Attention: The rejection of the "1 RMB" equity transfer of the foreign company has resulted in significant losses! Featured

Monday, 31 July 2023 09:53

The foreign company A in Shanghai is a wholly-owned production company headquartered in the United States, with a registered capital of USD 2 million. Now company B, the US headquarters has urgent need for foreign investment, it has decided to transfer the equity of company A to US company C as soon as possible.


Although according to the latest balance sheet of foreign company A, it is already in an insolvent state, the factory buildings purchased by foreign company A more than 10 years ago have significantly appreciated. In fact, foreign company A's net assets have exceeded RMB 30 million. In order to avoid taxes and complete the equity transfer as soon as possible, company B in the United States drafted a "1 RMB" equity transfer agreement, arranging the signing by company C and submitted the application to transfer all the equity of Company A in one go.


Although Shanghai Market Supervision Bureau accepted the equity transfer, during the reviewing, it discovered the issues with the above-mentioned factory buildings, and therefore rejected the application of foreign company A, requiring foreign company A to entrust an independent third-party asset evaluation agency to issue the latest net asset evaluation report and use it as the basis for pricing the equity transfer.


Due to foreign company A completing the equity transfer three months later than the original plan, company B violated the payment deadline stipulated in the investment agreement and paid a penalty of USD 300,000, resulting in significant losses.


Dongjin Remind:

Chinese Market Supervision department is increasingly strict in reviewing the pricing of equity transfer, requiring companies to have a reasonable pricing basis for equity transfer. Otherwise the government may raise objections and affect the equity transfer. Due to the fact that equity transfer pricing involves comprehensive analysis and evaluation of company’s assets and liabilities, companies cannot price at will.


If a company has any questions during the equity transfer process, please consult Dongjin at any time.


Mike Chang


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