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Key Steps for Completing Equity Transfer in China

Trustiics 诚汇达

2020-06-27

导读：A Brief Description of Key Steps for Completing Equity Transfer in China

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A Brief Description of Key Steps for Completing Equity Transfer in China

Although equity transfers have recently become more common for foreign-invested enterprises in China, the process is considerably time consuming and should be handled by experienced professionals. Considering the implications on business strategy and other financial concerns, keen legal and financial knowledge are paramount.

Based on the general requirements and practice adopted in various transactions, we outline the key steps for a seller/transferor to complete an equity transfer in China:

Sign a confidential agreement with potential buyer(s)

Confidentiality agreements are one of the most important legal means to prevent potential buyer(s) from disclosing the commercial information of the seller to any other third parties, whether intentionally or unintentionally. It will be necessary to determine the terms and conditions of the confidentiality agreement such as the scope of confidentiality information, the choice of law and jurisdiction based on the specific situation of the parties and the transaction.

Accept due diligence review and provide necessary documents and information to potential buyer(s)

As part of the legal and financial due diligence review, the seller should make sure that all certificates and registrations of the target company are valid, updated and in good standing. It is also necessary to ensure that the target company has duly paid all taxes and social insurance contributions in accordance with legal requirements.

Draft, negotiate, revise, and finalize the equity transfer agreement, including but not limited to:

a) Transfer price (including tax implications)

b) Prerequisite conditions for payment

c) Representations, warranties and undertakings

d) Rights and liabilities of the parties

e) Government filings

f) Conditions for Closing

Prepare and execute other documents for equity transfer, including but not limited to:

a) Shareholder resolutions

b) Board resolutions (if applicable)

c) Amendment to Articles of Association

d) Letter of removal and appointment of directors, general manager and supervisor

e) Other documents required for the equity transfer

Complete government filings and change of registration, including but not limited to:

a) Filing with local commerce commission

b) Change of registration with local administration of industry and commerce

c) Change of registration with foreign exchange authority

d) Change of registration with tax bureau

e) Change of registration with other competent authorities

Tax filing and settlement (if applicable)

If there is any capital gain earned by the seller from the equity transfer, the seller should make sure to file and settle the income tax for the equity transfer. Normally, such tax (payable by overseas enterprises) should be withheld and paid with the assistance of the target company in China.

Closing of the transaction

Government applications often take several weeks depending on the location of the target company and the specific situation of the documents. However, preparation for the equity transfer and follow up issues may take much longer than the government filings itself. Beyond management, financial/tax personnel should also be involved.

It should be noted that the above list is only a brief summary based on general situations and is provided for general reference instead of guidance for actual implementation of such deals. More factors and issues will have to be evaluated and determined based on the specific situation of the transaction.

The Author

Sylvia Zhang

Legal and Tax Director at Jaguar Law & Consulting

Registered Counsel on Trustiics

Ms. Sylvia Zhang has over fifteen years of experience as a legal practitioner in China and has advised many international companies in their China-related investments, transactions, compliance and regulatory challenges and daily operational legal issues under Chinese law. As both a Chinese registered lawyer and CPA, Sylvia has solid sector knowledge in various industries that are subject to certain industry-specific regulations. In addition, based on her extensive tax and accounting knowledge, she can also provide tax-related services for foreign enterprises/individuals doing business in China.

Sylvia is very experienced in drafting and negotiating legal contracts in both English and Chinese, as well as translating/reviewing the translation of legal documents between Chinese and English languages.

If you have any specific legal or tax questions, you can ask Sylvia directly on Trustiics.com or drop her an email at sylviazhang@jaguarlaw.com.

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