How to Seamlessly Acquire a Diamond Process & Trade Company
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07
03-2018
Recently, the global high-end jewelry industry has gone through continuous development whilst mergers and acquisitions in this industry have also accelerated. The current industrial merger and acquisition trends mainly include acquiring international brands to rapidly improve the acquirer’s brand image (such as Gangtai Holding Group’s acquisition of Buccellati and Tesiro’s acquisition of Leysen); and horizontal mergers and acquisitions within the industry to realize expansion of channels and scales by way of resource integration, under which the acquirer instantly expands its existing business and operation territory and thus has an immediate effect to improve the company’s market share and brand competitiveness. In the mergers and acquisitions of jewelry enterprises, the acquirers concern most about the seamless continuation of production and operation after the acquisition so as to achieve the expected synergy as soon as possible. This usually involves issues such as transfer of the seller’s raw materials such as diamond, work in process (“WIP”) and finished products and the import and export regulations thereon, as well as the jewelry-related processing qualification and certificates, and etc. Recently, we have assisted a client in its asset acquisition of an international diamond jewelry processing trade company, and would like to use this case as an example to share our observations on the legal and practical issues needed paying attention to in the acquisitions of diamond processing and trading enterprises.
Ⅰ
Case Background
We represented the acquirer, a foreign high-end jewelry manufacturer (“Company A”) to acquire another foreign leading jewelry manufacturer (“Company B”). As part of the global asset acquisition, Company B’s subsidiary, Company C which is located in a bonded zone in China, will transfer its entire assets, including raw materials, WIP, manufacturing equipment, leased factory, workers, and etc. to Company A’s PRC subsidiary, Company D, by means of asset transfer. Company C mainly engages in processing trade of precious jewelry, such as diamond, yet Company D’s pre-acquisition business scope covers only processing trade of gold and silver jewelry, and does not cover diamond jewelry processing trade.
Ⅱ
How to Realize Seamless Production and Operation Transition to the Maximum Extent in the Acquisition of Diamond Processing Trading Enterprises
In representing the case above, we successfully assisted the client to achieve a seamless post-acquisition transition of production and operation, and we hereby summarize and share our observations on the following key points that may affect the post-acquisition production and operation.
1
The acquirer shall try to obtain the prerequisite qualifications for diamond processing and trading before closing
To realize seamless transition of production and operation, the acquirer shall first make sure that its acquisition entity has all the prerequisite qualifications for diamond processing and trading. In our case, Company D, as the acquirer, originally engaged in processing trade of gold and silver jewelry and its business qualification does not cover that of precious jewelry such as diamond, which Company C, as the seller, is currently engaged in. In order to process precious jewelry such as diamond after closing, Company D needs to obtain the following prerequisite qualifications:
(1) Qualification for Processing Trade to Match with the Proposed Business
According to the Measures on PRC Customs’ Supervision and Administration on Processing Trade Goods, enterprises engaged in processing trade with supplied materials for self-process must apply for (1) the Processing Trade Processing Enterprise’ Capacity Proof Certificate (hereinafter referred to as “Capacity Proof Certificate”) with the local economic and technology committee/bureau; and (2) the Processing Trade Goods Manual (“Processing Trade Manual”) with the in-charge Customs at the locality of the processing trade enterprise.
Considering that Company D will process precious jewelry such as diamond in the same way as Company C after closing, both of Company D’s Capacity Proof Certificate and Processing Trade Manual shall cover “diamond jewelry”. Although Company D already obtained the Capacity Proof Certificate prior to the asset transfer, yet the original Capacity Proof Certificate only covered gold and silver jewelries, without diamond jewelry, and the Processing Trade Manual established thereon did not cover diamond jewelry either. Therefore, Company D’s existing Capacity Proof Certificate and Processing Trade Manual cannot meet the requirement for post-closing production and operation, and need to add diamond jewelry processing trade into its Capacity Proof Certificate and Processing Trade Manual. According to our inquiry with the local economic and technology committee, adding new processing trade items into the Capacity Proof Certificate is deemed as a new application, and thus Company D needs to apply for a new Capacity Proof Certificate, instead of a mere change registration of the existing Capacity Proof Certificate. After obtaining the new Capacity Proof Certificate and execution of the new contracts for processing with supplied materials, Company D can apply for the change of its Processing Trade Manual with the local Customs to cover diamond jewelry.
Practical Difficulties and Suggestions:
In such kind of acquisition, if the acquirer wishes to initiate production immediately after closing, it shall make sure to obtain the Capacity Proof Certificate and Processing Trade Manual covering the intended processing goods prior to closing. In practice, the timing issue can be quite tricky. According to the local authorities, the application for a new Capacity Proof Certificate will be subject to on-site inspection, which will focus on the verification of the operation of production line, title of the manufacturing equipment (such as invoices and equipment transfer contract), staffing of the production line, and etc.
In practice, the actual time for on-site inspection depends on the authority’s schedule, and it could sometimes take up to one or two months, which may adversely affect the production and operation after closing. In addition, during the on-site inspection, the authority will usually request for the invoice or transfer agreement of the equipment to verify the acquirer’s title to the equipment. However, under normal circumstances, the title to the equipment will not be transferred to the acquirer prior to closing of the asset transfer. Therefore, the application for Capacity Proof Certificate might be hindered.
Considering the above, we suggest (1) the acquirer should communicate with the governmental authorities as early as possible and schedule for the on-site inspection so as to avoid any delay of the transaction due to the uncertainty of the government schedule; and (2) in order to successfully obtain the Capacity Proof Certificate prior to closing, the parties to the transaction may agree in the transaction document that the title to the relevant equipment shall pass on to the acquirer upon execution of the asset transfer agreement. To address the seller’s concern, the acquirer may pay certain amount of advancement at the execution of the agreement, based on the value of the relevant equipment in proportion to the total consideration or provide security to ensure the acquirer’s performance of the agreement.
(2) Diamond Import Qualification
As a diamond processing and trading enterprise, importation of diamond as raw materials is one of the indispensable parts of the business flow. Therefore, the acquirer shall make sure that its acquisition entity has the qualification to import diamond.
According to the relevant laws and regulations, diamond can be imported through two methods: general trade and processing trade. Pursuant to the Measures on PRC Customs’ Supervision on Shanghai Diamond Exchange, importation of diamond through general trade shall be subject to the importation declaration with the Customs at Shanghai Diamond Exchange. And the importation of diamond through processing trade shall be subject to importation declaration with the local Customs in accordance with the Measures on the PRC Customs’ Supervision and Administration on Processing Trade Goods. Generally speaking, diamond processing and trading enterprises usually import diamond through the processing trade method.
The scope of goods which an enterprise is allowed to import depends on the enterprise’s business scope. That is to say, in order to import diamond as raw materials, the acquirer’s business scope shall include the relevant items in relation to diamond. In addition, considering that the acquirer will import diamond as raw materials to conduct processing trade, the Processing Trade Manual thereof shall specify diamond as the imported raw materials and diamond embedded jewelry as the goods to be exported. This step can be conducted together with the change of Processing Trade Manual as mentioned above.
Practical Difficulties and Suggestions:
As mentioned above, the scope of goods which an enterprise is allowed to import depends on the enterprise’s business scope. However, an enterprise’s business scope is usually worded according to the formatted language required by the industry and commerce authorities. The business scope of the jewelry processing industry generally only specify “jewelry” processing without mentioning any details of the jewelry such as “diamond”. Therefore, it’s doubtful whether a jewelry processing enterprise with a general business scope description of “jewelry” can satisfy the Customs’ requirement on diamond importation qualification.
In our case, as confirmed with the local Customs and authority of industry and commerce (i.e. Company D’s registration locality), Company D’s business scope of “jewelry” is interpreted to cover diamond embedded jewelry, and thus is not required to change its business scope specified in the business license. Considering the practical variations at different local Customs and industry and commerce authorities, we suggest to check and confirm the business scope with the local Customs and industry and commerce authorities in advance on a case-by-case basis.
2
How to Transfer the Seller’s WIP
Practical Difficulties:
Enterprise engaged in processing trade with supplied materials will conclude processing contract with a foreign enterprise, and then process the supplied raw materials according to the foreign enterprise’s requirements and deliver the processed goods to the offshore company designated in the processing contract. Therefore, in the acquisition of diamond processing and trading enterprise, the seller is subject to the special supervision on the processing trade goods (i.e., the finished products must be exported to the designated offshore entity in the processing contract, instead of the acquirer or any designated entity of the acquirer), and thus is not able to transfer the WIP directly to the acquirer like normal asset transfer.
Suggestions:
In practice, potential alternatives include:
(1) Complete processing of WIP, export the goods offshore and then transfer them at offshore level.
This is a recommended plan if the acquirer has offshore related entities. In our case, the client adopted this approach, in which Company C completed processing of the WIP, exported them out of China to the designated entity under the processing contract and then completed the transfer of the WIP at offshore level.
(2)Deep Processing Transit
If the acquirer does not have offshore related entities and the WIP must be transferred within China, it may be handled through deep processing transit, subject to the satisfaction of certain requirements.
Specifically, deep processing transit refers to business activities in which a processing trade enterprise (the “Transferor”) transfers the products to be processed with bonded imported materials to another processing trade enterprise (the “Transferee”) for further processing and re-export. To implement this approach, the description of the Transferor’s processed goods specified in its Processing Trade Manual shall be identical with the transferee’s imported materials itemized in its Processing Trade Manual, e.g. the processed product specified in the Transferor’s Processing Trade Manual is processed diamond (such as cut and polished diamond), and the Transferee’s imported materials specified in its Processing Trade Manual is also processed diamond, which will be used for further processing into diamond embedded jewelry for exportation. Under such circumstance, the seller (i.e., the Transferor) may apply for deep processing transit through the Customs’ electronic platform system. The Customs will review and issue “Customs Cover” for the seller and acquirer to transfer the goods within 30 days upon the issuance. Through this approach, the Transferor and the Transferee complete the virtual formalities for import and export without the need for actually physical import and export of the goods, and thus the title transfer and delivery of these goods can be completed directly within PRC.
Given that the preconditions for deep processing transit are very strict and practical procedures thereof are complicated and time-consuming, if companies intend to adopt this approach, they shall confirm that both the seller and buyer satisfy the preconditions and shall communicate with the local Customs in advance.
Above all, similar to mergers and acquisitions transactions in various industries, the acquisition of diamond processing and trading enterprises also has its own distinctiveness. In addition to the basic issues normally faced by manufacturing enterprises, diamond processing and trading enterprises shall pay special attention to the particular qualifications and licenses to apply for as well as its impact on the business transition, timing arrangement of the transfer, and even the impact of structuring the deal at the onshore or offshore level. When dealing with such transactions, companies are advised to seek professional legal advice in advance so as to design an efficient and reasonable transfer step plan and structure and to avoid adverse impact on the deal process due to lack of full consideration.
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作者简介：
非权益合伙人 上海办公室
业务领域：公司/外商直接投资，银行与金融，私募股权与投资基金
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输12
上海办公室 公司一部
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