The gratuitous transfer of enterprises’ state-owned property rights is considered a cost-effective and efficient way of restructuring and redeploying state-owned assets within China’s economic system. There is a risk, however, that state-owned assets will be lost in the process. In order to further regulate the gratuitous transfer of the state-owned property rights of enterprises directly under the central government (Central Enterprises) and avoid the loss of state-owned assets, the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) issued Working Guidelines on Gratuitous Transfers of Enterprises’ State-Owned Property Rights on February 16, 2009.
The Guidelines, which took effect on the day of their issuance, follow SASAC’s Interim Measures on the Administration of the Gratuitous Transfer of Enterprises’ State-Owned Property Rights promulgated in August 2005. The Guidelines spell out certain procedural issues that the Measures did not address. Since the SASAC intends to reduce the number of Central Enterprises from approximately 140 in 2008 to between 80 and 100 by 2010, some experts believe that the Guidelines signal an acceleration of the restructuring process of, as well as mergers and acquisitions among, the Central Enterprises.
The Guidelines only apply to Central Enterprises and their subsidiaries that gratuitously transfer state-owned property rights. Specifically, each of the transferor and transferee must be a wholly state-owned enterprise, a wholly state-owned company, a one-person limited liability company directly or indirectly wholly owned by a state-owned public institution. Thus, only purely stateowned enterprises can engage in the gratuitous transfer of state-owned property rights.
To facilitate corporate governance, the Guidelines stipulate that a transferee’s management hierarchy should not contain more than three levels after a gratuitous transfer of state-owned property rights.
The SASAC is in charge of approving applications for the gratuitous transfer of state-owned property rights by Central Enterprises and their subsidiaries. To expedite the approval process, the Guidelines specify a timeline for the SASAC to respond to an application for a gratuitous transfer. For example, the SASAC must provide a preliminary opinion within five working days after it receives an applicant’s application materials. In addition, if the SASAC finds any problem with the application in its preliminary review, it must communicate this problem to the applicant, and if the applicant has no objection to the problem, then the applicant should submit a revised application to the SASAC within five working days.
The Guidelines also elaborate on the application materials that the Measures require for a gratuitous transfer. For example, Article 16 of the Measures states that an application for a gratuitous transfer should include the application documents and other relevant documents. The Guidelines further clarify that an application for a gratuitous transfer should contain:
- application details;
- basic information of the transferor, transferee and target company, including their date of establishment, organization type, registered capital, shareholding structure, major business, business and operational information, and financial condition;
- the reasons for the gratuitous transfer;
- a development plan and profit projection of the target company as prepared by the transferee;
- the target company’s risk exposure information;
- executed agreements and documents pertaining to decision analysis; and
- an undertaking that the ownership of the target company is free and clear of all restrictions on or barriers to transfer, and that neither party has executed any supplemental agreements nor undertaken any other obligations except for the gratuitous transfer agreement and related obligations that have been submitted to the SASAC.
The Guidelines further specify that the abovementioned target company’s risk exposure information includes:
- employee information, which refers to the total number of current and retired employees, employee transfer and settlement proposals, and details on the administration of retired employees;
- contingent liabilities, which means the security interest provided for third parties and unresolved disputes, and relevant resolutions and risk assessments; and
- a review of the social benefits provided by the target company.
As for the other relevant documents mentioned in Article 16 of the Measures, the Guidelines provide the following list of materials that applicants should include in their application:
- relevant resolutions and approval documents of a Central Enterprise where its subsidiary is the transferor or transferee;
- approval documents issued by relevant governmental authorities (e.g., local governments or branches of the SASAC at or above the municipal level) where the gratuitous transfer is conducted between a Central Enterprise and a non-Central Enterprise;
- relevant shareholder resolutions or other legal certification documents where the gratuitous transfer involves the state-owned property rights of a limited liability company; and
- relevant board resolutions or other legal certification documents where the gratuitous transfer involves the state-owned property rights of a Sino-foreign joint venture.
By clarifying certain formalities involved in obtaining approval for gratuitous transfers of enterprises’ state-owned assets, the Guidelines will facilitate and expedite the transfer process.