(I) Principles for distribution of the credits and debts

In general principles, the target enterprise shall undertake its credits and debts as independent legal person provided its qualification as a legal person does not change. Based on such principles, the M&A Provisions adopts a provision in the nature of general principles on the issue relating to distribution of credits and debts of the target enterprise. In case of equity M&A, the qualification as a legal person of the original company exist, only with the change of the enterprise nature from a domestic-invested enterprise to a foreign-invested enterprise.

Therefore, as the same legal person, the foreign-invested enterprises established upon the M&A shall undertake its credits and debts prior to the M&A. In case of asset M&A, the merged domestic enterprise coexists with the foreign-invested enterprise established upon the M&A. the original credits and debts of the merged domestic enterprise shall be undertaken by itself, but not by the foreign-invested enterprises established upon the M&A.

However, through special legal procedures, the target enterprise may transfer its credits and debts to a third party. According to the provisions of the Contract Law of our country, upon notification to the debtors, the target enterprise may transfer its credits and debts to a third party; and with consent by the creditors, the target enterprise may also transfer its debts to a third party. In practice, it is popular that the taker-over or a third party undertakes the credits and debts of the target enterprise. For instance, the M&A "designated to pay the debts" may effectively relief the burden of the state-owned enterprise and solve the arrangement of the employees. However, the practice has also witnessed that the rights of the creditors fail due to malicious transfer of the credits of enterprises. Considering the actual demands in practice and the existing problems, the M&A Provisions allows for foreign investors，the merged domestic enterprises, the creditors and other parties concerned to separately reach agreements on the disposal of the credits and debts of the merged domestic enterprise provided that such agreements "shall not damage the interests of a third party or the social and public interests."

(II) Announcement and notification on asset M&A

In practice, malicious asset M&A may also lead to the failure of the credits of the creditors of the target enterprise. In order to safeguard the transaction security and protect the interests of the creditors, the M&A Provisions have set up the procedures for announcement and notification on asset M&A, which requires the investing enterprise to perform the obligations for notification to the creditors.
The M&A Provisions provide for that the domestic enterprise that sells assets shall, within 10 days as of the day when the resolution on the sale of assets is made, send written notices to the creditors, and promulgate an announcement on a newspaper at or above the provincial level which is issued nationwide. The creditors shall, within 10 days upon receipt of the written notice or promulgation of the announcement, be entitled to demand the domestic enterprise that sells assets to provide the corresponding guarantee.

The procedures for such announcement and notification are similar in functions to those for notification on corporate consolidation, separation or reduction of registered capital, which are all designated to protect the interests of the creditors. Considering the demands for the flexibility and quickness of the M&A transactions, the M&A Provisions have provided for ten days when the creditors may claim for their rights, and guarantee is required as the content of the claims by the creditors for rights, and the public announcement shall be one time on a newspaper at or above the provincial level which is issued nationwide. Hence, the legitimate rights and benefits of the creditors are safeguarded, which is also conducive to the completion of the M&A acts in a relatively short term.