Member Article

The State Administration of Foreign Exchange ("SAFE") issued the Notice on Relevant Issues in Perfecting Foreign Exchange Control in Mergers and Acquisitions by Foreign Investors ("Notice 1") on 24 January 2005 and the Notice on Relevant Issues in the Registration of the Offshore Investments of Individual Domestic Residents and Foreign Exchange Registration of Mergers and Acquisitions by Foreign Investors ("Notice 2") on 21 April 2005. The Notices, which entered into effect on the dates of their respective issuance, impose additional foreign exchange registration requirements on certain merger and acquisition transactions. Notice 2 clarifies some of the issues discussed in Notice 1. Chinese residents investing overseas Notice 1 requires residents in China who, directly or indirectly, invest in the establishment or assume control of an enterprise outside China to carry out approval and registration formalities with the foreign exchange authorities. Notice 1 further requires foreign exchange authorities to verify whether the residents in China are assigning an interest in a domestic enterprise in exchange for share certificates or other property rights in an enterprise outside China pursuant to the Provisional Regulations Regarding the Acquisition of Domestic Enterprises by Foreign Investors (as discussed in the April 2003 issue of Deacons' China Legal Update - http://www.deacons.com.hk/eng/knowledge/knowledge_146.htm). Residents in China are prohibited from carrying out such an exchange without verification by the foreign exchange authorities. Notice 2 clarifies that if the assignment of the interest took place prior to the date on which Notice 1 entered into effect (i.e. 24 January 2005), the PRC resident has to retroactively carry out foreign exchange registration procedures. Notice 2 details five different domestic acquisition structures and the type of foreign exchange registration, which needs to be attended to for each structure. Notice 2 imposes further reporting requirements in case of a major change, such as a capital increase or decrease, equity assignment, merger, division, overseas equity investment or creation of foreign security over assets inside China, relating to the overseas holding company in which a PRC resident has a shareholding interest. If such a change occurs, the PRC resident with the largest shareholding in the overseas company is required to attend to foreign exchange registration or filing procedures in respect of such change with the local foreign exchange authority. Domestic acquisitions Notice 1 calls upon the foreign exchange authorities to pay particular attention when they verify a foreign investment enterprise ("FIE"), which has been established through the acquisition of a domestic enterprise by a foreign investor. They should check whether the foreign investor has been established or is controlled by a resident in China or has the same management as the target company. If an FIE is established after a domestic acquisition which is carried out by a resident in China through an enterprise outside China, the foreign exchange authorities are required to report the application for foreign exchange registration to the national level SAFE. If an FIE established in this manner has already carried out its foreign exchange registration, the foreign exchange authorities are to increase their scrutiny of its capital verification, registration of foreign exchange derived from the equity assignment or the foreign exchange of the foreign investor, shareholder loan registration, profit remittance, re-investment of profits, equity assignment, etc.