Essay about Bringing Students Together Case

2208 Words Jun 26th, 2015 9 Pages
The Enterprise Business Classification


BRIEF BACKGROUND

Six Chinese nationals of related parties (Nominee Shareholders) formed a business enterprise in the People’s Republic of China (PRC) that will own and operate private schools. The Nominee Shareholders own 100 percent of the equity in the Enterprise. A foreign entity (the SEC registrant) in the Cayman Islands establishes a WFOE domiciled in the PRC. The WFOE develops and maintains all of the property providing employees, resources, and other services to run the schools. The WFOE and Nominee Shareholders enter into an equity pledge agreement, call option agreement, and management service agreement. The Enterprise’s Board of Directors, comprising of Nominee Shareholders, manages
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Equity Pledge Agreement — The WFOE and Nominee Shareholders enter into an
agreement whereby the Nominee Shareholders pledge their equity interests in the
Enterprise to the WFOE to secure and protect the WFOE from incurring economic losses in the event the Enterprise does not fulfill its obligation to pay to the WFOE service fees pursuant to the terms of the management service agreement. The agreement prevents the Nominee Shareholders from selling, transferring, or encumbering their equity ownership interest in the Enterprise without the consent of the WFOE. In addition, the agreement prevents the Enterprise from declaring a dividend or initiating a liquidation. This agreement protects the WFOE against possible unauthorized transfers of equity or assets by the Nominee Shareholders and attempts to further protect the WFOE by maintaining the assets of the Enterprise unencumbered.
Call Option — The WFOE and Nominee Shareholders enter into an agreement whereby the WFOE has the exclusive and irrevocable right to cause the Nominee Shareholders to transfer to the WFOE all or part of their equity ownership interests in the Enterprise at any time for either (1) the lowest amount permissible under PRC law or (2) the original capital contribution amount. The exercisability of this contract is questionable since there are foreign ownership restrictions in…