Which issues should be considered when effecting an equity acquisition
in an FIE?
In order to gain approval of the acquisition, important issues
to bear in mind are:
1. If it is an acquisition that is in the shape
of a JV, the foreign ownership must be at least 25%.
2. Debt/equity
ratios should be complied with.
3. If the acquisition creates a WFOE,
the business scope may not be in area prohibited to foreign undertakings.
4. If PRC law demands that a majority stake is reserved for the Chinese
party, a foreign party may not gain control.
5. The MOFTEC Foreign
Investment Guidelines must be complied with, as well as the Several
Provisions on Changes in Equity Interests of Investors in Foreign
Invested Enterprises.
Furthermore, legal due diligence is highly advisable. First,
the investigation should include background and history of the project
and a preliminary project approval. Second, the joint venture contract
and/or articles of association are important documents to consider
since they contain regulations concerning the rights of the parties
as well as rules concerning mutual rights and obligations of the parties
to the FIE. The investor should also ensure that the FIE has been
duly approved. Other important to consider are
a) the formulation
of the business license,
b) the need for any special permits or licenses,
c) the capital verification report and investment certificates in
order to see the amounts of capital injection of the parties,
d) if
any conditions are imposed on the parties equity interests,
e) land
use documentation,
f) construction permits,
g) technology and intellectual
property rights,
h) environmental requirements and assessments.
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