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M&A in China

M&A in China

3. Interim Provisions on Restructuring State Owned Enterprises with Foreign Investment (“SOE Restructuring Provisions”)

The SOE Restructuring Provisions were issued jointly by the State Economic and Trade Commission, the Ministry of Finance, SAIC and SAFE and became effective on 1 January 2003.

(A) Applicability and Scope

With reference to Article 3 of the SOE Restructuring Provisions, there are five methods of restructuring State Owned Enterprise (“SOE”) using foreign capital:

  1. foreign investors may restructure a SOE into a foreign-funded enterprise by acquiring all or part of the State interest in a SOE;
  2. foreign investors may restructure a SOE or a company-based enterprise consisting of state-owned shares (“state-owned company”) into a Foreign-funded enterprise by acquiring all or part of the shares in a SOE;
  3. foreign investors may acquire from domestic creditors, debt owed to them by the SOE and restructure such enterprise into a foreign-funded enterprise;
  4. foreign investors may acquire all or the majority of the assets of a SOE or a state-owned company and subsequently establish a foreign-funded enterprise jointly with that SOE and state-owned company separately from the assets purchased from that SOE and state-owned company; and
  5. foreign investors may subscribe for increased registered capital including new/additional shares of a SOE or a state-owned company, and subsequently convert such enterprise into a foreign-funded enterprise.

(B) Foreign Investor Qualifications

Foreign investors wishing to take part in the restructuring of a SOE must meet the following criteria:

  1. having the management qualifications and technical skills required by the restructured enterprise;
  2. having good business credit standing and management skills; and
  3. having good financial standing and economic strengths;

As is often the case with foreign investor qualifications set out in PRC legislation, these qualifications are highly subjective, and it is unclear from the SOE Restructuring Provisions how or by whom such conditions will be defined.

(C) Required Reorganisation Plan

A reorganization plan, which is in many respects similar to the “feasibility study report” required for all foreign-funded enterprises, must be submitted by the reorganising party of the SOE, highlighting information about the foreign investor, its financial status, its business scope and equity structure, and plan for settlement of staff. In addition, it appears from the SOE Restructuring Provisions that, in permitting foreign investment in the restructuring of SOEs, one of the State’s requirements is the introduction of sound corporate governance into the target SOE. Article 5 of the SOE Restructuring Provisions specifically requires foreign investors to provide plans to improve the enterprise’s corporate governance structure and promote sustained growth of the SOE. Such a restructuring plan must also include measures for strengthening corporate management and a plan of investment, and provide for the introduction and development of new products and technology. The submission of a reorganisation plan is a new requirement for foreign investors.
 

Skills

Posted on

2015-02-03