Highlights:

The Ministry of Commerce of the PRC promulgated a new regulation allowing foreign investors to use equity held in a PRC company to invest in the capital of other PRC companies.

Main Article:

On September 21, 2012, the Ministry ofCommerce of the PRC (“MOFCOM”) released the Interim Measures for the Administration of Capital Contribution in the Form of Equity Involving Foreign-Invested Enterprises” (the “Measures”),which came into effect on October 22, 2012.  Pursuant to the Measures, a foreign investor that holds equity interests or shares (“PRC Equity”) in a foreign-invested company will be allowed to contribute PRC Equity to the capital of newly-established companies in the PRC or of existing PRC companies (each an “Invested Company”).

Contributions of such PRC Equity are subject to the following requirements:

1. approval of the competent provincial branch of MOFCOM;
2. such PRC Equity being unencumbered and freely transferable;
3. a legal opinion issued by a PRC law firm confirming such capital contribution complies with the Measures, especially with respect to any circumstances restricting such capital contribution and any potential violations of PRC foreign investment policy;
4. valuation of such PRC Equity by a PRC evaluation agency; and
5. the total amount of the capital contribution in the form of PRC Equity and other non-monetary contributions not exceeding seventy per cent (70%) of the registered capital of the Invested Company.

Comments

With the issuance of the Measures, foreign investors have more flexibility to restructure their businesses in China, and can enjoy the same treatment as the Chinese investors who have been able to contribute equity interests or shares in a Chinese company to the capital of other PRC companies for more than two years.