Key point: Today we share an original article by lawyer Tang Shunliang, a legal expert in tobacco, e-cigarettes, and next-generation tobacco products. In this article, he not only reviews vaping regulations
FLOW-wrap: break-word !important;"> This tweet I shared with you today Tobacco,e-cigarettesandnew tobaccoField legal experts Tang Shun Original by Good Lawyer.
In this article, Lawyer Tang Shunliang not only sorted out the requirements for changes in investors or shareholders in the e-cigarette regulatory rules, but also related toe-cigarette enterprisesThere are three typical situations where investors or shareholders change their litigation claims, More focuses on analyzing the risks of changes in investors or shareholders of e-cigarette companies from the following seven aspects.
1. The materials required for the change of investors during the certificate renewal process have not yet been clarified
2. Change of investor in case of equity acquisition based on order cooperation
3. Investor risks changed under the absolute holding model of equity acquisition
4. Validity period and policy adjustment risks after equity investment is exchanged
5. Risk of litigation arising from investment acquisition equity disputes
6. Risk of equity holding in e-cigarette companies
7. Other risks
We recommend that people in the e-cigarette supply chain collect and forward this tweet for any time.
Summary: On June 9, 2023, the State Tobacco Monopoly Administration issued the Notice on Carrying out the License Renewal Work of Tobacco Monopoly Production Enterprises Related to Electronic Cigarette Production Enterprises (hereinafter referred to as the" License Renewal Notice "), and the license renewal work was officially started. Compared with the license application stage, the change of major investors or shareholders may be more common in this round of license renewal, but there are many risks that need to be avoided in advance.▌ A. Requirements for changes in investors or shareholders in e-cigarette regulatory rules1. The "Instructions for E-cigarette Production and Operation Entities to Apply for a License" stipulates Regarding the change of e-cigarette licenses, it first appeared in the" Instructions for Application for Licences for E-cigarette Production and Operation Entities "issued by the State Tobacco Monopoly Administration on April 25, 2022. In the" List of Materials for Application for New Licences for Tobacco Monopoly Production Enterprises (E-Cigarette Related Production Enterprises)"point" 8 "mentioned that" to change a tobacco monopoly license, materials related to the change matters are required." Annex 9 of the" Instructions "is the" Application Form for Change of the License of Tobacco Monopoly Production Enterprises ", among which the" change matters "include" enterprise name "," legal representative (person in charge)"," enterprise type (limited to business entity not changed)"," residence (main business site, business site)(limited to change due to objective reasons such as road planning and urban construction)"," main investor, registration matters such as the address of production factories and finished product warehouses under the jurisdiction of the certificate holder ". Many e-cigarette companies have requested change after obtaining licenses. However, apart from the" Instructions "and Annex 9, the specific change process and relevant annex materials required for the change are unclear, and there have been no changes.2. "License Replacement Notice" Requirements of State Tobacco Ban Zong [2023] No. 79 The" Certificate Replacement Notice "mentions the" changes in the main investors "that e-cigarette companies are more concerned about. In the third point of the notice," Clarify relevant policies ", item (2)" Regarding the changes in the main investors ", it is clear: In order to regulate the changes in the main investors of certified e-cigarette-related production enterprises and the orderly flow of capital in the e-cigarette industry, the following circumstances shall not be changed: the newly added main investors of certified e-cigarette-related production enterprises are listed as business entities such as the list of serious illegal and dishonest entities and the list of suppliers who have committed bribery; those who violate the relevant regulations on foreign investment in e-cigarettes; and those who do not comply with the regulatory regulations on e-cigarettes. This clause has two keywords: " changes in major investors "and" orderly flow of industrial capital ". Combined with the analysis of the planning and regulatory purposes of the e-cigarette industry, allowing changes is conducive to the optimal allocation and reorganization of resources, and is beneficial to the intensive development of the e-cigarette industry and its participation in international competition. Therefore, this clause only stipulates that no #p#pagination title #e# In the event of changes, other eligible change requests should be made in this round of certificate replacement.▌ two. Three typical situations in which investors or shareholders of e-cigarette companies change their litigation requests There is a small example: Due to the strict requirements for changing the address of e-cigarette companies, some factory landlords use this policy to increase rents, forcing companies to reconsider changing production or business sites. This shows that there may be many factors affecting the change of e-cigarette licenses. Specific changes in investors or shareholders generally include the following circumstances.1. No advance changes before license application There are a large number of existing e-cigarette companies, manye-cigarette companiesThe relationship between governance and equity is relatively extensive, and the articles of association, capital contribution and distribution rules are unclear. Since the license application stage is unclear about the significance of investors and shareholders registering on the license, changes are not considered in advance, and they are busy applying for the license first. Most e-cigarette companies apply as the actual named shareholders of industrial and commercial registration. The actual controller and share holding cannot be reflected in the license.# p #pagination title #e # After obtaining the license, the value has changed. If no relevant agreement is reached among the company's shareholders before the application, shareholder disputes will arise. Even if the shareholders have reached an agreement to transfer or withdraw, there is still a question of whether the change in industrial and commercial registration and the change in monopoly license can be realized.2. Equity investment during the license application process In the early stage of the introduction of the e-cigarette regulatory policy, the market was generally not optimistic about domestic supervision, but it wase-cigarette industryEnterprises, investment institutions, and individuals who know better are expected to obtain monopoly licenses, so during the license application stage, the transfer and acquisition of equity are relatively close. However, if the shareholder change registration is not completed when submitting the application for the license, it will be "stranded" outside the license. However, after obtaining the license, certain disputes will also arise due to specific agreements such as whether the capital contribution is actually in place and conditional agreements. Some investors have invested in companies that have not obtained licenses due to previous certification materials, product categories, scale, production conditions and other reasons, resulting in capital withdrawal litigation. Therefore, changes in some investors and shareholders may wait until this round of certificate replacement process before they can be changed.3. Investment and mergers after obtaining the license After the approval of e-cigarette licenses was completed and put into operation the trading system, many companies truly felt that it was difficult to move without a license. At the same time, there are also some existing companies that have not obtained licenses and are well aware of the risks of not having a license and the significant impact on their existing customers, orders and sales expectations. At this stage, there are also companies that have obtained licenses but have unsatisfactory management capabilities and operating performance that need to transfer equity. Enterprises with relatively good market resources and have not obtained licenses need to acquire equity in licensed companies.4. Equity changes among affiliated entities of large and medium-sized e-cigarette companies Large and medium-sized e-cigarette enterprises with advantages in the entire industry chain, including tobacco-related affiliated enterprises, after the completion of the e-cigarette monopoly license, they also need to adjust their equity due to strategic reorganization and transformation, cross-shareholding, supply chain cooperation, compliance risks, core technologies and intellectual property rights, market and brand integration, and cross-border investment.▌ three.#p#pagination title #e# Risk of changes in investors or shareholders of e-cigarette companies Due to the particularity of the registration of investors or shareholders of e-cigarette licenses, the issue of change is different from industrial and commercial registration in the sense of Company Law. Rules such as the Company Registration Management Regulations take precedence in terms of legal effect. E-cigarette supervision rules, and the effect of change registrations made in accordance with the Company Law and other laws and regulations is guaranteed. However, the e-cigarette license law mainly stems from the Tobacco Monopoly Law and its Implementation Regulations, and can be regarded as a special law. When there is a conflict between the two in actual operation, there may be situations where agreements such as equity transfer change and conditional entry into force may be invalid. Based on this basis, these risks need to be considered in the agreement between investment mergers and acquisitions, equity transactions, and the certificate replacement process.1. The materials required for the change of investors during the certificate renewal process have not yet been clarified #p#Page title #e#(1) The materials required by an enterprise to submit changes in investors are unclear. Possible situations include applying for a change in license investors based on industrial and commercial registration change materials, changing license investors and then applying for industrial and commercial registration changes, or directly applying for changes in the company's articles of association and equity transfer agreement as annexes.(2) Due to this uncertainty, both parties to the equity change do not know how to sign equity transfer and other agreements. At the same time, there will also be two versions of the agreement, the registered version of the agreement and the actual transaction agreement. The provisions of the two agreements are inconsistent. If there is a change or one party breaches the contract, risks will arise, and the interests of one party may not be guaranteed.(3) Due to this uncertainty, when the change registration cannot be registered, or other compliance risks arise, how the conditions for terminating the agreement are agreed, and whether the funds and other rights that have been paid after the cancellation can be recovered in a timely manner., or whether guarantees have been provided, etc., are risks that need to be carefully considered.2. Change of investor in the case of equity acquisitions based on order-based cooperation(1) One situation is that an existing e-cigarette company with stable customers overseas did not obtain a production enterprise license in the previous round and placed customer orders to the small and medium-sized e-cigarette company that obtained the license. This situation may sacrifice profits and lose customers, so the most urgent need for equity acquisition to control the e-cigarette production enterprise. The risks of this acquisition stem from the ability to continuously guarantee customer orders and the level of control over a series of core issues such as R & D, production, and compliance of the acquired e-cigarette companies. Failure to acquire changes may face risks such as the resignation of core personnel after liquidation, and large investment losses.(2) The second situation is that a production company that has obtained a license and has the ability to increase production capacity by acquiring the licensed company to avoid the risk of new fixed investment approval and new production capacity. The risks of this operation method include: the legal representative of the acquirer (major shareholder) invests in another e-cigarette company under real name or pseudonym, the priority and guarantee ability of the acquiree to produce according to orders, the agreement between equity corresponding income and order cooperation fees, exclusive cooperation and competition restrictions of holding or shareholding companies.# p#pagination title #e# Overall, this situation requires many risks to be considered and requires a detailed and thorough cooperation plan (agreement).3. Investor risks changed under the absolute holding model of equity acquisition(1) The acquisition of absolute control hides the possibility of violations of laws and regulations by" sick "shareholders who transfer equity. After the acquisition, the safety risk of the license survival will be caused for other reasons (if the law enforcement in the e-cigarette case is implicated). As a result, the validity period after the certificate is renewed is shortened, and relevant supporting materials and legal opinions need to be provided, otherwise the certificate may not be passed.(2) The acquisition agreement does not clearly distinguish whether it is an asset acquisition or an equity acquisition. It retains or replaces management and core technical personnel, and only requires production capacity to inherit the original customer resources. If there is no clear agreement, it will also bring greater risks.(3) Consistent with the previous acquisition method, the evaluation of the two basic capabilities of the acquired enterprise: R & D capabilities and compliance management not only affects the acquisition price, but also affects the profitability and compliance management capabilities after the acquisition.(4) The acquisition of absolute control has a major risk to be considered: the competitive relationship between the target enterprise's original customers and the acquirer, the target enterprise's own intellectual property assets, and the risk of infringement of overseas intellectual property rights of its own brands.4. Validity period and policy adjustment risks after equity investment redemption(1) The acquirer's expected judgment on the increase in production capacity of the acquired e-cigarette company. If both parties expect to increase production capacity as much as possible after the acquisition, or add additional fixed investment to expand the factory to increase production capacity, insufficient prediction of the capacity increase policy may lead to the risk that the acquired company will not be able to expand production capacity.# p#pagination title #e#(2) In principle, as long as there are no violations, the license will continue to be valid after the acquisition. However, if there is a situation where the third round of license renewal cannot be extended, including regulatory policy adjustments and compliance issues arise, then it will cause a large loss of investment. Judging from the "orderly flow of industrial capital" mentioned in this round of certificate replacement notices, if a disorderly trend occurs, adjustments will be made in the next round, and subsequent sales or acquisitions will become more uncertain.5. Risk of litigation arising from investment acquisition equity disputes(1) Shareholders of e-cigarette companies withdrew and their creditor's rights and debts were not properly handled. The occurrence of litigation will affect the company and new shareholders after the acquisition and change;(2) During the withdrawal process of foreign natural person shareholders, equity transfer fees will be paid, but whether to continue to pay for their unfinished brand licenses and orders until the brand is fully sold overseas, otherwise cross-border disputes may arise, and domestic e-cigarettes have no right to sell products produced but not sold, trademark infringement and other risks.(3) The non-competition agreement was not fully supplemented during the acquisition process of shareholders who transferred the equity. After transferring the equity, they moved to a competitive enterprise with trade secrets, customers, and core technology.(4) During the transaction negotiation process, the shareholders planning to transfer their equity were preserved and included in the dishonest list due to personal or actual control of the enterprise, which made it impossible for investors to make shareholder changes in a timely manner.6. Risk of equity holding in e-cigarette companies(1) Due to the special nature of monopoly supervision of e-cigarette companies, equity substitution is relatively common, including the issue of the names and hidden shareholders of both parties to the acquisition transaction. The substitution agreement itself has very large risks: Including the risks of whether the proxy holder actually contributes capital and whether the shareholder qualifications are valid, the company's shareholders 'meeting confronts third parties against the resolutions of the proxy holding agreement, and whether the equity transfer has been made by the shareholders' meeting (including anonymous shareholders) in accordance with the company's articles of association. These issues will lead to the risk that either party will use the flaws in the agreement to renege on after the investor changes.# p#pagination title #e#(2) Including the above-mentioned equity changes, equity proxy holding cannot completely avoid equity penetration. It is found that" the main investor is included in the list of entities with serious violations of law and breach of trust, and there is a business entity such as a list of bribery suppliers; violations of relevant regulations on foreign investment in e-cigarettes ". Therefore, both parties to the investment and acquisition need to fully evaluate the transaction structure to avoid the risk of equity proxy holding.
The license renewal notice includes a cover clause that" other things that do not comply with the regulatory requirements of e-cigarettes "and cannot be changed. However, as for which circumstances may not comply with the regulatory requirements of e-cigarettes, it is necessary to have sufficient understanding of domestic and foreign regulatory policies for e-cigarettes. For example, e-cigarette companies generally believe that if they only export, they will not be subject to domestic supervision, but it cannot be completely ruled out that e-cigarette companies violate regulations overseas and lead to handling by domestic regulatory authorities. Legally speaking, there is no problem at all. Although the export target countries adopt a commitment system for adding ingredients, the certified e-cigarette companies are after all the subjects under tobacco monopoly supervision. If they violate the law overseas, they will bring negative comments on the weak supervision of China's regulatory authorities. Therefore, when this occurs, it is reasonable to apply" other items that do not comply with the regulatory regulations on e-cigarettes "and will even face other more serious treatment from relevant domestic departments. Finally, we remind that except for a few relatively standardized e-cigarette companies and strong legal teams, the situation they have shown on issues such as investment and acquisition of equity in e-cigarette companies is simple and crude. There may be blind spots in acquisition strategic considerations and policy pre-judgment, intellectual property rights, due diligence, framework agreements to detailed acquisition agreements, because this industry has low pre-regulatory entry barriers, and many companies lack awareness of compliance operations.
