Hong Kong: Issues arising from the reorganisation of a People's Republic of China state own

Last Updated: 26 September 1995
This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

The following article examines the issues arising with regard to the reorganisation of a PRC state owned enterprise into a private company.

1. Introduction

Very often, as part of its preparation for listing on a stock exchange or investment by independent third parties, a state owned PRC enterprise will go through a reorganisation of its corporate structure. The enterprise may decide to hive off only the profitable parts of its business into the new company ("Newco"). The less profitable parts of the business or operations unconnected to its principal business (such as hospitals, schools, utilities and social welfare units) may be left to the original enterprise which will remain state owned ("Holding Co."). Holding Co. may continue to provide services to Newco in respect of the non-profit making units by way of service agreements.

Often, Holding Co. would also hold a substantial shareholding, which would represent the PRC government stake, in Newco.

2. Transfer of assets

Under the new Companies Law, the transfer or division of assets, rights and liabilities is not specifically provided for, and does not happen automatically. Care must be taken to ensure that Newco has the intended assets, rights and liabilities, and that investors, as well as creditors, are not prejudiced by the reorganisation. The transfer is usually achieved by an asset transfer or division agreement between Holding Co. and Newco.

It is important that the company and its professional advisers draw up a reorganisation plan comprehensively, identifying which assets which will go into Newco and Holding Co. respectively. This is because, if certain assets have been accidentally left out of Newco, subsequent asset transfers between Newco and Holding Co. may be difficult as the appropriate approvals from the PRC authorities may have to be obtained. This is also important because of the asset valuation process which will fix the capital of Newco and which will determine the number of state shares to be issued by Newco to Holding Co.. Any subsequent changes to this may be inconvenient.

3. Valuation

The purpose of a valuation is to assess the net asset value of Newco. Not only are all the assets (including trademarks and other intangible property) valued, but also the debts and liabilities of the enterprise to be listed. Typically, this is performed by the valuers (both foreign and PRC), with input by the auditors and reporting accountants.

The valuation process may take months to complete. Often, if Newco will be listed subsequently on a stock exchange, the valuation may influence the decision as to which assets will go to Newco and which will go to Holding Co.. This is because (especially when market conditions are not so favourable) Newco may wish to avoid having a net asset value which is too high, which may consequently affect the pricing of its shares, which in turn may make the marketing of its shares difficult. The issue of whether to include particular assets in Newco is particularly pertinent in respect of land, where it may not matter whether the land is being transferred to Newco, or whether the land will remain with Holding Co., which in turn leases the land to Newco.

The valuation must then be submitted to the State Assets Administration Bureau for verification and confirmation. Only then may the capitalisation of Newco be determined, which is an essential condition to its establishment. The valuation process is therefore a particularly important factor in the reorganisation timetable.

4. Trademarks

Usually, these would be transferred to Newco, since the trademark may be important to its operational business. However, in certain cases, Holding Co. may wish to share the use of these trademarks. As a result, there may be an arrangement whereby Holding Co. retains the trademark and licenses its use to Newco, or vice versa.

Another problem which may arise may be that the trademark may be of a disproportionately high value. Under the Company Law of the PRC, not more than 20% of the registered capital of a company may be contributed by way of industrial property and non-patented technology. In the case of the listing of Tsingtao Breweries on the Hong Kong Stock Exchange, the high value of the world-famous "Tsingtao Beer" trademark presented problems in this respect. The structure whereby Holding Co. licenses the trademark to Newco may not always be thought to be a satisfactory solution to this problem by potential investors, since they may take the view that a trademark of such significance to Newco's business should be owned by Newco itself.

5. Novation of contracts and other rights/liabilities

As part of the rights and liabilities to be transferred to Newco, contracts previously entered in the name of the original PRC enterprise (or Holding Co., as the case may be) will have to be novated to Newco.

Third party consents usually will have to be obtained for this. Identifying all these contracts and obtaining the consents from the third parties may be a tedious and time-consuming process. As a precaution, Holding Co. and Newco may enter into an agreement whereby Holding Co. will hold in trust for Newco all the benefits in contracts previously entered into by Holding Co. and which have not been novated to Newco. In turn, Newco will agree to indemnify Holding Co. against expenses which Holding Co. may incur in carrying out the obligations under the contracts as trustee for Newco.

6. Accounting Adjustments

The reorganisation may give rise to the need to make accounting adjustments for a number of reasons. It may be that the original entity, prior to its reorganisation, may have been buying some of its raw materials or utilities at a price subsidised by the government. If the subsidised pricing is to be discontinued, it may be necessary to have the profit figures for the appropriate track record period restated. This adjustment will take into account what the market price for the goods and services would have been during the period. Such restatement may be appropriate in order that the investors may know how the profits in the past years would have been affected, if the company had paid the higher market prices during that period. In this way investors will be able to get a more accurate picture of the company's trend of profits.

The accounts may also have to be restated for the track record period, on account of adjustments made in respect of the service fees to be paid by Newco to Holding Co.. That is to say, a notional amount representing such fees per year may be deducted from the yearly profits of the company during that period. This is to ensure that the trend of profits shown in the accounts fairly reflects that of the corporate structure of Newco. Whether or not such adjustments will be made will depend on the view taken by the accountants as to whether the adjustments involved are material to the overall turnover and profits of the company.

Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr, or enter text search 'Linklaters & Paines' and 'Business Monitor'.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions