The Ministry of Commerce released the Interim Provisions of the Ministry of Commerce for the Equity Contribution of Foreign Invested Companies (the "Provisions") on September 21, 2012. The Provisions became effective from October 22, 2012.
The purpose of the Provisions is to regulate how equity can be contributed to foreign invested companies which hitherto has not been specifically regulated although in practice has been permitted.
The Provisions apply to the establishment and change of foreign invested companies (the "Invested Enterprise") where investors contribute their equity in an enterprise in China (the "Equity Enterprise") into the Invested Enterprise, including the following circumstances: (i) setting up a new foreign invested enterprise (the "FIE"); (ii) investing in an existing non-FIE and converting it into an FIE by subscribing to its increased capital; and (iii) investing in an existing FIE and changing its equity by subscribing to its increased capital.
According to the Provisions, the establishment and change of FIEs by investors in the form of equity contribution must be approved by the competent commercial departments of the province, autonomous region, municipality directly under the Central Government or city specifically designated in the State plan where the Invested Enterprise is located, excluding those FIEs the establishment and change of which must be approved by the Ministry of Commerce according to the relevant foreign investment examination and approval administrative regulations.
The Provisions provide that the equity used for the purpose of capital contribution must be clear in ownership, the rights attaching thereto must be complete and legally capable of transfer. Where the Equity Enterprise is an FIE, it must be properly established and comply with the relevant foreign investment industrial polices.
The Provisions also set out certain circumstances where equity cannot be invested as capital contribution: (i) the registered capital of the Equity Enterprise has not been fully paid; (ii) the equity has been pledged; (iii) the equity has been frozen; (iv) the equity is non-transferable according to the Articles of Association or contract of the Equity Enterprise; (v) the Equity Enterprise (if it is an FIE) did not participate in or failed to pass the annual inspection for the previous year; (vi) the Equity Enterprise is a real estate enterprise, a foreign-invested holding company, or a foreign-invested venture capital enterprise; (vii) the necessary approvals required by laws and regulations have not been obtained for the equity transfer, or (viii) other circumstances under which the equity transfer is prohibited according to applicable law.
Pursuant to the Provisions, the "equity price amount" (i.e., the transaction price) of the contributed equity can be determined by the investor of the equity and the shareholders of the Invested Enterprise or other investors based on an evaluation conducted by a domestic evaluation institution. However, the "equity contribution amount", which is defined as the part of "equity price amount" that is calculated in the registered capital of the Invested Enterprise must not be higher than the evaluation amount. The total of the equity capital contributed by all shareholders in the form of equity and in other forms of non-monetary property as evaluated must not exceed 70% of the registered capital of the Invested Company.
The Provisions formalize and clarify the requirements for the examination, approval and registration for equity contribution into FIEs. However, as the Provisions only apply where the contributed equity is "equity in an enterprise in China", investors who wish to contribute equity in a foreign or Hong Kong company still do not have any clear guidelines to follow.
Although these Provisions are a welcome step towards increased flexibility in corporate reorganizations, as many FIEs have restrictions on transfer of equity, it may still be difficult as a practical matter for the investors of such FIEs to use their equity to contribute to another FIE.
The full Chinese text of the Provisions is available here.