enterprise. For the industries where foreign investors are prohibited from operation, no foreign investor shall merge any enterprise engaged in such industries. Article 5. A foreign investor shall, when merging a domestic enterprise to establish a foreign-funded enterprise, apply to the approval organ in accordance with the present provisions for approval, and make registration of modification or establishment in the administrative organ for registration. The proportion of investments contributed by a foreign investor shall not be less than 25% of the registered capital of the foreign-funded enterprise established after the merger. When the proportion of a foreign investor's contribution of investments is less than 25%, it shall, unless otherwise provided for in laws or administrative regulations, get the approval and make registration by following the procedures on approving and registering the establishment of foreign-funded enterprises. The approval organ shall, when issuing the approval certificate of foreign-funded enterprise, indicate on the certificate the following words: "investments contributed by the foreign party are less than 25%". The administrative organ for registration shall also, when issuing the business license of foreign-funded enterprise, indicate on it the words of "investments contributed by the foreign party are less than 25%". Article 6. The approval organ in the present provisions shall be the Ministry of Foreign Trade and Economic Cooperation of the People's Republic of China (hereinafter referred to "the MOFTEC") or the department at the provincial level in charge of foreign trade and economic cooperation (hereinafter referred to "the approval organ at the provincial level"), while the administrative organ for registration shall be the State Administration for Industry and Commerce of the People's Republic of China or the authorized local administration for industry and commerce. When, in accordance with the laws, administrative regulations or departmental rules, a foreign-funded enterprise established after the merger belongs to the foreign-funded enterprises of certain types or in certain industries that shall be approved by the MOFTEC, the approval organ at the provincial level shall transfer the application documents to the MOFTEC for approval, and the MOFTEC shall decide on whether to grant the approval in accordance with the law. Article 7. When a foreign investor carries out a share right merger, the claims and debts of the merged domestic company shall be succeeded to by the foreign-funded enterprise established after the merger. When a foreign investor carries out an asset merger, the domestic enterprise that sells assets shall assume its original claims and debts. The foreign investor, the merged domestic enterprise, the creditors and other parties may reach an agreement separately on the disposition of the claims and debts of the merged domestic enterprise, provided that the agreement shall not damage a third person's benefits or public benefits. The agreement on disposition of the claims and debts shall be submitted to the approval organ. The domestic enterprise that sells assets shall, within 10 days as of the day when the resolution on the sale of assets is made, send written notices to the creditors, and promulgate an announcement on a newspaper at or above the provincial level which is issued nationwide. The creditors shall, within 10 days as of the receipt of the written notice or promulgation of the announcement, be entitled to demand the domestic enterprise that sells assets to provide the corresponding guaranty. Article 8. The parties to a merger shall take the result valuated by the asset valuation institution on the value of the share rights under planned transfer or the assets under planned sale as the basis for determining the transaction price. The parties to a merger may determine an asset valuation institution established inside the territory of China in accordance with the law. The assets shall be valuated in a way internationally used. When a foreign investor merges a domestic enterprise, and thus resulting in the modification of the share rights formed from investment of state-owned assets or transference of the property of state-owned assets, valuation shall be made in accordance with the relevant provisions on the administration of state-owned assets for determination of the transaction price. Foreign investors are prohibited from diverting capital abroad in a disguised form by transferring share rights or selling assets at a price obviously lower than the valuated one. Article 9. A foreign investor shall, when merging a domestic enterprise to establish a foreign-funded enterprise, within 3 months as of the day when the foreign-funded enterprise is issued its business license, pay all the consideration to the shareholders who transfer the share rights or to the domestic enterprise which sells the assets. In case of any particular circumstance under which the period needs to be extended, the foreign investor shall, upon the approval by the approval organ, pay 60% or more of the consideration within 6 months as of the day when the foreign-funded enterprise is issued its business license, and pay all the consideration within one year, and the proceeds shall be distributed according to the proportion of investments it has actually contributed. When a foreign investor carries out a share right merger, and the capital of the established foreign-funded enterprise after the merger is increased, the investor shall stipulate the time limit for contribution of investments in the contract and articles of association of the foreign-funded enterprise under planned modification and establishment. If the investments are stipulated to be contributed in a lump sum, the investor shall contribute all within 6 months as of the day when the foreign-funded enterprise is issued its business license; while if the investments are stipulated to be contributed by installments, the first installment of investments contributed by each investor shall not be lower than 15% of investment amount it has subscribed, and shall contribute all the investments within 3 months as of the day when the foreign-funded enterprise is issued its business license. When a foreign investor carries out an asset merger, it shall stipulate the time limit for contribution of investments in the contract and articles of association of the foreign-funded enterprise under planned establishment. When the foreign investor establishes a foreign-funded enterprise, and through which purchases the assets of a domestic enterprise and operates such assets, it shall contribute the investments equivalent to the consideration of the assets within the time limit for payment of consideration provided for in Paragraph 1 of the present article; for the remaining investments, the time limit for contribution shall be stipulated in a way provided for in Paragraph 2 of the present article. When a foreign investor merges a domestic enterprise to establish a foreign-funded enterprise, and the proportion of investments it contributes is less than 25%, the investor shall, contribute all the investments in cash within 3 months as of the day when the foreign-funded enterprise is issued its business license; or contribute all the investments in kind or in industrial properties, within 6 months as of the day when the foreign-funded enterprise is issued its business license. The means of payment as the consideration shall conform to the state's relevant laws and administrative regulations. If the foreign investor uses the shares over which it has the right to disposition or the Renminbi assets it lawfully owns as the means of payment, it shall obtain the approval of the department of foreign exchange control. Article 10. After a foreign investor purchases by agreement the share rights of a domestic company, and the domestic company has been modified to be established as a foreign-funded enterprise, the foreign-funded enterprise's registered capital shall be the registered capital of the original domestic company, and the proportion of investments contributed by the foreign investor shall be the proportion of the purchased share rights in the original registered capital. If the domestic company merged by means of share right merger increases its capital at the same time, the registered capital of the foreign-funded enterprise established after the merger shall be the sum of the original domestic company's registered capital and the increased amount; the foreign investor and other original investors of the merged domestic company shall, on the basis of the asset valuation of the domestic company, determine the proportions of their respectively contributed investments in the foreign-funded enterprise's registered capital. When a foreign investor subscribes a domestic company's increased capital, the registered capital of the foreign-funded enterprise established after the modification of the domestic company shall be the sum of the original domestic company's registered capital and the increased amount. The foreign investor and other original shareholders of the merged domestic company shall, on the basis of the asset valuation of the domestic company, determine the proportions of their respectively contributed investments in the foreign-funded enterprise's registered capital. The Chinese natural person shareholder of a domestic company merged by means of share right merger may, if having been a shareholder in the original company for one year or more, be approved to continue its identity as a Chinese investor of the foreign-funded enterprise established after the modification. Article 11. When a foreign investor merges a domestic enterprise by means of share right merger, the upper limit of the total investment amount of the foreign-funded enterprise established after the merger shall be determined according to the following proportions: (1) if the registered capital is less than US$2,100,000, the total investment amount shall not exceed 7/10 of the registered capital; (2) if the registered capital is more than US$2,100,000 but less than US$5,000,000, the total investment amount shall not exceed two times of the registered capital; (3) if the registered capital is more than US$5,000,000 but less than US$12,000,000, the total investment amount shall not exceed 2.5 times of the registered capital; (4) if the registered capital is more than US$12,000,000, the total investment amount shall not exceed 3 times of the registered capital. Article 12. When a foreign investor merges a domestic enterprise by means of share right merger, it shall submit the following documents to the approval organ with the corresponding approval power according to the total investment amount of the foreign-funded enterprise established after the merger: (1) resolution of the shareholders of the merged domestic limited liability company on unanimous consent of the foreign investor's share right merger, or resolution of the shareholders' meeting of the merged domestic stock limited company on consent of the foreign investor's share right merger; (2) application letter for the merged domestic company to be modified in accordance with the law into and be established as a foreign-funded enterprise; (3) contract and articles of association of the foreign-funded enterprise established after the merger; (4) agreement on the foreign investor's purchase of the share rights of the shareholders of the domestic company or on the subscription of the domestic company to increase capital; (5) the financial auditing report of the merged domestic company in recent accounting years; (6) the investor's documents on proof of identity, or proof of the opening of business and proof of credibility; (7) statement on the enterprises invested by the merged domestic company; (8) business licenses (copies) of the merged domestic company and of the enterprises it invests in; (9) the merged domestic company's proposal on settlement of employees; and (10) documents required by Articles 7 and 19 of the present provisions. Where the business scope, scale and obtainment of land use right of the foreign-funded enterprise established after the merger involves permits from other relevant governmental departments, the relevant permit documents shall be submitted along with those provided for in the preceding paragraph. The business scope of the company previously invested by the merged domestic company shall meet the relevant requirements on foreign investment industrial policies; otherwise it shall be adjusted. Article 13. The agreement on purchase of share rights and the agreement on increase of capital by the domestic company, which are provided for in Article 12 of the present provisions, shall be governed by Chinese law, and shall include the following main contents: (1) information of each party to the agreements, including the name and domicile of each party, the name, position and nationality, of each legal representative; (2) the amount of the purchased share rights or the capital increased from subscription and the price thereof; (3) time limit and method for implementation of the agreements; (4) the rights and obligations of each party to the agreements; (5) breach liabilities and settlement of disputes; and (6) time and place for conclusion of the agreements. Article 14. When a foreign investor merges a domestic enterprise by means of asset merger, it shall determine the total investment amount of the foreign-funded enterprise under planned establishment according to the transaction price for purchasing the assets and the actual scale of production and operation. The proportion of the registered capital of the foreign-funded enterprise under planned establishment in its total investment amount shall conform to the relevant provisions. Article 15. When a foreign investor merges a domestic enterprise by means of asset merger, it shall, pursuant to the total investment amount of the foreign-funded enterprise under planned establishment, the type of the enterprise and the industry it engages in, submit the following documents to the approval organ with the corresponding approval power in accordance with the laws, administrative regulations and departmental rules on establishment of foreign-funded enterprises: (1) resolution of the property holders or authority of the domestic enterprise on agreeing to sell the assets; (2) the application letter for the establishment of the foreign-funded enterprise; (3) contract and articles of association of the foreign-funded enterprise under planned establishment; (4) the agreement concluded between the foreign-funded enterprise under planned establishment and the domestic enterprise on purchase of assets, or, the agreement concluded between the foreign investor and the domestic enterprise on purchase of assets; (5) the merged domestic enterprise's articles of association and business license (copies); (6) proof proving that the merged domestic enterprise has notified and announced the creditors; (7) the investor's documents on proof of identity, or proof of the opening of business and proof of credibility; (8) the merged domestic enterprise's proposal on settlement of employees; and (9) documents required by Articles 7 and 19 of the present provisions. When the assets of the domestic enterprise purchased and operated in accordance with the preceding paragraph involves permits from other relevant governmental departments, the relevant permit documents shall be submitted along with those provided for in the preceding paragraph. Where a foreign investor purchases the assets of a domestic enterprise by agreement and invests such assets in establishing a foreign-funded enterprise, it shall not, prior to the establishment of the foreign-funded enterprise, carry out any business activities with such assets. Article 16. The agreement on purchase of assets provided for in Article 15 of the present provisions shall be governed by Chinese laws, and shall contain the following main contents: (1) natural conditions of each party to the agreement, including the name and domicile of each party, the name, position and nationality, of each legal representative; (2) the list of the assets under planned purchase and the price thereof; (3) time limit and method for the implementation of the agreement; (4) the rights and obligations of each party to the agreement; (5) breach liabilities and settlement of disputes; and (6) time and place for conclusion of the agreement. Article 17. Where a foreign investor merges a domestic enterprise to establish a foreign-funded enterprise, the approval organ shall, unless otherwise provided for in Article 20 of the present provisions, decide on, in accordance with the law, whether to grant the approval within 30 days as of the receipt of all the documents submitted. If the approval is to be granted, the approval organ shall issue the approval certificate of foreign-funded enterprise. Where the approval organ decides to approve a foreign investor to purchase by agreement the share rights of the shareholder of a domestic company, it shall simultaneously make copies of the relevant approval documents separately to the foreign exchange control department at the share rights transferor's locality and that at the domestic company's locality. The foreign exchange control department at the share rights transferor's locality shall handle the registration of foreign investments and foreign exchanges on the collection of exchanges, and issue proof of registration of foreign investments and foreign exchanges which indicates that the consideration to the foreign investor's share right merger has been fully paid. Article 18. Where a foreign investor merges a domestic enterprise by means of asset merger, it shall, within 30 days as of the receipt of the approval certificate of foreign-funded enterprise, apply to the administrative organ of registration for making registration of establishment, and obtaining the foreign-funded enterprise's business license. Where a foreign investor merges a domestic enterprise by means of share right merger, the merged domestic company shall, in accordance with the present provisions, apply to the original administrative organ of registration for making registration of modification, and obtaining the foreign-funded enterprise's business license. If the original administrative organ of registration has no jurisdiction of registration, it shall, within 10 days as of the receipt of the application documents, transfer them to an administrative organ of registration with the jurisdiction for handling the registration, and meanwhile attach the domestic company's registration files. The merged domestic company shall, when applying for registration of modification, submit the following documents, and be responsible for their genuineness and validity: (1) the application letter for registration of modification; (2) resolution of shareholders' meeting (general meeting) made by the merged domestic company in accordance with the Company Law of the People's Republic of China and the company's articles of association on transfer of share rights or increase of capital; (3) agreement on the foreign investor's purchase of the share rights of the shareholders of the domestic company or on the subscription of the domestic company to increase capital; (4) the amended articles of association of the company or the amendment to the original articles of association, and the contract of the foreign-funded enterprise that needs to be submitted in accordance with the law; (5) the foreign-funded enterprise's approval certificate; (6) the foreign investor's documents on proof of identity, or proof of the opening of business and proof of credibility; (7) the amended name list of the board of directors, the documents stating the names and domiciles of the newly increased directors, and the documents on the positions held by the newly increased directors; and (8) other relevant documents and certificates provided for by the State Administration for Industry and Commerce. In case of transfer of state-owned share rights or subscription by a foreign investor of the increased amount of a company containing state-owned share rights, the approval documents issued by the department in charge of economy and trade shall be submitted in addition. The investor shall, within 30 days as of the receipt of the foreign-funded enterprise's business license, make registration in the departments of taxation, customs, land administration and foreign exchange control. Article 19. When a foreign investor merges a domestic enterprise under any of the following circumstances, it shall report the situation involved to the MOFTEC and the State Administration for Industry and Commerce: (1) the sales turnover of the party who merges a domestic enterprise in China's market exceeds RMB 1.5 billion Yuan in the current year; (2) the enterprises in domestic associated industries, which it merges within one year, totaled more than 10; (3) the market occupancy ratio of the party who merges a domestic enterprise has reached 20% in China; or (4) the merger leads to the fact that the market occupancy ratio of the party who merges a domestic enterprise has reached 25% in China. When the foreign investor fails to meet the conditions mentioned in the preceding paragraph, but the MOFTEC or the State Administration for Industry and Commerce considers upon request by a domestic enterprise of competitive relationship, a relevant functional department or industrial association that the merger by the foreign investor involves huge market share, or there are other major factors which seriously impact market competition, national economy and people's livelihood, or state economic security, it may also demand the foreign investor to make a report. The above said party who merges a domestic enterprise may be any of the foreign investor's associated enterprises. Article 20. When a foreign investor's merger of a domestic enterprise is under any of the circumstances mentioned in Article 19 of the present provisions, and the MOFTEC and the State Administration for Industry and Commerce consider that the merger may cause excessive market centralization, hinder fair competition, or damage the consumers' benefits, they shall, within 90 days as of the receipt of all the documents submitted, either solely through negotiation or jointly, convene the relevant departments, institutions, enterprises and other interested parties and hold a hearing, and shall decide on whether to grant the approval in accordance with the law. Article 21. When an overseas merger is under any of the following circumstances, the merging party shall, before announcing the merger proposal or when submitting the said proposal to the competent authority in the country of its locality, submit the merger proposal to the MOFTEC and the State Administration for Industry and Commerce. The MOFTEC and the State Administration for Industry and Commerce shall examine whether there is any circumstance leading to excessive centralization in the domestic market, hindering domestic fair competition, or damaging the domestic consumers' benefits, and shall make a decision on whether approve the proposal or not: (1) the overseas party who merges a domestic enterprise owns more than RMB 3 billion Yuan of assets inside the territory of China; (2) the sales turnover of the overseas party who merges a domestic enterprise in China's market is more than RMB 1.5 billion Yuan in the current year; (3) the market occupancy ratio of the overseas party who merges a domestic enterprise and its associated enterprises in China has reached 20%; (4) the market occupancy ratio of the overseas party who merges a domestic enterprise and its associated enterprises in China has reached 25% due to the overseas merger; or (5) due to the overseas merger, there will be more than 15 foreign-funded enterprises in the relevant domestic industries with the shares of which directly or indirectly participated in by the overseas party who merges a domestic enterprise. Article 22. In case of a merger under any of the following circumstances, the party who merges a domestic enterprise may apply to the MOFTEC and the State Administration for Industry and Commerce for examination of exemption: (1) the merger may improve the conditions for fair competition in the market; (2) a loss-making enterprise is merged and the employment is ensured; (3) the merger absorbs advanced technologies and management talents and is able to improve the enterprise's international competitiveness; or (4) the merger may improve the environment. Article 23. An investor shall, when submitting the documents, classify them in accordance with the provisions, and shall attach a catalogue of the documents. All the documents to be submitted shall be in Chinese. Article 24. An investment company which is established by a foreign investor inside the territory of China in accordance with the law shall be governed by the present provisions to merge a domestic enterprise. The share right mergers by foreign investors of foreign-funded enterprises inside the territory shall be subject to the present laws and administrative regulations on foreign-funded enterprises, and the Some Provisions on the Share Right Modification of the Shareholders of Foreign-Funded Enterprises. If there are no applicable laws, such mergers shall be handled by referring to the present provisions. Article 25. The mergers by investors from Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region of the enterprises in other regions inside the territory shall be handled by referring to the present provisions. Article 26. The present provisions shall come into force on April 12, 2003. |
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