Company AAB was registered in the United States. With the business development, AAB wants to enter the Chinese market. After exploration in China, AAB wants to merge Company BBC which was registered in Beijing. AAB has three merging plans at the moment: 1. Purchase BBCs total Stock Equity directly. 2. Establish a foreign-invested enterprise (WFOE) and purchase BBC's total Stock Equity through the WFOE. 3. Establish a foreign-invested enterprise (WFOE) and then use the WFOE to merge BBC.
According to the related definitions of Regulations for Merger with and Acquisition of Domestic Enterprises by Foreign Investors, aforementioned three merging plans actually belong to Equity Merger and Acquisition, Asset Takeover, Enterprise Amalgamation. Those three forms are the main ways of foreign capital M&A.
If AAB chooses the first option, it shall comply with the following legal procedures:
1. Negotiation which includes assets value evaluation and discussion on each party's rights and obligations.
2. Application approving. AAB shall, pursuant to the total investments of the foreign-funded enterprise to be established after the takeover, the type of the enterprise and the industry it engages in, submit the following documents to the competent examination and approval organ:
1) A resolution of the shareholders of the BBC on the full consent to the equity-based takeover by AAB.
2) BBC's application for changing to the foreign-funded enterprise;
3) Contract and the articles of association of the foreign-funded enterprise to be established after takeover;
4) An agreement on the AAB's acquisition of equities of shareholders of BBC;
5) Financial audit report of BBC for last fiscal year;
6) Identification or Certificate of incorporation of the investor that has been notarized and certified according to law;
7) The descriptions about the enterprises invested by BBC;
8) The (duplicates) of the business licenses of BBC and its invested companies;
9) The proposal on the settlement of employees of BBC;
10) The report of an asset assessment institution assessing the properties of BBC, and AAB and BBC shall state whether there is a connected relationship between the parties to the takeover.
3. When BBC applies to the original registration administrative organ for changing to a foreign-funded enterprise, following documents shall be submitted:
1) An application for modifying registration;
2) An agreement on the purchase of equities of the domestic company by AAB;
3) The revised articles of association or revisions to the original articles of association, and the foreign-funded enterprise contract which shall be submitted in pursuance of law;
4) Certificate of Approval for the foreign-funded enterprise;
5) The certification for the qualifications of the foreign investor, or the identification for the foreign investor as a natural person;
6) The revised name list of the members of the board of directors, the documents which state the name and domicile of the newly added directors, and the documents on the appointment of the newly added directors.
4. Paying Equity-Merger-and-Acquisition Fund. AAB shall, within 3 months from the date of issuance of business license for the foreign-funded enterprise, pay all the considerations to the shareholders who transfer the equities. In the case of any particular circumstance under which it is necessary to extend the time limit, AAB shall, upon the approval of the examination and approval organ, pay 60% or more of the consideration within 6 months as of the date of issuance of the business license to the foreign-funded enterprise, and pay off the balance of consideration within one year. The distribution of the revenue shall be according to the proportion of investments it has actually contributed.
5. Finish the follow-up registration formalities. AAB shall, within 30 days after it receives a foreign-funded enterprise business license, go through the registration formalities in the tax, customs, land administration and foreign exchange administration departments.
6. Publish the takeover proclamation.
If AAB adopt the second option, under that takeover method, WFOE actually is an shell company established for the takeover. Thus the asset takeover shall be synchronized with the establishment of WFOE, and shall comply with following legal procedures:
1. Set up WFOE
A foreign investor shall submit a report to the government authority at where WFOE to be established. The report shall include: the aim of the establishment of the proposed enterprise; the scope and scale of business operation; the products to be produced; the technology and equipment to be adopted and used; the proportion of the sales of products between the domestic market and the foreign market; the area of land to be used and the related requirements; the conditions and quantities of water, electricity, coal, coal gas and other forms of energy resources required; and the requirement of public facilities. The local people's government at or above the county level shall, within 30 days after receiving the report submitted by the foreign investor, give a reply in writing to the said foreign investor.
2. WFOE shall submit an application to the examining and approving organ through government authority at where the enterprise is to be established, together with the following documents:
1)The written application for the establishment of a foreign-capital enterprise;
2)A feasibility study report;
3)The articles of association of the foreign-capital enterprise;
4)The name-list of the legal representatives (or the candidates for members of the board of directors) of the foreign-capital enterprise;
5)The legal certifying documents and the credit documents of the foreign investor;
6)The written reply given by the people's government at or above the county level at the place, where the enterprise is to be established;
7)An inventory of goods and materials needed to be imported;
3. While establishing WFOE, the following legal procedures shall be finished:
1)Takeover Negotiation which shall includes the targeted assets to be taken over, assets value and payment methods and so on;
2)To evaluate and verify the assets of the merged corporation;
3)To confirm the transaction price;
4)To sign an asset purchase agreement;
5)To execute merger deals and deliver property transfer;
6)BBC sends written notices to the creditors, and promulgates an announcement on a newspaper at or above the provincial level which is issued nationwide.
7)AAB shall submit the application for the establishment of WFOE and the application for WFOE merging BBC to the examining and approving organ, together with the following documents:
A resolution of the property right holders or power authority of the domestic enterprise on the consent to the sale of assets;
An application for the establishment of a foreign-funded enterprise;
A contract and the articles of association of the foreign-funded enterprise to be established;
An asset purchase agreement signed by the foreign-funded enterprise to be established and the domestic enterprise, or by the foreign investor and the domestic enterprise;
The articles of association and the business license (duplicate) of the domestic enterprise to be merged;
The notice of the domestic enterprise taken over, certifications of the creditors announced, and statement about whether the creditors have raised any objections
The certification documents for the identity, registration and credit standing of the investor that have been notarized and certified according to law
The proposal on the settlement of employees of the domestic enterprise that is taken over
BBC Company shall send a notice to the creditors and shall publish an announcement on a provincial newspaper or above, which is circulated nationwide
8). The WFOE shall, within 30 days after it receives the approval document, apply to the registration administrative organ for establishment registration so as to fetch a foreign-funded enterprise business license.
9). The WFOE shall, within 30 days after it receives a foreign-funded enterprise business license, go through the registration formalities in the tax, customs, land administration and foreign exchange administration departments.
10). Pay the fund of asset takeover. WFOE shall, within 3 months from the date of issuance of business license to the foreign-funded enterprise, pay all the considerations to the domestic enterprise which sells the assets. In the case of any particular circumstance under which it is necessary to extend the time limit, the WFOE shall, upon the approval of the examination and approval organ, pay 60% or more of the consideration within 6 months as of the date of issuance of the business license to the foreign-funded enterprise, and pay off the balance ofconsideration within one year, and distribute the proceeds according to the proportion of investments it has actually contributed.
11. Publish the merge announcement
If AAB uses the third option, it shall fulfill the legal proceedings below.
1. Establishment of a WFOE company
WFOE shall, prior to the filing of an application for the establishment, submit a report to the local people's government at or above the county level at the place where the proposed enterprise is to be established. The report shall include: the aim of the establishment of the proposed enterprise; the scope and scale of business operation; the products to be produced; the technology and equipment to be adopted and used; the area of land to be used and the related requirements; the conditions and quantities of water, electricity, coal, coal gas and other forms of energy resources required; and the requirement of public facilities. The local people's government at or above the county level shall, within 30 days after receiving the report submitted by the foreign investor, give a reply in writing to the said foreign investor.
2. An application shall be submitted to the approving organ through the local people's government at the place where the enterprise is to be established, together with the following documents.
1) An application for the establishment of the foreign-funded enterprise
2) A feasibility study report
3)The articles of association of the foreign-funded enterprise
4)The name-list of the legal representatives (or the candidates for members of the board of directors) of the foreign-capital enterprise
5)The legal certifying documents and the credit position certifying documents of the foreign investor
6)The written reply given by the people's government at or above the county level at the place, where the enterprise is to be established;
7)An inventory of goods and materials needed to be imported
3. Merger by absorption
Preliminary approval of an application for merger: the applicant shall submit the following documents to the examining and approving department
1)The letter of merger application and the merger agreement signed by the legal representatives of the various companies;
2) The resolutions on the merger by the organs of supreme power of the companies
3)The contracts and Article s of association of the companies;
4)Photocopies of the documents of approval and business licenses of the companies;
5)The asset verification reports prepared and issued by the statutory Chinese asset verification agencies to the companies involved the merger;
6)The balance sheet and the inventories of the properties of the companies party to the merger;
7)The audit reports of the previous year for the companies involved in the merger
8)A name list of the creditors of the companies party to the merger
9)The contract and Article s of association of the company emerging from the merger;
10)A name list of the members of the organ of supreme power of the company emerging from the merger
11)Other documents the examining and approving department may require
12)Business license (duplicate) of the company invested by BBC.
4. The first publish of Creditor
1)WFOE shall, within 10 days as of the date of receipt of the preliminary reply from the examining and approving department consenting the proposed merger or division, send out letters of notification to the creditors, and shall, within 30 days have the announcement carried three times in nationally circulated newspapers at or above the provincial level.
2)WFOE shall explain the inheritance plan for the existing debts of the companies in the letters of notification and announcement mentioned above.
3)The creditors of BBC shall, within 30 days as of the date of receipt of the letters of notification as prescribed in Article 25 of these Provisions or within 90 days as of the first publication of the announcement in the absence of the letters of notification, have the right to demand that the companies in question revise their inheritance plans for the existing debts or demand that they come current with the debt payments or they provide corresponding financial guarantees.
4)If creditors of BBC have failed to exercise the rights as prescribed in the preceding paragraph within the stipulated time limits, it shall therefore be construed that the creditors have agreed to the inheritance plans for the existing credit and debts of the companies to be merged or divided, and that the propositions of the creditors shall not in any way affect the merger processes of the companies.
5)The applicant of the companies to be merged shall, at the end of the 90-day period as of the date of the first publication of the announcements, submit the following documents to the examining and approving departments in the absence of objections from the creditors:
Certificates of the three-time publication in newspapers of the announcements of corporate merger or division;
Certificates of the notification of the companies to their creditors
An explanation of the companies on the disposal of their credits and debts
5. WFOE shall have the approval certificate for enterprises with foreign investment altered at the original examining and approving department and have the alteration registered at the registration department; the BB company shall have its approval certificate for enterprises with foreign investment withdrawn at the original examining and approving department and have the cancellation of the company registered at the registration department.
6. Applicants of WFOE, within 30 days as of the date of approval of the merger or division, go through the procedures relating to the cancellation, alteration or the attainment of the approval certificates for enterprises with foreign investment at the examining and approving departments for the companies that are dissolved, continue to exist or to be newly established as a result of the merger or division.
7. WFOE that is to be established after the merger or division shall, within 30 days as of the date of alteration or the acquisition of the business license, issue letters of notification on the change of creditors and debtors to the creditors or debtors of the companies that have been dissolved because of the merger, and have the announcement carried in nationally circulated newspapers at or above the provincial level.
8. Other registration and record
The WFOE to continue to exist after the merger or division shall, within 30 days as of the date of the acquisition of replacement business license or a new business license, go through the corresponding procedures at the departments such as taxation, Customs, land administration and foreign exchange control.
Among the aforementioned three options, the first one is suggested by us as it's the easiest way and requires less time and can also save tax. Although adopting the method of Equity Merger and Acquisition means that all the debt after merger shall be paid by BBC which might bring some potential debt risks, such risk can be avoided through written agreement. The second option ---Asset Acquisition requires more complicated procedures and Due Diligence on each assets and then need to transfer the ownership and approval to each assets. In addition, it shall set up an additional shell company thus more taxes might be levied. The third option also has complicated procedure and more investment. A WFOE has to be set up and then complete the M&A. From the marketing point of view, it would be much better to use AAB brand than to create the new WFOE brand.
According to the related definitions of Regulations for Merger with and Acquisition of Domestic Enterprises by Foreign Investors, aforementioned three merging plans actually belong to Equity Merger and Acquisition, Asset Takeover, Enterprise Amalgamation. Those three forms are the main ways of foreign capital M&A.
If AAB chooses the first option, it shall comply with the following legal procedures:
1. Negotiation which includes assets value evaluation and discussion on each party's rights and obligations.
2. Application approving. AAB shall, pursuant to the total investments of the foreign-funded enterprise to be established after the takeover, the type of the enterprise and the industry it engages in, submit the following documents to the competent examination and approval organ:
1) A resolution of the shareholders of the BBC on the full consent to the equity-based takeover by AAB.
2) BBC's application for changing to the foreign-funded enterprise;
3) Contract and the articles of association of the foreign-funded enterprise to be established after takeover;
4) An agreement on the AAB's acquisition of equities of shareholders of BBC;
5) Financial audit report of BBC for last fiscal year;
6) Identification or Certificate of incorporation of the investor that has been notarized and certified according to law;
7) The descriptions about the enterprises invested by BBC;
8) The (duplicates) of the business licenses of BBC and its invested companies;
9) The proposal on the settlement of employees of BBC;
10) The report of an asset assessment institution assessing the properties of BBC, and AAB and BBC shall state whether there is a connected relationship between the parties to the takeover.
3. When BBC applies to the original registration administrative organ for changing to a foreign-funded enterprise, following documents shall be submitted:
1) An application for modifying registration;
2) An agreement on the purchase of equities of the domestic company by AAB;
3) The revised articles of association or revisions to the original articles of association, and the foreign-funded enterprise contract which shall be submitted in pursuance of law;
4) Certificate of Approval for the foreign-funded enterprise;
5) The certification for the qualifications of the foreign investor, or the identification for the foreign investor as a natural person;
6) The revised name list of the members of the board of directors, the documents which state the name and domicile of the newly added directors, and the documents on the appointment of the newly added directors.
4. Paying Equity-Merger-and-Acquisition Fund. AAB shall, within 3 months from the date of issuance of business license for the foreign-funded enterprise, pay all the considerations to the shareholders who transfer the equities. In the case of any particular circumstance under which it is necessary to extend the time limit, AAB shall, upon the approval of the examination and approval organ, pay 60% or more of the consideration within 6 months as of the date of issuance of the business license to the foreign-funded enterprise, and pay off the balance of consideration within one year. The distribution of the revenue shall be according to the proportion of investments it has actually contributed.
5. Finish the follow-up registration formalities. AAB shall, within 30 days after it receives a foreign-funded enterprise business license, go through the registration formalities in the tax, customs, land administration and foreign exchange administration departments.
6. Publish the takeover proclamation.
If AAB adopt the second option, under that takeover method, WFOE actually is an shell company established for the takeover. Thus the asset takeover shall be synchronized with the establishment of WFOE, and shall comply with following legal procedures:
1. Set up WFOE
A foreign investor shall submit a report to the government authority at where WFOE to be established. The report shall include: the aim of the establishment of the proposed enterprise; the scope and scale of business operation; the products to be produced; the technology and equipment to be adopted and used; the proportion of the sales of products between the domestic market and the foreign market; the area of land to be used and the related requirements; the conditions and quantities of water, electricity, coal, coal gas and other forms of energy resources required; and the requirement of public facilities. The local people's government at or above the county level shall, within 30 days after receiving the report submitted by the foreign investor, give a reply in writing to the said foreign investor.
2. WFOE shall submit an application to the examining and approving organ through government authority at where the enterprise is to be established, together with the following documents:
1)The written application for the establishment of a foreign-capital enterprise;
2)A feasibility study report;
3)The articles of association of the foreign-capital enterprise;
4)The name-list of the legal representatives (or the candidates for members of the board of directors) of the foreign-capital enterprise;
5)The legal certifying documents and the credit documents of the foreign investor;
6)The written reply given by the people's government at or above the county level at the place, where the enterprise is to be established;
7)An inventory of goods and materials needed to be imported;
3. While establishing WFOE, the following legal procedures shall be finished:
1)Takeover Negotiation which shall includes the targeted assets to be taken over, assets value and payment methods and so on;
2)To evaluate and verify the assets of the merged corporation;
3)To confirm the transaction price;
4)To sign an asset purchase agreement;
5)To execute merger deals and deliver property transfer;
6)BBC sends written notices to the creditors, and promulgates an announcement on a newspaper at or above the provincial level which is issued nationwide.
7)AAB shall submit the application for the establishment of WFOE and the application for WFOE merging BBC to the examining and approving organ, together with the following documents:
A resolution of the property right holders or power authority of the domestic enterprise on the consent to the sale of assets;
An application for the establishment of a foreign-funded enterprise;
A contract and the articles of association of the foreign-funded enterprise to be established;
An asset purchase agreement signed by the foreign-funded enterprise to be established and the domestic enterprise, or by the foreign investor and the domestic enterprise;
The articles of association and the business license (duplicate) of the domestic enterprise to be merged;
The notice of the domestic enterprise taken over, certifications of the creditors announced, and statement about whether the creditors have raised any objections
The certification documents for the identity, registration and credit standing of the investor that have been notarized and certified according to law
The proposal on the settlement of employees of the domestic enterprise that is taken over
BBC Company shall send a notice to the creditors and shall publish an announcement on a provincial newspaper or above, which is circulated nationwide
8). The WFOE shall, within 30 days after it receives the approval document, apply to the registration administrative organ for establishment registration so as to fetch a foreign-funded enterprise business license.
9). The WFOE shall, within 30 days after it receives a foreign-funded enterprise business license, go through the registration formalities in the tax, customs, land administration and foreign exchange administration departments.
10). Pay the fund of asset takeover. WFOE shall, within 3 months from the date of issuance of business license to the foreign-funded enterprise, pay all the considerations to the domestic enterprise which sells the assets. In the case of any particular circumstance under which it is necessary to extend the time limit, the WFOE shall, upon the approval of the examination and approval organ, pay 60% or more of the consideration within 6 months as of the date of issuance of the business license to the foreign-funded enterprise, and pay off the balance ofconsideration within one year, and distribute the proceeds according to the proportion of investments it has actually contributed.
11. Publish the merge announcement
If AAB uses the third option, it shall fulfill the legal proceedings below.
1. Establishment of a WFOE company
WFOE shall, prior to the filing of an application for the establishment, submit a report to the local people's government at or above the county level at the place where the proposed enterprise is to be established. The report shall include: the aim of the establishment of the proposed enterprise; the scope and scale of business operation; the products to be produced; the technology and equipment to be adopted and used; the area of land to be used and the related requirements; the conditions and quantities of water, electricity, coal, coal gas and other forms of energy resources required; and the requirement of public facilities. The local people's government at or above the county level shall, within 30 days after receiving the report submitted by the foreign investor, give a reply in writing to the said foreign investor.
2. An application shall be submitted to the approving organ through the local people's government at the place where the enterprise is to be established, together with the following documents.
1) An application for the establishment of the foreign-funded enterprise
2) A feasibility study report
3)The articles of association of the foreign-funded enterprise
4)The name-list of the legal representatives (or the candidates for members of the board of directors) of the foreign-capital enterprise
5)The legal certifying documents and the credit position certifying documents of the foreign investor
6)The written reply given by the people's government at or above the county level at the place, where the enterprise is to be established;
7)An inventory of goods and materials needed to be imported
3. Merger by absorption
Preliminary approval of an application for merger: the applicant shall submit the following documents to the examining and approving department
1)The letter of merger application and the merger agreement signed by the legal representatives of the various companies;
2) The resolutions on the merger by the organs of supreme power of the companies
3)The contracts and Article s of association of the companies;
4)Photocopies of the documents of approval and business licenses of the companies;
5)The asset verification reports prepared and issued by the statutory Chinese asset verification agencies to the companies involved the merger;
6)The balance sheet and the inventories of the properties of the companies party to the merger;
7)The audit reports of the previous year for the companies involved in the merger
8)A name list of the creditors of the companies party to the merger
9)The contract and Article s of association of the company emerging from the merger;
10)A name list of the members of the organ of supreme power of the company emerging from the merger
11)Other documents the examining and approving department may require
12)Business license (duplicate) of the company invested by BBC.
4. The first publish of Creditor
1)WFOE shall, within 10 days as of the date of receipt of the preliminary reply from the examining and approving department consenting the proposed merger or division, send out letters of notification to the creditors, and shall, within 30 days have the announcement carried three times in nationally circulated newspapers at or above the provincial level.
2)WFOE shall explain the inheritance plan for the existing debts of the companies in the letters of notification and announcement mentioned above.
3)The creditors of BBC shall, within 30 days as of the date of receipt of the letters of notification as prescribed in Article 25 of these Provisions or within 90 days as of the first publication of the announcement in the absence of the letters of notification, have the right to demand that the companies in question revise their inheritance plans for the existing debts or demand that they come current with the debt payments or they provide corresponding financial guarantees.
4)If creditors of BBC have failed to exercise the rights as prescribed in the preceding paragraph within the stipulated time limits, it shall therefore be construed that the creditors have agreed to the inheritance plans for the existing credit and debts of the companies to be merged or divided, and that the propositions of the creditors shall not in any way affect the merger processes of the companies.
5)The applicant of the companies to be merged shall, at the end of the 90-day period as of the date of the first publication of the announcements, submit the following documents to the examining and approving departments in the absence of objections from the creditors:
Certificates of the three-time publication in newspapers of the announcements of corporate merger or division;
Certificates of the notification of the companies to their creditors
An explanation of the companies on the disposal of their credits and debts
5. WFOE shall have the approval certificate for enterprises with foreign investment altered at the original examining and approving department and have the alteration registered at the registration department; the BB company shall have its approval certificate for enterprises with foreign investment withdrawn at the original examining and approving department and have the cancellation of the company registered at the registration department.
6. Applicants of WFOE, within 30 days as of the date of approval of the merger or division, go through the procedures relating to the cancellation, alteration or the attainment of the approval certificates for enterprises with foreign investment at the examining and approving departments for the companies that are dissolved, continue to exist or to be newly established as a result of the merger or division.
7. WFOE that is to be established after the merger or division shall, within 30 days as of the date of alteration or the acquisition of the business license, issue letters of notification on the change of creditors and debtors to the creditors or debtors of the companies that have been dissolved because of the merger, and have the announcement carried in nationally circulated newspapers at or above the provincial level.
8. Other registration and record
The WFOE to continue to exist after the merger or division shall, within 30 days as of the date of the acquisition of replacement business license or a new business license, go through the corresponding procedures at the departments such as taxation, Customs, land administration and foreign exchange control.
Among the aforementioned three options, the first one is suggested by us as it's the easiest way and requires less time and can also save tax. Although adopting the method of Equity Merger and Acquisition means that all the debt after merger shall be paid by BBC which might bring some potential debt risks, such risk can be avoided through written agreement. The second option ---Asset Acquisition requires more complicated procedures and Due Diligence on each assets and then need to transfer the ownership and approval to each assets. In addition, it shall set up an additional shell company thus more taxes might be levied. The third option also has complicated procedure and more investment. A WFOE has to be set up and then complete the M&A. From the marketing point of view, it would be much better to use AAB brand than to create the new WFOE brand.
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