Equity Purchase Agreement

 

The foreign investor and domestic enterprise are to conclude an equity purchase agreement, or in the case of foreign investors’ subscription to the capital increase of the target, a capital increase agreement. The M&A Rules provide that the agreement should contain the following:

 

1. The relevant information of the parties in the agreement

2. The amount of equity to be purchased or capital to be increased, and the price to be paid

3. The term and method of performance of the agreement

4. The rights and obligations of each party

5. The liabilities for breach of agreement and the means by which disputes will be settled

6. The date and place of the conclusion of the agreement

 

Acquisition Price

 

The price of the acquisition should be determined on the basis of the valuation report prepared by a PRC asset valuation company entrusted by the parties to the acquisition. If State-owned assets are involved in an Equity Acquisition or Asset Acquisition, the price for the acquisition should be determined in accordance with the relevant regulations governing the management of State-owned assets. The acquisition price should not be, prima facie, lower than the appraised value of the relevant equity interest or assets of the target company as stated in the valuation report.

 

Payment of Price for Acquisition or Equity Subscription

 

(1)  Foreign investors who establish a new FIE through the acquisition of equity in or assets of a PRC domestic company should pay the acquisition price in full within 3 months from the date of issuance of the business licence of the FIE. If the approval authorities have agreed to grant an extension of time for the payment of the acquisition price, then at least 60% of the acquisition price should be paid within 6 months, and the remaining 40% should be settled within 1 year, from the date of issuance of the business licence.

 

(2)  For an Equity Acquisition which involves the subscription for new equity in the target company, or which involves the promotion of a new company limited by shares, the shareholders are required to pay not less than 20% of the subscription price for the new equity at the same time when the application for the business licence is submitted, and the remaining balance of such subscription price can be paid in accordance with the time period which complies with the PRC Company Law and the Regulations of the PRC on Administration of Company Registration (effective as from 1 January 2006). Hence, if a FIE is formed as a result of a subscription for new equity by foreign investors in a PRC company, then foreign investors have to pay at least 20% of the subscription price for the new equity before the issuance of the business licence of the FIE.

 

(3)  If foreign investors intend to establish a FIE through an Asset Acquisition, the time for capital contribution shall be determined in accordance with the provisions of the joint venture contract and articles of association of the FIE. If foreign investors were to establish a FIE for the purpose of purchasing and operating assets acquired from PRC domestic companies, an amount of capital contribution which is equivalent to the price of those assets to be acquired shall be paid within the time period for the payment of acquisition price.The remainder of the capital contribution may be paid within a time period which complies with the regulations governing capital contributions in FIEs (i.e. within 6 months if capital is to be contributed in one lump sum, or by instalments with the first instalment being not less than 15% of the capital subscription and to be paid within 3 months after date of issuance of the business licence).

 

(4)  When foreign investors establish a FIE through a M&A transaction and if the equity interest of such foreign investors is less than 25% of the target companys registered capital, the foreign investors capital contribution should be made within 3 months from the date of issuance of the new business licence where capital is to be contributed in cash, or within 6 months from the date of issuance of the new business licence if capital is to be contributed in the form of non-cash assets or industrial property rights.

 

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