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M&A in China

M&A in China

(D) Employee Protection

The SOE Restructuring Provisions specifically impose requirements for ensuring the welfare of SOE employees and require the SOE being reorganized to first seek the opinions of the employees’ congress of the SOE. Also, in the event that a controlling interest in the SOE will pass to the foreign investor upon acquisition, or if all or the main business assets of the SOE will be sold to the foreign investor, the reorganising party of the SOE must formulate a plan for settling the staff and such plan is subject to the approval of the employees’ congress of the SOE.

While these specific employee protection requirements are new to foreign investors, the absorption of, and responsibility for, the staff of their Chinese partners is not. However, the effect of these new requirements may be that SOEs will have more leverage in negotiations with foreign investors over the number of employees to be absorbed by a foreign-funded enterprise after completion of an acquisition.

The reality is that personnel are the key to a successful transaction. Consultation with staff is often beneficial in any event in China to allay unrest. Otherwise, this will delay the process considerably. In many cases, management are the key to a successful acquisition. They have access to information about the business necessary to carry out a due diligence process. Their support in agreeing the terms of the transaction and obtaining local government support can be crucial. The reality is that foreign investors buying SOEs in most cases need to agree incentive packages with existing management regarding their retention and remuneration after the acquisition to achieve a successful transaction. Having management on side can be one of the main means of reducing acquisition risk by ensuring a higher level of knowledge and transparency regarding the business operations before acquisition.

(E) Approvals and Procedures

The approval thresholds and procedures under the SOE Restructuring Provisions mirror in many respects existing foreign investment rules. According to Article 9, the reorganisation plan must be submitted to the State Economic and Trade Commission for examination (Commissions and departments under the State Council undergone a systematic reform during 2003 and a new commission, SASAC, was established to overtake the function of state assets supervision under the previous State Economic and Trade Commission.). Therefore, the relevant reorganisation plan should be submitted to SASAC for approval at present. The same US$30 million threshold used in establishing a foreign-funded enterprise is used for determining the level of approval required under the SOE Restructuring Provisions.

Upon receipt of an official reply from the SASAC regarding the reorganisation plan, an acquisition agreement entered into by the reorganising party of the SOE and the foreign investor must be submitted for approval in accordance with the 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. Several documents are required to be submitted along with the acquisition agreement:

  1. the registration certificate of state owned property rights;
  2. information of the ratification or record filing of the auditing and assets evaluation reports of the reorganising party;
  3. a staff and worker settlement program;
  4. an agreement for settling claims and debts;
  5. a restructuring plan;
  6. resolutions of the reorganizing party and the SOE; and
  7. the opinions or resolution of the congress of the staff and workers of the SOE.

Upon receipt of approval of the reorganising plan and the acquisition agreement, the reorganising party or the SOE must then proceed with the examination and approval procedures for foreign-funded enterprises in accordance with the relevant foreign-funded enterprises rules and the PRC Company Law. While it is not explicitly stated in the SOE Restructuring Provisions, MOFCOM has confirmed its jurisdiction over this examination and approval for the establishment of foreign-funded enterprises, and as such it will be the final authority for approval.

Upon completion of these approval procedures, registration procedures must be followed in accordance with the Industry Catalogue and other applicable laws, and foreign investors must pay for the acquisitions in freely convertible currency from abroad. However, similar to other acquisitions in China by foreign investors, foreign investors may use their RMB profits derived from their existing operations in China to purchase their interests.



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