Supervision of SOEs’ external investment by equity participation

In recent years, there has been a growing trend in state-owned enterprises’ (SOEs) external investment in unlisted Chinese enterprises by equity participation. This article clarifies the procedures governing the processes of stock investment, equity transfer and capital increase.

Equity participation

Approval of decision-making
Article 11 of the Interim Measures for the Administration of Equity Participation by SOEs stipulates that the downward authorisation of decision-making power from equity participation should be discussed by the party committee (party group), and the decision shall be made by the board of directors or by the managerial levels. The authorisation shall be granted to no more than two managerial levels in principle.

Equity participation should be included in the scope of “major issues, major appointments and dismissals, major project investment, and use of large amount of funds”, and decided by the group company. An SOE investing in a target enterprise by equity participation should fulfil the decision-making and approval procedures in accordance with the main business of the target enterprise, the amount of investment and the authorisation of the group that owns the SOE.

Appraisal and filing
According to regulations such as: China’s Law on the State-owned Assets of Enterprises; the Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises (Order No. 12); and the Opinions of the Ministry of Finance on the Reform of State-owned Asset Appraisal to Strengthen Supervision and Administration of Asset Appraisal, SOEs should appraise relevant assets for external investment and perform filing procedures for the appraisal projects of state-owned assets under different circumstances.

Property rights registration
According to the Rules on the Management of Property Right Registration of the State Assets of Enterprises and the Interim Measures for the Administration of the Property Right Registration of State-Funded Enterprises (Order No. 29), if an SOE acquires an equity interest in an enterprise for the first time by acquisition or investment in shares, it should register for the possession of property rights.

Equity transfer

According to provisions including chapter 2 of the Measures for the Supervision and Administration of the Transactions of State-Owned Assets of Enterprises, order No. 12 and order No. 29, the steps to be followed by an SOE in the transfer of property rights, are as follows:

Decision-making and approval
The state-owned asset’s regulators are responsible for approving the transfer of property rights of state-funded enterprises, and the specific approval authority should be decided by the state-funded enterprises according to their articles of association and internal management system.

Audit Report
The transferring party shall obtain the latest annual audit report of the enterprise subject to the transfer.

Appraisal and filing
The transfer of property rights should be appraised on relevant assets and fulfil corresponding filing procedures.

Exchange in the market
The transfer of property rights shall be carried out openly in the property rights market, and only some exceptions may be made by way of non-public agreement.

Property rights registration
Handling changes in, or cancellation of, property rights registration.

Capital increase

In the event of a capital increase of the target enterprise without the SOE subscribing to the additional registered capital, the proportion of the SOE’s shareholding in the target enterprise will be diluted, and the following procedures need to be fulfilled:

Appraisal and filing
According to article 6 of order No. 12, equity changes of state-owned shareholders in unlisted companies should, in principle, be appraised in respect of the relevant assets. However, in practice, most state-owned shareholders did not fulfil the appraisal and filing procedures for passive dilution of their equity.

According to article 20 of the Interim Measures for the Administration of Equity Participation and the reply of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, on 6 November 2020, to the question of “Whether to carry out asset appraisal and filing for capital increase of state-owned shareholding participations”, the state-owned shareholders should express their opinions on asset appraisal and the fulfilment of filing procedures for appraisal of state-owned assets according to relevant provisions on the supervision and management of state-owned assets at the decision-making meeting, with the resolution of the shareholders meeting ultimately prevailing.

In general, where a state-owned shareholding enterprise increases its capital, but state-owned shareholders do not participate in the subscription of newly registered capital, resulting in dilution of their shareholding, those shareholders should express their opinions on asset appraisal and market transactions in the decision-making process of the target enterprise.

Registration of change of property rights
According to article 13 of order No. 29, if the registered capital of the target enterprise is changed, the state-owned shareholders should register the change in property rights.