Author: Wang Jihong Qiu Jian
In recent years, private equity funds have been increasingly keen to invest in mineral resources companies. Their interest has been further heightened by the rising prices of mineral products. This article will briefly examine some of the legal issues relating to investment by offshore funds in China’s mining companies and seeking to exit once the company has been listed on the A-share market.
Industry access An offshore fund registered in China as a foreign entity should refer to the relevant legislation and policies (such as the Foreign Investment Industrial Guidance Catalogue) toascertain whether foreign investment is allowed in a domestic Chinese company. For example, foreign investment is restricted in the exploration and mining of special and scarce coal and barites; and foreign investment is banned in the exploration and mining of tungsten, molybdenum, tin, antimony, fluorite and rare earths.
Due diligence The most important assets of a mining company are the prospecting and mining rights, as well as land use rights and other intangible assets. An offshore fund should conduct detailed legal due diligence of these intangible assets to determine whether the company has lawful and effective control over the mineral resources and can carry out exploration and mining activities accordingly.
Tax planning Offshore funds should design an optimal investment portfolio by referring to the relevant Chinese tax laws and tax agreements or arrangements. For example, an offshore fund should consider where (such as Hong Kong or the BVI) it should set up its company for special investment purposes, and whether its investment will give rise to any need for a Chinese domestic company and/or its related entities to pay resources tax, land capital gain tax and income tax.
Approval and registration Any investment made by offshore funds in domestic Chinese companies must be approved and registered pursuant to the Merger and Acquisition of Domestic Enterprises by Foreign Investors Provisions (the M&A Provisions), and other laws and regulations. Offshore funds should be familiarwith the requirements of the relevant laws andregulations (for example, the valuation of domestic companies, time frame for capital contributions, proportion of capital contribution, etc.) in designing an investment portfolio, negotiating investment terms, drafting investment documents and arranging investment.
Transforming into a joint-stock company A domestic Chinese company which has been invested in by an offshore fund will become a Sino-foreign equity joint venture, a Sino-foreign cooperative joint venture or a foreign-invested joint-stock limited company. If a Chinese domestic company has transformed into a Sino-foreign equity joint venture or a Sino-foreign cooperative joint venture, it will subsequently need to become a joint-stock company after its listing objectives and plans are finalized, subject to approval by the competent authorities. It should be noted that according to the requirements of the PRC Company Law, shares held by the sponsor shareholders of a joint-stock company must not be transferred within one year of the establishment of the company.
Foreign investment and exchange controls Offshore funds should primarily focus on equity investment in domestic companies. They may also think of investing a certain amount in debt. However, the sum of a fund’s debt investments and other foreign debts of domestic companies which it has invested in must not exceed the difference of the total investment minus its registered capital. In addition, according to foreign exchange control regulations, RMB funds settled by the capital acquired from offshore funds by a Chinese domestic company must not generally be used for domestic equity investments.
Natural person shareholders According to M&A Provisions and written explanations from the Ministry of Commerce, if a natural person from a Chinese party has formerly been a shareholder in a domestic Chinese company, and becomes an investor in the Chinese party to a Sino-foreign equity joint venture as a result of the acquisition of that company by a foreign investor, the Chinese party may remain a shareholder.