CHINA Law and Practice Contributed by: Chen Yanhong, Beijing DHH Law Firm
After determination, the floating charge converts to a fixed mortgage, and the mortgagee may claim priority over the determined property. 5.3 Downstream, Upstream and Cross- Stream Guarantees PRC law permits downstream (parent for subsidiary), upstream (subsidiary for parent), and cross-stream (sibling companies) guarantees, but with restrictions. • Upstream and cross-stream guarantees: must comply with the Company Law, ie, the guarantor’s shareholder meeting or board must pass a resolu- tion (the related shareholders recuse themselves from voting), and the guarantee must not harm the guarantor or its minority shareholders. • Cross-border guarantees: filing or registration with foreign exchange authorities is required (eg, domestic guarantee for overseas loans, overseas guarantee for domestic loans), otherwise cross- border fund payment may be restricted. To address insufficient credit support, common solu- tions include: • adding mortgaged/pledge assets; • introducing third-party guarantees (eg, professional guarantee companies); and • raising the guarantor’s registered capital or net asset threshold. 5.4 Restrictions on the Target A target company providing guarantees or financial assistance for the acquisition of its own shares must comply with Company Law restrictions. • A shareholder meeting resolution is mandatory (the board has no decision-making power), requiring approval by more than half of the voting rights of shareholders present (related shareholders need not recuse themselves but must truthfully disclose related-party relationships). • Protection of the target company: the guarantee must not harm the company, eg, the guarantee amount must not exceed net assets and must not cause insolvency. Without the shareholder meeting resolution, the guarantee or financial assistance may be ruled invalid by the courts.
In practice, acquirers usually stipulate in acquisition agreements that “the target provides guarantees only after completing internal resolutions” to ensure com- pliance. 5.5 Other Restrictions Other restrictions, costs, and consent requirements for guarantees/security include the following. • State-owned enterprise guarantees: major guaran- tees (eg, amounts exceeding 10% of net assets) require approval of the State-owned Assets Super- vision and Administration Commission of the State Council. • Listed company guarantees: board and share- holder meeting resolutions are required, with timely public disclosure of the announcement. • Costs: in addition to registration and appraisal fees, legal fees (RMB5,000-50,000 for drafting documents) and insurance premiums (if insuring secured property) may apply. • Special industries: financial institutions and medi- cal institutions must comply with industry regula- tions (eg, banks need to meet capital adequacy requirements for guarantees). 5.6 Release of Typical Forms of Security Release of Mortgage Guarantees The extinction of the principal debt, including repay- ment, set-off, or forgiveness, results in the termina- tion of the mortgage. Additionally, if the mortgaged property is destroyed and there is no substitute, the For movable property pledges, the pledgee must immediately return the pledged property after the debtor fulfils the obligation. If the pledged property is damaged, the parties may negotiate a discounted value or compensation before releasing the pledge. For rights pledges (such as equity or accounts receiv- able), the pledgee must cancel the pledge registration in the China Securities Depository or relevant market supervision system once the principal debt is extin- guished. If the pledgee delays, the debtor may apply to the court for compulsory enforcement. mortgage right is extinguished. Release of Pledge Guarantees
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