Foreign Buyers Acquiring a Chinese Manufacturing Business Before 2027

A foreign industrial group wants to acquire a Chinese manufacturing business in Xi'an. The target has valuable customer contracts, permits, employees and production equipment, but its registered capital is only partly paid and the buyer is concerned about historical liabilities. The global M&A team initially prefers an asset deal because it appears to isolate legacy risk. That instinct can be commercially wrong. A Chinese asset acquisition may require separate transfers of land or leases, contracts, permits, intellectual property and employees. A share acquisition preserves the operating entity but transfers its historical corporate liabilities. The revised Company Law and the registered-capital transition rules add a new issue for older targets: a buyer can acquire a company with substantial future contribution obligations that were originally scheduled far into the future.^[1][2]

The narrow question is therefore when the operational continuity of a share deal outweighs its legacy-liability risk, and how a foreign buyer should price and protect against unpaid registered capital before the 2027 transition deadline.

The specific problem#

Choosing the operating structure#

Start with what the buyer actually needs to own on day one. the structure should follow the operating model. If the buyer needs the target's: The relevant items include business license and sector permits, customer and supplier contracts, workforce, factory lease, customs registrations, IP, and bank accounts and local operational history. a share deal may preserve those relationships more efficiently. An asset deal gives the buyer greater ability to select assets, but every selected asset must be legally transferable. A license issued to the seller may not follow the machinery. A customer may refuse assignment. Employees may not agree to move to a new employer. A landlord may demand new terms. The buyer should therefore build an "operational continuity matrix" before deciding structure. For each critical element, identify whether it survives a share acquisition automatically, whether assignment consent is required in an asset transaction, and whether the foreign-owned acquiring entity is legally eligible to hold it. The cheapest legal structure on paper can be the most expensive operationally.

Confirm foreign-investment access before designing the acquisition vehicle. china's Foreign Investment Law establishes the general foreign-investment framework, including national treatment plus the negative-list system for foreign investment access.^[3] Before choosing share or asset structure, counsel should confirm whether the post-closing business can be owned and operated by the proposed foreign investor. If the target operates in an unrestricted manufacturing sector, a 100% foreign share acquisition may be straightforward in principle. If the business includes a restricted activity, licensing or ownership limitations may affect the structure. An asset transaction does not solve a market-access restriction. The buyer still needs a legally eligible entity to own and operate the acquired business assets. The transaction team should therefore identify: The relevant items include target business scope, regulated activities, current licenses, proposed post-closing shareholder, any foreign-ownership restrictions, and whether permits survive change of control.

This review should precede the term sheet. A buyer should not negotiate an asset package that its China vehicle cannot legally operate. Audit registered capital before accepting the share-deal risk. article 47 of the revised Company Law establishes the current general five-year contribution framework for limited liability companies.^[1] The State Council's 2024 implementation provisions create a transition for companies established before July 1, 2024. Where the remaining contribution period calculated from July 1, 2027 exceeds five years, the company must adjust the remaining period to within five years by June 30, 2027.^[2] For an older target, the buyer should reconstruct: The relevant items include registered capital, paid-in capital, unpaid amount, original due dates, non-cash contributions, previous shareholder transfers, and any capital reduction.

Do not rely on a public registration summary. The buyer needs to examine bank records, accounting entries, contribution certificates, historical articles and documents for non-cash contributions. The question is not simply whether the target is "compliant today." The buyer needs to know what cash it may have to contribute after closing and how that future funding should affect the purchase price. Share purchase pricing must normalize the future capital obligation. assume the target has RMB 80 million registered capital but only RMB 30 million paid. If the buyer pays RMB 100 million for the shares and will later need to contribute RMB 50 million, the economic acquisition cost may be closer to RMB 150 million before other liabilities. The SPA should therefore choose an explicit allocation. Common structures include:

Seller funds before closing#

The seller contributes all or part of the unpaid capital as a condition precedent. ### Purchase-price reduction The buyer assumes the future contribution burden and reduces equity price accordingly. ### Escrow or holdback Part of the price remains secured against contribution or creditor risk. ### Capital reduction before closing Where commercially appropriate, the target reduces excessive registered capital through lawful procedures before completion. The financial model and SPA need to use the same assumption. A transaction can become contentious if the business team prices the target as fully capitalized while the legal documents leave the buyer responsible for future funding.

Registered capital and acquisition economics#

An asset deal may avoid corporate history but create employee-transfer risk. in a share acquisition, the legal employer normally remains the same entity. Ownership changes, but employment contracts continue with the target. In an asset deal, employees may need to transfer to a new employer. That can require negotiated arrangements and can produce severance or refusal-to-transfer risk. For a plant with 500 employees, this can dominate transaction implementation. The buyer should segment employees into: The relevant items include critical employees, ordinary transferable employees, protected employees, employees subject to non-competes, and employees likely to refuse.

The SPA should allocate the economic cost of transfer failures. A foreign buyer should also review social-insurance history and employment disputes. The 2025 Supreme People's Court Labor Dispute Interpretation II addresses issues including affiliated employment, non-competes and social insurance and can affect post-acquisition workforce risk.^[4] An asset deal is not automatically cleaner if the buyer must recreate the entire workforce relationship. Permits and contracts often make the share deal operationally safer. manufacturing targets may depend on: The relevant items include environmental permits, production licenses, customs registrations, utility agreements, customer quality certifications, long-term supply agreements, and factory leases. A share deal preserves the contracting entity unless the document contains a change-of-control restriction. An asset deal can require novation or reissuance. The buyer needs to classify each material contract and permit as: 1. survives share change without consent;

1. requires change-of-control notice or consent;
2. assignable in an asset sale;
3. non-transferable;
4. requires new application.

This analysis often reveals why a share transaction is operationally superior despite diligence risk. Where a non-transferable permit is essential, the buyer may have no practical asset-deal route without a long transition period. IP structure can point in either direction. a target may own trademarks and patents while licensing core technology from the seller's overseas affiliate. A share deal preserves target-owned IP but does not automatically preserve related-party licenses if those agreements terminate on change of control. An asset deal allows selected IP to be transferred, but ownership registrations and third-party consents may be required. The buyer should build an IP schedule showing: The relevant items include registered owner, license rights, change-of-control provisions, employee-created IP, third-party software, and trade secrets.

If the operating business depends on a parent technology license, the replacement license should be a closing condition in either structure. Do not assume that buying the factory also buys the technology. Historical liabilities should be converted into deal protections, not vague fear. a share deal inherits corporate history, but that risk can be managed if diligence identifies the material exposures. The buyer needs to create a quantified red-flag table covering: The relevant items include unpaid capital, tax and customs, employment, environmental, product claims, litigation, guarantees, and related-party balances. Each issue should map to a remedy: The relevant items include price adjustment, specific indemnity, escrow, condition precedent, seller remediation, and insurance where available. The right comparison is not "asset deal has no historical risk." The right comparison is whether the cost of legally transferring the business in an asset deal is greater than the priced and protected legacy risk of a share deal.

Employees, permits and intellectual property#

Case study: foreign acquisition of an automotive supplier. assume a European group wants to acquire a Xi'an automotive component manufacturer. The target has: The relevant items include RMB 60 million registered capital, RMB 35 million paid in, 420 employees, a long-term factory lease, customer certifications tied to the target entity, two environmental permits, patents owned by the target, and a software license from the seller's affiliate. An asset deal appears cleaner but requires: The relevant items include customer consent, employee migration, new permit applications, lease transfer, and software re-licensing. A share deal preserves the operating platform but leaves RMB 25 million unpaid capital and known environmental remediation exposure. A rational structure may be: 1. seller contributes RMB 15 million before closing;

1. buyer assumes RMB 10 million and reduces price;
2. environmental risk is covered by a specific indemnity and escrow;
3. software license is replaced at closing;
4. customer change-of-control consents are obtained.

The result is a share acquisition with quantified legacy risk and much lower operational disruption. Closing conditions should be structure-specific. for a share deal, conditions might include: The relevant items include capital remediation, key change-of-control consents, release of shareholder guarantees, replacement IP licenses, and regulatory confirmation. For an asset deal: The relevant items include assignment of key contracts, employee transfer threshold, permits, title transfer, IP assignment, and inventory verification. The buyer should avoid conditions that are impossible to prove. "All employees transferred" may be unrealistic; a threshold for critical or percentage-based transfer may be more workable. The long-stop date should reflect real regulatory and employee timing. Build a post-closing liability plan before signing. a share deal requires immediate post-closing governance. The buyer needs to plan: The relevant items include capital contribution calendar, board and legal-representative changes, bank authority, compliance remediation, related-party separation, employee-policy localization, and environmental cleanup.

The first 100 days should address liabilities that were accepted in price. The buyer should also preserve seller evidence supporting indemnity claims. Once the seller team leaves, access to historical emails, accounting records and transaction witnesses can decline quickly. Tax and customs history can change the structure decision. a manufacturing target may have recurring customs valuation, transfer-pricing, VAT or bonded-processing issues. In a share deal, those historical positions remain with the company. In an asset deal, some tax and customs liabilities may remain with the seller, but asset transfer itself can trigger taxes, customs consequences or valuation issues. The buyer needs to therefore compare expected historical exposure with transaction taxes and implementation cost. For imported equipment, determine whether customs status restricts transfer or disposal. For related-party imports, review whether customs has challenged value. For real property, model taxes and registration costs in an asset transfer.

The structure should not be chosen using corporate law alone. A supposedly "clean" asset purchase may become more expensive than a share deal once asset-transfer taxes and permit migration are included.

Legacy liabilities and transaction protection#

Environmental liabilities deserve a separate share-versus-asset analysis. industrial land and historical contamination can complicate both structures. A share acquisition inherits the operating company and its environmental history. An asset acquisition may still expose the buyer if it acquires or operates contaminated land or facilities. The buyer should obtain technical environmental diligence and map legal responsibility separately from corporate ownership. If the risk is quantifiable, a share deal can use: The relevant items include remediation condition, specific indemnity, escrow, and post-closing access rights. If the site itself is the source of unacceptable risk, an asset structure that excludes the land may be preferable, provided the business can operate elsewhere. The correct answer depends on the asset and liability, not on a general assumption that asset deals avoid history. Seller guarantees and related-party balances should be cleaned before a share closing. foreign-invested or founder-controlled targets often contain:

The relevant items include shareholder loans, intercompany receivables, parent guarantees, related-party service agreements, and cash-pooling arrangements. A share buyer should identify which relationships must survive and which should terminate at closing. The SPA should contain a related-party settlement schedule. If the seller's group owns a critical warehouse, provides IT services or guarantees a bank loan, those arrangements need replacement. The buyer needs to not discover after closing that the target cannot access its ERP or that the bank requires immediate repayment because the seller guarantee was released. This is another reason why share deals require detailed separation planning even though the legal entity continues unchanged. The investment committee should compare total transition cost, not legal labels. a useful decision paper should show four numbers for each structure: 1. equity or asset purchase price;

1. known liabilities assumed;
2. implementation cost;
3. required post-closing funding.

For the share deal, implementation cost may be lower but historical liability higher. For the asset deal, legacy liability may be lower but employee, permit, tax and contract-transfer costs may be substantial. The committee should also compare timeline and execution certainty. An asset deal that requires twelve months of permit and employee work may be unacceptable if the buyer needs immediate production capacity. A share deal with well-priced liabilities may be the safer route even when diligence identifies historical issues. That is the practical meaning of structure selection: not abstract legal cleanliness, but executable acquisition economics. The asset perimeter must be tested for hidden dependencies. an asset buyer should identify dependencies that do not appear on the fixed-asset register. A production line may depend on: The relevant items include software licenses, calibration databases, supplier tooling, parent-company trademarks, shared quality systems, and group procurement agreements.

If those dependencies remain with the seller, the buyer can acquire machinery without acquiring a functioning business. The asset schedule should therefore include intangible and service dependencies and identify which require transitional services. A transition services agreement may be necessary, but it should have a defined term, service standard, data rules and exit plan.

Tax, environmental and related-party dependencies#

Dispute resolution and enforcement should be designed around the chosen structure. a share SPA and an asset purchase agreement create different post-closing claims. For share deals, the buyer may rely heavily on warranties and indemnities concerning historical liabilities. Evidence should therefore be preserved and seller security considered. For asset deals, disputes are more likely to concern whether particular assets, contracts or employees were successfully transferred. The agreement should define: The relevant items include governing law, forum, notice, calculation of indemnifiable loss, claim procedure, and security. A foreign buyer should also consider where the seller's assets will be after closing. A strong indemnity against a seller that distributes the sale proceeds can be difficult to enforce. The final structure decision should be documented before exclusivity ends. the legal team should prepare a short structure memo comparing share and asset routes on the specific target. It should state:

The relevant items include foreign-investment feasibility, capital exposure, employees, permits, contracts, IP, tax/customs, environmental risk, and timetable. The recommendation should explain which risks are accepted and how they are priced. This memo becomes a useful baseline when the transaction later changes. If the parties switch from assets to shares during negotiation, management can see which new liabilities entered the deal and which implementation burdens disappeared. Warranty-and-indemnity insurance does not replace known-risk allocation. some foreign buyers use representations-and-warranties insurance in larger transactions. Even where available, known registered-capital, environmental, tax or employment issues may be excluded or subject to special treatment. The buyer should therefore avoid assuming that insurance converts a share deal into an asset-deal risk profile. Known risks should be allocated directly through price, escrow, remediation or specific indemnity. Insurance is more useful for unknown breaches of covered warranties. The transaction team should review exclusions before finalizing the SPA so the seller cannot argue that insurance was intended to replace contractual recovery.

Execution, integration and final structure decision#

The board should approve the integration model with the acquisition structure. a share deal preserves the target's entity, but the buyer still needs an integration decision. Will the target remain standalone, merge with an existing affiliate or gradually transfer functions? That choice affects: The relevant items include employee reporting, contracts, systems, intercompany pricing, data flows, and future capital. If the buyer expects to merge the target shortly after closing, some of the operational advantages of the share deal may be temporary. The integration cost should be included in the structure comparison. The legal structure at closing should therefore be consistent with the business architecture the buyer intends to operate one year later. Final structure decision. before signing, the buyer should require counsel, tax, HR and operations to sign off on one structure paper. It should identify which risks are inherited, which are transferred, which are mitigated contractually and which remain unresolved. That single decision record prevents the transaction from drifting between a share-deal commercial model and an asset-deal implementation plan.

Long-stop dates should reflect the harder structure. a share deal and an asset deal can have very different regulatory and implementation timelines. The buyer should set the long-stop date based on the slower required workstream, not on a standard M&A template. If the structure changes during negotiation, the long-stop and termination rights should be revisited rather than carried over mechanically. A share deal can also preserve commercial reputation that an asset deal would need to rebuild. manufacturing customers may have approved the target through quality audits, supplier codes, long-term performance history or industry certifications. Even where a contract can technically be assigned, the customer may treat a new legal entity as a new supplier and require requalification. For automotive, aerospace, medical-device or other quality-sensitive sectors, that requalification can interrupt revenue.

The structure memo should therefore identify entity-specific commercial credentials as part of operational continuity. If a key customer certification cannot be transferred in an asset deal, the buyer should estimate the revenue-at-risk period and compare that cost with the liabilities inherited in a share deal. Closing cash mechanics should also reflect capital cleanup. if the seller contributes capital shortly before closing, completion accounts should state whether the new cash increases purchase price. The buyer needs to not pay an additional dollar of equity value merely because the seller satisfied a pre-existing contribution obligation. Locked-box or completion-account rules should address pre-closing capital injections, shareholder-loan repayment and related-party settlement explicitly. This prevents capital remediation from creating an unintended purchase-price increase.

Conclusion#

For a foreign buyer of a Chinese manufacturing business, a share deal can be safer than an asset deal when operational continuity depends on contracts, permits, employees and entity-specific relationships. The revised Company Law and the 2027 registered-capital transition rules make unpaid capital a central share-deal pricing issue.^[1][2] The Foreign Investment Law remains the market-access framework,^[3] while employment rules affect asset-deal workforce migration.^[4] The practical decision is not "which structure has fewer theoretical liabilities?" It is which structure can deliver the operating business at a known total cost, with the material risks allocated before closing.

Legal and regulatory sources#

^[1] Company Law of the People's Republic of China (2023 Revision), effective July 1, 2024: https://www.npc.gov.cn/npc/c2/c30834/202312/t20231229_433999.html ^[2] State Council, Provisions on Implementing the Registered Capital Registration Management System under the Company Law (2024): https://xzfg.moj.gov.cn/front/law/detail?LawID=1727 ^[3] Foreign Investment Law of the People's Republic of China: https://www.npc.gov.cn/englishnpc/c23934/202012/5b3b129aa0a84c41b5f7b0e8bce9bb09.shtml ^[4] Supreme People's Court, Interpretation on Several Issues Concerning the Application of Law in Labor Dispute Cases (II), effective September 1, 2025: https://www.court.gov.cn/zixun/xiangqing/472691.html

General legal information only; not legal advice for a specific acquisition.