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The Financing Pattern of Foreign Investment Enterprises --Pledge of Stock Rights
The former blog talked about how foreign investment enterprises finance by borrowing. In this article, we shall discuss how foreign investment enterprises finance by pledging of stock rights.
Pledge of stock rights belongs to the category of Pledge of Rights. It a kind of guarantee way that pledgor and pledge reach a contractual agreement, which pledgor's stock is in the pledge, when debtor cannot fulfill debt on schedule, creditor can obtain the compensation from the stock discounted in accordance with contractual agreement or shall be paid in priority out of proceeds from selling the stock. The financing of pledge of stock rights is a new but great potential financing method in China. And that go for foreign investment enterprises, choosing pledge of stock rights to finance not only can resolve the hard fund-raising of SMEs, but also can revitalize the controlling interest in the company.
In accordance with the existing regulations, if foreign investment enterprises want to finance by pledging of stock rights, they shall:
1. Conclude a written contract.
2. Handle the registration of the pledge. As regards the pledge of stock rights that are registered in the securities depository and clearing institution (that is the stocks of listed company), the securities depository and clearing institution handles the registration of the pledge. As regards the pledge of other stock rights (involves the stocks of both limited liability company and non-listed company), the administrations for industry and commerce handle the registration of the pledge.
3. The pledge of stocks shall be written into the shareholders' name-list, which is only for the pledge of stocks of limited liability companies and non-listed companies. (Liquidity of stocks in listed companies decides that they cannot appoint the shareholders' name-list.) Besides, Changes in Equity Interest of Investors in Foreign Investment Enterprises Several Provisions promulgated by the original Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and the State Administration for Industry and Commerce on 28 May 1997 has explicitly demanded that relevant documents of the pledge of stocks of foreign investment enterprises “shall be submitted for examination to the examination and approval authority that approved the establishment of the Enterprise”, in addition “pledge acts that have not been examined and approved and placed on the record in accordance with this Article shall be invalid”. The Measures for the Registration of Equity Pledge with the Administrative Organs for Industry and Commerce promulgated by the State Administration for Industry and Commerce on 1 September 2008 confirmed that “where the equities in a foreign-funded company are pledged, the registration of pledge may be conducted only after the approval of the original organ examining and approving the formation of the company”. So, the shareholders of foreign investment enterprises pledge the equities, except for meeting those requirements, must also achieve the approval of the competent authority.
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