On July 1, 2016, the State-owned Assets Supervision and Administration Commission (SASAC) and the Ministry of Finance jointly issued the “Measures for the Supervision and Administration of Trading in State-owned Assets of Enterprises” (SASAC and Ministry of Finance Order No. 32), which, for the first time, provided comprehensive regulations covering definitions, property rights transfers, and unified trading procedures. Compared with SASAC and Ministry of Finance Order No. 3, the “Measures” lay down clear provisions regarding the methods of trading state-owned assets, as well as equity increases and share expansions and asset transfers.
1 The transaction activities involving state-owned assets explicitly include the transfer of corporate equity, capital increases, and asset transfers. Article 3 of the Measures stipulates that transactions involving state-owned assets by enterprises include: (1) the transfer of equity interests arising from various forms of investment made by institutions performing investor duties, state-owned enterprises, and state-controlled enterprises (hereinafter referred to as “enterprise property rights transfer”); (2) the increase of capital by state-owned enterprises and state-controlled enterprises, as well as enterprises under actual state control (hereinafter referred to as “enterprise capital increase”), excluding government investments in state-funded enterprises made through the injection of additional capital; (3) the transfer of significant assets by state-owned enterprises, state-controlled enterprises, and enterprises under actual state control (hereinafter referred to as “enterprise asset transfer”).
It is clarified that capital increases and asset transfers shall be conducted through on-exchange transactions. Article 2 of the Measures stipulates that transactions involving state-owned assets of enterprises shall be conducted publicly through property rights trading institutions established in accordance with the law; where otherwise provided by national laws and regulations, such provisions shall prevail. Meanwhile, Article 39 of the Measures clarifies that when an enterprise raises additional capital and discloses information via the website of a property rights trading institution to solicit investors, the duration of the information announcement shall not be less than 40 working days, and specifies the key contents that must be included in the disclosed information. Article 48 further clarifies that the transfer of physical assets of a certain value by an enterprise shall, after following the relevant decision-making procedures prescribed by the enterprise’s internal management system, be conducted publicly through a property rights trading institution.
In addition, Articles 45 and 46 of the Measures clearly stipulate the procedures for capital increases conducted through non-public agreements. Specifically, Article 45 provides that, subject to approval by the State-owned Assets Supervision and Administration Commission (SASAC), a non-public agreement approach may be adopted for capital increases under the following circumstances: (1) where the capital increase involves specific state-owned enterprises, state-controlled enterprises, or enterprises under actual state control due to adjustments in the layout and structure of state-owned capital; (2) where the capital increase involves a specific investor who is partnering strategically with or forming a community of interests with the state-funded enterprise or its subsidiary. Article 46 further specifies that, following deliberation and decision-making by the state-funded enterprise, a non-public agreement approach may be used for capital increases under the following circumstances: (1) where the state-funded enterprise itself or another subsidiary directly controlled or actually controlled by it participates in the capital increase; (2) where corporate debt is converted into equity; (3) where existing shareholders of the enterprise contribute additional capital.
Meanwhile, Article 48 of the Measures stipulates that for asset transfers involving state-owned enterprises or specific industries, if such transfers must be conducted in a non-public manner between state-owned enterprises, state-controlled enterprises, and enterprises under actual state control, the transferring party shall submit the matter to the state-owned enterprise for review and approval at each successive level.
The approval authority, transaction procedures, and pricing principles for capital increases and share expansions were proposed for the first time. Article 34 of the Measures stipulates that any capital increase by state-owned enterprises shall be subject to approval by the SASAC. If such a capital increase results in the state no longer holding a controlling interest in the invested enterprise, the SASAC must submit the matter for approval to the people's government at the same level. Article 35 provides that state-owned enterprises shall decide on the capital-increase actions of their subsidiaries. Among these, for subsidiaries whose primary business is in industries and key sectors vital to national security and the lifeline of the national economy and which primarily undertake major special tasks, the capital-increase actions of such subsidiaries must be reported by the state-owned enterprise to the competent state-asset supervision and administration authority at the same level for approval. If the enterprise undergoing the capital increase is jointly held by multiple state-owned shareholders, the state-owned shareholder with the largest shareholding ratio shall be responsible for carrying out the relevant approval procedures; if the shareholding ratios of all state-owned shareholders are equal, the relevant shareholders shall, through consultation, designate one of them to carry out the relevant approval procedures.
Articles 36, 37, and 38 of the Measures clearly stipulate that when a company undertakes an equity increase, it must conduct a feasibility study, develop an equity-increase plan, specify the amount of funds to be raised, the intended use of these funds, the qualifications that investors should meet, selection criteria, and selection procedures. The decision on equity increase shall be made by the company itself in accordance with its articles of association and internal management regulations, and a written resolution shall be adopted. The company undertaking the equity increase shall entrust intermediary agencies with appropriate qualifications to carry out auditing and asset valuation. Article 38 of the Measures further provides that, under the following circumstances, the company’s capital and equity proportions may be determined based on the appraisal report or the most recent audit report: (1) when the original shareholders of the company undertaking the equity increase make proportional additional investments; (2) when an institution fulfilling the duties of an investor increases the capital of a state-owned enterprise; (3) when a state-controlled or state-de facto controlled enterprise increases the capital of its wholly-owned subsidiary; (4) when both the company undertaking the equity increase and the investor are wholly state-owned or fully state-owned enterprises.
Meanwhile, Article 43 of the Measures stipulates that if an investor contributes non-monetary assets, such contribution must be approved by the board of directors or shareholders’ meeting of the company undergoing the capital increase, and the investor must entrust a qualified appraisal agency to conduct an appraisal and confirm the amount of the investment contribution.
For the first time, the approval authority for the transfer of property rights in enterprises jointly held by multiple state-owned shareholders has been clearly defined. Article 8 of the Measures clearly stipulates that, in cases where the transferor is an enterprise jointly held by multiple state-owned shareholders, the state-owned shareholder with the largest shareholding shall be responsible for carrying out the relevant approval procedures. If the shareholdings of all state-owned shareholders are equal, the relevant shareholders shall, after consultation, designate one of them to carry out the relevant approval procedures.
Clarify the principle of combining preliminary and formal disclosures of state-owned asset transaction information, and disclose asset transaction information to the public in a phased manner. The Measures explicitly state for the first time that transactions involving state-owned assets shall, based on the actual conditions of the enterprise and the progress of the work, adopt a combination of preliminary information disclosure and formal disclosure. Asset transaction information will be disclosed to the public in stages via the website of the property rights trading institution, with an open call for potential transferees. Specifically, the duration of formal disclosure for equity transfers shall be no less than 20 working days; and the duration of formal disclosure for capital increases shall be no less than 40 working days.
For the transfer of state-owned equity in enterprises and capital increases, a legal opinion shall be issued regarding the equity transfer plan or the capital increase plan. The Measures clearly stipulate that when the state-owned asset supervision and administration authorities approve or when state-funded enterprises deliberate and decide on enterprise property rights transfers and capital increases conducted through non-public agreements, they shall review the legal opinions pertaining to such property rights transfers or capital increases. Document No. 60 also explicitly requires that a legal opinion must be issued for any enterprise restructuring plan. Moreover, Order No. 3 issued by the State-owned Assets Supervision and Administration Commission and the Ministry of Finance explicitly states that, in making decisions on or approving the transfer of state-owned enterprise property rights, the legal opinions issued by law firms must be reviewed.
As can be seen from this, Document No. 32 further reinforces the guiding principle of property rights reform—namely, standardized compliance and transparent operations in accordance with the law. By leveraging the independent third-party expertise of law firms to issue legal opinions, it is possible to provide legal assessments on the legality and compliance of state-owned asset transactions. This plays a crucial role in standardizing transaction practices, preventing losses of state-owned assets, and safeguarding the legitimate rights and interests of employees and creditors.
