China: Shares In Chinese Companies Can Now Be Contributed To Chinese Foreign Invested Enterprises

Until recently it was not possible for shareholders of Foreign Invested Enterprises ("FIEs") (such as Sino-Foreign Joint-Ventures and WFOEs) to contribute equity interest in other PRC companies to the FIE. Regulators were unwilling to approve this as no formal guidance existed.

This is addressed by recently issued interim provisions from MOFCOM that took effect on 22 October 2012. Pursuant to these new interim provisions, a shareholder of a FIE can make or increase capital contributions in an FIE by means of contributing an equity interest in another PRC company (the "Equity Company"). The Equity Company can be either a fully domestic PRC company or an FIE. These new interim provisions provide foreign investors with more flexibility on structuring their investments in China.

Scope

The new procedure can be used not only when incorporating an FIE but also when increasing the amount of registered capital of an existing FIE. In addition, the procedure can be used when increasing the registered capital of a domestic company when converting it into an FIE.

Requirements

There are several requirements that need to be met. Most importantly, the Equity Company cannot be a real estate company or certain types of investment vehicles. The equity that will be contributed also needs to be valuated by a valuator duly qualified in the PRC and may, together with any other non-monetary contributions, not exceed 70% of the total registered capital of the FIE.

Competent regulator

The capital contributions to the FIE need to be approved by the central or local MOFCOM at the place of incorporation of the FIE. In certain cases central or local MOFCOM approval at the place of incorporation of the Equity Company is also required. Unfortunately, it is still unclear how long it will take to obtain these approvals.

Caveats

The value of contributed equity from an Equity Company in an FIE is not included when calculating the FIE's total investment amount. This limits the ability of the FIE to borrow foreign (shareholder) debt.

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