The transfer of so-called State-owned assets already for considerable time has been subject to special procedures. State-owned assets are shares or assets held by State-owned enterprises. According to the Provisional Measures on Administration of Transfer of State-owned Property Rights in Enterprises of 1 February 2004 (“2004 Provisions”), State-owned assets cannot be simply transferred by agreement and registration. Additional approval/recordal formalities with the competent State-owned Assets Supervision and Administration Commission (“SASAC”) are required, the State-owned assets must be evaluated by a specially licensed evaluation firm and the transfer must be handled through the so-called Equity Exchange Center by bidding process. On 24 June 2016, the SASAC and the PRC Ministry of Finance provided further guidance on these issues by jointly promulgating the Measures on Administration of Transactions of State-owned Assets of Enterprises (“2016 Measures”). The 2016 Measures took effect on 24 June 2016 and confirm that all State-owned asset transactions shall be subject to public bidding. We summarise the key content of the 2016 Measures below.
1. Definition of “State-owned asset transactions”
According to Article 3 and Article 4 of the 2016 Measures, “State-owned asset transactions” refer to the transfer of shares held by, capital increase of and the transfer of assets of the following enterprises (collectively “Regulated Enterprises”):
- enterprises solely invested and established directly or indirectly by government departments, organisations and institutions;
- enterprises individually or jointly invested by the entities and enterprises listed in above item (1), if the shareholding ratio of the latter collectively exceeds 50%, and one of which is the largest shareholder;
- various levels of subsidiaries invested by the enterprises listed in above item (1) and item (2), if the shareholding ratio of the latter is more than 50%; and
- enterprises in which government departments, organisations, institutions, wholly state-owned enterprises and state-controlled enterprises directly or indirectly hold no more than 50% of the equity interests, but one of them is the largest shareholder, and has the actual control of such enterprise through shareholders’ agreement, articles of association, board resolution or other agreements or arrangements.
The above definitions are in line with the past regulations and practice.
2. Transfer of shares held by Regulated Enterprises
Compared with the 2004 Provisions, the 2016 Measures introduce the following changes for the transfer of shares held by Regulated Enterprises:
- Requirements imposed on the buyer
According to the 2004 Provisions, when inviting buyers, the seller may set necessary conditions for the transfer in relation to the buyer's qualifications, commercial credit standing, status of business operations and scale of assets etc.
Under the 2016 Measures, the seller, in principle, shall not set qualification requirements for the buyer. If such requirements are indeed needed, no clear hints shall be given, and the principle of fair competition shall not be violated. The relevant content of the qualification requirements shall be filed with the competent SASAC for recordal before disclosure of the information to the public.
The above changes are in line with the practice of recent years. A decade ago, if a seller had found a buyer for its State-owned assets, it was relatively easy to ensure that no third party joined the bidding by setting qualification requirements which, in practice, could only be met by the pre-selected buyer. However, already in the past years, the Equity Exchange Centers were increasingly reluctant to set limiting criteria. In the future this will become even more difficult.
- Adoption of pre-disclosure system
The 2016 Measures allow the seller to apply a combination of pre-disclosure and formal disclosure of information according to its actual conditions and work schedule. If a share transfer results in the transfer of actual control of the target enterprise, the seller shall, within 10 working days upon approval of the transfer, pre-disclose the information through the Equity Exchange Center for a time period of at least 20 working days.
Compared with the 2004 Provisions which only require the formal disclosure for a time period of 20 working days, the 2016 Measures extended the maximum duration for information disclosure to 40 working days.
3. Capital increase
(1) Already in 2005 the PRC State Council published the Circular on Further Standardization of the Work Relating to the Reconstruction of State-owned Enterprises which stipulated that State-owned enterprises planning to carry out restructuring by way of capital increase and equity expansion shall select investors through public bidding, media or networks. However, in practice, only few local SASACs strictly implemented this Circular.
The 2016 Measures now make it mandatory to carry out capital increase through public bidding nationwide and, for the first time, specify detailed procedures. These are as follows:
- application for examination and approval of the capital increase with the competent SASAC;
- adoption of internal decisions in accordance with the articles of association;
- engagement of an auditing firm / an evaluation firm for the purpose of preparing an auditing report / evaluation report;
- disclosure of information for at least 40 working days and determination of the intended investor;
- conclusion of the capital increase agreement; and
- public announcement for a period of at least five working days.
(2) The 2016 Measures also provide for exemptions from public bidding for capital increases. Under the following circumstances, a capital increase can be done through mutual agreement:
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Due to the above exemptions, luckily, the impact of the 2016 Measures on foreign-invested joint ventures will be limited. If a joint venture has a State-owned shareholder and the existing shareholders agree on a capital increase, they do not need to go through public bidding, but can apply for an exemption.
4. Transfer of enterprise assets
Despite the 2004 Provisions, in practice, there were disputes on whether the transfer of assets (such as equipment and real estate) of State-owned enterprises must be handled through the Equity Exchange Center. The 2016 Measures make it clear that the transfer of production equipment, real estate, construction in progress, land use rights, creditors' rights, intellectual property rights and other assets with certain value by any Regulated Enterprises shall be carried out through public bidding at the Equity Exchange Center.
The disclosure period depends on the value of the assets in question:
- For assets which have a minimum price between 1 million RMB and 10 million RMB, the period for information disclosure shall not be less than 10 working days.
- For assets which have a minimum price above 10 million RMB, the period for information disclosure shall not be less than 20 working days.
The 2016 Measures seek to unify the practice for the transfer of State-owned shares and assets as well as the capital increase of State-owned enterprises. They aim at further strengthening protection and management of State-owned assets by making transactions more transparent. Foreign investors which cooperate with State-owned enterprises or intend to acquire State-owned assets are well advised to familiarise themselves with the special procedures for State-owned assets. They also need to be aware that these special procedures add uncertainties and are time consuming.