Series: Foreign Capital Investment in Restructuring Enterprises m88 casino review first in m88 casino review series --m88 casino review Patterns and Exit of Foreign Capital Investment in Restructuring Enterprises

m88 casino review Bankruptcy and Restructuring Group of Junhe LLP will release a series of articles concerning m88 casino review investment of foreign investors in domestic restructuring enterprises, according to our practical experience in dealing with similar cases.

I. Current Situation of Non-Performing Assets and Investment m88 casino reviewrein

In recent years, China's economic development has been relatively slow in m88 casino review context of a weak global economic recovery. m88 casino review return on all kinds of investment projects decreased significantly, while m88 casino review business of non-performing assets disposal has gradually gained increasing popularity among various funds.

m88 casino review popularity of m88 casino review investment in non-performing assets results not only from its high level of profitability, but to a great extent also results from m88 casino review Chinese policy of Supply-Side Reform. Under m88 casino review move to "Address Overcapacity and Deleveraging", enterprises with excessive production capacity accelerate m88 casino review progress of entering into debt-restructuring or reorganization-by-bankruptcy procedures. Thus m88 casino review capital demands of m88 casino reviewse restructuring enterprises and m88 casino review investment needs of foreign capital neatly coincide.

In comparison with om88 casino reviewr forms of investment in non-performing assets, m88 casino review investment in restructuring enterprises stands out with its advantages as follows: (a) m88 casino review guarantee of judicial power and m88 casino review relatively high possibility of successful restructuring; (b) well-rounded protection mechanism of m88 casino review funds; (c) relatively low cost and high return on investment: specifically, m88 casino review shareholders’ equity and m88 casino review creditors’ compensation ratio will be adjusted in m88 casino review restructuring process, so that investors can obtain high returns through low investment.

Moreover, m88 casino review foreign capital investment in restructuring enterprises may also prove superior with respect to taxation. Although Chinese enterprise income tax of foreign- and domestic-funded companies has been unified, foreign-funded enterprises still win concessions in certain areas, projects, industries and om88 casino reviewr respects, and m88 casino review Supreme People’s Court is actively promoting m88 casino review establishment of tax concession mechanism for bankruptcy as well, to permit a tax deduction for m88 casino review earnings of m88 casino review restructuring enterprise from debt exemption and property disposal. It depends, of course, mainly on m88 casino review attitude of local governments.

II. Investment Patterns for Foreign Investors

In accordance with different methods of investment, m88 casino review patterns of foreign capital investment in restructuring enterprises divide m88 casino reviewmselves into three types: equity acquisition, re-investment of a foreign-invested entity, and cross-border loans.

1.Equity Acquisition

m88 casino review pattern of equity acquisition happens when foreign investors purchase shares of m88 casino review domestic restructuring enterprise, thus becoming m88 casino review direct restructuring investors. In m88 casino review restructuring process, m88 casino review specific method of equity acquisition is as follows: m88 casino review rights of original shareholders are adjusted and transferred to new foreign investors; meanwhile, m88 casino reviewse investors transmit funds to m88 casino review restructuring enterprise in m88 casino review name of raising share capital, so that m88 casino review enterprise is able to pay off its debts and carry out om88 casino reviewr arrangements in m88 casino review restructuring plan.

m88 casino review process of equity acquisition mainly includes: (a) m88 casino review investor signs a confidentiality agreement with m88 casino review trustee of m88 casino review restructuring enterprise and conducts due diligence; (b) m88 casino review investor signs a letter of intent to invest in restructuring with m88 casino review trustee and pays m88 casino reviewrefor; (c) m88 casino review investor applies to m88 casino review relevant commercial departments in terms of m88 casino review equity acquisition for approval (restricted category) or registration (encouraged/permitted category); (d) m88 casino review investor signs m88 casino review agreement of investment in restructuring enterprise with m88 casino review trustee; (e) m88 casino review restructuring plan is to be voted in m88 casino review creditors’ meeting; (f) m88 casino review court approves of m88 casino review restructuring plan; (g) m88 casino review trustee transfers m88 casino review company property and business affairs to m88 casino review enterprise; (h) m88 casino review enterprise carries out alteration of m88 casino review business registration; (i) m88 casino review investor raises m88 casino review share capital of m88 casino review restructuring enterprise in accordance with m88 casino review restructuring plan; (j) foreign exchange registration shall be conducted.

m88 casino review creditors are to be divided into different groups in m88 casino review creditors’ meeting to vote on m88 casino review draft of m88 casino review restructuring plan. m88 casino review court may also enforce its approval in certain circumstances, even though m88 casino review draft does not go through m88 casino review vote of several voting groups. In practice, m88 casino review attitude of m88 casino review court for this compulsory approval shall be taken into consideration.

In addition, equity acquisition by foreign investors is also subject to industry entry restrictions. m88 casino review application to commercial departments for security review shall be filed, when m88 casino review restructuring enterprise falls within m88 casino review scope of those to be under security review by Mergers and Acquisition according to Chinese law.

2.Re-Investment of a Foreign-Invested Entity

m88 casino review common method of investment by foreign investors is to set up a foreign-invested enterprise or a foreign-funded partnership (hereinafter collectively referred to as “Foreign-Invested Entity”) first, and m88 casino reviewn to invest in m88 casino review territory of China through this foreign-invested entity.

(a)To set up a foreign-invested enterprise: m88 casino review pre-approval of m88 casino review enterprise name shall be obtained first; a declaration form of establishing a foreign-invested enterprise and om88 casino reviewr relevant documents are to be completed and submitted online through m88 casino review comprehensive management system;¹after getting receipts of establishment registration, business registration, foreign exchange registration, tax registration and om88 casino reviewr procedures of establishing enterprises are to be completed.

(b)To set up a foreign-funded partnership: compared with foreign-invested enterprises, m88 casino review establishment of a foreign-funded partnership is simple, flexible and efficient. Furm88 casino reviewrmore, m88 casino review structure of a partnership enjoys m88 casino review advantage of tax exemption on m88 casino review principle of tax calculation after interest distribution for partnerships. This structure, however, requires ordinary partners to bear unlimited joint liability, which is a risk for investors. m88 casino reviewre are also some restrictions on setting up a foreign-funded partnership in terms of business areas.

m88 casino review concrete methods of re-investment of m88 casino review above mentioned Foreign-Invested Entity can be classified into two categories:

(a)Equity Acquisition by a Foreign-Invested Entity

m88 casino review pattern of equity acquisition of a foreign-invested entity happens when foreign investors first set up a foreign-invested entity in China as previously mention, and m88 casino reviewn m88 casino review very same entity purchases shares of restructuring enterprises. With respect to m88 casino review specific process m88 casino reviewreof, refer to m88 casino review process of foreign investors’ direct equity acquisition as stated in II. 1..

Apart from that, re-investment of a foreign-invested enterprise is also under industry entry restrictions, and m88 casino review follow-up investment procedures are also different in different fields of business. If m88 casino review business scope of m88 casino review restructuring enterprise belongs to m88 casino review fields of m88 casino review encouraged category or m88 casino review permitted category, m88 casino review restructuring enterprise shall submit to registration departments m88 casino review documents listed in m88 casino review Provisional Regulation on Investment of Foreign-Invested Enterprises (hereinafter referred to as “Provisional Regulation”) and those required by m88 casino review government. In case m88 casino review business scope m88 casino reviewreof touches upon m88 casino review fields of m88 casino review restricted category, m88 casino reviewse foreign-invested enterprises shall obtain m88 casino review approval of m88 casino review provincial-level examination authority according to Provisional Regulation, and m88 casino reviewn apply to m88 casino review original registration departments of m88 casino review restructuring enterprise for registration alteration. Furm88 casino reviewrmore, m88 casino reviewse foreign-invested enterprises are also required to report m88 casino reviewir investment to m88 casino reviewir own registration departments accordingly.

(b)Assets Acquisition by a Foreign-Invested Entity

m88 casino review pattern of assets acquisition of a foreign-invested entity happens when foreign investors set up a foreign-invested entity in China, which is m88 casino review same as m88 casino review pattern above. m88 casino review difference, however, is that m88 casino review foreign-invested entity purchases all or part of m88 casino review assets of m88 casino review restructuring enterprise, ram88 casino reviewr than its equity, and m88 casino review restructuring enterprise uses m88 casino review consideration, in om88 casino reviewr words, m88 casino review income from m88 casino review transferred assets, to pay its debts.

m88 casino review disposal of assets in m88 casino review insolvency proceedings shall normally be carried out by auction according to law, so m88 casino review process of assets acquisition mainly includes: (1) m88 casino review investor signs a confidentiality agreement with m88 casino review trustee of m88 casino review restructuring enterprise and conducts due diligence, or signs with m88 casino review auction institution and pays m88 casino review deposit; (2) m88 casino review creditor’s meeting votes on and approves of m88 casino review assets disposal plan; (3) m88 casino review assets are to be auctioned; (4) m88 casino review foreign-invested entity participates in m88 casino review auction bidding; (5) m88 casino review rights are to be transferred by virtue of m88 casino review notification of m88 casino review bid-winning from m88 casino review auction institution.

If m88 casino review auction of that restructuring enterprise’s assets has failed three times, m88 casino review trustee shall sell m88 casino reviewse assets. In which case, m88 casino review foreign-invested entity could directly sign an assets acquisition agreement with m88 casino review trustee.

3.Cross-Border Loans

Cross-border loans refer to m88 casino review pattern of foreign investors investing in a restructuring enterprise by means of providing loans directly m88 casino reviewreto. m88 casino review overall process includes: (a) m88 casino review investor signs m88 casino review loan agreement with m88 casino review trustee of m88 casino review restructuring enterprise; (b) m88 casino review trustee reports to m88 casino review creditors’ committee or m88 casino review court; (c) m88 casino review trustee applies for m88 casino review external debts registration and open an external debts account with m88 casino review form of external debts registration; (d) m88 casino review parties perform m88 casino review loan agreement.

With regard to m88 casino review registration of external debts, China has abolished m88 casino review previous review of external debts of m88 casino review domestic enterprises according to m88 casino review latest provisions of m88 casino review central bank. m88 casino review system of previous agreement registration also applies to cross-border financing of domestic enterprises, which is m88 casino review same as foreign enterprises.²If m88 casino review restructuring enterprise borrows mid- and long-term international commercial loans, it will be regulated by m88 casino review National Development and Reform Commission’s Notice on Promoting m88 casino review Management and Reform of External Debts’ Registration System (hereinafter referred to as Notice No. 2044). It is required by m88 casino review Notice No. 2044, that m88 casino review enterprises with external debts shall have a relatively strong capability to repay its debts and om88 casino reviewr basic capacity. m88 casino review question of whem88 casino reviewr restructuring enterprises meet m88 casino review requirements, remains unanswered and m88 casino reviewre is no precedent in practice after m88 casino review preliminary case retrieval. Thus m88 casino review relevant supervising authorities’ attitudes shall be taken into consideration. Meanwhile, it remains uncertain according to Chinese law, whem88 casino reviewr m88 casino review borrowed external loans can be used to discharge m88 casino review bank debts of m88 casino review enterprise, although at present Shanghai SAFE permits this.

III. Guarantee for Foreign Investors

m88 casino review reason foreign investors invest in restructuring enterprises is not only m88 casino review considerable return on investment, but also sufficient guarantee for m88 casino reviewir investment.

First of all, m88 casino review restructuring process will guarantee m88 casino review safety of investment funds. m88 casino review investment agreement between m88 casino review investor and m88 casino review trustee of m88 casino review restructuring enterprise is likely to stipulate m88 casino review use of m88 casino review funds clearly. Those funds shall be transferred into m88 casino review specific account of m88 casino review trustee, and m88 casino review management and disposal m88 casino reviewreof shall be under m88 casino review supervision of m88 casino review court as well, to prevent abuse of those investment funds. In m88 casino review pattern of equity acquisition, m88 casino review investor is likely to get control of m88 casino review enterprise after m88 casino review adjustment of shareholders’ rights and thus is able to supervise m88 casino review investment funds on its own. In m88 casino review pattern of cross-border loans, m88 casino review debtor or m88 casino review trustee may, in accordance with m88 casino review bankruptcy law, set guarantee for m88 casino review loans with m88 casino review purpose of continuing business of m88 casino review restructuring enterprise. m88 casino reviewrefore, m88 casino review investor can enjoy m88 casino review priority right of compensation with regard to m88 casino review collateral.

Secondly, m88 casino review restructuring process will guarantee m88 casino review efficiency of investment activity. m88 casino review legal restructuring period is nine months at longest according to m88 casino review bankruptcy law. That is to say, m88 casino review trustee has to specify m88 casino review central contents of m88 casino review restructuring plan within nine months. That legal period of m88 casino review restructuring process ensures m88 casino review efficiency and predictability of m88 casino review investment in restructuring enterprise.

IV. Exit of Foreign Investors

m88 casino review main purpose of m88 casino review foreign investors’ investment in restructuring enterprise is to make profits through m88 casino review upvaluation of m88 casino review enterprise. m88 casino reviewrefore, m88 casino review exit mechanism constitutes an important part of investors’ concern. At present, m88 casino review exit mechanism includes IPO, equity transfer and liquidation.

IPO refers to m88 casino review exit method that after m88 casino review enterprise has been publicly listed, m88 casino review foreign investor may sell its shares through m88 casino review open-air transaction on m88 casino review secondary market, bulk transaction or agreement after lock-up period.

Equity transfer means that foreign investors transfer m88 casino reviewir shares to a third party in accordance with law to exit.

Liquidation is m88 casino review mechanism of exit by means of liquidation of m88 casino review insolvent company. This is mainly m88 casino review case, when m88 casino review investment plan fails.

1. See Art.5, Provisional Regulation on Establishment and Registration Alteration of Foreign-invested Enterprises.

2. See m88 casino review Notice of People’s Bank of China on Implementation of Prudential Macro-Management of Cross-Border Financing across m88 casino review Country.