Interim Provisions on Restructuring State Owned Enterprises (“SOEs”) with Foreign Investment
(NB: This is not a definitive translation)
Promulgated by the State Economic and Trade Commission, Ministry of Finance, the State General Administration of Industry and Commerce, and the State Administration of Foreign Exchange.
Article 1. This set of Regulations, formulated in line with the Corporate Law of the People’s Republic of China, the Contract Law of the People’s Republic of China, and the related laws and regulations of the State on foreign investment and on management of state assets, is designed to instruct and standardize the acts of reforming State owned enterprises with foreign investment, to promote the strategic reformation in the national economy, accelerate the pace of establishing a modern enterprise system for the SOEs, and safeguard social stability.
Article 2. This set of Regulations shall be applied to acts of reforming SOEs or corporate companies in which the State has stakes (excluding financial enterprises and publicly listed companies) or transforming them into foreign funded enterprises in the form of companies with foreign investment (hereinafter referred to as reforming SOEs with foreign investment).
Article 3. Reforming SOEs with foreign investment mentioned in this set of Regulations include:
- State stake holders of SOEs transferring all or part of the stakes to foreign companies, enterprises or other economic organizations or individuals (hereinafter referred to as foreign investors) and the enterprises being reformed into foreign invested ones;
- State stake holders of corporate enterprises transferring all or part of the stakes held to foreign investors, and the enterprises being reformed into foreign invested ones;
- Domestic creditors of SOEs transferring creditors’ rights to foreign investors and the enterprises being reformed into foreign invested ones;
- SOEs or corporate enterprises in which the State has stakes selling all or a major part of their assets to foreign investors and foreign investors setting up foreign invested enterprises independently with the assets purchased or jointly with the sellers;
- SOEs or corporate enterprises in which the State has stakes attracting foreign investment through expanding the quantity of their shares and the enterprises being reformed into foreign invested ones.
Article 4. SOEs and corporate enterprises mentioned in items 1, 2, 3, and 5 of article 3 of this set of Regulations are termed as reformed enterprises.
State owned property rights within SOEs and State owned stakes in corporate enterprises are termed as State owned property rights and holders of State owned property rights and of state owned stakes are termed as holders of State owned property rights.
Holders of State owned property rights refer to departments authorized by the State or institutions authorized by the State to make investment, or enterprises holding State owned assets and other economic organizations.
Holders of State owned property rights, creditors of SOEs transferring creditors’ rights, and enterprises selling assets are termed as the reforming party.
Article 5. The reforming party shall select foreign investors meeting the following terms and conditions:
- Having operational qualifications and technological level required by the reformed enterprises;
- Having sound business reputation and management capacity;
- Having sound financial status and economic strength.
The reforming party shall request foreign investors to propose their regrouping programme to improve the corporate management structure and promote the sustainable development of the enterprises and the programme shall include development of new products, technological renovation and related investment plan, and Regulations to be adopted to strengthen enterprise management.
Article 6. The following principles shall be observed in reforming SOEs with foreign investment:
- Abiding by the State laws and regulations and safeguarding national economic security;
- Conforming to the requirements of the industrial policies of the State. Foreign investors are not allowed to participate in the reforming of enterprises (including enterprises directly or indirectly owned by them) whose business scopes fall within the prohibited categories for foreign investment. Enterprises whose shares are controlled directly or indirectly by the Chinese sides shall remain so after being reformed.
- Conducive to the economic structural adjustment and to promoting the optimized allocation of State owned assets;
- Stressing the introduction of advanced technologies and managerial experiences, establishing a standard corporate management structure, and promotion of technological advance and structural upgrading of enterprises;
- Adhering to the principles of being open, fair, just, honest and faithful, prevention of wastage of State owned assets, avoiding, evading or abandoning the creditors’ rights of banks and other creditors; not harming the lawful benefits of workers, and protecting the lawful benefits of foreign investors;
- Promoting fair competition and not contributing to market monopoly;
Article 7. In cases where the property rights of a SOE or a wholly state owned company are transferred, or two or more SOEs are transferred, or the state owned stakes within limited liability companies, set up by two or more state owned investors, are transferred, the reforming party shall solicit opinions from the congress of workers and staff of the to-be reformed enterprises in advance. In cases of transferring state owned stakes of a corporate enterprise, consent should be obtained from the shareholders of the to-be reformed enterprise. In cases of transferring creditors’ rights of a SOE, consent from the holder of the state owned property rights of the to-be reformed enterprise should be obtained. In the case of an enterprise selling all or a major part of its assets, consent should be obtained from the holders of the state owned assets within the enterprise or from the shareholders meeting, and creditors shall be informed to that effect.
Article 8. The following terms and conditions shall be satisfied when reforming a SOE with foreign investment:
- Prior to reforming the SOE, holders of the state owned assets within the enterprise shall organize the to-be reformed enterprise to check the assets, identify the property rights, disentangle the creditors’ rights and debts, hire qualified intermediaries to conduct financial auditing, and conduct assets evaluations in line with the provisions of Regulations Governing the Evaluation of State Assets (No. 91 Order of the State Council), Regulations on the Issues of the Administration of State Assets Evaluation (No. 14 Decree of the Ministry of Finance), and other relevant regulations;
- In cases where the right to control the enterprise is transferred or all or a major part of the operational assets are to be sold to foreign investors after reformation, the reforming party and the reformed enterprise shall formulate an appropriate programme for disposing of workers, which shall be reviewed and adopted by the congress of workers and staff. The reformed enterprise shall pay off the salaries owed to the workers, funds raised having not been reimbursed, social securities fee owed and other fees with the existing assets. Two-way choices shall be offered by the reformed enterprise to the workers and staff. Workers retained shall sign or modify their labour contracts according to laws. Compensation shall be paid to workers whose labour contracts have been terminated. Social securities fees shall be paid off in one lump-sum for workers that are to be transferred to social securities institutions, and the capital needed for this, shall be deducted from the net assets of the reformed enterprise before reform takes place, or paid as a priority from the earnings obtained by holders of the state owned property rights from transferring the state owned property rights.
- In cases where reform is undertaken by means of selling assets, the creditors rights and liabilities of the enterprise shall be borne by the original enterprise. Where other means are adopted for the reform, the enterprise’s creditors’ rights and liabilities shall be borne by the enterprise reformed. In cases where mortgaged or pledged state owned property rights or assets are transferred, the relevant provisions of the Guarantee Law of the People’s Republic of China shall be observed. The successor of the debt shall sign an agreement on the disposal of creditors rights and liabilities with creditors.
- The reforming party shall publicize the information of its reforming, solicit foreign investors extensively, and investigate into the qualifications, reputation, financial status, management capacity, safeguard for payment, and quality of operators of foreign investors. Middle and long-term investors that could bring advanced technologies, managerial experiences and have highly industrial relevance shall be selected as a priority.
The reforming party and foreign investors shall, upon request from each other, provide relevant information honestly and in a detailed manner, and no misleading and cheating activities are allowed. In addition, they also have an obligation to maintain confidentiality.
- In cases where reform is conducted by means of transferring state owned property rights or selling assets, the reforming party shall prioritize the method of public bidding in identifying foreign investors and transfer price. In cases where public bidding is adopted in the transfer, relevant formalities shall be honoured according to the law. Relevant information concerning the state owned property rights to be transferred or assets to be sold shall be publicized. Open operation is also requested for contractual transfer.
The reforming party and foreign investors shall, irrespective of the way of transfer, sign transfer agreements according to the relevant provisions of the State and this set of Regulations. The transfer agreement shall include the basic information of the transfer of State owned property rights, disposal of workers, disposal of creditors’ rights and liabilities, transfer ratio, transfer price, ways and terms of payment, delivery of property rights, reform of enterprise, and clauses to that effect.
Article 9. The following procedures shall be followed in reforming SOEs with foreign investment:
- The reforming party (a reforming party shall be identified if there are more than two reforming parties) shall file application with the economic and trade administration at the same level for reforming. The reforming application documents shall include feasibility studies, information of the reforming party and the reformed enterprises, information of foreign investors (including the financial report of the latest three years audited by a certified public accountant and market shares of products or services of similar enterprises under the actual control of the foreign investors inside China), reforming plan (including disposal of workers, disposal of creditors’ rights and liabilities, and enterprise reforming plan), business scope and structure of stock rights of the to-be reformed enterprises (including enterprises directly or indirectly owned).
The economic and trade administration, upon receiving applications, shall conduct examination and verification according to the power delegated by the Rules Governing Direction of Foreign Investment and related laws and regulations. In cases where the enterprises are under the direct control of the Central Government and their wholly owned or controlled enterprises are being reformed, or the reformed enterprises hold stocks of publicly listed companies directly or indirectly, or the total enterprise’s assets are no less than US$30 million after being reformed, the application for reforming shall be examined and verified by the economic and trade administration under the State Council. A hearing shall be conducted in cases where there is the likelihood of causing a monopoly or hindering fair competition.
The economic and trade administration shall make a decision on whether or not to approve the application within 45 days upon receiving the application for reform. In cases where a hearing is requested, the decision shall be made in three months.
In cases where the State has other provisions concerning the utilization of foreign investment by industries, within which the reformed enterprises or enterprises directly or indirectly owned by the reformed enterprises fall, and changes to the nature of state stakes are triggered by the changes in the property rights of holders of state stakes in publicly listed companies, the provisions shall be abided by.
- Transfer agreement signed between the reforming party and foreign investors shall be submitted for approval according to the relevant provisions of the Circular on Issuing the Provisional Regulations on the Enterprises’ State Owned Assets and Financial Administration (No. 325, 2001, Caiqi) issued by the Ministry of Finance.
The transfer agreement shall be accompanied by the registration certificate of state owned property rights, information of the ratification or record filing of the auditing and assets evaluation reports of the reformed enterprises, disposal plan of workers, agreement on creditors’ rights and liabilities, plan of enterprise reform, related decisions made by the reforming party and the reformed enterprises, opinion or decision made by the congress of workers and staff of the reformed enterprises.
- The reforming party or the reformed enterprises shall handle the examination and approval procedures of foreign invested enterprises according to laws on the strength of the approval documents of the reforming application and transfer agreement. In cases where the enterprises are reformed into limited stock companies, the relevant provisions of the Corporate Law of the People’s Republic of China shall be followed when handling the relevant formalities.
- After being reformed, the enterprises or the investors shall go to the original registration authority with power to register foreign invested enterprises, or the local registration authority with power to register foreign invested enterprises, with the approval documents mentioned in paragraphs 1 and 3 of this article, to handle the registration formalities. In cases where the enterprises are reformed into limited stock companies, the relevant provisions of the Corporate Law of the People’s Republic of China shall be followed when handling the relevant formalities.
- The reforming party shall, on the strength of the approval documents for reforming application and transfer agreement, registration proof for foreign investment and foreign exchange, and other related documents, handle the formalities involved in the delivery of state owned property rights and in the registration of modification to the state owned property rights, in line with the relevant regulations. It should entrust a certified public accountant to produce a capital assessment report according to the law. In cases where the land used by the enterprises was previously transferred by the State to the enterprises, the enterprises shall handle the examination and approval and transfer formalities of land use right according to the law.
- Foreign exchange income of the reforming party from transferring State owned property rights, creditors’ rights or selling assets may be settled according to the approval documents for the reforming application and transfer agreement and other relevant documents, subject to approval by the foreign exchange administration.
In cases where the reformed enterprises are reformed with foreign investment by means of issuing more shares and expanding their capital, the enterprises may, subject to approval by the foreign exchange administration, open foreign exchange capital account to retain the foreign capital inputted by foreign investors.
- The reforming application, transfer agreement and their approval documents involving key State enterprises, debt-to-equity enterprises approved by the State, and enterprises categorized as restricted types in the Guiding Catalogue of Industries for Foreign Investment, whose registered capital is below a certain level and which are to be examined and approved by the local economic and trade administration and financial administration, shall be submitted to the economic and trade administration and the financial administration under the State Council respectively for record filing.
Article 10. Foreign investors shall pay the transfer money or contribute capital with freely convertible currencies remitted in from overseas or other lawful property rights. They may also use the net profits in RMB obtained within China from their investment or other lawful property rights to pay the transfer money or contribute capital, subject to approval by the foreign exchange administration. Other lawful property rights, mentioned above, include:
- Property from the foreign investors obtained from other foreign invested enterprises established inside China due to the enterprises’ liquidation, transfer of stock rights, pre-recovered investment, and reduction in investment;
- State owned property rights or assets purchased by foreign investors from SOEs or corporate enterprises in which the State has stakes;
- Creditors’ rights purchased by foreign investors from the creditors of SOEs;
- Other means of capital contribution specified in laws and regulations.
When conducting capital assessment for foreign investors, certified public accountants shall follow the capital assessment procedures and issue capital assessment reports according to the provisions of the Circular on Further Strengthening the Work of Capital Assessment of Foreign Invested Enterprises and the Registration System Governing Foreign Investment and Foreign Exchange (No. 1017, 2002, Caikuai) issued by the Ministry of Finance and the State Administration of Foreign Exchange.