By Susan Yang

Recently, a client inquired whether it is possible to use the net assets of a branch to contribute to a wholly owned subsidiary when transferring the branch's assets, liabilities, and personnel to the subsidiary. The client mentioned that many listed companies seem to have adopted this practice. In addressing this query, it is essential to clarify whether net assets meet the legal requirements for capital contribution.

Legal Perspective on Forms of Capital Contribution

Net assets, in their legal context, do not satisfy the statutory requirements for forms of capital contribution. Article 48 of the Company Law (2023 Revision) stipulates that "shareholders may make capital contributions in cash, or in the form of non-monetary assets that can be monetarily appraised and legally transferred, such as physical assets, intellectual property, land use rights, equity, or receivables. However, assets that are prohibited by law or administrative regulations from being contributed are excluded." This provision highlights that capital contributions must consist of specific assets. In contrast, "net assets" refer to the residual value of a company’s total assets after liabilities are deducted, serving as an accounting measure of an entity’s overall financial position. It is not a specific transferable asset and therefore cannot qualify as a form of capital contribution.

Potential Misunderstanding of Contributions based on Book Value

Given the client's mention that many listed companies engage in asset transfers and use net assets for contributions, I researched related announcements from listed companies. Upon reviewing these announcements, I found that they referred to making contributions based on book value instead of using net assets. Below are three examples from companies registered in different provinces:

1.November 2022: Guangdong Shantou A Co., Ltd.

In its announcement titled “Announcement on the Transfer of Assets, Liabilities, Business, and Personnel from a Branch to a Wholly-Owned Subsidiary, Capital Increase in the Subsidiary, and Subsequent Deregistration of the Branch,” the company disclosed that it planned to transfer the assets, liabilities, and personnel of its Copper-Clad Laminate Plant branch to its wholly-owned subsidiary, Ultrasonic Copper-Clad Laminate, based on the audited book value as of September 30, 2022. Ultrasonic Copper-Clad Laminate would assume all related assets, liabilities, businesses, and personnel from the branch. Upon completion of the transfer, the Copper-Clad Laminate Plant branch would be deregistered. The transferred assets included real estate and land-use rights, as listed in the appendix to the Asset Transfer and Capital Increase Agreement between the company and Ultrasonic Copper-Clad Laminate.

Based on the audited book value as of the reference date (September 30, 2022), the total book value of the transferred assets was RMB 567.5565 million. Of this, RMB 379 million was subscribed to the increase in registered capital of Ultrasonic Copper Clad Laminate, and the remaining RMB 188.56 million was recorded as capital reserve of the subsidiary. Any changes in assets and liabilities between the benchmark date and the actual transfer date would be adjusted based on the actual situation. The final assets and liabilities transferred would be subject to the results of the implementation.

2.December 2022: Jiangsu B Co., Ltd.

Jiangsu B Corporation issued "Announcement on the Reorganization of a Wholly Owned Indirect Subsidiary into a Wholly Owned Direct Subsidiary and the Transfer of Certain Branch Assets to the Subsidiary," which disclosed the following:

The company planned to transfer the assets, liabilities, businesses, and personnel related to its dye business from the Lianyungang Branch to Jiangsu X Limited, a wholly owned subsidiary of B Corporation. The transfer would be based on the audited book value of the assets and liabilities as of the reference date and would serve as a capital increase for Jiangsu X Limited. This reorganization would not alter the substantive business operations of the transferred assets.

Under the plan, the assets and liabilities transferred at their audited book value as of the reference date would be contributed as follows: the real estate assets would be contributed as paid-in capital in the amount of RMB 100 million, while any excess value will be recorded as capital reserve. Other transferred assets and liabilities will also be recorded as contributions to the capital reserve.

3.November 2021: Zhejiang C Co., Ltd.

In its announcement titled "Announcement on the Transfer of Assets, Liabilities, and Personnel from a Branch to a Wholly Owned Subsidiary and the Change of Certain Fundraising Projects’ Implementation Entities.", Zhejiang C company disclosed:

It planned to transfer the assets, liabilities, and personnel related to the fine chemical intermediate business of its Taizhou New Agricultural branch to its wholly owned subsidiary, New Agricultural Technology, based on the unaudited book value as of October 31, 2021. New Agricultural Technology would assume all relevant assets, liabilities, businesses, and personnel from the branch. Following the completion of the transfer, the Taizhou New Agricultural branch would be deregistered. The transferred assets included real estate and land-use rights, as detailed in the appendix to the Asset Transfer and Capital Increase Agreement signed by the company and New Agricultural Technology. 

Based on the unaudited book value as of October 31, 2021, the total value of the transferred assets was RMB 107.4167 million. Of this, RMB 99 million was subscribed to the increase in registered capital of New Agricultural Technology, and the remaining RMB 8.4167 million was recorded as capital reserve. The final transferred assets and liabilities were subject to adjustments based on their actual status on the transfer date.

Clarifying the Nature of "Contributions Based on Book Value":

In the above cases, assets used for contributions were specific assets such as real estate and land use rights that were listed item by item in the agreements. Their book value was used as the basis for valuation when making capital contributions to the subsidiary. This aligns with Article 48 of Company Law (2023 Revision), which requires the valuation of non-monetary assets for capital contributions.

The difference between all assets and liabilities transferred from the branch to the subsidiary does constitute net assets. However, this does not mean that the net assets themselves were used as the contributed assets. As explained earlier, net assets are merely a financial benchmark for reflecting the overall financial position of the transferred assets; they are not specific assets, therefore cannot be used directly for capital contributions.