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Order of Ministry of Foreign Trade and Economic Cooperation of the People’s Republic of China, State Administration of Taxation of the People's Republic of China, State Administration of Industry and Commerce of the People’s Republic of China, and State Administration of Foreign Exchange of the People’s Republic of China
No. 3, 2003
Provisional Rules on Annexation of Domestic Enterprises by Foreign Investors, adopted at the first departmental meeting of Foreign Trade and Economic Cooperation Department of the People’s Republic of China on January 2, 2003, is hereby promulgated and shall go into effect as of April 12, 2003.
Shi Guangsheng Minister
Jin Renqing Director
Wang Zhongfu Director
Guo Shuqing Director
March 7, 2003
1. These Rules is enacted in accordance with laws and administrative regulations on foreign invested enterprises, and other relevant laws and administrative regulations to promote and regulate foreign investment in China, to introduce advanced foreign technologies and management, to improve the quality of using foreign investment and realize the proper distribution of resources, to guarantee employment, and maintain fair competition and national economic safety.
2. The annexation of domestic enterprises by foreign investors as mentioned in the Rules refers to foreign investors purchasing the stocks of the shareholders of domestic non-foreign invested enterprises (hereinafter domestic enterprises) or subscribing for the domestic enterprises’ gains through agreement, thus changing the domestic enterprises into foreign invested enterprises (hereinafter share annexation); or foreign investors setting up foreign invested enterprises through which they purchase domestic enterprises and operate them through agreement; or foreign investors purchasing domestic enterprises assets through agreement with which they set up foreign invested enterprises for operation (hereinafter assets annexation).
3. While annexing domestic enterprises, foreign investors shall abide by State laws and administrative regulations as well as departmental regulations, observe the principles of fair competition, fair prices with profit, and honesty and credibility. They shall not disturb social economic order and harm social public interests by causing over-convergence, excluding or limiting competition.
4. Foreign investors’ annexing domestic enterprises shall observe the requirements on investors’ qualification and industry policy stipulated in related State laws, administrative regulations and departmental regulations.
As for industries which foreign investors are not allowed to operate solely, as listed in the Guiding Index of Foreign Investment in Enterprises, annexation shall not lead to foreign investors’ holding all the shares of the enterprise. As for enterprises that need to be held or relatively held by Chinese party, the Chinese party shall still hold or relatively hold shares as required after annexation. As for industries that foreign investors are forbidden to operate, they shall not be annexed or operated by foreign investors.
5. While annexing domestic enterprises and setting up foreign invested enterprises, foreign investors shall observe the Rules, and register modifications with registration management department after being approved by the examination and approval authority. The capital ratio of foreign investor’s shall be no less than 25% in the registration capital of the foreign invested enterprise established after annexation. If it is under 25%, with the exception of special laws, administrative rules or regulations, the foreign investors shall go through the examination, approval and registration procedures in compliance with stipulations concerning establishing new foreign invested enterprise. The examination and approval authority shall mark the certificate of approval “ration of foreign capital less than 25%” while issuing the certificate to the foreign invested enterprise, and the registration management department will mark the business licenses with the same words when issuing business licenses.
6. The examination and approval authorities mentioned in this Rules refer to Ministry of Foreign Trade and Economic Cooperation (hereinafter MOFTEC) and provincial foreign trade and economic relation commissions (hereinafter provincial examination and approval authorities); the registration management department mentioned in this Rules refers to State Administration of Industry and Commerce or the local bureaus of industry and commerce administration authorized by the State Administration.
In cases where the foreign invested enterprises established after annexation constitute foreign invested enterprises of special type or trade that should be approved by MOFTEC in accordance with related laws, administration rules and departmental regulations, the provincial examination and approval authorities shall transfer the application materials to MOFTEC, which shall then decide whether or not to approve in accordance with laws concerned.
7. In cases of share annexation, foreign investors shall inherit the creditors’ rights and liabilities of the annexed domestic enterprises after annexation.
In cases of foreign investors conducting assets annexation, the domestic enterprises that sell the assets shall inherit the creditors’ rights and liabilities.
Foreign investors, the annexed domestic enterprise, the creditor and other parties may reach other agreement on the creditor’s rights and liabilities of the annexed domestic enterprise’s, but the agreement shall not harm a third party’s interests and the social public interests. The agreement of the handling of the creditor’s rights and liabilities shall be reported to the examination and approval authority.
In 10 days after the annexation decision, domestic enterprises shall send an advance note to creditors and publish it in newspapers of or above provincial level. In 10 days after receiving the advance note or of publication, creditors shall have the right to ask for corresponding vouch from domestic enterprises that sell their assets.
8. Annexing investors shall base the deal price on the appraisal of the assets appraisal institution of the shares to be transferred and the assets to be sold. The parties of the annexation may establish legal assets appraisal institutions in China through agreement. The assets appraisal shall follow the universally adopted appraisal method.
In cases where foreign investors’ annexation of the domestic enterprise may cause the change of shares of state-owned assets investment or the transfer of the property right of state-owned assets, appraisal shall be carried out, and the price be decided, in accordance with regulations of state-owned assets management.
To prevent assets transference abroad in disguised forms, transference of the share right or sale of assets at a price obviously lower than the appraisal shall be forbidden..
9. While annexing the domestic enterprise and establishing the foreign invested enterprise, foreign investors shall pay the consideration to the shareholders who transfer the share right or to the domestic enterprise that sells the assets in three months of the issuance of the business license of the foreign invested enterprise. Should extension be required, foreign investors shall pay 60% plus of the consideration in six months, and the rest within 1 year, after the issuance of the business license of the foreign invested enterprise, and allocate profits in proportion to the consideration actually paid.
In cases of capital increase in foreign invested enterprise established via share annexation, investors shall define the time limit of payment in the contract and regulations of the foreign invested enterprise to be established. If it is stipulated to pay once and for all, the investors shall pay off in six months of the issuance of the business license of the foreign invested enterprise; if it is stipulated to pay by installment, the initial payment shall be no less than 15% of the amount the investors admit to pay and shall be paid off the consideration in three month of the issuance of the business license of the foreign invested enterprise.
In cases of assets annexation, investors shall define the time limit of payment in the contract and charter of the foreign invested enterprise to be established. Investors who set up a foreign invested enterprises to purchase the domestic enterprises’ assets and operate the assets through agreement shall pay off the consideration the amount equal to the assets in the time limit stipulated in the first clause of this Article, and shall decide on the time limit of payment for the rest of consideration in the way stipulated in the second clause of this Article.
In cases of investment ratio of the foreign investors annexing domestic enterprises and establish the foreign invested enterprises is below 25%, and in cases of investment by cash, investors shall pay off the consideration in three months of issuing the business license of the foreign invested enterprise; investors investing by materials and industrial property right shall pay off the consideration in six months of issuing the business license of the foreign invested enterprise.
The consideration payment shall observe the relevant State laws and administrative rules and regulations. If the foreign investors pay with shares that they have the right to handle with or in Renminbi they legally own, they shall have it checked and approved by the exchange control authorities.
10. After the foreign investors purchase the shares of the shareholders of the domestic enterprises through agreement, and change the domestic enterprises into the foreign invested enterprises, the registration capital of the foreign invested enterprise shall be that of the former domestic enterprises and the capital ratio of the foreign investor shall be equal to that of the purchased shares to the former registration capital. The registration capital of the foreign invested enterprise established after share annexation together with increment shall be the total of the registration capital of the former domestic enterprises and the increase of the investment; foreign investors and former investors in the annexed domestic enterprises shall jointly decide their investment ratios in the registration capital of the foreign invested enterprises on the basis of the assets appraisal of the domestic enterprise.
If foreign investors have purchased the gain of the domestic enterprises, their registration capital shall be the total of the registration capital of the former domestic enterprises and the increase of the investment after the domestic enterprises change into the foreign invested enterprises. Foreign investors and the other former investors in the annexed domestic enterprises shall jointly decide their investment ratios in the registration capital of the foreign invested enterprises on the basis of the assets appraisal of the domestic enterprises.
The Chinese natural person shareholder of the share annexed domestic enterprise who has been a shareholder in the former enterprise over one year can still be a Chinese investor in the foreign invested enterprise after approval.
11. The foreign investors of share annexation shall decide the upper limit of the investment sum in the foreign invested enterprise established after annexation according to the following proportion:
(1) If the registration capital is under $ 2.1 million, the investment sum shall not exceed 10/7 of the registration capital;
(2) If the registration capital is $ 2.1 to 5 million, the investment sum shall not exceed two times of the registration capital;
(3) If the registration capital is $ 5 to 12 million, the investment sum shall not exceed 2.5 times the registration capital;
(4) If the registration capital is over $ 12 million, the investment sum shall not exceed the three of the registration capital;
12. On the basis of the investment sum in the foreign invested enterprise established after the annexation, foreign investors of share annexation shall submit the following documents to the examination and approval authority:
(1) The resolution of foreign investors’ share annexation agreed on by the shareholders of the annexed domestic company of limited liability, or the resolution of the shareholders’ meeting agreement on the annexation of the enterprise by foreign investors;
(2) The application of changing the annexed domestic enterprise into the foreign invested enterprise;
(3) Contract and charter of the foreign invested enterprise established after annexation;
(4) Agreement of the foreign investors purchasing shares or the increment of the domestic enterprise;
(5) Financial audit report of the annexed domestic enterprise in the recent fiscal years;
(6) Proof of the investors’ identity, business operation and credibility;
(7) Status documents of the enterprise invested by the annexed domestic enterprise;
(8) The business license (duplicate) of the annexed domestic enterprise and the affiliated enterprise it invests in;
(9) Allocation plan of the annexed domestic enterprise staff;
(10) Materials required by the 7th and 19th Articles of the Rules.
As for business scope, scale and land-use right of the foreign invested enterprises established after the annexation requiring the permission of other related departments, the admission materials concerned shall be submitted together with the above-mentioned documents.
Business scope of the company invested by the annexed domestic enterprise shall be in line with the policy on foreign invested industries. The scope shall be adjusted in case of discrepancy.
13. The agreement of share purchase and the domestic enterprise increment stipulated in the Article 12 of the Rules shall observe Chinese laws and include the following items:
(1) The status of the parties of the agreement, including titles (names), addresses, and name, position and nationality of the legal representative;
(2) The amount and price of the purchased shares and increment subscribed for;
(3) The time limit and terms of fulfillment of the agreement;
(4) Rights and obligations of the parties of the agreement;
(5) Responsibility of breach and the solution of conflicts
(6) Time and place of signature of the agreement.
14. foreign investors of assets annexation shall define the investment sum in the foreign invested enterprise to be established on the basis of the deal price of purchasing the assets and the actual production capacity. The ratio of the registration capital of the foreign invested enterprise to be established and the investment sum shall be in accordance with relevant regulations.
15. In accordance with the laws and administrative regulations and departmental regulations on the establishment of foreign invested enterprises, and on the basis of the investment sum, the business type and industrial category of the foreign invested enterprise to be established, the foreign investors of assets annexation shall submit the following documents to the examination and approval authority:
(1) Resolution on the sale of the assets made by the property right holder of the domestic enterprise or of the authority institution;
(2) Application for the establishment of the foreign invested enterprise;
(3) Contract and charter of the foreign invested enterprise to be established;
(4) Assets purchase agreement signed by the foreign invested enterprise to be established and the domestic enterprise or that signed by the foreign investors and the domestic enterprise;
(5) Charter and business license (duplicate) of the annexed domestic enterprise;
(6) Proof of the annexed domestic enterprise informing the creditor through advance note or publication;
(7) Proof of the investors’ identity, business operation and credibility;
(8) Plan of staff allocation of the annexed domestic enterprise;
(9) Materials required in Articles 7 and 19 of the Rules.
If purchase and operation of the assets of domestic enterprises conducted in accordance with the proceeding Articles require permission of other government department concerned, relevant documents apply for permission shall be submitted together with the above-mentioned documents.
Foreign investors who purchase the domestic enterprise assets and set up the foreign invested enterprises through agreement shall not conduct any business activities with the assets before the foreign invested enterprise is established.
16. The assets purchase agreement stipulated in the Article 15 of the Rules shall observe State laws and include the following items:
(1) Natural status of the parties of the agreement, including the title (name), the address, and the name, position and nationality of the legal representative;
(2) List and price of the assets to be purchased;
(3) The time limit and terms of fulfillment of the agreement;
(4) Rights and obligations of the parties of the agreement;
(5) Breach liability and solution to conflicts;
(6) Time and place of the signature of the agreement.
17. With the exception of provisions in the Article 20 of the Rules, for the foreign investors who annex the domestic enterprise and establish the foreign invested enterprise, the examination and approval authority shall decide whether or not to grant approval within 30 days of receipt of all the materials required. In case of approval, the examination and approval authority shall issue the certificate of approval to the approved foreign invested enterprise.
The foreign investors purchase the share rights of the shareholders of the domestic enterprise through agreement, which the examination and approval authority decides to approve, shall make a copy of the approval documents for the share transfer party and the exchange control authorities of the place where the domestic enterprise locates. The exchange control authorities of the place where the share transfer party locates shall register the drawing and remitting of the foreign capital exchange, and produce the certificate of foreign capital exchange registration that proves the execution of the consideration of the foreign investors of share annexation.
18. Foreign investors of assets annexation shall, within 30 days of receiving the certificate of approval for the foreign invested enterprise, apply to the registration administrative authorities for registration of establishment and obtain business license of the foreign invested enterprise.
With regard to the foreign investors of share annexation, the annexed domestic enterprise shall, in accordance with the Rules, apply to the former registration administrative authorities for registration of modifications and obtain business license of the foreign invested enterprise. The former registration administrative authorities without jurisdiction shall, within 10 days of the receipt of the application, transmit to the registration administrative authorities with jurisdiction together with the registration record of the domestic enterprise. The annexed domestic enterprise shall, when applying for registration of change, submit the following materials and be responsible for the authenticity and validity of the materials:
(1) Application for the registration of the alteration;
(2) Resolution of the shareholders meeting acknowledging that the annexed domestic enterprise decides to transfer the shares or increment in accordance with the Corporation Law of the People’s Republic of China and the charter of the company;
(3) Resolution that the foreign investors purchase the shares of the shareholders of the domestic enterprise or subscribe for the increment of the domestic enterprise;
(4) Modified charter of the company or the amendment to the charter of the original company, and the contract of the foreign invested enterprise required by related laws;
(5) Certificate of approval of the foreign invested enterprise;
(6) Proof of the foreign investors’ identity or business operation, and credibility;
(7) Modified name list of the board of directors, document with the names and addresses of the newly added directors and the appointment documents of the newly added directors.
In cases of the transfer of state-owned shares and the subscription of the foreign investors of the increment of the state-owned share, investors shall submit the certificate of approval issue by economic relations and trade authorities.
Investors shall, within 30 days of receipt of the business license of the foreign invested enterprise, register with the tax, customers, land management and exchange control authorities.
19. In cases of any of the following conditions, foreign investors annexing domestic enterprises shall report to the MOFTEC and State Administration of Industry and Commerce:
(1) One party of the annexation has a turnover over 1.5 billion RMB in Chinese market that year;
(2) The investor has annexed over 10 associated enterprises in China within 1 year;
(3) One party has obtained up to 20% of market share in China;
(4) The annexation causes one party to occupy up to 25% of market in China.
Though the above clauses are not applicable, should the annexation by the foreign investors involves a tremendous market share, or that there are other important factors that seriously affect market competition or the national economy and the people’s living and the national economic safety, at the request of domestic enterprises with competitive relations, functional departments concerned or related trade associations, MOFTEC or the General Administrative Bureau for Industry and Commerce may require foreign investors to submit the report.
The above-mentioned one party can also refer to the associated enterprises of the foreign investors.
20. Should the foreign investors’ annexation of the domestic enterprises involves any one of the conditions mentioned in Article 19 of the Rules, and MOFTEC and the General National Administrative Bureau for Industry and Commerce think that it may cause over-convergence, and harm fair competition or consumers’ interests, MOFTEC and the General National Administrative Bureau for Industry and Commerce shall, within 90 days of receipt of all the required materials, jointly or acting alone, summon departments, institutions, enterprises and other parties concerned for hearing and decide whether or not to grant approval in accordance with law after related consultation has been made.
21. If the outbound annexation involves one of the following situations, the annexing party shall, before making public the annexation plan or reporting to the supervision authorities of its country, submit the annexation plan to the MOFTEC and the General National Administrative Bureau for Industry and Commerce. The MOFTEC and the General National Administrative Bureau for Industry and Commerce shall examine to see whether or not there exists any situation that may cause over-convergence of the market, harm domestic just competition and consumers’ interest, and decide whether or not to approve.
(1) One party of the outbound annexation has a capital of over 3 billion RMB in China;
(2) One party of the outbound annexation has had a turnover of over 1.5 billion RMB in Chinese market that year;
(3) One party of the outbound annexation and its associated enterprises occupy up to 20% of the Chinese market;
(4) Because of the outbound annexation, one party of the outbound annexation and its associated enterprises occupy up to 25% of the Chinese market;
(5) Because of the outbound annexation, one party of the outbound annexation, directly or indirectly, purchase shares in over 15 foreign invested enterprises in the trade concerned in China.
22. In cases of one of the following situations, the annexing party can apply to the MOFTEC and the General National Administrative Bureau for Industry and Commerce for exemption from censor:
(1) It can improve the fair competition in market;
(2) It can reorganize enterprises running at a loss and guarantee employment;
(3) It can introduce advanced technology and managerial personnel to enhance the enterprises’ international competitiveness;
(4) It can improve the environment.
23. Investors shall, in submitting materials, classify the materials in accordance with the provisions and enclose the material index. All the materials required shall be written in Chinese.
24. These Rules shall apply to the annexation of domestic enterprises by the investment companies foreign investors have established in China in accordance with law.
The current laws, administrative rules on foreign invested enterprises and Regulations on the Share Right Change of the Shareholders of the Foreign Invested enterprise can apply to the foreign investors’ domestic enterprises of the foreign investor, and if there is no stipulation in this respect, the Rules shall be referred to.
25. Annexation of domestic enterprises in other places in Mainland China by investors from Hong Kong Special Administration zone, Macao Special Administration Zone and Taiwan and other investors may refer to the Rules.
26. The Rules shall come into force as of April12, 2003.
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