In recent years there has been a significant increase in the number of Chinese state-owned enterprises (SOEs) involved in M&A transactions. Given the special nature of state-owned assets, these equity acquisitions raise various issues regarding the disposal of state-owned assets, including in particular transfers of state-owned equity and capital increases in SOEs.
Transfer of state-owned equity
If the state-owned shareholder of a targeted company decides to sell its shares, it must follow the rules set out in the Administration of the Transfer of the State-owned Equity of Enterprises Provisional Measures, jointly issued by the State-owned Assets Supervision and Administration Commission of the State Council and the Ministry of Finance. First, it should consider the matter internally and make a written resolution. In the case of a wholly state-owned enterprise, deliberations should be conducted at a general managers’ working meeting. At a wholly state-owned company, they should be conducted by the board of directors of its state-owned shareholder or, if it does not have a board of directors, at a general manager’s working meeting.
Once the transfer of state-owned equity is approved, the state-owned shareholder must arrange for the target company to assess its assets and verify its capital, and appoint an accounting firm to conduct an audit. In addition, it must appoint an asset appraisal firm to appraise the assets of the target company. If the sale of the state-owned equity will result in the seller losing its controlling stake in the enterprise, the state-owned asset supervision and administration authority will appoint relevant firms to value its assets and verify its capital.
Once the appraisal is complete, the seller must appoint a property-rights exchange institution to solicit buyers by publishing an announcement in a provincial-level or higher economic or financial-type newspaper and also on the property-rights exchange institution’s website. If two or more potential buyers come forward, the sale will be carried out by auction or tender. If only one transferee comes forward, the sale can be completed by way of an agreement.
Transfers may also take place by agreement (and with the approval of provincial-level state-owned asset supervision and administration authorities) in relation to enterprises in key industries where only certain types of buyers are permitted or, in an enterprise-asset restructuring exercise, where the state-owned equity is to be sold to a holding enterprise.
Pricing and payments
Sale prices should be set by open-market bidding with the asset-appraisal result serving as reference. However, sales will be suspended where they fetch less than 90% of the appraised value, and may only be resumed with the approval of the relevant authority. Once a buyer is found, payment must generally be made in full by way of a single lump-sum instalment. Where this creates problems, settlement by multiple instalments is possible. However, the initial payment must be at least 30% of total sale price, and paid within five working days of the date of the contract. Buyers should also provide security for the balance due and pay interest at the applicable bank-lending rate. All sales must be completed within one year.
If the sale of the enterprise’s state-owned equity results in the seller losing its controlling stake, it must then comply with various regulations concerning its relationship with the enterprise’s employees. It must pay off outstanding debts such as wages and social insurance premiums, and must also transfer responsibility for the handling of social insurance payments to the new owner. Any plans for the resettlement of enterprise employees must be expressly set out in the equity-transfer contract. Once the sale is complete, the relevant property-rights transfer certificate should be used to amend the target company’s business registration.
Under the Administration of the Transfer of the State-owned Equity of Enterprises Provisional Measures, where a sale of state-owned shares in another enterprise that has been approved by a state-owned asset supervision and administration authority results in the state losing its controlling stake in the enterprise, the sale must be approved by the People’s Government at the same level. In addition, when an entity partly or wholly-owned by a SOE decides to sell equity it holds in a subsidiary, the sale is subject to the approval of the Ministry of Finance and the relevant state-owned asset supervision and administration authority.
Where an increase in capital or in the number of shares issued by a SOE results in an increase in the percentage of non-state-owned equity in it, or where there is an increase in the quantity of non-state-owned assets in a SOE or in a state-controlled enterprise, that increase constitutes a change in the “form of ownership” that brings the transaction within the scope of various regulations, in particular:
- the Supervision and Administration of the State-Owned Assets of Enterprises Provisional Regulations,
- the Regulating the Work Associated with the Reform of the Form of Ownership of State-Owned Enterprises Opinions, and
- the Further Regulating the Work Associated with the Reform of the Form of Ownership of State-Owned Enterprise Implementing Opinions,
Any change in the ‘form of ownership’ means the SOE must: (1) create a plan detailing the change and submit it for approval, and (2) take stock of assets, verify its capital, audit its finances, and appraise its assets. If the change in form of ownership involves only a small amount of non-state-owned investment and the enterprise already prepares financial accounts in accordance with regulations, it may be exempt from the stock-taking and capital-verification exercises subject to the approval of the relevant state-owned asset supervision and administration authority. The results of any appraisal should be submitted to the capital increase approval authority.
When a target company increases its capital by bringing in new investors, it must use the appraised value as the main reference to determine how the shareholding ratios of each party should change, at the same time taking into account factors such as supply and demand in the property-rights exchange market, the market value of similar assets, resettlement of employees, introduction of advanced technologies, etc. The value of the assets of the target company may not be set at less than 90% of their appraised value.
The Further Regulating the Work Associated with the Reform of the Form of Ownership of State-owned Enterprises Implementing Opinions provide in principle that investors in a capital and share increase be selected in a public manner, without specifically stipulating the procedure for the public solicitation of buyers. However, it is our understanding that, in practice, state-owned asset administration authorities do not currently require SOEs to solicit investors through property-rights exchange institutions when carrying out capital or share-increase transactions.
Zhang Meiying is a partner at Concord & Partners
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