Measures Governing the Foreign Acquisition of Domestic Enterprises

Measures Governing the Foreign Acquisition of Domestic Enterprises, revised and adopted at the 7th Ministry's Meeting of the Ministry of Commerce of the People's Republic of China, is now published and shall enter into force as of 8 September 2006.

Minister of Commerce Bo Xi Lai
Chairman of State Owned Assets Supervision and Administration Commission of the State
Council  Li Rong Rong
Commissioner of State General Administration of Taxation Xie Xu Ren
Commissioner of State General Administration of Industry and Commerce Wang Zhong Fu
Chairman of China Securities Regulatory Committee Shan Fu Lin
Commissioner of State Administration of Foreign Exchange Hu Xiao Lian

8 August 2006

Table of Contents

Chapter I   General Principles

Article 1. This set of measures is formulated in accordance with the Company Law, laws and administrative regulations on foreign invested enterprises, and other related laws and administrative regulations to promote and standardise the incoming foreign investment, introduce foreign advanced technology and managerial experience, improve the level of foreign investment utilisation, realize the rational allocation of resources, guarantee employment, protect fair competition and national economic safety.

Article 2. Foreign acquisition of domestic enterprises mentioned in this set of measures refers to the practice whereby a foreign investor acquires the share right of a shareholder of a domestic enterprise not invested in by foreign investors (hereinafter referred to as "domestic company") or subscribes the increased capital of a domestic company, and transforms the domestic company into a foreign invested enterprise (hereinafter referred to as "acquisition by share rights"), or the practice whereby a foreign investor sets up a foreign invested enterprise and acquires contractually and manages the assets of domestic enterprises through the enterprise established, or the practice whereby a foreign investor acquires the assets of domestic enterprises through contracts signed and sets up a foreign invested enterprise with the assets acquired to manage the assets (hereinafter referred to as "assets acquisition").

Article 3. Foreign investors acquiring domestic enterprises shall abide by Chinese laws, administrative regulations and rules, follow the principles of being fair, reasonable, honest, faithful, paying justifiable prices, not cause over concentration, exclusion or restrict competition, or harm the social economic orders or public benefits. Nor shall they cause the loss and erosion of state owned assets.

Article 4. Foreign investors acquiring domestic enterprises shall abide by the requirements over qualifications of investors as specified by Chinese laws, administrative regulations and rules, and the policies governing industry, land, and environmental protection.

For industries in which foreign investment is not allowed to run solely funded operations according to the Catalogue of Industries for Foreign Investment, the acquisition shall not result in the situation where foreign investors hold the whole share rights of enterprises. For industries in which the Chinese side is required to hold the majority share or comparative majority share, the Chinese side shall maintain its positions of majority shareholder or comparative majority shareholder in the enterprises acquired by foreign investors. For industries in which foreign investors are not allowed, foreign investors are not allowed to acquire enterprises in the industries.

The business scope of enterprises originally invested in by the domestic enterprises that are being acquired shall conform with the requirements of industrial policies governing foreign investment. Adjustments shall be made to those that do not conform to the requirements.

Article 5. In cases where foreign acquisition of domestic enterprises involves transfer of state owned assets of enterprises and management of state owned share rights of publicly listed companies, the related provisions governing state owned assets management shall be observed.

Article 6. Foreign investors acquiring domestic enterprises to set up foreign invested enterprises shall be approved by the examination and approval agency in line with this set of regulations, and shall apply to the registration agency for modification of registration or setup registration.  

In cases where the acquired enterprise is a publicly listed domestic enterprise, the provisions of the Measures Governing the Strategic Investment Made by Foreign Investors in Publicly Listed Companies shall be followed and the related formalities shall also be handled with the securities regulatory body of the State Council.

Article 7. Various parties involved in the foreign acquisition of domestic enterprises shall pay taxes according to Chinese taxation regulations and accept supervision of taxation authorities.
 
Article 8. Various parties involved in the foreign acquisition of domestic enterprises shall abide by the Chinese laws and administrative regulations on foreign exchange administration, and handle verification, registration, record filing, and modification formalities with the foreign exchange administration without undue delay. 
 
Chapter II   Basic Principles

Article 9. In cases where a foreign investor contributes more than 25% of the registered capital of a foreign invested enterprise established by a foreign investor after the acquisition, the enterprise shall be entitled to the treatment granted to foreign invested enterprises.

In cases where a foreign investor contributes less than 25% in the registered capital of a foreign invested enterprise established by a foreign investor after the acquisition, the enterprise shall not be entitled to the treatment granted to foreign invested enterprises, unless otherwise specified in laws and administrative regulations. The related regulations on the borrowing of foreign loans by domestic non-foreign invested enterprises shall be followed in borrowing foreign loans. The examination and approval agency will issue an approval certificate (hereinafter referred to as "approval certificate") of foreign invested enterprise to the enterprise, with remarks of foreign capital ratio lower than 25%. The registration authority and foreign exchange administration shall issue a business license of foreign invested enterprise and foreign exchange registration certificate to the enterprise respectively, with remarks of foreign capital ratio lower than 25%.

In cases where a domestic company, enterprise or natural person, in the name of companies set up or controlled overseas lawfully, acquires a domestic company correlated with it, the foreign invested enterprise thus set up shall not be entitled to treatment granted to foreign invested enterprises. However, exceptions will be granted to cases whereby the overseas company subscribes to the increased capital of a domestic company or increases its investment in the enterprise set up after acquisition, and the increased amount in the registered capital of the enterprise set up is 25% or above. For foreign invested enterprises set up following the ways specified in this article, if the capital contribution in the registered capital of the enterprise by foreign investors other than the actual controller is over 25%, the enterprise is entitled to the treatment of foreign invested enterprises.  

Treatment to foreign invested enterprises funded by foreign investors after acquiring a publicly listed domestic company will be granted according to the relevant regulations of the State.

Article 10. Examination and approval authorities mentioned in this set of measures refer to the Ministry of Commerce or provincial level commercial authorities (hereinafter referred to as the "provincial level examination and approval authorities") of the People's Republic of China, and the registration authority refers to the State General Administration of Industry and Commerce of the People's Republic of China or local administration of industry and commerce authorised by the State General Administration of Industry and Commerce. Foreign exchange administration refers to the State Administration of Foreign Exchange of the People's Republic of China and its branches.

For foreign invested enterprises set up after acquisition, if they are within a certain category or a certain industry that needs approval from the Ministry of Commerce (MOFCOM) according to the provisions of laws, administrative regulations and rules, the provincial level examination and approval authorities shall submit the application documents to the MOFCOM for examination and approval and the MOFCOM shall decide whether or not to approve according to law.

Article 11. In cases where a domestic enterprise, company or natural person acquires, in the name of its company established or controlled overseas according to law, a domestic company with which it has associated relations, the acquisition shall be submitted to the MOFCOM for examination and approval.

Parties concerned shall not escape the requirements mentioned above with such excuses as a foreign invested enterprise making investment in China or other means.

Article 12. In cases where the foreign acquisition of a domestic enterprise and obtaining of actual controlling rights involves key industries, factors that will impact or be likely to impact the national economic security or causes the transfer of the actual controlling right of a domestic enterprise which owns name brands or traditional Chinese brands, the parties concerned shall declare that to the MOFCOM.

In cases where the parties concerned fail to report, however, that the acquisition will cause or is likely to cause a major impact on the national economic safety, the MOFCOM may, jointly with other relevant ministries, request the parties concerned to terminate trading or transfer the related share rights, assets or adopt other effective measures, so as to eliminate the impact on the national economic safety.

Article 13. In cases where a foreign investor acquires through share trading, the foreign invested enterprise set up after acquisition shall bear the creditors and debtors' rights and obligations of the domestic company.

In cases where the foreign investor acquires the assets of a domestic enterprise, the domestic enterprise selling its asets shall bear the original rights and obligations

Foreign investors, acquired domestic enterprises, creditors and other parties concerned may reach agreement on the disposal of the creditors' rights and debts of the acquired domestic enterprise, however, the agreement shall not harm the interests of the third parties and social public benefits. The disposal agreement of creditors' rights and debts shall be submitted to the examination and approval agency.

The domestic enterprise selling its assets shall issue notice to creditors at least 15 days before the investor submits application documents to the examination and approval authorities and publish a public notice in provincial level or above newspapers that circulate nationwide.

Article 14. Parties concerned in the acquisition shall base the trading prices on the results of appraisal of assets to be sold or value of share rights to be transferred conducted by the assets appraisal agency. Parties concerned in the acquisition may agree mutually on the selection of an assets appraisal agency lawfully set up inside China. The assets appraisal shall be conducted in line with the internationally recognised and adopted appraisal methods, and transfer of share rights or sales of assets at prices significantly lower than the appraisal results and transferring capital overseas in disguised forms are strictly forbidden.

In cases where foreign acquisition of domestic enterprises results in the change of share right of investment made by state owned assets or transfer of rights of state owned assets, the related provisions of the management of state owned assets shall be followed.

Article 15. Parties concerned in the acquisition shall give explanations on whether there is an associated relationship between and amongst the parties to the acquisition and in cases where the two parties are de facto controlled by one controller, the parties concerned shall disclose the information of the actual controller to the examination and approval agency, and explain whether the purpose of acquisition and results of appraisal conform to the fair market price. Parties concerned shall not escape the above mentioned requirements in the name of trust, holding assets on behalf of others, or other means.

Article 16. In cases where a foreign investor acquires a domestic enterprise and sets up a foreign invested enterprise, the foreign investor shall pay all the money agreed to the shareholders that sell their shares or domestic enterprise that sell its assets within 3 months, upon the date of issuance of the business license of the foreign invested enterprise. In cases where extension is required due to special circumstances, 60% of the total amount of money agreed shall be paid within 6 months, upon the date of issuance of the business license of the foreign invested enterprise, subject to approval by the examination and approval authority, and the remainder will be paid within a year. The profits will be distributed to parties concerned in accordance with the ratio of capital actually contributed.

In cases where foreign investors subscribe the increased investment of a domestic enterprise, the shareholder of a domestic company limited by shares and the domestic joint stock company shall pay no lower than 15% of the newly increased capital, and the remainder of the contribution shall be made within the timeframe specified by the provisions of the Company Law, related laws on foreign investment, and Measures Governing Company Registration. The provisions of other laws and administrative regulations shall be followed in cases where there are specific provisions on this. In cases where a company limited by shares issues new shares to increase its registered capital and shareholders subscribe to new shares, the related provisions governing the payment of share right money to set up the company limited by shares shall prevail.

In the case of foreign acquisition of assets, the investors shall specify a timeframe of capital contribution in the contract and articles of association of the foreign invested enterprises to be set up. When setting up a foreign invested enterprise and purchasing and managing the assets of domestic enterprises through the enterprise set up, the investors shall contribute the capital with the equivalent value of the counter performance of assets within the timeframe as specified in paragraph one of this article. The remainder of the contribution shall be made in line with the related provisions governing the contribution made by foreign invested enterprises set up.

In the case of a foreign acquisition of domestic enterprises to set up foreign invested enterprises, if the capital contribution ratio from foreign investors is lower than 25% of the registered capital of the enterprise, the investors shall make all the payment within three months, upon the date of issuance of the business license to the foreign invested enterprises in cases where the investors contribute in cash. In cases where the investors contribute in kind, industrial intellectual property right, and others, the contribution shall be made in full within six months, upon the date of issuance of the business license to the foreign invested enterprises.

Article 17. Means of payment used to pay counter performance shall comply with the provisions of related laws and administrative regulations of the State. Foreign investors using lawfully owned RMB assets to serve as means of payment need to have verification from the foreign exchange administration. In cases where foreign investors using shares over which they have disposal right to serve as means of payment, the provisions of chapter IV shall be followed.

Article 18. In cases where foreign investors purchase the shares from shareholders of a domestic company, which is transformed into a foreign invested enterprise, the registered capital of the foreign invested enterprise is that of the original domestic company, and the ratio accounted by the foreign investors in the capital is that in the original registered capital.
In cases where foreign investors subscribe the increased capital of a domestic limited liability company, the registered capital of the foreign invested enterprise set up after acquisition shall be the total of the registered capital of the original domestic company and the increased capital. Foreign investors and the original shareholders of the acquired domestic company shall identify and agree on the capital contribution ratio of each other in the registered capital of the foreign invested enterprises based on the assets appraisal of the domestic company.

Foreign investors subscribing to increased capital of a domestic limited liability company shall identify and agree on the registered capital according to the related provisions of the Company Law.

Article 19. For share acquisition by foreign investors, the upper limit of the total investment of the foreign invested enterprise to be set up after acquisition shall be agreed according to the following ratios, unless otherwise specified by the State:

total investment not exceeding 10/7 of the registered capital if the registered capital is lower than US$2.1 million,

total investment not exceeding 2 times of the registered capital if the registered capital is between US$ 2.1 million and US$5 million,

total investment not exceeding 2.5 times of the registered capital if the registered capital is between US$5 million and US$12 million,

total investment not exceeding 3 times of the registered capital if the registered capital is over US$12 million.

Article 20. For assets acquisition by foreign investors, the total investment of the foreign invested enterprise to be set up shall be identified according to the trading price of the assets and the actual production scale. The ratio between the registered capital and total investment of the foreign invested enterprise to be set up shall comply with related provisions.

Chapter III   Examination, Approval and Registration

Article 21. In the case of share acquisition by foreign investors, the investors shall submit the following documents to the examination and approval agencies with corresponding authority in examination and approval in accordance with the total investment, type of enterprises and industries of the foreign invested enterprises to be set up after acquisition as per provisions of laws, administrative regulations and rules governing foreign invested enterprises:

1. resolution unanimously adopted by shareholders of the domestic limited liability company acquired giving consent to share acquisition by foreign investors, or resolution of the meeting of shareholders of the domestic limited liability company agreeing to share acquisition by foreign investors,

2. application for transforming a domestic limited liability company acquired into a foreign invested company,

3.contract and articles of association of the foreign invested enterprise to be set up after acquisition,

4. agreement of purchasing shares from shareholders of domestic companies or subscribing to increased capital of domestic companies by foreign investors,

5. financial and auditing report of the previous fiscal year of the domestic companies acquired,

6. identity certificate of the investors that have been notarised and legalised or registration certificate or credit proof document,

7. information of the enterprises invested in by domestic companies acquired,

8. copy of the business license of domestic companies acquired and enterprises invested in by the domestic companies,

9. plan of placing employees of domestic companies acquired,

10. documents requested in articles 13 to 15 of this set of measures.

In cases where the business scope, scale, obtaining of land use right of the foreign invested enterprises to be set up after acquisition involves a license from other related governmental bodies, the related documents applying for license shall be submitted at the same time.

Article 22. Share acquisition contract and agreement to increase capital in the domestic companies shall be subject to Chinese laws and contain the following information:

1. status of parties to the contract, including name, address, names of legal representatives, title, nationality, etc,

2. number and price of purchased shares or subscribed increased capital,

3. implementation period and method of the contract,

4. rights and obligations of all parties to the agreement,

5. breaching liabilities, dispute settlement,

6. time and location of the signing of agreement.

Article 23. In the case of assets acquisition by foreign investors, the investors shall submit the following documents to the examination and approval agencies with corresponding authority in examination and approval in accordance with the total investment, type of enterprises and industries of the foreign invested enterprises to be set up after acquisition as per provisions of laws, administrative regulations and rules governing foreign invested enterprises:

1. resolution of the holders of property right of the domestic enterprises or resolution from the authorised agency agreeing to sell the assets,

2.  application to set up foreign invested enterprises,

3. contract and articles of association of the foreign invested enterprise to be set up,

4. assets acquisition agreement signed between the foreign invested enterprise to be set up and the domestic enterprises, or assets acquisition agreement signed between foreign investors and domestic enterprises,

5. articles of association and copy of business license of domestic enterprises acquired,

6. proof of notifying creditors by the domestic enterprises acquired and explanations of whether the creditors have expressed their objections,

7.  identity certificate of the investors that have been notarised and legalised or registration certificate or credit proof document,

8.  plan of placing employees of the domestic enterprises acquired,

9. documents requested in articles 13 to 15 of this set of measures.

In cases where the acquisition and management of assets of domestic enterprises in line with the provisions of the previous paragraph involves a license from other related governmental bodies, the related documents applying for license shall be submitted at the same time.

In cases where foreign investors acquire assets of domestic enterprises contractually and set up foreign invested enterprises with the assets, the assets shall not be used in operations before the official setup of the foreign invested enterprises.

Article 24. Chinese laws shall be applicable to the assets acquisition agreement, which shall include the following items:

1.  status of parties to the contract, including name, address, names of legal representatives, title, nationality, etc,

2. list and prices of assets acquired contractually,

3. implementation period and method of the contract,

4. rights and obligations of all parties to the agreement,

5. breaching liabilities, dispute settlement,

6. time and location of the signing of agreement.

Article 25. For foreign acquisition of domestic enterprises and setup of foreign invested enterprises, the examination and approval agencies shall make a decision according to law whether or not to approve within 30 days upon receiving the complete set of documents, unless otherwise specified in this set of measures. Those approved will be granted a certificate of approval by the examination and approval agencies.

In cases where foreign investors acquire shares from shareholders of domestic companies, and the examination and approval authorities decide to approve the acquisition, it shall send the approval documents to the party that transfers the shares and the foreign exchange administration at the place where the domestic companies are located at the same time. The foreign exchange administration at the place where the party that transfers shares is located shall handle registration of foreign exchange received from transfer of shares and issue related proof, which is the valid document for the payment of counter performance paid by foreign parties for shares acquired.

Article 26. For foreign acquisition of assets, the investors shall apply to the registration authority for setup registration within 30 days of receiving the approval certificate, and obtain a business license for foreign invested enterprise.  

For foreign acquisition of shares, the acquired domestic companies shall, in line with this set of measures, apply to the original registration authority for modification of registration and obtain a business license for foreign invested enterprise. In cases where the original registration authority has no registration jurisdiction, it shall transfer the application documents to a registration authority that has such jurisdiction within 10 days upon receiving the application documents, together with the registration files of the domestic companies. Domestic companies being acquired shall submit the following documents when applying for modification registration, and be held liable for the authenticity and validity of the documents:

1. application for registration modification,

2. agreement for foreign investors' purchase of shares from shareholders of domestic companies or subscription to the increased capital of domestic companies,

3. revised articles of association of the company or the amendments to the original articles of association and contract of foreign invested enterprises requested to be submitted according to law,

4. certificate of approval for foreign invested enterprise,

5. proof of qualifications of principal body of the foreign investors or identity proof of the natural person,

6. revised list of board of directors, documents specifying the names and addresses of newly added board members, and the post assumption documents of newly added board members,

7. other related documents and certificates specified by the State Administration of Industry and Commerce.

Investors shall go to the taxation, customs, land management, foreign exchange and other related departments to handle registration formalities within 30 days upon the receipt of the business license for foreign invested enterprises.

Chapter IV   Foreign Investors' Use of Shares to Acquire Domestic Companies

Section I   Terms and conditions of share acquisition

Article 27. Foreign investors' use of shares to acquire domestic companies mentioned in this chapter refers to the practice whereby shareholders of overseas companies acquire the shares from shareholders of domestic companies or newly issued shares of domestic companies by paying shares they hold of overseas companies or shares newly issued of overseas companies.

Article 28. Overseas companies mentioned in this chapter shall be established lawfully and its place of registration shall have a complete company legal system, and the companies and their management have not been subject to punishment by regulatory bodies in the past three years. Overseas companies shall be publicly listed companies, except those mentioned in section III of this chapter, and the place where the companies are listed shall have a complete securities trading system.

Article 29. Shares of domestic and overseas companies involved in the share acquisition of domestic companies by foreign investors shall conform to the following terms and conditions:

1. legally owned by shareholders and transferable according to law,

2. no dispute surrounding the ownership and no pledge having been made or any other restrictions being placed,

3. shares of overseas companies shall be publicly listed for trading in overseas public and lawful securities markets (except OTC),

4. shares of overseas companies experiencing stable trading price within the past year.

Items 3 and 4 of the above paragraph are not applicable to special purpose companies mentioned in section III of this chapter.

Article 30. In cases where foreign investors acquire domestic companies with shares, domestic companies or their shareholders shall hire intermediaries registered in China to serve as consultants (hereinafter referred to as "acquisition consultant"). The acquisition consultants shall conduct due diligence over the authenticity of the application documents for acquisition, financial status of overseas companies and whether the acquisition conforms to the requirements of articles 14, 28 and 29 of this set of measures, and issue an acquisition consulting report, listing their professional opinions on items mentioned above in a clear manner.

Article 31. Acquisition consultants shall conform to the following terms and conditions:

1. having sound reputation and professional experience,

2. no major illegal or rule breaking record,

3. having capacity to investigate and analyse the legal system of the places where the overseas companies are registered and listed as well as the financial status of the overseas companies.

Section II  Application Documentation and Procedures

Article 32. Foreign investors acquiring domestic companies with shares shall be reported to the MOFOCM for examination and approval and domestic companies shall submit the following documents in addition to those requested in chapter III of this set of measures : 

1. information regarding changes to the share rights and major changes to the assets during the last year of the domestic company,

2. acquisition consulting report,

3. start of business proof of domestic and foreign companies and their shareholders involved or identity documents,

4. information regarding the shares held by shareholders of overseas companies and names of shareholders with 5% of the shares of overseas companies,

5. articles of association of overseas companies and information regarding provision of guarantee to others,

6. financial statement of the latest year of overseas companies that has been audited and the report of stock trading during the latest half year.

Article 33. MOFCOM shall conduct examination and verification of the acquisition application within 30 days upon receiving the complete set of documents and issue approval certificates to those qualified ones and make such remarks on the approval certificates as "foreign investors acquire domestic companies with shares and becomes valid within 6 months upon the day of issuance of the business license".

Article 34.  Domestic companies shall, within 30 days upon receiving the remarked certificates of approval, go to the registration authority and foreign exchange administration to handle modification registration, and the two authorities will issue them a business license of foreign invested enterprise and a foreign exchange registration certificate bearing such remarks as "valid for 8 months starting from the day of issuance".

When applying to the registration authority to handle modification registration, the domestic companies shall submit in advance an application for changing share right signed by legal representatives of the domestic companies aimed to resume the share right structure, the amendments to the articles of association of the company, share right transfer agreement, and other documents.

Article 35. Within 6 months upon the day of issuance of the business license, domestic companies or their shareholders shall, with regard to their holding of shares of overseas companies, apply to the MOFCOM and foreign exchange administration to handle verification and registration formalities related to making investment and starting enterprises overseas.

The parties concerned shall, in addition to submitting documents required in the Measures Governing the Items subject to Verification for Making Investment and Starting Business Overseas, submit the certificate of approval of a foreign invested enterprise with special remarks and the business license of foreign invested enterprise with special remarks. The MOFCOM, after verifying the holding of shares of overseas companies by domestic companies or their shareholders, shall issue a certificate of approval for Chinese enterprises making overseas investment, and issue an approval certificate of foreign invested enterprise without remarks.

Domestic companies, upon obtaining the certificate of approval of foreign invested enterprise without remarks, shall go to the registration authority and foreign exchange administration to apply for the issuance of a business license for foreign invested enterprise and certificate of registration of foreign exchanges without remarks, within 30 days.

Article 36. In cases where within 6 months upon the day of issuance of the business license, the domestic and foreign companies fail to complete the formalities of share right change, the certificate of approval with remarks and the certificate of approval for Chinese enterprises making overseas investment shall become invalid automatically, and the registration authority shall verify the modification registration according to the application document for share right modification registration submitted in advance by the domestic companies and reinstate the status of share right structure of the domestic companies before the share acquisition.

In cases where a domestic company under acquisition fails in the issuance of new shares, the domestic company shall, before the registration authority verifies and registers the share right structure according to the previous paragraph, publish a public announcement in newspapers regarding the reduction of corresponding registered capital in line with the provisions of the Company Law.

Domestic companies failing to handle corresponding registration formalities in line with the previous paragraph will be subject to sanctions by the registration authorities in accordance with the related provisions of the Measures Governing Company Registration.

Article 37. Domestic companies shall not, before obtaining the certificate of approval of foreign invested enterprise without special remarks and registration certificate of foreign exchange, distribute profits to shareholders or provide guarantee to associated companies. Nor shall they make payment related to capital items of transfer of shares, reduction in registered capital, liquidation, and others.

Article 38. Domestic companies or their shareholders shall, on the strength of the certificate of approval and business license without special remarks issued by MOFCOM and the registration authority, go to the taxation authority to handle taxation modification registration.

Section III Special Provisions on Special Purpose Companies

Article 39. Special purpose companies refer to overseas companies controlled directly or indirectly by Chinese domestic companies or natural persons to achieve the purpose of listing overseas the domestic companies under their actual control.

The provisions of this section shall be applicable to the practice whereby to achieve the purpose of listing overseas, the special purpose companies use the shares held by their shareholders or newly issued shares to serve as means of payment to acquire the shares from shareholders of domestic companies or newly issued shares of domestic companies.

In cases where parties concerned use the overseas companies that have shares in special purpose companies as the principal body for overseas listing, the overseas companies shall conform to the related requirements of a special purpose company as specified in this section.

Article 40. Overseas listing and trading of special purpose companies shall be subject to approval by the State securities regulatory body.

The country or region where the special purpose company is to be listed shall have a complete legal and regulatory system, and its securities regulatory body has signed a memorandum of understanding of regulatory cooperation with the State securities regulatory body, and has maintained effective cooperative relations.

Article 41. Domestic companies mentioned in this section whose benefits have been listed overseas shall meet the following terms and conditions:

1. clear cut property right relationship, no dispute or potential dispute surrounding property right,

2. having complete operation mechanism and sound sustainable capacity for operations,

3. having complete corporate governance structure and internal management system,

4. company and its major shareholders having no record of major law breaking or rule breaking acts in the last 3 years.

Article 42. Domestic companies establishing special purpose companies overseas shall apply to the MOFCOM to handle verification formalities. In so doing, domestic companies shall submit the following documents, in addition to those requested in the Measures Governing Items subject to Verification for Making Overseas Investment and Starting Enterprises:

1. identity document of the final controller of the special purpose company,

2. commercial plan of overseas listing of the special purpose company,

3. evaluation report issued by acquisition consultant regarding the issuing price of shares of the special purpose company to be listed overseas.

Upon obtaining a certificate of approval of overseas investment by Chinese enterprises, the initiator or controller shall apply to the local foreign exchange administration to handle the corresponding formalities of foreign exchange registration of overseas investment.

Article 43. Total value of issuing price of shares of special purpose companies listed overseas shall not be lower than the value of shares of domestic companies to be acquired as appraised by the related Chinese assets appraisal agency.

Article 44. In cases where a special purpose company acquires a domestic company through shares, the domestic company shall submit the following documents to MOFCOM, in addition to those requested in article 32 of this set of measures:

1. approval document and certificate for overseas investment and start of enterprises issued at the time of setting up the special purpose company,

2. foreign exchange registration form of overseas investment of the special purpose company,

3. identity document or proof of start of business and articles of association of the final controller of the special purpose company,

4. commercial plan of overseas listing of the special purpose company,

5. evaluation report issued by acquisition consultant regarding the issuing price of shares of the special purpose company to be listed overseas.

In cases where the overseas company that holds shares of special purpose companies is used as the principal body for overseas listing, the domestic company shall submit the following documents:

1. proof of start of business and articles of association of the overseas company,

2. detailed explanation regarding the trading arrangement and pricing of shares of domestic companies to be acquired between special purpose companies and the overseas companies.

Article 45. When MOFCOM agrees through its preliminary examination to the documents specified in article 44 of this set of measures and issues a letter of approval in principle, the domestic company shall, on the strength of the letter of approval, submit to the state securities regulatory body to apply for listing, and the state securities regulatory body shall make a decision of whether or not to approve the listing within 20 working days.

Domestic companies shall apply to MOFCOM for a certificate of approval upon obtaining verification. MOFCOM will issue a certificate of approval with remarks of "shares held by overseas special purpose companies and valid for a year starting from the day of issuance of business license".

In cases where acquisition results in the change of share right and other items of special purpose companies, the domestic companies or natural persons holding shares of special purpose companies shall, on the strength of the certificate of approval of foreign invested enterprise with special remarks, go to MOFCOM to handle formalities of verification of modification with regard to special purpose companies, and handle modification of registration of foreign exchange for overseas investment with local foreign exchange administration.

Article 46. Domestic companies shall, within 30 days upon the day of receiving the certificate of approval with special remarks, go to the registration authority and foreign exchange administration to handle modification registration. Registration authorities and foreign exchange administrations shall issue a business license for foreign invested enterprises and a certificate of foreign exchange registration bearing such remarks of "valid for 14 months upon day of issuance" to domestic companies.

Domestic companies when handling modification registration with the registration authority shall submit in advance an application for changing share right signed by legal representatives of the domestic companies aimed to resume the share right structure, the amendments to the articles of association of the company, share right transfer agreement, and other documents.

Article 47. Domestic companies shall, within 30 days upon the day when overseas listing of the special purpose company or overseas company that has an associated relationship with the special purpose companies is completed, submit to the MOFCOM information of its overseas listing and plan to transfer the money raised back into the country, and apply to issue a certificate of approval of foreign invested enterprise without remarks. In addition, domestic companies shall, within 30 days upon the completion of overseas listing, submit to the state securities regulatory body a report of the overseas listing and provide related record filing documents. Domestic companies shall also submit the plan to transfer the money raised back into the country to the foreign exchange administration, which will monitor the implementation. Domestic companies obtaining a certificate of approval without remarks shall apply to the registration authority and foreign exchange administration within 30 days to change the business license of foreign invested enterprise and certificate of registration of foreign exchange without remarks.

In cases where domestic companies fail to report to MOFCOM before the expiration of the mentioned date, the certificate of approval with remarks issued to domestic companies shall become invalid automatically, and the share right structure of the domestic companies shall be reinstated to the original status, and modification registration formalities shall be handled in line with article 36 of this set of measures.

Article 48. Money raised through overseas listing of a special purpose company shall be transferred back into the country for use according to the transfer-back plan filed with the foreign exchange administration in line with the existing regulations on foreign exchange administration. Fund raised may be transferred into the country via the following means:

1. providing commercial loans to domestic companies,

2. setting up new foreign invested enterprises inside China,

3. acquiring domestic enterprises.

When transferring back funds raised overseas by special purpose companies under any of the above mentioned circumstances, the laws and administrative regulations of China on foreign investment and foreign debt administration shall be followed. In cases where the transfer of funds raised overseas by special purpose companies into China results in the increase of holdings of the rights of special purpose companies by domestic companies and natural persons or the increase in the net assets of the special purpose companies, the parties concerned shall disclose according to the facts and submit the information for approval. The corresponding formalities of registration of foreign exchange of foreign investment and registration of overseas investment shall be handled after completion of the examination and approval procedures.

Profits, dividends and capital change generated income in foreign exchange obtained by domestic companies and natural persons from special purpose companies shall be transferred back into China within 6 months, starting from the day they are obtained. Profits or dividends may be deposited in the foreign exchange account of the current account or be sold for RMB. Foreign exchange income generated from capital account changes, upon verification by the foreign exchange administration, may be kept in a special account for capital account or may be converted into RMB upon the verification by the foreign exchange administration.

Article 49. In cases where domestic companies fail to obtain a certificate of approval without remarks within a year, starting from the day of issuance of the business license, the certificate of approval with special remarks will become invalid automatically and the modification registration formalities shall be handled in line with article 36 of this set of measures.

Article 50. In cases where a special purpose company completes its overseas listing and the domestic companies have obtained a certificate of approval and a business license without remarks, and the parties concerned continue to use the shares of the company to serve as means of payment to acquire domestic companies, the provisions of sections I and II of this chapter shall apply.

Chapter V   Anti Monopoly Inspection

Article 51. In cases where any of the following circumstances apply to the foreign investors acquiring a domestic enterprise, the investors shall report to the MOFCOM and State Administration of Industry and Commerce:

1. one of the parties to the acquisition has had annual turnover of RMB 1.5 billion in the Chinese market,

2. having acquired more than 10 enterprises in the associated domestic sector in accumulation within a year,

3. one of the parties to the acquisition has a market share in China of over 15%,

4. acquisition resulting in the condition whereby one of the parties to the acquisition has a market share in China of 25%.

In cases where the above mentioned terms and conditions are not met, however, at the request of domestic enterprises that have competitive relationship with foreign investors or related regulatory bodies or industry associations, and MOFCOM or the State Administration of Industry and Commerce considers that the market share involved in the foreign acquisition is significant or important factors exist that have serious impact on market competition, it may request the foreign investors to make a report.

Parties involved in the parties as mentioned above shall include enterprises that have an associated relationship with the foreign investors.

Article 52. In cases where any of the circumstances mentioned in article 51 of this set of measures applies to the foreign investors acquiring domestic enterprises, and MOFCOM and the State Administration of Commerce and Industry consider that the acquisition may cause over concentration, hurt fair competition, harm the benefits of consumers, they may call a hearing jointly or collectively of related departments, agencies, enterprises and other parties concerned, within 90 days upon receipt of the complete set of documents, and decide whether or not to approve according to law.

Article 53. In cases where any of the following circumstances apply to a foreign acquisition, the acquiring party shall, before publicly announcing its acquisition plan or at the same time as reporting to the competent authorities in the host country, submit to the MOFCOM and the State Administration of Commerce and Industry its acquisition plan, which shall examine to see whether the acquisition will result in over concentration in the domestic market, hurt fair competition in the internal market, or harm the benefits of the domestic consumers, and make a decision of whether or not to approve:

1. one of the parties to the foreign acquisition has assets of over RMB 3 billion in China,

2. one of the parties to the foreign acquisition has business turnover of RMB 1.5 billion in the Chinese market during the year of acquisition,

3. one of the parties to the foreign acquisition and its associated enterprises have a combined market share in China of over 15%,

4. due to foreign acquisition, one of the parties to the foreign acquisition and its associated enterprises have a combined market share in China of over 25%,

5. due to foreign acquisition, one of the parties to the foreign acquisition has directly or indirectly participated in terms of shares i more than 15 foreign invested enterprises in the related industries in China.

Article 54. For acquisitions under any of the following circumstances, one of the parties to the acquisition may apply to the MOFCOM and State Administration of Industry and Commerce for waiver of inspection:

1.  capable of improving fair market competitive conditions,

2. regrouping loss-making enterprises and guaranteeing employment,  

3. able to introduce advanced technology and managerial talent and improve the international competitiveness of enterprises,

4. able to improve the environment.

Chapter VI   Supplementary Articles

Article 55. This set of measures shall be applicable to the acquisition of domestic companies by investment companies set up by foreign investors inside China according to law.

The related provisions of the existing laws and administrative regulations on foreign invested enterprises and on share right change of foreign invested enterprises shall be applicable to the practice whereby foreign investors acquire shares from shareholders of foreign invested enterprises established in China or subscribe to increased capital of foreign invested enterprises established in China. In cases where there are no such provisions, this set of measures shall be referred to.

The related provisions regarding division and merger of foreign invested enterprises and on domestic investment by foreign invested enterprises shall be applicable to the practice whereby foreign investors merge or acquire domestic enterprises through foreign invested enterprises they have established in China. In cases where there are no such provisions, this set of measures shall serve as reference.

The related provisions on the establishment of foreign invested companies limited by shares shall be applicable to the practice whereby foreign investors acquire domestic limited liability companies and transfer them into companies limited by shares, or domestic companies acquired are those limited by shares. In cases where there are no such provisions, this set of measures shall be referred to.

Article 56. Applicants or declarants submitting documents shall categorise the documents in line with the provisions of this set of measures and attach a catalogue of the documents. All documents requested shall be in Chinese.

Article 57. Chinese natural persons of domestic companies that have been acquired through shares may continue, subject to approval, to be Chinese investors in the foreign invested enterprises set up after modifications.

Article 58. In cases where natural person shareholders of a domestic company change their nationalities, this does not alter the nature of the company.

Article 59. Working staff of related governmental agencies shall be faithful to their duties, perform their functions according to law, and not seek unjustified benefits with their positions, and be held liable for confidentiality of commercial secrets known to them.

Article 60. This set of measures shall serve as a reference in terms of investors from Hong Kong SAR, Macao SAR and Taiwan region acquiring enterprises from other regions.

Article 61. This set of measures shall enter into force as of 8 September 2006.

商务部、国务院国有资产监督管理委员会、国家税务总局、国家工商行政管理总局、中国证券监督管理委员会、国家外汇管理局

关于外国投资者并购境内企业的规定

(商务部、国务院国有资产监督管理委员会、国家税务总局、国家工商行政管理总局、中国证券监督管理委员会、国家外汇管理局令2006年第10号)