Legal Analysis of Asset Acquisition by Foreign Investors

Zhang Zhong Dong and Chen Zheng Jun
KhattarWong

Pursuant to the Provisions for the Acquisition of Domestic Enterprises by Foreign Investors of the People's Republic of China (the Provisions), the acquisition of domestic enterprises by foreign investors may take two forms, that is (a) through stock purchase and (b) by asset acquisition. “Domestic enterprises” refers to non-foreign-invested enterprises incorporated and registered in the PRC, which can be in the form of limited liability companies, companies limited by shares, etc. Asset acquisition can take place via two methods: (a) the foreign investor establishes a foreign-invested enterprise in China and purchases by agreement, through such enterprise, the target company's assets; or (b) the foreign investor purchases assets in the target company directly and uses the assets to set up a foreign-invested enterprise in China.

Currently, acquisition of domestic enterprises in China through asset acquisition is experiencing strong and stable growth. Compared to stock purchase, asset acquisition has its own advantages and disadvantages. Some of these are analyzed below.

Avoidance of Debt Traps