On 7 September, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) published the Issues Regarding the Exchange of State-owned Property Rights by Central Enterprises Notice.
Definition
In the Notice, the exchange of state-owned property rights refers to the transfer of property rights to companies held by central enterprises and their wholly owned subsidiaries and companies wholly owned by these central enterprises (collectively known as state-owned work units), or the transfer of property rights to companies held by state-owned work units with the property rights or assets held by entities actually controlled by central enterprises during asset restructuring, with cash payments accounting for less than 25% of the total amount of an asset exchange.
An actually controlled entity refers to an entity in which a central enterprise does not directly or indirectly own 100%, but it can exercise actual control over this entity as the largest shareholder and through the articles of association, the board of directors or other arrangements, and other shareholders do not constitute any party acting in concert.
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Principles
According to the Notice, the exchange of state-owned property rights should meet the needs of national economic patterns and restructuring, strengthen the principal businesses and optimize resource allocation, and improve the core competitiveness of enterprises. The ownership of the property to be exchanged must be clear, and the delivery or transfer of the property must be free from any legal impediments.
Procedures
Feasibility study. State-owned work units are required to carry out a feasibility study on any exchange of state-owned property rights, submit a preliminary feasibility report and put forward solutions to various issues involving arrangements for workers and the handling of creditors’ rights and debts.
Internal resolution. State-owned work units should carry out an internal decision-making process and make a resolution in writing.
Assessment and filing for record. The two parties involved in an exchange should appoint a qualified asset evaluation agency to conduct an assessment of the assets to be replaced, and complete the formalities for filing the assessment for the record. The results of the asset assessment filed for record should serve as the basis for determining the replacement price.
Entry into a replacement agreement. The two parties involved in an exchange must sign an exchange agreement which should clearly describe the exchange price, the method of payment, delivery of the assets to be replaced, liability for breach of contract, methods of dispute resolution, conditions for effecting the agreement and other particulars.
Approval and presentation of opinions. After an exchange of state-owned property rights is considered and approved, or after an opinion is presented, by a central enterprise pursuant to its internal decision-making process, a copy of this should be submitted to SASAC.
If an actually controlled entity is a listed company, review and approval or an opinion is given by SASAC. If a state-owned work unit is a limited corporation, and the exchange requires a resolution at a shareholders’ meeting or a general meeting, the exchange should be tabled at such a meeting for consideration after the central enterprise or SASAC gives its opinion.
If the exchange is of property rights among central enterprises or between a central enterprise and a local enterprise regulated by SASAC, the two parties to the replacement, as state-owned enterprises, are required to comply with the requirements in the Notice as well as relevant laws and regulations, and the exchange must be reported by the central enterprise to SASAC for approval. In particular, if the exchange is of property rights between a central enterprise and a local enterprise regulated by SASAC, the local enterprise should report to a local SASAC office for approval in advance.
Responsibilities of central enterprises
Central enterprises may not expand the scope of exchange of state-owned property rights or delegate their approval authority without authorization.
Supervision and penalties
SASAC conducts an annual supervision and inspection of the exchange of state-owned property rights by some central enterprises, and criticizes those central enterprises and related responsible persons, by means of a circulated notice, for any violation of laws and regulations or the requirements in the Notice. If any loss is caused to state-owned assets, SASAC will pursue the liability of relevant people according to the law.
Replacement of property rights involving listed companies
If a state-owned work unit carries out an exchange of shares it holds in a listed company, or if an exchange between a state-owned work unit and a listed company involves any changes in the shares held by the state-owned work unit in the listed company, the replacement should be handled in accordance with relevant regulations.
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