Equity Transfers in China
PRC M&A - KEY STEPS FOR EQUITY SALES IN CHINA
Although equity transfers by and of foreign invested enterprises in China have become very common in recent years, the process to complete an equity transfer is still time consuming and should be handled by experienced professionals with legal and financial knowledge using up-to-date practices. We provide a brief summary of the key steps for a seller/transferor to complete an equity transfer in China based on general requirements and practices adopted in various transactions in China:
1. Sign a confidentiality agreement with potential buyer(s)
A confidentiality agreement is an important legal means to prevent potential buyer(s) from disclosing the seller's commercial information to any other parties, whether intentionally or unintentionally. The terms and conditions of the confidentiality agreement must be determined, including the scope of confidential information, choice of law and jurisdiction for deciding disputes according to the specific situation of the parties and the transaction.
2. Respond to the buyer's due diligence review by providing necessary documents and information
As part of preparing to respond to the legal and financial due diligence review, the seller should make sure that all the certificates and registrations of the target company are valid, updated and in good standing. The target company should have duly paid all its taxes and social insurance contributions according to legal requirements.
3. Draft, negotiate, revise and finalize an equity transfer agreement, including but not limited to the following issues:
- Transfer price (taking account of tax implications)
- Prerequisite conditions for payment
- Representations, warranties and undertakings
- Rights and liabilities of the parties
- Government filings
- Conditions for Closing
4. Execute an equity transfer agreement
The equity transfer agreement will be filed with the government authorities and the competent officials may require amendments based on the result of their review. According to administrative rules, in theory, the equity transfer agreement becomes effective upon execution without waiting for approval or filing, but local authorities may still have a different understanding and impose more stringent requirements on the equity transfer agreement.
5. Prepare and execute other documents for equity transfer, including but not limited to:
- Shareholder resolutions
- Board resolutions (if applicable)
- Amendment to Articles of Association
- Letter of removal and appointment of directors, general manager and supervisor
- Other documents required for the equity transfer
6. Complete government filings and change of registration, including but not limited to:
- Filing with local commerce commission
- Change of registration with local administration of industry and commerce
- Change of registration with foreign exchange authority
- Change of registration with tax bureau
- Change of registration with other competent authorities
7. Tax filing and settlement (if applicable)
If seller earns any capital gains from the equity transfer, the seller should make sure to duly file and settle income tax for the equity transfer within a specified period of time. Normally, tax that is payable by an overseas company or individual should be withheld and settled by the target company in China.
8. Closing the transaction
Government applications typically take one to two months, depending on the location of the target company and the specific requirements with respect to the documents. However, the preparation for the equity transfer, as well as follow up issues after the equity transfer, may take much longer than the government filings themselves. Not only the management but also financial/tax personnel should be involved.
The above list is a brief summary based on general situations and is provided for general reference and not offered as guidance for actual implementation of such transactions. Additional factors and issues will have to be evaluated and determined based on the specific transaction.
By Jeff Sun
with Allan Marson. Jeff is a founding partner of Jaguar Law in Beijing, P.R.C.
