CHINA Law and Practice Contributed by: Nelson Zhou, Yifeng Yuan, Jianwei Yang and Jingbo Zhou, JunHe LLP
( “OpCo” ) are PRC domestic companies, there appear to be no legal constraints preventing OpCos from providing upstream security to the ParentCo. When the OpCo is a joint venture with a partner outside the ParentCo group, then such upstreaming security must be approved by the shareholders’ meeting of the OpCo, with the ParentCo refraining from voting. When the ParentCo is an offshore company and the OpCos are PRC domestic entities, the OpCos are unable to provide upstream secu- rity to the ParentCo unless they can register such upstream security with SAFE as an out- ward security for offshore debts, which is not easily achievable, as discussed in 4.1 Typical Elements . 5.5 Financial Assistance The Administration Rules for a Listco Takeover provide that a listed company in the PRC is not permitted to provide financial assistance to an acquirer. Such restriction does not apply to non- public companies, which can provide security to support the financing of an acquirer subject to compliance with the requirements below, includ- ing such security being properly approved by the shareholders/directors. The amended Company Law came into effect on 1 July 2024, and Article 163 states that a joint stock company is prohibited from providing gifts, loans, guarantees or other financial assis- tance to any person for the purpose of acquiring shares in the company or its parent company. Exceptions to this rule are allowed if the assis- tance is intended to implement employee stock ownership plans or if it benefits the company as approved by the shareholders’ meeting or the board of directors. Such approval must comply with the articles of association or be authorised
by the shareholders’ meeting, and must receive affirmative votes from at least two-thirds of all directors. In addition, the total financial assis- tance provided under these exceptions must not exceed 10% of the company’s issued share capital. It is important to note that this provision does not specify the precise approval requirements for the shareholders’ meeting, such as when approval is mandatory or the exact voting thresholds. These procedural details are expected to be clarified in future judicial interpretations or listing rules. 5.6 Other Restrictions PRC law does not have a general corporate benefit test requirement, although if a company is to provide security for the indebtedness of a third party, this security must be approved by the shareholders’ meeting or board meeting, pursu- ant to the stipulations of the articles of associa- tion of the company. The PRC Company Law provides that a con- nected shareholder must refrain from voting on resolutions regarding the company providing security to a creditor for the benefit of such con- nected shareholder, to avoid the majority share- holders of a company abusing the assets and resources of the company. 5.7 General Principles of Enforcement In a typical onshore/offshore PRC acquisition financing, there are three principal methods of loan enforcement for the offshore lenders. Option 1: Enforcement of the Offshore Security This involves the sale of the offshore borrower’s equity interests pursuant to the enforcement of the relevant share charge, or the sale of the PRC WFOE, which is owned by the offshore bor-
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