New Regulation

On 11 April 2005, the State-owned Assets Supervision and Administration Commission of Ministry of Finance of Peoples Republic of China ("MOF") issued a new regulation, known as "Provisional Regulations for Transferring the State Owned Enterprise’s Property Rights to the Management" ("Provisional Regulation"), governing management buy-outs of State Owned Enterprises ("SOEs") in China. It also sets out requirements and conditions in relation to the capital contribution made by the management of SOEs for the transfer of state-owned property and clarifies the obligations of management during the transfer of property.

Purpose of Regulation

The purpose of this Provisional Regulation is to facilitate reform of SOEs in China, to strengthen supervision and administration of state-owned assets of enterprises and to regulate the transfer of their assets.

The Provisional Regulation is based on and is in addition to a number of previous regulations governing the transfer of state-owned property rights in China, for example the "Notice of Working Opinions of the State-owned Assets Supervision and Administration Commission of the State Council on Regulating Reform of State-owned Enterprises forwarded by the General Office of the State Council" and the "Provisional Regulations on Administration of Transfer of State-owned Property Rights of Enterprises".

Brief Summary of Regulation

"The management" in the Provisional Regulation refers to the persons-in-charge and management of the units holding directly or indirectly the property being transferred. "Transfer of state-owned property rights to the management" is defined as the act of transferring state-owned property rights to management or providing funds to management directly or indirectly to facilitate the transfer.

Article 5 of the Provisional Regulation sets out five requirements for transferring state-owned property rights to management:-

  1. Appoint independent intermediaries to carry out financial audit on the SOEs;
  2. Formulation of proposals and carrying out of other related tasks such as financial audit, asset assessment, setting of floor price and appointment of intermediaries will be determined by the specific units holding the state-owned property rights in accordance with relevant laws and regulations of the state without any intervention or participation of the management;
  3. The management and other intended transferees will be treated equally. The transfer will be with full disclosure and the following information must be disclosed when publishing the notice of transfer: i.e. condition of the property, identity of intended transferees, proportion being transferred, purpose of transfer and related forthcoming plans, any change of business of the subject enterprises or substantial reorganisation of the subject enterprises;
  4. The net assets of the SOEs must not be diminished by the severance payments of staff or in other unauthorized way; and
  5. Upon transfer of the state-owned assets, management must provide relevant proof of source of capital. The subject enterprises are prohibited from financing the transfer. The state-owned property rights or assets must not be subject to any guarantee, mortgage, pledge, charge or discount.

Article 6 of the Provisional Regulation states that no transfer of state-owned property to management will be allowed if management :-

  1. is liable for any downturn of the business of the subject enterprise evidenced by the audit reports;
  2. has transferred or concealed assets or made changes to the net asset amount of the subject enterprises by connected transactions in the course of the transfer;
  3. has provided false information to intermediaries which results in distortion in audit or assessment or management has conspired with related authorities to diminish the asset value or the transfer price;
  4. has contravened the relevant regulations by formulating proposals of transfer and participating in related transactions and critical tasks for the transfer such as financial audit, asset assessment, setting of floor price and appointment of intermediaries; and
  5. is unable to provide proof of source of capital in respect of the transfer.

Article 9 of the Provisional Regulation further sets out that the transfer of the state-owned property rights to the management cannot be by way of trust.

Article 15 of the Provisional Regulation states that if the relevant authorities or staff contravene any provisions of the Provisional Regulation, the state-owned assets supervisory authorities or other authorised departments will request the transferors to cease the transfer and, where appropriate, lodge complaints with the People's Courts to nullify the transfer. The relevant authorities or staff may be subject to civil claims in accordance with the relevant laws and regulations or criminal liabilities (if applicable) and such persons may be referred to the appropriate authorities for investigation.

The Provisional Regulation applies to management buy-out practices concerning SOEs transferring state-owned assets to management and it does not apply to other state-owned properties owned by financial institutions or listed companies.

Further information

For more information on the above issues, or if you have any questions in relation to other China related matters, please contact our China Practice Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.