The State-Owned Assets Supervision and Administration Commission (SASAC) and the State Financial Bureau issued a Notice Regarding Transfer of State-owned Assets and Equity (2006) on the last day of 2006. The Notice does not create any new rules but clarifies certain issues in the current practice of the transfer of state-owned equity.
1. Transfer by Contract
a. Permitted Circumstances
As a general principle, transfer of state-owned equity must take place through an auction process. However, in special circumstances, state-owned equity may be transferred by contract between the parties. Transfer by contract is usually preferred if the buyer wants to eliminate other competitors. The Notice defines the special circumstances as those complying with national industry policies that could significantly improve the advancement of technology. These guidelines, which are vague, are subject to the discretion of the approval authorities.
b. Approval by Provincial or National SASAC
The Notice requires that any transfer of stateowned equity by contract without an auction must be approved by the provincial- or national-level SASAC and states the provincial SASAC may not authorize lower-level SASACs to approve such transfers. Today, these approval authorities vary by province; some provinces permit lower-level approval for small- or mid-scale transactions. The approval requirement under the Notice clarifies who has authority to approve equity contracts and will increase the difficulty of receiving approval for transfer by contract.
c. Price May Not Be Lower Than Appraised Value
The Notice also provides that if a transfer is conducted by contract, the transfer price may not be lower than the appraised value of the transferred equity, while in case of transfer by auction, it is possible for the transfer price to be as low as 90% of the appraised value.
2. Transfer Through Auction
a. Powers of the Exchange
A transfer through public auction must be conducted at a qualified asset and equity exchange. The Notice grants extensive powers to exchanges to administer the substance and procedure of the auction including the following:
- The exchange shall review the conditions of transfer and the qualification requirements of the transferee. If the exchange finds anything unclear or against fair competition in the conditions, it shall suggest proper changes; otherwise, such conditions or requirements must be approved by the approval authority.
- The exchange must publish all the conditions and requirements.
- The exchange has the right to examine the qualifications of the bidders and determine the transferee.
- After the transferee is determined, the exchange shall supervise the transferee to ensure the transferee meets all the conditions in the auction notice. The exchange reserves the right to revoke the deal if the transferee fails to fulfill the conditions.
Previously, the exchanges were fairly flexible in terms of auction conditions and requirements and usually would agree to facilitate “sweetheart” deals. However, while the Notice grants the above powers to the exchanges, it also imposes obligations and liabilities. As a result, exchanges have recently become stricter in dealing with auction procedures.