The feasibility of using a special purpose company (SPC) has long been an issue under the PRC Company Law. As the newly amended Company Law became effective on January 1 2006, arrangers and lawyers alike are reappraising the possibility of forming an SPC in project financing and securitization transactions.
Four changes under the new Company Law facilitate the use of an SPC in China: (1) a single shareholder company is now permitted (Article 58) and the minimum registered capital requirements are reduced (Articles 26, 59, and 81); (2) the restriction on inter-company investment has been removed; (3) the restriction on a limited liability company issuing bonds has been lifted; and (4) private placement is formally recognized (Article 154). The first two changes lay the groundwork to form an SPC and the last two changes enable an SPC to issue securities on a private placement basis.
The use of an SPC is not without drawbacks: the corporate veil of a single shareholder company may be pierced (Article 64); the restriction on public offering of bonds is not relaxed (Article 154); an SPC's corporate governance issues are more complicated; and an SPC is a separate taxable entity. However, these are not insurmountable obstacles. For example, an SPC's business scope may be restricted by its articles of association to control the risk of piercing, whereas the power of its shareholders and directors to file voluntary insolvency proceedings may be restricted to achieve bankruptcy remoteness. Private placement may be used to get around the restrictions on public offering of bonds. Core business or assets of the SPC may be entrusted to a third party to simplify the SPC's own governance. Even the unfavourable double taxation issue may be mitigated through the use of debt finance techniques.
Xusheng Yang and Sheng Wu