Capital Contribution by Equity

Foreign investors in China are increasingly using shares in existing domestic companies to acquire an interest in other domestic companies. But they should be aware of certain restrictions be¬fore contemplating such a move. PRC law allows a shareholder of a limited liability company or a company limited by shares ("Invested Company") to make capital contribution in the form of equity held in another domestic company ("Equity Company"), provided that the sum of the equity and other non-monetary property contributions of all shareholders does not exceed 70% of the registered capital of the Invested Company.

Contributed equity must have clear title and be legally transferable and appraised by a qualified appraisal institution, which includes all of the "Big Four". Equity may not be used as a capital contri¬bution under any of the following circumstances: the registered capital of the Equity Company has not been fully paid up; the equity has been pledged or frozen;