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.