Unofficial translation courtesy of Squire,Sanders Dempsey LLP PROVISIONS ON ACQUISITION OF DOMESTIC ENTERPRISES BY FOREIGN INVESTORS TABLE OF CONTENT CHAPTER I GENERAL PROVISIONS CHAPTER II】 BASIC SYSTEM CHAPTER III EXAMINATION,APPROVAL AND REGISTRATION CHAPTER IV ACQUISITION OF DOMESTIC COMPANY BY FOREIGN INVESTOR THROUGH PAYMENT OF EQUITY INTERESTS SECTION 1 CONDITIONS OF EQUITY ACQUISITION SECTION 2 APPLICATION DOCUMENTS AND PROCEDURES SECTION 3 SPECIAL PROVISIONS ON SPECIALLY-PURPOSED COMPANIES CHAPTER V ANTI-MONOPOLY INVESTIGATION CHAPTER VI SUPPLEMENTARY PROVISIONS Chapter I General Provisions Article 1 These Provisions are formulated pursuant to laws and administrative regulations for foreign-invested enterprises("FIEs"),Company Law and other related laws and administrative regulations in order to promote and regulate investments in China by foreign investors,introduce advanced foreign technology and management expertise,make more effective use of foreign investment,realize the rational allocation of resources,ensure employment and safeguard fair competition and the economic security of the State. Article 2 For the purposes of these Provisions,the term"acquisition of domestic enterprises by foreign investors"means a foreign investor's purchase by agreement of the equity interests of a shareholder in an enterprise other than a FIE (hereinafter referred to as the"Domestic Company")or subscription to a Domestic Company's capital increase,resulting in the conversion of the Domestic Company into a newly established FIE (hereinafter referred to as the "Equity Acquisition");or a foreign investor's establishment of a FIE and purchase by agreement,through such FIE,of the assets of a domestic enterprise and operation of such assets,or a foreign investor's purchase by agreement of the assets of a domestic enterprise and use of such assets to
TrunslutionSquire,Sanders Dempsey L.L.P. invest in and establish a FIE to operate such assets(hereinafter referred to as the “Asset Acquisition'". Article 3 When a foreign investor acquires a domestic enterprise,it shall abide by Chinese laws,administrative regulations and rules and regulations and adhere to the principles of fairness,reasonableness,compensation of equal value and good faith.It shall not cause over-concentration to eliminate or restrict competition,disturb the socio-economic order,damage the public interest or the loss of state-owned asset. Article 4 A foreign investor intending to acquire a domestic enterprise shall satisfy the requirements of Chinese laws,administrative regulations and rules and regulations concerning investor qualifications and industrial,land and environmental protection policies. An acquisition shall not result in a foreign investor owning all of the equity interests of an enterprise in an industry in which,pursuant to the Foreign Investment Industrial Guidance Catalogue,a foreign investor is not permitted to operate by way of a wholly foreign-owned enterprise.After the acquisition of an enterprise in an industry in which the Chinese party is required to have a controlling interest or a relative controlling interest,the Chinese party shall continue to have a controlling interests or relative controlling interests in the enterprise.A foreign investor may not acquire an enterprise engaged in an industry which operation by foreign investors is prohibited. The original business scope of the domestic enterprise being acquired shall comply with the requirements for the foreign investment industrial policy;if such requirements cannot be met,adjustment thereto shall be made. Article 5 If a domestic enterprise being acquired by a foreign investor involves the transfer of its state-owned assets and administration of state-owned equity of a listed company,such acquisition shall comply with relevant regulations governing state-owned assets. Article 6 When a foreign investor acquires a domestic enterprise and establishes a FIE,it shall obtain the approval of the examination and approval authority in accordance herewith and carry out the procedures for amendment of registration or establishment registration with the registration administration authority. If the enterprise being acquired is a domestic listed company,it shall also carry out relevant procedures with the securities regulatory authority of the State Council pursuant to the Measures Governing Strategic Investment Made by Foreign Investors in Listed Companies. Article 7 The parties involving in the enterprise being acquired by a foreign investor shall pay taxes in accordance with tax regulations of China and accept supervision of tax authorities. Article 8 The parties involving in the enterprise being acquired by a foreign investor shall handle procedures with the relevant authority in charge of administration of foreign exchange ("forex")for forex approval,registration,filing 2
Translation Sqnire,Sanders Dempsey L.L-P. and amendment in a timely manner in compliance with Chinese forex laws and administrative regulations. Chapter II Basic System Article 9 If the foreign investor's contribution to the registered capital of the FIE established after the acquisition is more than twenty five percent(25%)thereof,such enterprise shall enjoy treatment of a FIE. If the foreign investor's capital contribution to the registered capital of the FIE established after the acquisition is less than twenty five percent(25%),such enterprise thus set up shall not enjoy treatment of a FIE and any foreign loans it may borrow shall be handled in accordance with the relevant regulations governing foreign loans borrowed by non-FIEs,except otherwise provided by laws and administrative regulations.The examination and approval authority shall issue to such enterprise a FIE approval certificate (hereinafter referred to as the "Approval Certificate"or "COA"),which shall be remarked with such words as "foreign investment ratio less than twenty five percent (25%)",and the registration administration authority and forex administrative authority shall issue,respectively,to such enterprise a FIE's business license ("Business License")and forex registration certificate ("Forex Certificate")also remarked with such words as "foreign investment ratio less than twenty five percent(25%)". Acquisition by a Domestic Company,enterprise or natural person of an affiliate company of such Domestic Company in the name of an overseas company lawfully established or controlled outside China,such enterprise thus set up shall not enjoy treatment of a FIE,unless the overseas company subscribes to any increased capital of the Domestic Company or contributes additional capital to such enterprise newly formed after acquisition and the amount of the increased capital exceeds twenty five percent(25%)of such new enterprise's registered capital.Where the contribution made by any foreign investor other than the actual controlling party of the FIE established by way mentioned in this Clause to the registered capital of such enterprise is higher than twenty five percent(25%)thereof,such enterprise shall enjoy treatment of a FIE. Treatment enjoyable by the FIE newly established through acquisition of any domestic listed company by a foreign investor shall be subject to relevant provisions of the state. Article 10 The examination and approval authority referred herein shall be the Ministry of Commerce ("MOFCOM")or the provincial level commercial authority of the People's Republic of China(hereinafter referred to as the "Provincial Level Examination and Approval Authority").The registration administration authority shall be the State Administration of Industry and Commerce("SAIC")of the People's Republic of China or its authorized local administrative authority for industry and commerce.The forex control authority shall be the State Administration of Foreign Exchange("SAFE")or its branch offices
Trunstution Squire,Sanders Dempsey L.L.P. The Provincial Level Examination and Approval Authorities shall forward to MOFCOM for examination and approval the application documents for FIE to be established after acquisitions that,pursuant to laws,administrative regulations or departmental rules or regulations,are of a particular type or in a particular industry that requires the examination and approval of MOFCOM.The decision whether or not to grant approval shall be made by MOFCOM,in accordance with the law. Article 11 Application shall be made to MOFCOM for examination and approval of the acquisition of any company inside China affiliating to a Domestic Company, enterprise or natural person,which is made in the name of an overseas company lawfully established or controlled by such Domestic Company,enterprise or natural person. The parties concerned shall not circumvent any requirements set forth above by means of making domestic investment through a FIE or otherwise. Article 12 A party concerned in the acquisition by foreign investor of a domestic enterprise obtains the actual controlling rights of such enterprise shall apply to MOFCOM for examination and approval if such acquisition involves in any major industry,or has or may have an impact on the state economy security,or may result in transfer of the actual controlling right of the domestic enterprise owning any famous trademarks or traditional Chinese brands. If such party concerned fails to make application to MOFCOM and its acquisition causes or may cause significant impact to the state economy security,MOFCOM together with relevant authorities in charge can then demand that such party ceases the transaction transfers relevant equity interests,assets or take any other effective actions in order to eliminate the impact of such acquisition on the security of the national economy. Article 13 If a foreign investor carries out an Equity Acquisition,the FIE established after the acquisition shall succeed to the claims and debts of the acquired Domestic Company. If a foreign investor carries out an Asset Acquisition,the domestic enterprise that sold the assets shall bear its existing claims and debts. The foreign investor,the domestic enterprise to be acquired,creditors and/or other parties may otherwise agree on the disposal of the claims and debts of the domestic enterprise to be acquired,provided that such agreement does not prejudice the interests of a third party or the public.An agreement on the disposal of claims and debts shall be submitted to the examination and approval authority. A domestic enterprise that sells its assets shall dispatch a notice to its creditors and publish an announcement in a provincial or higher level newspaper distributed nationally fifteen (15)days before the investor submits relevant application documents to the examination and approval authority in charge. Article 14 The parties concemned in the acquisition shall use the evaluation results provided by the relevant asset appraisal organ regarding the value of the equity
Translation Squire.Sanders Dempsey L.L.P. interest to be transferred or the assets to be sold as the basis for its determination of the transaction price.The parties to such acquisition may reach agreement on their use of the asset appraisal organ legally established within China.Asset appraisal thus required shall adopt common international methods of appraisal.It is forbidden to assign equity interests or sell assets at a price that is manifestly lower than the appraisal result in order to transfer capital abroad in a covert manner. Acquisition of a domestic enterprise by a foreign investor that causes any change to the equity interests resulting from an investment of State assets or a transfer of title to State-owned assets shall be conducted in accordance with provisions on the administration of State-owned assets. Article 15 The parties to the acquisition shall state to make it clear whether or not there is any relation of affiliation between them;if both of them is actually under the common control of a same controlling party,they shall make disclosure thereof to the examination and approval authority in charge and provide further explanation with regard to whether or not the acquisition purpose and appraisal results conform to the fair market value.Neither of such parties concerned shall be allowed to circumvent the requirements set forth above by means of trusteeship,holding through agency or otherwise. Article 16 When a foreign investor acquires a domestic enterprise and establishes a FIE,it shall pay the entire amount of the consideration to the shareholder that transferred the equity interests or the domestic enterprise that sold the assets within three (3)months after the date of issuance of the FIE's Business License.In special circumstances requiring an extension,and subject to the approval of the examination and approval authority,the foreign investor shall pay at least sixty percent(60%)of the consideration within six (6)months after the date of issuance of the FIE's Business License and pay the balance in full within one(1)year,and its share of the gains shall be proportional to the capital contribution it has actually paid in. Where a foreign investor subscribes to any increased capital of a Domestic Company, the shareholder(s)of the limited liability company or the domestic shareholding company established by means of sponsorship shall contribute no less than twenty percent(20%)of the increased registered capital at the time such Domestic Company applies for its FIE Business License.The schedule for contributions to the rest of such enterprise's increased registered capital shall be in conformity to the Company Law,relevant laws and regulations on foreign investment and the provisions of the Regulations on Administration of Company Registration.Relevant stipulations of other laws and administrative regulations shall also be followed where necessary. When a shareholding company issues new stocks for purpose of increasing its registered capital,its shareholders shall comply with the provisions on payment of stocks for establishment of shareholding companies. When a foreign investor carries out an Asset Acquisition,the investors shall specify the time limits for making the capital contributions in the contract for and the articles of association of the FIE that is to be established.If a FIE is to be established and the assets of a domestic enterprise are to be purchased by agreement and operated by such FIE,then that part of the capital contribution that is equivalent to the consideration
Trunsiation Squire,Sanders&Dempsey L.L.P. payable for the assets shall be paid in by the investors within the time limit for the payment of consideration specified in the first paragraph of this Article.The balance of the capital contribution shall be in accordance with the relevant provisions on capital contribution for establishment of FIEs If a foreign investor acquires a domestic enterprise and establishes a FIE and its capital contribution accounts for less than twenty five percent(25%)of the registered capital of such enterprise,and if the investor is to make capital contribution in the form of cash,they shall make payment in full within three(3)months after the date of issuance of the FIE's Business License;if the investor is to make capital contribution in kind or in the form of industrial property,etc.,it shall make payment in full within six(6)months after the date of issuance of the FIE's Business License. Article 17 The method by which consideration is paid for acquisition shall comply with relevant State laws and administrative regulations.If the foreign investor is to make payment in the form of Renminbi assets that it lawfully owns,it shall require the approval of the forex control authority.If the foreign investor is to make payment in the form of stock that it has the right to dispose of,it shall comply with the requirements provided in Chapter IV hereof. Article 18 Where a foreign investor acquires the equity interests from shareholders of a Domestic Company by agreement,after the Domestic Company is converted into a FIE through such acquisition with the registered capital of such FIE remaining equal to that of the original Domestic Company,the foreign investor's proportion of contribution shall be the ratio between the equity interests it has acquired and the original registered capital. Where a foreign investor subscribes to the capital increase of a domestic limited liability company,the registered capital of the FIE after the acquisition shall be the aggregation of the original Domestic Company's registered capital and the amount of the capital increase.The foreign investor and the existing shareholders of the acquired Domestic Company shall determine the percentages of their respective contributions to the FIE's registered capital on the basis of the appraisal of the assets of the Domestic Company. Where a foreign investor subscribes to any increased capital of a domestic shareholding company,the registered capital shall be determined in accordance with the provisions of the Company Law. Article 19 When a foreign investor carries out an Equity Acquisition,unless otherwise provided in the State law,the upper limit on the total amount of investment of the FIE established after the acquisition shall be determined in accordance with the following percentages: (1) if the registered capital is less than Two Million One Hundred Thousand US Dollars (US$2,100,000),the total amount of investment may not exceed ten- seventh(10/7)of the registered capital; (2) if the registered capital is Two Million One Hundred Thousand US Dollars (US$2,100,000)or more but less than Five Million US Dollars 6
Translation Squire,Sanders Dempsey L.LP. (USS5,000,000),the total amount of investment may not exceed twice(2)the registered capital; (3) if the registered capital is Five Million US Dollars (US$5,000,000)or more but less than Twelve Million US Dollars (US$12,000,000),the total amount of investment may not exceed two and a half(2.5)times the registered capital; (4) if the registered capital is Twelve Million US Dollars (US$12,000,000)or more,the total amount of investment may not exceed three (3)times the registered capital. Article 20 When a foreign investor carries out an Asset Acquisition,the total amount of investment of the proposed FIE shall be determined in accordance with the transaction price of the assets purchased and the actual scale of production and operation.The ratio of the proposed FIE's registered capital to its total amount of investment shall comply with relevant provisions. Chapter III Examination,Approval and Registration Article 21 When a foreign investor carries out an Equity Acquisition,the investor shall submit the documents set forth below to the examination and approval authority whose competence corresponds to the total amount of investment and enterprise type of the proposed FIE and the industry it is to engage in,pursuant to laws, administrative regulations and departmental rules and regulations on the establishment of FIEs: (1) in the case of a domestic limited liability company targeted for acquisition:the unanimous shareholders'resolution in favor of the Equity Acquisition by the foreign investor;in the case of a domestic company limited by shares targeted for acquisition:the resolution of the shareholders'general meeting in favor of the Equity Acquisition by the foreign investor; (2) an application to convert the Domestic Company targeted for acquisition into a newly established FIE in accordance with the law; (3) the contract for and the articles of association of the FIE to be established after the acquisition; (4) the agreement for the purchase of the equity of the shareholder in the Domestic Company or the subscription to the Domestic Company's capital increase by the foreign investor; (5) a financial audit report for the previous fiscal year of the Domestic Company to be acquired; (6) the notarized or legally certified investor's identification documents or certificates of registration and certificates of creditworthiness;
Trunslation Sqnire,Sanders Dempsey L.L.P. (7) details of the enterprises invested in by the Domestic Company to be acquired; (8) (duplicates of)the Business License of the Domestic Company to be acquired and the enterprises in which it has invested; (9) the arrangements made for the staff and workers of the Domestic Company to be acquired;and (10)the documents to be submitted pursuant to Articles 13,14,and 15 hereof. If the scope or scale of business of,or the acquisition of land use right by,the FIE to be established after the acquisition or any other matters in regard thereto requires permission from other relevant government authorities,the relevant permission documents shall be submitted together with the aforementioned documents Article 22 The equity purchase agreement and the agreement for increasing the capital of a Domestic Company shall be governed by Chinese law and shall include the following main provisions: (1) the particulars of the parties to the agreement,including their names and domiciles,the names,positions and nationalities of their legal representatives, etc.; (2) the share and price of the equity to be purchased or of the capital increase to be subscribed to; (3) the term and method of performance of the agreement; 4) the rights and obligations of the parties; (5) liability for breach of contract and resolution of disputes;and (6) the date and place of execution of the agreement. Article 23 When a foreign investor carries out an Asset Acquisition,the investors shall submit the documents set forth below to the examination and approval authority whose competence corresponds to the total amount of investment and enterprise type of the proposed FIE and the industry it is to engage in,pursuant to laws, administrative regulations and departmental rules and regulations on the establishment of FIEs: (1) the resolution in favor of the asset sale passed by the owner of the title to,or the organ of authority of,the domestic enterprise; (2) an application for the establishment of a FIE; (3) the contract for and the articles of association of the proposed FIE; (4) the assets purchase agreement executed by the proposed FIE and the domestic enterprise or by the foreign investor and the domestic enterprise; 8
Translation Squire,Sanders Dempsey L.L.P. (5 (duplicates of)the articles of association and the Business License of the domestic enterprise to be acquired; (6) certification of the fact that the domestic enterprise to be acquired has notified, and published an announcement for,its creditors,as well as statements on whether its creditors have raised any objections; (7 the notarized or legally certified investor's identification documents or certificates of commencement of business and certificates of creditworthiness; (8) the arrangements made for the staff and workers of the domestic enterprise to be acquired;and (9) the documents to be submitted pursuant to Articles 13,14,and 15 hereof. If the purchase and operation of the assets of a domestic enterprise in accordance with the provisions of the preceding paragraph require permission from other relevant government authorities,the relevant permission documents shall be submitted together with the aforementioned documents. When a foreign investor purchases the assets of domestic enterprise by agreement and uses such assets to invest in and establish a FIE,it may not carry on business with such assets before the establishment of the FIE. Article 24 The asset purchase agreement shall be governed by Chinese law and shall include the following main provisions: (1) the particulars of the parties to the agreement,including their names and domiciles,the names,positions and nationalities of their legal representatives, etc.; (2) the list and price of the assets to be purchased; (3) the term and method of performance of the agreement; (4) the rights and obligations of the parties; (5) liability for breach of contract and resolution of disputes;and (6) the date and place of execution of the agreement Article 25 When a foreign investor acquires a domestic enterprise and establishes a FIE,the examination and approval authority shall,in accordance with the law, render its decision on whether to grant approval within thirty (30)days after the date of receipt of the entire set of prescribed documents,unless otherwise specified differently herein.If it decides to grant its approval,it shall issue an Approval Certificate. When an examination and approval authority grants its approval to the acquisition by a foreign investor of the equity interests of a shareholder in a Domestic Company subject to agreement,it shall send copies of the relevant approval document to the 9
TranslationSquire,Sanders Dempsey L.LP. forex control authorities of the places where the transferor of the equity interests and the Domestic Company are located.The forex control authority of the place where the transferor of the equity interests is located shall carry out procedures for registration of its receipt of the equity-transfer related forex and shall issue relevant certificate.The registration certificate of receipt of equity-transfer related forex shall be the effective documents attesting that the foreign investor has paid in the consideration for the Equity Acquisition. Article 26 When a foreign investor carries out an Asset Acquisition,the investors shall apply for registration of establishment to the registration administration authority within thirty(30)days after the date of receipt of the Approval Certificate, and obtain a FIE Business License from the said administration. When a foreign investor carries out an Equity Acquisition,the Domestic Company to be acquired shall apply for amendment of registration to its original registration administration authority in accordance herewith and obtain a FIE Business License. If its original registration administration authority is not competent to register the change,it shall,within ten (10)days after the date of receipt of the application documents,transfer the case together with the Domestic Company's registration file to the competent registration authority for handling.When applying for amendment of registration,the Domestic Company to be acquired shall submit the documents set forth below and shall be liable for their truthfulness and validity: (1) an application for amendment of registration; (2) the agreement under which the foreign investor purchases the equity of the shareholder in the Domestic Company or subscribes to the Domestic Company's capital increase; (3) the company's amended articles of association or the proposed amendments to the original articles of association and the contract for the FIE that needs to be submitted in accordance with the law; (4) the FIE Approval Certificate; (5) the foreign investor's qualification certificate of a subject and identification certificate of a natural person; (6) the amended name list of directors,a document specifying the names and domiciles of the new directors and the instruments of appointment of the new directors;and (7) other relevant documents and certificates specified by the SAIC. The investor shall go through registration procedures with relevant authorities such as those for taxation,customs,land administration and forex control within thirty (30) days after the date of receipt of the FIE Business License. 10
