- Provides specific guidelines for use of equity interests or shares of a company as capital contributions under PRC Company Law
- Provides alternative means of capital contribution intended to stimulate M&A market and investment activity
The Administrative Measures on Registration of Capital Contribution With Equity Interests (“Measures”), officially promulgated by the State Administration for Industry & Commerce (“SAIC”) this January and which took effect on March 1, provide specific guidelines for the use of equity interests or shares of a company as capital contributions under PRC Company Law. The Measures facilitate corporate restructuring by providing alternative means of capital contribution and should stimulate China’s M&A market and investment activities during the economic turndown.
Under the Measures, contributions of equity interests or shares must meet the following conditions:
1. The investments must be made to an onshore company (“Invested Company”) by an investor using equity interests or shares in another onshore company (“Equity Company”).
2. The investor is required to have clear and complete title to the equity interests or shares to be used for capital contribution and the equity interests or shares must be legally transferrable.
3. Equity interests or shares may not be used as capital contributions under any of the following circumstances:
- if the registered capital of the Equity Company has not been paid in full;
- if the equity interests or shares are subject to a pledge;
- if the equity interests or shares have been frozen by the competent authority;
- if transfer of the equity interests or shares is prohibited by the Equity Company’s articles of associations;
- if transfer of equity interests or shares is subject to governmental approval but such approval has not been obtained; or
- if any law, administrative regulation or decision of the State Council prohibits transfer of the equity interests or shares.
4. The total amount of in-kind capital contribution (including equity interests or shares contribution) should not exceed 70% of the Invested Company’s total amount of registered capital, and the equity interests or shares must be appraised by a qualified appraiser.
5. The contribution is required to be made within one year after the establishment of an Invested Company.
The Measures also specify the procedures the Invested Company must make in registering the capital contribution with the appropriate local AIC. Invested Companies are required, in the course of applying for registration of incorporation, to register the names of investors contributing equity interests or shares as well as the values, forms and times of their investments. Investors contributing equity interests or shares to a newly incorporated company must fully contribute those equity interests or shares within one year after the incorporation of the Invested Company, which is then required to revise the notation of its paid-up capital on the registration form.