Study On Legal Issues Concerning Disposal Of Debts Of Target Enterprise In Merger & Acquisition By Foreign Investors

The acquisition of a domestic enterprise by foreign investors is a complicated transaction, in which, the disposal of debts of the target enterprise is a very important part. Whether the debts of the target enterprise can be disposed properly or not will affect the interests of foreign investors, the target enterprise and its shareholders, the existing creditors and even the potential creditors of the target enterprise, and other related parties, so it shall be paid great attention to.This thesis, mainly from the perspective of civil & commercial law, analyses and explores the major legal issues in relation to the disposal of debts of the target enterprise in M&A by foreign investors, and puts forward some points of view of the author. The thesis consists of three (3) chapters, the abstracts of which are as follows:Chapter 1 Section 1 defines the term of"M&A by Foreign Investors", and illustrates the characteristics of M&A by Foreign Investors through comparing with the Greenfield Investment; Section 2 defines the term of"Equity Acquisition"and"Asset Acquisition", which are the two (2) basic types of M&A by Foreign Investors as stipulated by the regulation, and further analyses the characteristics of"Equity Acquisition"and"Asset Acquisition". This chapter has laid the foundation for the analysis of legal issues concerning the disposal of debts of the target enterprise in M&A by Foreign Investors in the following chapters.Chapter 2 Section 1 introduces the types of debts of the target enterprise in M&A by Foreign Investors, especially the differences between existing debts and potential debts, disclosed debts and invisible debts; Section 2 analyses the rules on disposal of debts of the target enterprise in M&A by Foreign Investors and concludes that unless otherwise agreed by the parties on disposal of the debts, no matter in Equity Acquisition or Asset acquisition, the debts of the target enterprise shall be borne by the target enterprise after the M&A completes; Section 3 analyses the special requirements on disposal of debts of the target enterprise in M&A by Foreign Investors, which are, the transfer of creditor's right shall notify the debtor, the transfer of debt shall obtain consent of the creditor, and in Asset Acquisition, the target enterprise shall notify its creditors and publish announcement in newspaper. Currently there is still controversy on the condition to effective the transfer of creditor's right, this thesis, after analysis, concludes the viewpoint of the author that the transfer of creditor's right shall become effective after the notification reaches the debtor.Chapter 3 Section 1 introduces several types of invisible debts that may exist in Equity Acquisition, and by analyzing the rules on disposal of debts of the target enterprise, concludes that the risk of invisible debts mainly exists in Equity Acquisition, and further proposes the measures that foreign investors can take to prevent the risk of invisible debts in Equity Acquisition. Section 2 Analyses the issue of which party shall bear the potential debts arising by the behaviors of the target enterprise before it sells the assets and is deregistered, but the damage occurs after the target enterprise is deregistered. The author holds the opinion that if the target enterprise is a partnership enterprise or a sole proprietorship enterprise, such debt shall be borne by the original general partner of the partnership enterprise or the original investor of the sole proprietorship enterprise (within five (5) years); if the target enterprise is a company, such debt shall be borne by its shareholders within the scope of the residual property that the shareholders have taken from the target company.