In China equity investors in companies are required to make capital contributions which form the registered capital of the company. Contributions in the form of equity interests or shares in other companies were not permitted before January 2006 as the law only allowed contributions in the form of cash, physical objects, intellectual property, non-patent technology and land use rights. After January 2006, new laws allowed contributions in the form of non-monetary property whose monetary value could be appraised and which could legally be transferred.  As such, capital contributions in the form of equity interests or shares became technically possible.  However, due to the lack of guidelines on how to make  these contributions, such contributions have rarely been seen in practice.

 

In order to provide clarity, the State Administration of Industry and Commerce (SAIC) recently issued the Measures on Administration of Registration of Capital Contribution with Equity Interests (the “Measures”), which will come into force on 1 March 2009. Key provisions of the Measures are highlighted below.

 

    •          The Measures will apply to capital contributions to a PRC incorporated limited liability company or joint stock company (the “Invested Company”) by an investor using equity interests or shares held by the investor in another PRC incorporated limited liability company or joint stock company (the “Equity Company”).

 

    •          Investors are required to have clear title to the equity interests or shares to be used as contributions and the interests or shares must be legally transferable.

 

    •          Contributions of equity interests or shares are not permitted if (i) the registered capital of the Equity Company has not been fully paid up, (ii) the equity interests or shares are subject to a pledge, (iii) the equity interests or shares have been frozen according to the law, (iv) the transfer of the equity interests or shares is prohibited by the articles of association of the Equity Company, or (v) the transfer of the equity interests or shares is subject to governmental approval and the approval has not been obtained.

 

    •          The aggregated amount of capital contributions in the form of equity interests or shares and those in other forms of non-monetary property must not exceed 70% of the total amount of registered capital of the Invested Company. The equity interests or shares to be used as capital contributions are required to be appraised by a qualified valuation institution.  The equity interests or shares most be contributed into the Invested Company within one year after its establishment or in case of an increase of capital, before initiating the relevant modification registration for the increase.

 

It is widely believed that the implementation of the Measures will relieve investors of the burden to make cash contributions when forming or investing in a PRC company. The Measures should go some way to enhancing corporate restructuring options and stimulating M&A and investment activities.