On January 14, 2009, the State Administration for Industry and Commerce (SAIC) issued the Administrative Measures on Registration of Capital Contribution with Equity Interests of Companies. The Draft Measures provide specific guidelines on using a company’s equity interests as a capital contribution, and facilitate corporate restructuring by providing an alternative form of capital contributions.
The Draft Measures apply to investors using equity interests in one PRC-incorporated company (the Equity Company) to invest in another PRC-incorporated company (the Invested Company). The equity interests to be used as a capital contribution must be free of all encumbrances and legally transferable. According to the Draft Measures, equity interests cannot be used for capital contribution if: (1) the registered capital of the Equity Company has not been paid in full; (2) the equity interests are subject to a pledge; (3) the equity interests have been frozen by a competent authority; (4) transfer of the equity interests is prohibited by the Equity Company’s articles of associations; or (5) transfer of the equity interests is subject to government approval but such approval has not been obtained.
Under the Draft Measures, the total amount of the capital contributions made in equity interests and other non-cash forms may not exceed 70 percent of the Invested Company’s registered capital, and the equity interests contributed to the Invested Company must be assessed by a qualified valuation agency. This is consistent with the requirement under the PRC Company Law that cash contributions to the registered capital of a limited liability company account for no less than 30 percent of the company’s total registered capital.
The Draft Measures require that any contribution of equity interests be made within one year after the Invested Company’s establishment. This time limitation is shorter than that of the PRC Company Law, which states that investors may complete their capital contribution, except for the first installment (which constitutes at least 20 percent of the total registered capital), within two years.
The Draft Measures also specify what information a capital verification report for a contribution of equity interests should contain, and what an Invested Company should do in order to register such contribution with the competent Administration for Industry and Commerce.