Control risks before submission of FIE equity contract for approval

By Zhang Tianwu, Zhu Jing, East & Concord Partners

China currently implements an approval system for foreign investment, with the establishment, division, merger and changes in the major particulars of a foreign-invested enterprise (FIE) all subject to the approval of the approval authority and the relevant registration with the administration for industry and commerce.

张天武 Zhang Tianwu 天达共和律师事务所 合伙人 Partner East & Concord Partners
Zhang Tianwu
East & Concord Partners

Article 3 of the Several Provisions on Changes in the Equity of Investors of Foreign-Invested Enterprises specifies that “changes in the equity of investors of foreign-invested enterprises shall comply with the relevant laws and regulations of China and, pursuant hereto, be subject to the approval of the approval authority and registration of the change by the registration authority”.

From this, it can be seen that changes in the equity of FIEs fall within the scope of matters subject to approval, and equity transfer contracts that have not been approved by the approval authority do not enter into effect.

However, in practice, the counter-parties to many contracts are negligent in performing their approval obligations, or refuse to co-operate in such procedure, after the execution of an equity acquisition contract. If it is to their advantage, they will carry out the approval procedure, but if not, they do not.

They may even go as far as not performing the contract on the grounds that the equity transfer contract is invalid because it was not approved. Accordingly, control of the legal risks before an FIE equity acquisition contract is submitted for approval is of particular importance.

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