By Su Zheng, Partner at King & Wood, and Hu Ping
I. First Law Governing State-Owned Assets in China
The Enterprise State-owned Assets Law of the People’s Republic of China (“State-owned Assets Law”) was adopted on the fifth session of 11th Standing Committee of the National People’s Congress on October 28, 2008 and become effective on May 1, 2009. The State-owned Assets Law, which had been drafted and deliberated for more than ten years, is China’s first law addressing state-owned assets.
Before the promulgation of the State-owned Assets Law, the Interim Regulations on Supervision and Administration of Enterprise State-Owned Assets (“Interim Regulations”), a set of administrative regulations promulgated by the State Council on May 27, 2003, had been the regulations governing state-owned assets with the highest authority since the establishment of the State-owned Assets Supervision and Administration Commission under the State Council (“SASAC”) in 2003. The promulgation of the State-owned Assets Law fills the gap of state-level legislation on state-owned assets in China’s legal regime and formalizes the mandatory administration and regulation of state-owned assets in China.
The promulgation of the State-owned Assets Law did not draw much attention compared with the Property Rights Law, which attracted extensive academic discussions, or compared with the Anti-monopoly Law, which caused panic among the industrial oligarchs. One of the reasons for such a subdued public reaction is that the State-owned Assets Law mainly focuses on summarizing existing regulations and rules regarding the administration of state-owned assets. It is silent on matters that the public is concerned about, such as the supervision of offshore state-owned assets and executive compensation at state-owned enterprises (“SOEs”). Nevertheless, the State-owned Assets Lawis important because it recapitulates the SOE reform and development of the last three decades. The law also amalgamates old regulations and suggests future directions for the administration of state-owned assets.
Impact on Mergers and Acquisitions by Foreign Investors
The separation of management and ownership in modern corporate structures is a persistent headache for SOEs and the state-owned equity and assets management system. The government management mechanism, which combines the ownership of macro-control and administrative power over state-owned assets, also causes problems. Furthermore, administrative regulations and rules regarding state-owned assets are of a lower jurisdiction than laws and are often enacted by different authorities. Such practicalities have made these regulations and rules inconsistent and inoperable. For these reasons, when merging or acquiring an SOE, foreign investors or private equity funds are often overburdened with complicated approval procedures with two or more authorities, even those that may not have the proper legal authority. Foreign investors and private equity funds are also concerned about the potential difficulties in restructuring the SOE upon merger or acquisition due to the intervention of the government, and therefore, tend to avoid or react negatively to the acquisition of SOEs.
The State-owned Assets Law improves the supervision of state-owned assets by refining the rules for SOE reforms, related party transactions, appraisal, and transfer of state-owned assets. The State-owned Assets Law also clarifies the responsibilities of SASAC and its local branch offices, and prohibits(10) the state-owned assets investor’s interference with the operation of SOEs. All of these changes may increase the attractiveness of SOEs as acquisition targets for foreign investors.
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