CBL Team’s Introduction
In CBL’s translation of the Rules for Foreign Owned Entity Mergers and Spin-off, a critical insight is provided on corporate restructuring within the Chinese market where a foreign investment is involved. The Rules lay down the regulatory procedures for mergers and spin-offs involving foreign owned entities, detailing aspects such as approvals, registrations and investor-creditor dynamics. A thorough understanding of the Rules is indispensable for businesses dealing with China, ensuring regulatory compliance for its foreign investments, thus facilitating seamless corporate transitions.
Rules for Foreign Owned Entity Mergers and Spin-off
(Ministry of Foreign Trade and Economic Cooperation and the Administration for Industry and Commerce, Notice No. 8, 2001, amended in accordance with the Decision on Amending Certain Rules and Regulatory Documents issued by the Ministry of Commerce on October 28, 2015)
Section 1 Pursuant to the Company Law of the People’s Republic of China and other applicable statutes and administrative regulations governing foreign owned entities, these Rules are issued to regulate the merger and spin-off of entities and protect investor and creditor legal rights.
Section 2 These Rules apply to the merger and spin-off of China-Foreign joint venture entities, China-Foreign collaborative entities, wholly foreign-owned entities, and corporations that have foreign investors (hereinafter collectively referred to as “companies”) formed in China in accordance with Chinese law.
Mergers involving such companies with domestic business entities shall be conducted in compliance with applicable laws, regulations, and these Rules.
Section 3 The term “merger” as used in these Rules refers to the consolidation of two or more companies into a single entity through an agreement executed in accordance with the Company Law.
Company mergers include mergers by direct acquisition and formation of new entity.
Merger by direct acquisition refers to the process wherein one company acquires another, resulting in the continuation of the acquiring company’s existence and the termination of the acquired company.
A formation of new entity refers to the process wherein two or more companies are combined to form a new entity, resulting in the termination of the original merging companies.
Section 4 Spin-off, as defined in these Rules, refers to the process wherein a company is divided into two or more separate companies based on the resolution passed by the original company’s highest authority in accordance with the Company Law.
Company Spin-off includes both split-offs and split-up.
Split-off refers to the process wherein a company is divided into two or more companies, with the original company continuing to exist alongside the newly formed entity or entities.
Split-up refers to the process in which a company is divided into two or more entities, resulting in the termination of the original company and the creation of two or more new companies.
Section 5 The merger or spin-off of companies shall be in accordance with the law, regulations, and these Rules and based on voluntariness, equality, and fair competition and shall not impair the public interest or the creditors’ legal rights.
Company mergers or spin-offs shall comply with the Temporary Regulations for Foreign Investment Guidance and the List of Industries for Foreign Investment Guidance. Foreign investors shall not wholly own, control, or exercise a dominant role in companies operating in industries that restrict foreign ownership, control, or majority shareholding.
Any changes to a company’s industry or business activities resulting from its merger or spin-off must obtain the requisite approvals and comply with the applicable laws, regulations, and government industrial policies.
Section 6 Company mergers or spin-offs shall comply with regulations issued by the appropriate agencies, such as the General Administration of Customs, National Taxation Administration, and National Administration of Foreign Exchange. Upon approval by the General Administration of Customs, National Taxation Administration, and other appropriate agencies, the surviving or newly formed companies resulting from a merger or spin-off shall continue to enjoy the benefits and treatment accorded to foreign investors.
Section 7 Company mergers and spin-offs must obtain the approval of the original registering office, and any company formations, amendments, or terminations resulting from such shall be filed with the appropriate registering office.
In cases where the company to be merged falls under the jurisdiction of multiple approval agencies and registration offices, the jurisdictional registering office authorized by the Ministry of Foreign Trade and Economic Cooperation and National Administration for Industry and Commerce (hereinafter referred to as the “Industry Administration”) at the location of the merged company shall serve as the new approval and registering office.
Mergers where the total investment for the proposed merged company exceeds the amount approved by the original approval agency or the jurisdictional approval agency in the location of the merged company require approval from an authorized agency.
Mergers involving corporations must be approved by the Ministry of Foreign Trade and Economic Cooperation of the People’s Republic of China (hereinafter referred to as “Trade Ministry”).
Section 8 The termination of an existing company or formation of a new company resulting from a merger or spin-off must be approved by the jurisdictional approval agency in the location of the terminated or newly formed company.
Section 9 Entities formed through the merger of limited liability companies shall remain limited liability companies. The merger of stock corporations shall result in a corporation.
The merger of listed public corporations and limited liability companies result in a corporation. The merger of a private corporation and a limited liability company may result in a corporation or a limited liability companies.
Section 10 The registered capital of the surviving company shall be the combined sum of the registered capital of the pre-merger companies if the merger was made between corporations or the surviving company is a limited liability company.
The registered capital of a corporation resulting from a merger of a corporation and a limited liability company shall be calculated as the combined sum of the net assets of the pre-merger limited liability company and the total share capital of the pre-merger corporation, determined based on the net asset value per share of the merged corporation.
Section 11 The shareholding ratio of each party involved in the merger shall be determined through negotiations between the investors or based on the findings of an equity value appraisal of the original companies conducted by an asset appraisal firm pursuant to law. The shareholding ratios shall be specified in the merger agreement or Sections of incorporation of the merged company in accordance with Section 10.1 of these Rules, provided that the proportion of equity held by foreign investors shall be a minimum of 25% of the registered capital of the merged company.
Section 12 The registered capital of companies formed through spin-offs shall be determined by the ultimate decision-making authority of the pre-spin-off company in accordance with the laws governing foreign owned entities and applicable registering office rules. The sum of the registered capital of all companies resulting from the spin-off shall be equal to the registered capital of the pre-spin-off company.
Section 13 The shareholding ratios of all investors involved in the spin-off shall be specified in the company agreement or articles of incorporation, provided that the proportion of equity held by foreign investors shall be a minimum of 25% of the company’s total registered capital.
Section 14 In mergers by direct acquisition, the formation date for the acquired company shall become the formation and registration date of the acquiring company. In mergers with formation of new company, the formation date for the merged company shall become the date the registering office approved the registration and issued the business certificate for the merged company.
The formation date for new companies formed after a spin-off shall be deemed as the date the registering office approves the formation and registration and issues the business certificate for the new company.
Section 15 Mergers or spin-offs of publicly listed companies may only be conducted after receiving approval and must comply with applicable laws, and the regulations issued by the China Securities Regulatory Commission for listed companies.
Section 16 Mergers between companies and domestic business entities must comply with the laws, regulations, and industrial policies of China regulating foreign investment utilization, and satisfy the following conditions:
(i) Any domestic business entity to be merged shall be formed as a limited liability company or corporation under the Company Law of the People’s Republic of China;
(ii) Investors must meet investment eligibility requirements for the merged company’s industry as mandated by laws, regulations, and administrative rules;
(iii) The proportion of equity held by foreign investors shall be a minimum of 25% of the registered capital of the merged company;
(iv) Each Party to the merger agreement shall warrant that the employees of the pre-merger company shall remain employed or will be reasonably accommodated.
Section 17 Total investment amounts for companies formed through mergers between other companies and domestic business entities shall equal the combined investment amounts of the pre-merger company and domestic business entity. These companies shall be designated foreign ownedentities, and their total registered capital shall be equal to the combined sum of the pre-merger company’s registered capital and the net asset value of the domestic business entity recorded in its financial audit reports. The ratio of registered capital to the total investment in the merged company shall comply with the Temporary Regulations on Registered Capital and Total Investment Ratios for China-Foreign Joint Venture Entities. In exceptional circumstances where this requirement cannot be fulfilled, approval from Trade Ministry and the Industry Administration must be obtained.
Section 18 Companies owned or formed by domestic business entities that subsequently become entities held by a merged company must comply with China’s industrial policies regulating foreign investment utilization and the Temporary Regulations on Investments by Foreign Owned Entities. Companies formed through mergers shall not hold equity in companies engaged in industries where foreign investment is prohibited.
Section 19 The acquiring company shall serve as the applicant for a company formed through merger by acquisition, while the applicant for a a merger that forms a new company shall be designated by all parties involved in the merger through negotiation.
Applicants must submit the following documents to the approval agency:
(i) The merger application and merger agreement signed by the statutory representatives of each company;
(ii) Resolutions on the merger passed by the ultimate decision-making authority of each company;
(iii) The contracts and articles of incorporation of all companies involved in the merger;
(iv) Copies of approval certificates and business certificates of all companies involved;
(v) Balance sheets and asset lists of all companies involved;
(vi) Each company’s annual audit report for the previous fiscal year;
(vii) The list of creditors for all companies involved;
(viii) The merger contracts or articles of incorporation of the merged company;
(ix) List of members of the ultimate decision-making authority of the merged company;
(x) Other documents required by the approval agency.
Applicants for mergers forming a new company through mergers with domestic business entities must also submit a copy of the merged domestic business entity’s business certificate to the approval agency.
Section 20 The company merger agreement must include the following information:
(i) The names, addresses, and statutory representatives of the parties involved in the merger;
(ii) The name, address, and statutory representative of the merged company;
(iii) The total investment amount and registered capital of the merged company;
(iv) Form of merger;
(v) Credit and debt assignment plans for each party to the merger agreement;
(vi) Employee arrangements;
(vii) Liability for breach of contract;
(viii) Dispute resolution methods;
(ix) Signature date and location;
(x) Any other matters that the parties deem necessary to be included in the merger agreement.
Section 21 If a company subject to multiple registration agencies will be terminated as a result of a merger, it must first submit its termination application to the original approval agency before submitting its approval documents to the approval agency designated under Section 19 of these Rules.
The original approval agency shall decide whether to approve the termination within 15 days of receiving the termination application. If the approval agency fails to respond to a termination application within 15 days, the application shall be deemed approved.
If the original approval agency for the post-merger company rejects termination applications within the above time limit, companies due to be terminated may submit their applications to the Trade Ministry office accountable for the original jurisdictional agency for the post-merger company. The Trade Ministry office shall then issue its decision within 30 days of receiving such applications.
Approved termination applications shall be automatically invalidated if the approval agency objects to or does not approve the company merger.
Section 22 Companies applying for spin-off shall submit the following documents to the approval agency:
(i) Spin-off application signed by the company’s statutory representative;
(ii) Resolutions on the spin-off passed by the company’s ultimate decision-making authority;
(iii) The spin-off agreement signed by the companies that shall continue to exist or those newly formed by the spin-off (the “parties to the spin-off agreement”);
(iv) Company contracts and articles of incorporation;
(v) Copies of the approval certificates and business certificates of the companies;
(vi) Company balance sheets and asset lists;
(vii) Company creditor lists;
(viii) Contracts and articles of incorporation for each company after the spin-off;
(ix) The shareholder register for each company after the spin-off (or other registry of controlling interest);
(x) Other documents required by the approval agency.
The company must submit the signed opinion of the approval agency in the location where the company is due to be formed after the spin-off if the spin-off results in the formation of a company in a different location.
Section 23 The company spin-off agreement must include the following information:
(i) The name, address, and statutory representatives of all parties to the spin-off agreement;
(ii) The total investment and registered capital of the company after the spin-off;
(iii) Form of the spin-off;
(iv) The asset distribution plan for the proposed spin-off company as agreed by the parties to the spin-off agreement;
(v) The credit and debt assignment plan for the parent company as agreed by the parties to the spin-off agreement;
(vi) Employee arrangements;
(vii) Liability for breach of contract;
(viii) Dispute resolution methods;
(ix) Signature date and location;
(x) Any other matters that the parties deem necessary to be included in the spin-off agreement.
Section 24 The companies that continue to exist or those newly formed companies as a result of the spin-off shall assume the creditor’s rights and debts of the terminated company.
The creditor’s rights and debts of the terminated company shall be assigned to the post-spin-off company in accordance with the spin-off agreement.
Section 25 The approval agency shall provide written approval or rejection of the merger or spin-off within 45 days of receiving the documents submitted in accordance with Sections 19 or 22 of these Rules.
Where the Commerce Ministry is responsible for approving the merger, it is empowered to require the appropriate agencies and offices to hold hearings and conduct a market review of the company to be merged after receiving the above documents and has reason to believe that such merger would impair fair competition because it may create a monopoly in the related industry or a dominant market position for certain products or services. In such cases, the review period mentioned above may be extended to up to 180 days.
Section 26 Companies planning mergers or spin-offs shall notify their creditors of the approved merger or spin-off within 10 days of obtaining approval from the approval agency and must publish at least three notices in provincial or national newspapers within 30 days following the approval.
The above notices must also include a description of the company’s corporate debt assignment plan.
Section 27 Creditors are entitled to require that companies amend their debt assignment plans, settle outstanding debts, or furnish warranties for repayment within 30 days of receiving the notice provided in Section 26. Where creditors have not received such notice, they are entitled to submit their requirements within 90 days from the date of the first published announcement.
Any company creditors who fail to assert their rights within the above time limit shall be deemed to have consented to the merger or spin-off debt and credit assignment plans for the proposed merger or spin-off. Any claims submitted thereafter shall not impede the company’s merger or spin-off.
Section 28 In the event that no creditors submit objections within 90 days following the publication of the first announcement, companies seeking to undergo merger or spin-off may submit the following documents to the appropriate approval agency:
(i) Proof that the company has published at least three newspaper notices for the merger or spin-off;
(ii) Documentation proving that the company has duly notified its creditors;
(iii) A detailed explanation of the company’s plans for addressing outstanding credits and debts;
(iv) Other documents required by the approval agency.
Section 29 The approval agency shall render a decision on whether to approve the merger or spin-off within 30 days of receiving the documents provided in Section 28.
Section 30 In mergers by direct acquisition, the acquiring company shall be responsible for completing amendment filings pertaining to the acquired entity’s approval certificate with the original approval agency, as well as completing change registration with the appropriate registering office. The acquired company shall be responsible for canceling its entity approval certificate and terminating the original company with the registration office.
In mergers done by forming a new entity, the companies participating in the merger shall cancel their entity approval certificates with the original approval agency and their entity registrations with the registering office. The newly formed company must apply for a new entity approval certificate through the appropriate approval agency and complete company formation and registration with the appropriate registering office.
In split-offs, surviving companies shall complete amendment filings for their entity approval certificates with the approval agency and complete change registration with the registering office. Newly formed companies are required to obtain a new entity approval certificate through the approval agency and complete registration with the appropriate registering office.
In split-ups, the original companies shall cancel their entity approval certificates with the original approval agency and cancel their registrations with the registering office. The newly formed companies must obtain a new entity approval certificate through the approval agency and complete company formation and registration with the appropriate registering office.
Companies merging with domestic business entities shall be responsible for obtaining the entity approval certificate.
Section 31 Companies undergoing a merger or spin-off are required to complete termination registration, amendment filing, or obtain the entity approval certificate for the proposed company termination, continuation, or formation of a new company resulting from the approved merger or spin-off within thirty days of the approval granted by the appropriate approval agency.
Section 32 Companies shall complete cancellation, amendment, or formation registration with the registering office in compliance with the Entity Registration Administrative Regulations of the People’s Republic of China and the Administrative Regulations of the People’s Republic of China subsequent to the cancellation, amendment, or acquisition of the entity approval certificate.
Formation registration may be completed following amendment or cancellation registration.
Documents specified in the merger or spin-off agreement, including asset disposal plans, credit and debt assignment plans, and the merger or spin-off approval from the approval agency shall be deemed part of the liquidation report required to be submitted during cancellation registration.
Section 33 The parties involved in the merger or spin-off shall be held liable for any failure to form and register the new company after the original company completes registration or termination procedures.
Section 34 Amended contracts or articles of incorporation executed by company investors due to a merger or spin-off shall take effect on the date when the amended entity approval certificate is granted approval or a new certificate is issued.
Section 35 Companies continuing to exist or newly formed after a merger or spin-off are required to issue a notice to the creditors and debtors of the terminated companies within thirty days of receiving the amended or new business certificate. The notice shall inform them of the change in creditors and debtors, and notice must be published in provincial or national newspapers.
Section 36 Companies that continue to exist or are newly formed following a merger or spin-off must register with the appropriate tax, customs, land administration, and foreign exchange agencies within 30 days of receiving their amended or new business certificate.
Companies that continue to exist or are newly formed following a merger between a foreign owned and a domestic business entity are also required to register with the appropriate tax, customs, land administration, and foreign exchange agencies in compliance with the regulations governing entities.
Section 37 Any equity assignments conducted during a merger or spin-off must be completed in compliance with the law governing changes in entities’ shareholding.
The purchase of equity held by domestic business entity shareholders by foreign investors during mergers with domestic business entities shall be subject to the Supplemental Rules for China-Foreign Joint Venture Entity Capital Contributions.
Section 38 Investments in mainland China company mergers or spin-offs by investors from Hong Kong, Macao, and Taiwan shall be subject to these Regulations.
Section 39 These Regulations shall be interpreted by Trade Ministry and the Industry Administration.
Section 40 These Regulations shall take effect as of the date of issuance.