国际律师事务所实习生Memo撰写作业及参考答案

ASSIGNMENT:

Research and Drafting of Memorandum

Our client, a real estate investment fund incorporated in BVI (the “Client”) indirectly owns 50% equity interest of a real estate development company incorporated in Shanghai, China (the “Project Company”) through a special purpose vehicle (the “SPV”) incorporated in Hong Kong. The Project Company owns the title of an office building in Shanghai (the “Building”) as well as the land use right of the land associated with the Building, evidenced by a title certificate duly issued under the name of the Project Company. Please refer to Schedule 1 for an ownership structure chart and Schedule 2 for basic information of the Project Company.

The Project Company completed the development of the Building in March 2015, and needs to pay RMB80,000,000 to a Chinese contractor for the renovation expect to be started in November 2015. Meanwhile, the shareholders of the Project Company have fully contributed the registered capital they committed to the Project Company. The Project Company’s only outstanding debt is a shareholder loan with the principal amount of RMB100,000,000 in equivalent USD owed to the SPV payable in 2018 (the “Existing Loan”). The Existing Loan has been fully drawn down and utilized in 2008. As the Project Company is not able to pay the renovation cost, the Client plans to provide funding directly to the Project Company, or in the alternative, arrange bank loans to be provided to the Project Company. The Client has sufficient capital reserve and is able to obtain facility for the Project Company from banks both in Hong Kong and Shanghai.

The Client would like you to prepare a summary of the funding options available and identify any specific legal issues to complete the funding, including not limited to the requisite approvals or licenses which need to be obtained from governmental authorities.

NOTE: When you are preparing the memo, please take into account the regulations and restrictions applicable to foreign invested real estate companies issued by various PRC government authorities. For this assignment, you are required to work independently - teaming up or otherwise consulting anyone else is strictly prohibited.

This memorandum summarizes our comments regarding the options for the Client to fund the Project Company. Fourwaysare available for the financing: (i) direct equity investment, (ii) direct debt investment, (iii) loan from Hong Kong banks, and (iv) loan from Shanghai banks. In summary, direct equity investment requires unanimous consent of the board, and approval, filing, and registration by the government authorities;debt investment requires filing and registration by the SAFE, and preferential tax policy may be applied for loan from the SPV; loan from Hong Kong banks is just similar to debt investment; and loan from Shanghai banks requires no filing or registration unless foreign guarantee is provided, but the financial may be difficult as a result of tight policy.

The Project Company is an equity joint venture (“EJV”) incorporated under laws of the People’s Republic of China (the “PRC”), whose registered capital is RMB 500 million yuan.It also has a “total investment”, namely the sum of the amount of registered capital and the amount of loans required for its business scale, which is RMB 750 million yuan.

1.Direct Equity Investment

The Project Company can get an equity investment from the SPV through the following steps: (i) resolution of the board’s meeting, (ii) approval of provincial commercial authorities, (iii) filing in the Ministry of Commerce, and (iv) registration in The State Administration of Foreign Exchange (“SAFE”).

Equity investment means the investment an enterprise accepts for which it does not have to repay the principal and pay the interest and of which the investor holds ownership over the net assets of the enterprise in question. In this case, the Project Company can get financial through an increase of registered capital from the SPV.

1.1Resolution of the Company

The resolution of an increase of registered capital shall be made by borad’s meeting with a unanimous adoption by the directors who attend the board meeting.As the distribution of directors shall be determined through consultation and by reference to the proportion of capital contribution, there is at least one Chinese director in the board. A negotiation with them is necessary to make a unanimous resolution.

1.2Approval, Filing and Registration byGovernmentAuthorities

The provincial commercial authorities shall verify record-filing materials for the increment of investment, includingcontract of EJV, resolution of the company, revised articles of association,and the certificate for land use rights. The departments shall also examinewhetherthe increase of investment conforms to the principles of the Project Company, and is limited to the approved single real estate development project.Subsequently the materials shall be submitted to the Ministry of Commerce for record-filing.Finally, the change shall be registered by SAFElocal branches, with the certificate of the filing of Ministry of Commerce.

2.Direct Debt Investment

The Project Company may get a debt investment justby filing and registering in

SAFE.Preferential tax policy will be applied if the Project Company borrow loans from the SPV.

Debt investment means the financing that an enterprise obtains from the related party but has to repay the principal and pay the interest.The Project Company is permitted to borrow loans from offshore third parties including the Client and the SPV. Such loans will be treated as a “foreign debt” of it and subje ct to certain requirements.

2.1ForeignDebtRequirement

SAFE has a strict control over foreign debt by linking the foreign debt requirement with the registered capital, especially for foreign investment real estate enterprises.The following three requirements shall be satisfied:(i) the registered capital as prescribed in the articles of association is paid; (ii) the sum of foreign debt does not exceed the margin betweenthe registered capital and the total investment; and (iii)the foreign investment real estate enterprise obtains the certificate of approval and record-filing in the Ministry of Commerce before June, 1, 2007.

In this case, the registered capital is RMB 500 million yuan, and total investment is RMB 750 million yuan. So the margin between them is RMB 250 million yuan. Taking the Existing Loan (RMB 100 million yuan) into consideration, loan for the renovation (RMB 80 million yuan) is within the limit (RMB 150 million yuan). Furthermore, the registered capital of the Project Company has been fully contributed, and it obtained the certificate in May, 2007. So the loan for renovation satisfy the requirements of foreign debt.

2.2SAFE Registration

Foreign exchange is strictly regulated in China. Thus, foreign exchangeis not freely convertible into RMB and subject to the SAFE supervision and administration.

When the Project Company obtains a loan from the Client or SPV, it is required to register the loan agreement with the SAFE local branch within 15 business days after the loan agreement is signed. The purpose of the registration is for SAFE to (i) examine whether the Project Company meets the above mentioned foreign debt requirements and (ii) review the major terms of the loan agreement, including the amount, repayment, interests and use of proceeds, to make sure that the terms are in compliance with the PRC laws. Thus we recommend the Project Company to confirm with officials of the SAFE local branch if its intended use of proceeds is allowed under the business scope of it.

2.3Bank Settlement Application

After the Project Company finishes the SAFE registration, it can directly apply for and complete the (i) opening and closing of a foreign debt account, (ii) drawing of the loan and settlement of foreign exchange and (iii) purchasing foreign exchange and repayment of principal and interest with a bank designated by the SAFE. For the above mentioned procedures,the bank will determine the scope of required application documents in its sole discretion and review and verify supporting documents. In addition, RMB received from the settlement must be transferred to the contractor within five business days because the SAFE requires that the settlement of foreign exchange is based on an actual need.

Since banks have different internal management systems, the application process and the required documentation may vary across different banks. We recommend the Project Company to keep in close contact with its designated bank and prepare required documentation supporting its use of proceeds for foreign exchange settlement.

2.4PreferentialTax Policy for loansfrom the SPV Preferentialtaxpolicymaybeapplied for loanfromshareholders. Thusitmaybebefeficial to borrowfrom the SPVinstead of the Client.When calculating the taxable income amount, the Project Company can deduct its interest expenditures to the SPVto the extent that the debt investment obtained is less than 2 times of the equity investment obtained from the SPV.

In this case, equity investment from the SPV is RMB 250 million yuan, and its potential total debt is RMB 180 million yuan. So the preferential policy can be applied to all the debt.

3.Loanfrom Hong Kong banks

The Project Company may directly raise funds from foreign banksin its business operation activities.Loan from Hong Kong banks is alsoa foreign debt, so it shall be subject to the foreign debt requirement,SAFE registration and bank settlement application above. The banks may require guarantee or warrant, which may increase the cost of the loan.

4.Loanfrom Shanghai banks

As a legal personregistered in the PRC, the Project Company may borrow money from domestic banks.Most domestic big banks treat EJV the same as domestic enterprises, except that the Agricultural Bank of China requires full contribution for registered capital for EJV. As the Project Company may borrow in RMB, so registration by the SAFE is not necessary. Noticeably, if offshore guarantee is provided, the amount of the loan shall not exceed the margin between the registered capital and the total investment. And the loan shall be approved and registered by the SAFE.

Since the housing prices in China rose too fast in recent yearsand the total amount on real estate business loanfor the banks may be limited, so we recommend you to confirm with the bank of the loan.