Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign nvestors

　　The Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (hereinafter referred to as the "Provisions"), reviewed and adopted at the First Ministry Meeting of the Ministry of Foreign Trade and Economic Cooperation of the People's Republic of China on January 2, 2003, is hereby published and will come into force on April 12, 2003.

　　Chapter I General Provisions

　　Article 1

　　The Provisions are formulated in accordance with the laws and administrative regulations

　　governing foreign investment enterprises and other relevant laws and administrative regulations to

　　promote and regulate foreign investors' investment in China introduce advanced technologies and

　　management experience from abroad, improve the utilization of foreign investment, rationalize the

　　allocation of resources, ensure employment and safeguard fair competition and national economic

　　security.

　　Article 2

　　For the purpose of the Provisions, mergers and acquisitions of a domestic enterprise by

　　foreign investors shall mean that foreign investors, by agreement, purchase equity interest from

　　shareholders of domestic enterprise with no foreign investment (hereinafter referred to as the

　　"Domestic Company") or subscribe to the increase in the registered capital of the Domestic

　　Company with the result that such Domestic Company changes into a foreign investment enterprise

　　(hereinafter referred to as "Equity Merger and Acquisition"); or the foreign investors establish a

　　foreign investment enterprise and then, through such enterprise, purchase the assets of a domestic

　　enterprise by agreement and operate such assets, or the foreign investors purchase the assets of a

　　domestic enterprise by agreement and use such assets as investment to establish a foreign investment

　　enterprise to operate such assets (hereinafter referred to as "Asset Merger and Acquisition").

　　Article 3

　　In mergers and acquisitions of domestic enterprises, foreign investors shall comply with the

　　laws, administrative regulations and departmental rules and adhere to the principles of fairness,

　　reasonableness, compensation for equal value, and honesty and good faith, and shall not create

　　excessive concentration, eliminate or hinder competition, disturb the social economic order or harm

　　the societal public interests.

　　Article 4

　　In mergers and acquisitions of domestic enterprises, foreign investors shall comply with the

　　requirements regarding the investors' qualifications and industrial policy as set forth in the laws,

　　administrative regulations and departmental rules and the relevant requirements under industry

　　policies.

　　In the case of industries where no wholly foreign ownership is allowed under the Guidance

　　Catalog of Foreign Investment Industries, any merger or acquisition of a domestic enterprise

　　engaging in the industry shall not lead to the foreign investors' wholly ownership of all equity

　　interest in the acquired enterprise. In the case of industries which require the Chinese party to be

　　controlling or relatively controlling, the Chinese party shall remain to be in the controlling or

　　relatively controlling position in the acquired enterprise after any merger or acquisition of the

　　domestic enterprise engaging in such industries. In the case of industries where operation by foreign

　　investors is prohibited, no foreign investors may merge with or acquire any enterprise engaging

　　in such industries.

　　Article 5

　　Any merger or acquisition of a domestic enterprise by foreign investors to set up a foreign

　　investment enterprise shall be subject to the approval of the examination and approval authorities in

　　accordance with the Provisions, and procedures for change registration or establishment registration

　　shall be handled with the registration authorities. The contribution made by the foreign investors to

　　the registered capital of the foreign investment enterprise established after the merger or acquisition

　　shall generally not be less than 25% of the registered capital. Except as provided otherwise by the

　　laws or administrative regulations, if the contribution made by foreign investors is less than 25% of

　　the registered capital, the foreign investment enterprise shall be subject to the examination, approval

　　and registration in accordance with the currently applicable examination and registration procedures

　　for the establishment of a foreign investment enterprise. When issuing the foreign investment

　　enterprise approval certificates, the examination and approval authority shall add a notation "foreign

　　investment proportion less than 25%". When issuing the foreign investment enterprise business

　　licenses, the registration authority shall add the notation "foreign investment proportion less than

　　25%" .

　　Article 6

　　For the purpose of the Provisions, the examination and approval authority shall be the

　　Ministry of Foreign Trade and Economic Cooperation of the PRC (hereinafter referred to as

　　"MOFTEC") or the administrative authority in charge of foreign trade and economic cooperation at

　　the provincial level (hereinafter referred to as the "Provincial Examination and Approval

　　Authority"), and the registration authority shall be the State Administration for Industry and

　　Commerce of the PRC (hereinafter referred to as "SAIC") or its authorized local industrial and

　　commercial bureaus.

　　If the foreign investment enterprise established after the merger or acquisition falls into a

　　specific type or a specific industry subject to MOFTEC approval in accordance with the laws,

　　administrative regulations and departmental rules, the provincial examination and approval authority

　　shall submit the application documents to MOFTEC for examination and approval and MOFTEC

　　shall decide to approve or disapprove the application in accordance with the law.

　　Article 7

　　In the case of Equity Merger and Acquisition by foreign investors, the foreign investment

　　enterprise established thereafter shall succeed to the creditor's rights and liabilities of the merged or

　　acquired Domestic Company .

　　In the case of Asset Merger and Acquisition by foreign investors, the domestic enterprise

　　selling assets shall assume all its original creditor's rights and liabilities.

　　The Foreign investors, merged or acquired domestic enterprises, creditors and other parties may

　　reach separate agreements regarding the disposition of the creditor's rights and liabilities of the

　　merged or acquired domestic enterprises, provided that the agreement shall not result in any damage

　　to any third party interest or societal public interest. Any agreement on the disposition of the

　　creditor's rights and liabilities shall be submitted to the examination and approval authority.

　　The domestic enterprise selling assets shall, within 10 days of the adoption of the resolution to

　　sell its assets, gives notice to its creditors and makes a public announcement on a newspaper at the

　　provincial level or above with national circulation. A creditor of the domestic enterprise may, within

　　10 days from the date of receipt of such notice or publication of such public announcement, requests

　　the domestic enterprise selling assets to provide the corresponding security.

　　Article 8

　　The parties to a merger or acquisition shall determine the transaction price on the basis of

　　the result of the evaluation of the equity interest to be transferred or of the assets to be sold

　　conducted by the asset evaluation institution. The parties to a merger or acquisition may agree on an

　　asset evaluation institution established within the territory of China in accordance with the law.

　　Asset evaluation shall be conducted by adopting internationally recognized evaluation methods.

　　Where the merger or acquisition of a domestic enterprise leads to any change in the equity

　　interest formed by the investment of state-owned assets or resulting in any transfer of the property

　　right in state-owned assets, evaluation shall be conducted and transaction price shall be determined

　　in accordance with the relevant regulations governing the administration of state-owned assets.

　　It is prohibited to transfer equity interest or sell assets at a price obviously lower than the

　　evaluation result for the peupose of transferring the capital out of China in a disguised way.

　　Article 9

　　In case of a merger or acquisition of a domestic enterprise by foreign investors to set up a

　　foreign investment enterprise, the foreign investors shall, within 3 months from the date of issuance

　　of the foreign investment enterprise business license, pay the full consideration to the shareholder(s)

　　transferring equity interest or to the domestic enterprise selling assets. If the above time limit needs

　　to be extended under special circumstances, the foreign investors shall, upon the approval by the

　　examination and approval authority, pay 60% or more of the total consideration within 6 months and

　　full considerations within 1 year from the date of issuance of the foreign investment enterprise

　　business license, and shall distribute the proceeds in proportion to the actual capital contribution.

　　Where the foreign investors conduct Equity Merger and Acquisition and the foreign investment

　　enterprise established after such mergers and acquisitions increases its registered capital, the

　　investors shall set forth a time schedule for capital contribution in the contract and the articles of

　　association of the foreign investment enterprise. If it is set forth that the capital contribution shall be

　　paid up in one lump sum, the investors shall make the contribution within 6 months from the date of

　　issuance of the foreign investment enterprise business license ; or if it is set forth that the capital

　　contribution shall be paid by installments, the investors' first installment shall not be less than 15%

　　of their respective capital subscription and shall be made within 3 months from the date of issuance

　　of the foreign investment enterprise business license .

　　In case of an Asset Mergers and Acquisition by foreign investors, the investors shall set forth

　　the time schedule for capital contribution in the contract and the articles of association of the foreign

　　investment enterprise to be established. If the investors intend to establish a foreign investment

　　enterprise and purchase and operate such assets of a domestic enterprise through such enterprise, the

　　investors shall pay the part of its capital contribution equal to the price of such assets within the time

　　schedule specified for consideration payment in Paragraph 1 of this Article and the remaining part of

　　its capital contribution shall be paid within the time schedule agreed upon in accordance with

　　Paragraph 2 of this Article .

　　Where foreign investors establish a foreign investment enterprise through merger or acquisition

　　of a domestic enterprise, and the proportion of the foreign investors' capital contribution is less than

　　25% of the registered capital ,if the investors pay their capital contribution in cash, the full

　　contribution shall be made within 3 months from the date of issuance of the foreign investment

　　enterprise business license ; if the investors pay their capital contribution in kind or in industrial

　　property rights and so on, full contribution shall be made within 6 months from the date of issuance

　　of the foreign investment enterprise business license.

　　The instruments of payment of any consideration shall be in compliance with the provisions of

　　the relevant state laws and administrative regulations. Where a foreign investor intends to use any

　　stock it has the right to dispose of or any Renminbi assets it legitimately possesses as the instrument

　　of payment, such payment shall be subject to the approval of the foreign exchange administration

　　authority .

　　Article 10

　　Where a foreign investor acquires any equity interest held by a shareholder of a Domestic

　　Company by agreement, after the Domestic Company has changed into and established as a foreign

　　investment enterprise, the registered capital of such foreign investment enterprise shall be the

　　registered capital of the original Domestic Company and the proportion of the the foreign investor's

　　capital contribution shall be the proportion of the equity interest acquired by the foreign investor in

　　the original registered capital. Where a Domestic Company subject to Equity Merger and

　　Acquisition an Equity Merger and Acquisition also increases its capital at the same time, the

　　registered capital of the foreign investment enterprise established upon the Merger and Acquisition

　　shall be the sum of the registered capital of the original Domestic Company and the increased

　　capital. The foreign investors and the other original investors of the acquired Domestic Company

　　shall determine the proportion of their capital contribution respectively to the registered capital of

　　the foreign investment enterprise based on the evaluation of the Domestic Company's assets.

　　Where foreign investors subscribe to any increased capital of a Domestic Company, after the

　　Domestic Company has changed into and established as a foreign investment enterprise, the

　　registered capital of such foreign investment enterprise shall be the sum of the registered capital of

　　the original Domestic Company and the increased capital. The foreign investors and the other

　　original shareholders of the acquired Domestic Company shall determine the proportion of their

　　capital contribution respectively to the registered capital of the foreign investment enterprise

　　based upon the evaluation of the Domestic Company's assets.

　　If a natural person shareholder of the Domestic Company subject to Equity Merger and

　　Acquisition has been a shareholder of such Domestic Company for more than 1 year, the person

　　may, upon approval, continue to be a Chinese party investor of the foreign investment enterprise

　　established after the change.

　　Article 11

　　In case of an Equity Merger and Acquisition by foreign investors, the ceiling for the total

　　amount of investment of the foreign investment enterprise established upon the Merger and

　　Acquisition shall be determined according to the following proportions:

　　(1) no more than ten sevenths (10/7) of the registered capital of the foreign investment enterprise,

　　if the registered capital is less than US$ 2.1 million;

　　(2) no more than twice the registered capital, if the registered capital is between US$ 2.1million

　　and US$ 5 million;

　　(3) no more than two and a half times the registered capital, if the registered capital is more than

　　US$ 5 million but less than or equal to US$ 12 million; or

　　(4) no more than three times the registered capital, if the registered capital is more than US$ 12

　　million.

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