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Wholly Foreign Owned Enterprises (WFOE)
A Wholly Foreign Owned Enterprise (WFOE) is a Limited Liability Company established in China by foreign investor(s). A WFOE is very much like a LLC in the USA that it requires one member only.
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LAWS, RULES AND REGULATIONS OF FOREIGN DIRECT INVESTMENTS IN CHINA


Interim Provisions on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors
of the People's Republic of China

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.

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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 purpose 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 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.

Article 12 In case of an Equity Merger and Acquisition by foreign investors, the investors shall submit the following documents to the examination and approval authority with corresponding jurisdiction of approval based on the total amount of investment of the foreign investment enterprise established upon the Merger and Acquisition:

(1) the resolution adopted by the shareholders of the domestic limited liability company subject to the Merger and Acquisition unanimously approving the Equity Merger and Acquisition by the foreign investors, or the resolution adopted by the shareholders’ meeting of the domestic company limited by shares subject to the Merger and Acquisition approving the Equity Merger and Acquisition by the foreign investors;

(2) the application of the Domestic Company subject to the Merger and Acquisition to be changed in to and established as a foreign investment enterprise in accordance with the law;

(3) the contract and the articles of association of the foreign investment enterprise established upon the Merger and Acquisition;

(4) the agreement for the purchase of the shareholders’ equity interest or subscription for the increased capital of the Domestic Company by the foreign investors;

(5) the audited financial report for the most recent fiscal year of the Domestic Company subject to the Merger and Acquisition;

(6) identification documents or incorporation certification and creditworthiness certification of the foreign investors;

(7) explanation of the situation regarding the enterprises the Domestic Company subject to the Merger and Acquisition has invested in;

(8) the business licenses (duplicates) of the Domestic Company subject to the Merger and Acquisition and enterprises it has invested in;

(9) the plan for the re-settlement of the employees of the Domestic Company subject to the Merger and Acquisition; and

(10) documents required to be submitted under Articles 7 and 19 of the Provisions.

Where any permission given by any other government authority is required in connection with the business scope or business scale, or obtaining of any land use right by the foreign investment enterprise to be established upon the Merger and Acquisition, the relevant documents of such permission shall be submitted simultaneously.

The business scope of any company the Domestic Company subject to the Merger and Acquisition originally invested in shall comply with the requirements of relevant foreign investment industrial policies. Adjustments shall be made in case of noncompliance.

Article 13 The equity interest purchase agreement or the agreement to increase the capital of the Domestic Company as set forth in Article 12 of these Provisions shall be governed by the Chinese law and shall contain the following main contents:

(1) information regarding each of the parties to the agreement, including its full name, address, and the name, position and citizenship of its legal representative, etc.;

(2) proportions and the price of the equity interest to be acquired or the increased capital to be subscribed;
(3) term and methods of performance of the agreement;

(4) rights and obligations of the parties to the agreement;

(5) liabilities for breach of the agreement and settlement of dispute; and

(6) the date and the place of the execution of the agreement.

Article 14 In the case of an Asset Merger and Acquisition by foreign investors, the total amount of investment of the foreign investment enterprise established upon the Merger and Acquisition shall be determined on the basis of the transaction price of such assets and the actual scale of production and operation. The proportion between the registered capital and the total amount of investment of the foreign investment enterprise to be established shall be consistent with the relevant regulations.

Article 15 In the case of an Asset Merger and Acquisition by foreign investors, the investors shall submit the following documents to the examination and approval authority with the corresponding jurisdiction of approval, based on the total amount of investment, enterprise type, and industry of the foreign investment enterprise to be established and in accordance with the laws, administrative regulations and departmental rules governing the establishment of foreign investment enterprises:

(1) the resolution by the property rights holders or the agency of authority of the domestic enterprise approving the sale of such assets;

(2) the application for the establishment of the foreign investment enterprise;

(3) the contract and the articles of association of the foreign investment enterprise to be established;

(4) the asset purchase agreement executed between the foreign investment enterprise to be established and the domestic enterprise or the asset purchase agreement executed between the foreign investors and the domestic enterprise;

(5) the articles of association and the business license (duplicates) of the domestic enterprise subject to the Merger and Acquisition;

(6) certification proving that the domestic enterprise subject to the Merger and Acquisition has given notice and the public announcement to its creditors;

(7) identification documents or incorporation certification and creditworthiness certification of the foreign investors;

(8) the plan for the re-settlement of employees of the domestic enterprise subject to the Merger and Acquisition; and

(9) documents required to be submitted under Articles 7 and 19 of the Provisions.

Where any permission given by any other government authority is required in connection with the purchase and operation of the assets of the domestic enterprise as specified in the above paragraph, the relevant documents of such permission shall be submitted simultaneously.

If foreign investors purchase any assets by agreement with the domestic enterprise and invest such assets to set up a foreign investment enterprise, such assets shall not be used for operation purposes until and unless the foreign investment enterprise has been duly established.

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Article 16 The asset purchase agreement set forth in Article 15 shall be governed by the Chinese law and shall contain the following main contents:

(1) information regarding each of the parties to the agreement, including its name and address, and the name, position and citizenship of its legal representative, etc.;

(2) list and the price of the assets to be purchased;

(3) term and methods of performance of the agreement;

(4) rights and obligations of the parties to the agreement;

(5) liabilities for breach of the agreement and settlement of dispute; and

(6) the date and the place of the execution of the agreement.

Article 17 Except as otherwise provided for in Article 20, where foreign investors establish a foreign investment enterprise through merger and acquisition of a domestic enterprise, the examination and approval authority shall, within 30 days upon its receipt of all the documents required to be submitted, decide according to law whether to approve the application for the establishment. Upon such approval, the examination and approval authority shall issue the foreign investment enterprise approval certificate.

If the examination and approval authority decides to approve foreign investors’ acquisition of equity interest of a Domestic Company from its shareholders, the examination and approval authority shall concurrently copy the relevant approval documents to the local foreign exchange administration authority of the transferor and of the Domestic Company respectively. The foreign exchange administration authority in the locality of the transferor shall complete the foreign capital foreign exchange registration procedures for the transferor’s receipt of foreign exchange and shall issue the foreign capital foreign exchange registration certificate certifying the payment of the consideration for the above acquisition by the foreign investors.

Article 18 In the case of an Asset Merger and Acquisition by foreign investors, the investors shall, within 30 days of its receipt of the foreign investment enterprise approval certificate for, apply to the registration authority for the establishment registration and obtain the foreign investment enterprise business license.
In the case of an Equity Merger and Acquisition by foreign investors, the acquired Domestic Company shall apply to its original registration and administration authority for the change of registration and obtain the foreign investment enterprise business license in accordance with the Provisions. If the original registration and administration authority has no jurisdiction of registration and administration, it shall, within 10 days upon its receipt of the application documents, deliver such documents to the registration and administration authority with such jurisdiction, accompanied by the registration files of the Domestic Company. The acquired Domestic Company shall submit and be responsible for the authenticity and effectiveness of the following documents at the time of its application for the change of registration:

(1) the application for the change of registration;

(2) the resolution adopted by the shareholders’ meeting of the acquired Domestic Company in accordance with the Company Law of the PRC and its articles of association, approving the transfer of equity interest or the increased capital;

(3) the agreement for the purchase of the shareholders’ equity interest or subscription for the increased capital of the Domestic Company by the foreign investors;

(4) amended articles of association of the Domestic Company or any amendment to the original articles of association and the contract of the foreign investment enterprise to be submitted as required by law;

(5) the foreign investment enterprise approval certificate;

(6) identification documents or incorporation certification and creditworthiness certification of the foreign investors;

(7) the amended list of directors, the document specifying the names and addresses of new directors and the documents of appointment of new directors; and

(8) other relevant documents and certificates required by SAIC.

In case of the transfer of state-owned equity interest and in case of foreign investors’ subscription to any increased capital of a company with state-owned equity interest, the approval documents of the authority in charge of economic and trade administration shall also be submitted.

Investors shall, within 30 days upon the receipt of the foreign investment enterprise business license, handle the necessary registration formalities with authorities for taxation, customs, land administration and foreign exchange administration, etc..

Article 19 In case of any of the following occurrences in connection with the merger or acquisition of a domestic enterprise by foreign investors, the investors shall submit notification to MOFTEC and SAIC:

(1) the revenue of a party to the merger or acquisition in the domestic market for the current year exceeds RMB1.5 billion;

(2) the foreign investors have merged with or acquired more than 10 domestic enterprises in aggregate engaging in the related businesses within one year;

(3) the market share of a party to the merger or acquisition in the domestic market has reached 20%; or

(4) the market share of a party to the merger or acquisition in the domestic market will reach 25% as a result of the merger or acquisition.

Even without the above occurrences, MOFTEC or SAIC may still require the foreign investors to submit notification upon the request by any competing domestic enterprise, relevant functional department or industrial association, if MOFTEC or SAIC finds that the merger or acquisition will involve a huge market share, or if there is any other material aspect of the merger or acquisition which might severely affect market competition, national economy or people’s livelihood and national economic security.

The above-mentioned “a party to a merger or acquisition” shall include any affiliated enterprise of foreign investors.

Article 20 In case of any of the described in Article 19 in connection with a merger or acquisition of a domestic enterprise by foreign investors, and if MOFTEC and SAIC believe that the merger or acquisition might lead to over-concentration, impair fair competition or damage consumers’ interests, MOFTEC and SAIC shall, within 90 days upon its receipt of all the documents required to be submitted, jointly or separately after consultation with each other, hold a hearing of the relevant departments, organizations, enterprises and other related parties and decide according to law whether to approve the application for the merger or acquisition.

Article 21 In case of any of the following occurrences in connection with an offshore merger or acquisition, any party to the merger and acquisition shall, prior to its public announcement of the plan for the merger or acquisition or together with its application to the regulatory authorities of the country where it is located, submit to MOFTEC and SAIC the plan for the merger or acquisition. MOFTEC and SAIC shall examine whether the merger or acquisition might cause over-concentration of the domestic market, impair fair competition in the domestic market or damage the domestic consumers’ interests, and decide whether to approve the plan:

(1) the assets owned by a party to the offshore merger and acquisition within China exceeds RMB 3 billion;
(2) the sales of a party to the offshore merger or acquisition in the domestic market for the current year have exceeded RMB 1.5 billion;

(3) the aggregate market share in the domestic market by a party to the offshore merger or acquisition and its affiliated enterprises has reached 20%;

(4) the aggregate market share in the domestic market by a party to the offshore merger or acquisition and all of its affiliated enterprises in the domestic market will reach 25% as a result of the offshore merger or acquisition; or

(5) as a result of the offshore merger or acquisition, a party to the offshore merger or acquisition will hold, directly or indirectly, equity of more than 15 foreign investment enterprises engaging in the related businesses within China.

Article 22 In case of any of the following occurrences in connection with a merger or acquisition, a party to the merger or acquisition may apply to MOFTEC and SAIC for an exemption from examination:

(1) the merger or acquisition may improve the conditions for fair competition in the domestic market;

(2) the merger or acquisition will restructure the enterprise running at a loss and ensure employment;

(3) the merger or acquisition will absorb advanced technologies and management professionals and enhance the international competitiveness of the domestic enterprise; or

(4) the merger or acquisition will improve the environment.

Article 23 All documents submitted by investors shall be grouped into categories as required by the regulations and accompanied by a table of contents of the documents. All documents required to be submitted shall be in Chinese.

Article 24 The Provisions shall apply to all mergers and acquisitions of domestic enterprises by investment companies duly established by foreign investors within China.

Any acquisition of equity interest of PRC foreign investment enterprise by foreign investors shall be governed by the currently laws and administrative regulations governing foreign investment enterprises and Certain Regulations on Change in Shareholders’ Equity Interest of Foreign Investment Enterprises. Matters not covered therein shall be governed by the Provisions.

Article 25 Any merger or acquisition by investors in Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan of a domestic enterprise established in any other regions of the PRC shall be handled with reference to the Provisions.

Article 26 The Provisions shall come into force on April 12, 2003.

Promulgated by The Ministry of Foreign Trade and Economic Cooperation, the State Administration of Taxation, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange on March 7, 2003

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