Keys to transforming institutions for training and rehabilitation to health and elderly care

By Guo Da, East & Concord Partners
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With China facing an ageing society, the Healthy China 2030 strategy is prioritising transforming outdated training and rehabilitation institutions into health and elderly care institutions.

Guidance and support of this health care was first jointly issued in 2016 by the General Office of the CPC Central Committee and State Council in the Guiding Opinions on the Reform of Training and Rehabilitation and Public Institutions.

Major central state-owned enterprises and provincial health and elderly care investment platforms and industry groups are now gradually adopting the reform.

However, how to pragmatically and efficiently implement the shift for high-quality, sustainable development of the health and elderly care industry requires experience and practice.

In this article, the author introduces key points of legal practice to focus on for the shift – in terms of the transformation path, due diligence, regulation and agreement – that will determine whether the transformation succeeds.

TRANSFORMATION PATH

Guo Da, East & Concord Partners
Guo Da
Senior Associate
East & Concord Partners

The core transformation path of training and rehabilitation institutions differs from the gratuitous transfer of state-owned assets in the legal sense.

It is a full-chain path, covering the gratuitous transfer of assets, the entrusted operation of the business, institutional transformation to an enterprise, and restructuring and integration of platforms.

As the carrier realising the training and rehabilitation function of the entity it is affiliated to, a training and rehabilitation institution is generally the internal department of an entity, without a separate legal personality.

The core point therefore implies institutional transformation into an enterprise.

This involves a prolonged time cycle and relatively complex procedures, alongside the urgent need to satisfy the efficiency of reform.

Generally, after submitting the reform plan for approval, assets are transferred gratuitously (i.e. completion of ownership transfer and/or factual transfer) at the same time as health and elderly care platforms accept the training and rehabilitation institution to carry out the entrusted operation of the business.

This realises the transformation and normal operation of the business at the transition stage, so the training and rehabilitation institution finally becomes a regional health and elderly care company under the health and elderly care platform.

DUE DILIGENCE

Different from a conventional M&A project, the training and rehabilitation institution reform project is policy driven, and the relevant competent authorities often designate the receiving platform in the form of an asset package and preset the reform cycle, which leads to the negotiation of such a project before due diligence.

In addition, although the project itself is a gratuitous transfer, the receiving platform is required to invest funds, manpower and material resources at the early stage, to maintain the operation of the training and rehabilitation assets and prepare for the transformation.

Therefore, due diligence on the project should focus on the assets; for example, on the qualification of the institution and the state of its investment, namely whether the existing institution is abolished or has the basic conditions for institutional transformation into enterprises.

Consideration is also required of the state and any defects of the ownership of the existing assets, such as whether there are problems of unclear ownership, or difficulty in the subsequent transfer.

Issues continue over whether the existing qualification and certificates can be transferred and continued, especially the approvability of medical, food and business licences, as well as the safety, environmental protection and fire permits.

Due diligence must also be paid to the follow-up placement and settlement of medical insurance for existing personnel, especially those of public institutions within the staffing establishment.

To ensure the assets are legally owned by the receiving platform and used in compliance with the laws and regulations, it must also be established whether the institution has undisclosed major debts, disputes, controversies and penalties.

REGULATORY FOCUS

Supervision over the reform of training and rehabilitation institutions focuses on four aspects:

    1. Project filing by the competent development and reform authority, and when the transition period of the project involves new construction and technological transformation, the examination and approval by various departments in respect of planning and construction;
    2. Examination and approval by the state-owned assets, finance and other competent authorities when assets (including equity) are transferred gratuitously during the process of institutional transformation into enterprises;
    3. Examination and approval by health and market regulation authorities of the project’s business operation;
    4. Filing of business operation concentration possibly caused by a transfer of control rights in the project.

KEY AGREEMENTS

Generally speaking, agreement on the reform of training and rehabilitation institutions includes two core elements, the overall handover and gratuitous transfer.

Importantly, it contains the procedural requirements of institutional transformation into enterprises.

Accordingly, the agreement should mainly focus on three key points: How the receiving platform qualitatively and quantitatively determines the basis of receiving the assets, and the scope after the overall handover and before the completion of the gratuitous transfer of assets; how to use the received assets legally and effectively; and how to define the rights and obligations of both parties during the transition period.

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In particular, the agreement should – with the handover of assets as the boundary – establish execution standards for relevant issues left over from history (mainly including personnel placement and handling of creditor’s rights and debts), new special circumstances, and the proper resolution of disputes and controversies, to avoid any deadlock that the transferor shirks responsibility, and the transferee takes no action when it should have.

Only when both parties jointly promote the project, fulfil their responsibilities and give full play to the experience and scale advantages of the receiving platform in the health and elderly care industry, can the transformation be realised on schedule.

Guo Da is a senior associate at East & Concord Partners

Reform

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