Article 1 With a view to promoting the healthy development of foreign-invested Enterprises, protecting the legitimate rights and interest of all parties to the investment, and safeguarding social economic order, these regulations are formulated in accordance with the Company Law, Law of PRC on Chinese-Foreign Equity Joint Ventures, Law of PRC on Chinese-Foreign Contractual Joint Ventures, Law on Wholly Foreign-Owned Enterprises of the People¡¯s Republic of China and other related laws and regulations (hereinafter referred to as "these Regulations").
Article 2 For the purpose of these Regulations, change of equity interests of the investor in a Chinese-foreign Equity Joint Venture or a Chinese-foreign Contractual Joint Venture, or in a Wholly-foreign-owned Enterprise (hereinafter referred to as an "Enterprise") refers to any change as a result of the change of investor of the Enterprise or change of the ratio of contribution (including the provision of cooperation condition in case of a contractual joint venture) holds by the investor of the Enterprise. Change of equity interests includes but not limited to the change of equity interests resulting in the following circumstances:
(1) assign of equity interests by agreement among investors;
(2) assign of equity interests to the investor's affiliated enterprises or other assignees by an investor upon approval of other investors of the Enterprise;
(3) change of equity interests resulted from an adjustment in the registered capital of the Enterprise by agreement among the investors;
(4) acquisition of equity interests by a pawnee or a beneficiary as per law and contract, in which case an investor pledge its equity interests to a creditor upon approval of other parties to the investment;
(5) acquisition of equity interests by the heir, creditor or other beneficiaries in case of bankruptcy, dissolution, recession, license cancellation or death of an investor;
(6) lawful inheritance of equity interests by a successor created by merger or split-off between investors; and
(7) subject to the approval from the approval authority, change of investors or equity interests resulted by the investors¡¯ failure to fulfill its capital contribution obligation as stipulated in the joint venture contract or articles of association of the Enterprise.
Article 3 Change of equity interests of investors shall be conducted according to relevant Chinese laws and regulations, and approved and registered by the appropriate authorities in conformity with these Regulations. A change of equity interests is invalid unless approved by the appropriate authority.
Article 4 A change of equity interests of investors shall be conducted in accordance with provisions in relation to the investors' qualification and industrial policies under Chinese laws and regulations.
In areas where it is forbidden to set up Wholly-foreign-owned Enterprises specified in the Industrial Guidelines for Foreign Investment, a change of equity interests must not lead up to a situation where the total interests of the Enterprise is held by a foreign investor. In case a change of equity interests transforms the Enterprise into a Wholly-foreign-owned one, conditions specified in the Implementing Rules of the Law of PRC on Wholly-Foreign-Owned Enterprises must be satisfied.
In the industrial areas where state-owned assets are required to hold a controlling or dominant position, a change of equity interests must not lead up towards a controlling or dominant position by a foreign or non-state-owned enterprise.
Article 5 A change of equity interests of investors must not cause the shareholdings held by the foreign investor is less than 25% of the registered capital of the Enterprise, except in the case where the foreign investor assigns all its equity interests to the Chinese investor.
Article 6 Upon the agreement by the other parties of the Enterprise, the investor who has made its capital contribution may pledge, subject to the approval of relevant authority, its equity interests resulted from such contribution to a pawnee by a hypothecation contract according to the Security Law of People¡¯s Republic of China (hereinafter referred to as the "Security Law"). An investor is forbidden to pledge the equity interests which is contractually obligated to subscribe but however has not yet been subscribed at the of time of such pledge by such investor. Neither can an investor pledge its equity interests to the Enterprise invested by such investor itself.
During the period of hypothecation, the pledgor continues to hold the investor status, and the pledgee must not assign the equity interests under the hypothecation unless approved by the pledgor and other investors. The pledgee must not assign or multi-charge his equity under the hypothecation.
Rights, obligations and the terms of the hypothecation contract are subject to provisions of applicable laws, regulations and these Regulations.
Article 7 A change of equity interests of an investor shall be approved by the authority which approved the establishment of such Enterprise. A change of equity interests of a Chinese-foreign equity or contractual joint ventures must be approved by the Ministry of Foreign Trade and Economic Cooperation (hereinafter referred to as MOFTEC) if such a change will create a Wholly-foreign-owned Enterprise engages in an industry where foreign investment is restricted by the Provisional Guidance on Foreign Investment.
In case any increase in registered capital of an Enterprise results in a change of equity interests and therefore the total amount of investment surpasses the regulatory approval mandate of the original approval authority in terms of amount threshold, the change of equity interests shall be reported to the higher authority for approval according to the regulatory mandate and related regulations.
A change of equity interests shall be registered with the original registration authority. Such a change approved by MOFEC shall be registered with the State Administration of Industry and Commerce, or with the original registration agency authorized thereby.
Article 8 In case of a change of equity interests of a Chinese party who invests with state-owned assets, an assessment of the equity interests in question must be conducted by relevant state-owned assets evaluation agency first and confirmed by state-owned assets administration thereafter. The confirmed result of the evaluation shall be the basis for computing the value of the equity interests to be assigned.
Article 9 An Enterprise which needs to change the equity interests of its investors for reasons specified in Article 2(1) and 2(2) shall submit the following documents to the approving authority:
(1) a written application for change of equity interests of investors;
(2) the original contract and articles of association of the Enterprise, together with the agreement for amendment;
(3) copies of its approval certificate and business license;
(4) resolution of the board of directors regarding the change of equity interests;
(5) a name list of the board members after the change of equity interests of investors;
(6) an equity assignment agreement executed by and between the assignor and the assignee and recognized or confirmed otherwise by other investors in signature or other written forms to that effect; and
(7) other documents that the approval authority requires to be submitted.
Article 10 An equity interests assignment agreement shall cover the following major particulars:
(1) names and domiciles of the assignor and assignee, as well as the names, positions and nationalities of their legal representatives;
(2) the percentage and price of the equity interests to be assigned ;
(3) the time limit for settlement and the manner of the assignment;
(4) the rights and obligations of the assignee under the joint venture contract and articles of association;
(5) responsibilities for breach of contract;
(6) applicable laws and settlement of disputes;
(7) effectiveness and termination of the assignment agreement; and
(8) time and venue of conclusion of the assignment agreement.
Article 11 If an equity interests needs to be changed for the reason set forth in Article 2(3) of these Regulations, shall conform with the relevant specific regulations issued by MOFTEC and the State Administration of Industry and Commerce. Apart from documents specified in Article 9(1), 9(2), 9(3), 9(4) and 9(5), the Enterprise shall submit to the approval authority an agreement among investors on the change of equity interests.
Article 12 Upon execution of an equity interests hypothecation agreement between the investors and the pledgee, the following documents shall be submitted to the Enterprise's original approval authority for review:
(1) the resolutions of the board of directors and other investors in the Enterprise concerning the consent to the pledging investor's pledge of its equity interests;
(2) the hypothecation contract concluded between the pledgor and the pledgee;
(3) the capital contribution verification certificate of the pledging investor, and
(4) the investment verification report issued for the Enterprise by an accountant registered in China and the accountant's firm.
The approval authority shall decide whether to grant the approval or not within 30 days of the receipt of the complete documentation as specified in the preceding paragraph. Within 30 days of obtaining the official reply in which the approval authority agrees to the pledge of the equity interests by the investor in the Enterprise, the Enterprise shall record the pledge the with the original registration authority on the strength of the relevant reply document.
Any pledge of equity interests without an appropriate approval or registration in accordance with this Article shall be deemed invalid.
Article 13 According to the Security Law, when and where the pledged equity interests under pledge is put into interests of the pledgee or other beneficiaries, the Enterprise shall produce effective documents evidencing the acquisition of such equity interests by the pledgee or other beneficiaries, in addition to the documents specified in Article 9(1), 9(2), 9(3) and 9(5). The approval authority shall consider the case on the basis of the above-mentioned documents, the documents specified in Article 12 hereof and provisions of relevant laws and regulations.
Article 14 In case of an equity interests needs to be changed for a reason set forth in Article 2(5) and 2(6) hereof, the Enterprise shall submit, in addition to the documents specified in Article 9(1), 9(2), 9(3) and 9(5) hereof, to the original approval authority valid documentary evidence of the acquisition of the equity interests of the original investor by the successor receiver.
In case of a change of investor of an Enterprise under circumstances specified in Article 2(5) and 2(6), the Enterprise may apply to the original approval authority for termination of the original joint venture contract and articles of association if other investors do not wish to continue the operation of the Enterprise. Upon termination of the joint venture contract and articles of association, acquirer of the equity interests has the right to take part in the liquidation committee and to be distributed the remaining assets of the Enterprise after liquidation. If the acquirer of the equity interests does not wish to continue operations, the equity interests may be assigned to other investors or a third party subject to agreement among other investors.
Article 15 If an investor needs to be replaced or equity interests needs to be changed for the reason set forth in Article 2(7) hereof, only the non-defaulting investor is entitled to submit a unilateral application to the approval authority to make such change. Apart from documents specified in Article 9(1), 9(2), 9(3) and 9(5) hereof, the non-defaulting investor shall submit the following documents to the approval authority:
(1) the investment verification report issued for the Enterprise by an accountant registered in China and the accountant's firm; and
(2) documentary evidence of the non-defaulting investor's urging the investor in breach to make or make in full its capital contribution.
Where a new investor is taking part in the Enterprise, such new investor's lawful certificate of incorporation and a certificate of creditworthiness shall also be presented to the approval authority. Where the defaulting investor has partially paid up its capital contribution as set forth in the original joint venture contract and articles of association, documents evidencing the disposing manners towards such part of paid-up capital contribution shall also be presented to the approval granting authority.
Article 16 In case of a change of equity interests by a Chinese party who originally subscribed its registered capital in the Enterprise with state-owned assets, the Enterprise must submit, inter alia, the following documents to the approval authority:
(1) written comments by the superior authority of the Chinese investor over the change of equity interests;
(2) the assets evaluation report issued by a qualified state-owned assets evaluation agency over the equity interests to be adjusted; and
(3) a written confirmation given by the state-owned assets administration department in respect of the above assets evaluation report.
Article 17 The approval authority shall decide whether to grant the approval or not within 30 days after receipt of the complete documentation as required.
The Enterprise shall complete the formalities to revise the approval certificate for the foreign-invested enterprise with the approval authority within 30 days of the approval of the change of equity interests.
In case of a change of equity interests resulting that the Chinese party becomes the sole equity interests holder, the original approval certificate for the foreign-invested enterprise shall be canceled with the approval authority within 30 days of approval of the change of equity interests. The approval authority shall thereafter issue to the original registration authority a notice on the cancellation of the approval certificate within 15 days of such cancellation.
Article 18 The Enterprise shall apply to the registration authority for revision of its registration in accordance with the Rules of PRC on Registration of Enterprise Legal Persons and the Rules of PRC on Registration of Companies, within 30 days of the revision or cancellation of the Approval Certificate for foreign-invested enterprise. Failure to revise the registration with the proper authority in line with these Regulations will result in punishment by the registration authority according to relevant regulations.
Article 19 When applying for a revision of the registration due to change of equity interests, the Enterprise shall present to the registration authority relevant documents previously submitted to the approval authority, the approval documents issued by the approval authority in respect therewith and other documentation requested by the registration authority.
In case of a change in investors or equity interests under the circumstance of Article 2 (7), documents on the appointment of new directors, their identities and the resolution of the new board of directors in respect therewith shall be presented to the registration authority apart from those documentation specified in Article 15.
Where a change of equity interests resulting that the Chinese party becomes the sole holder of the equity interests, the Enterprise shall, while applying for a revision a its original incorporate registration, present to the registration authority relevant documents in line with type of business of the proposed newly established enterprise. Upon the confirmation by the registration authority, the Enterprise's PRC Business License of Enterprise Legal Person shall be canceled and replaced by a new Business License of Enterprise Legal Person.
Article 20 The equity interests assignment agreement and the agreement on amendment of the original contract and articles of association shall come into force as of the date the issuance by the approval authority of an approval regarding the alteration of the foreign-invested enterprise certificate. Upon the effectiveness of these documentation, the investors shall enjoy the rights and fulfill the obligations as provided for in the revised contract and articles of association.
Article 21 Unless otherwise specified in laws and regulations, these Regulations may apply to the assignment of the non-public listing shares of a Foreign-invested Company Limited by Shares.
Article 22 Change in equity shares of the enterprises with investment by companies, individuals and economic entities from Hong Kong, Macao, and Taiwan in other parts of China shall be handled by reference to these Regulations.
Article 23 These Regulations shall come into force as of the day of promulgation.
This translation, together with any explanatory material, is provided courtesy of Lehman Tax & Accounting.