As state-owned enterprises (SOEs) slow down their pace of merger and acquisition (M&A) activities as part of their “going global” programmes, and given the national policies in recent years and other considerations, it is not uncommon that SOEs start transferring their offshore state-owned property rights. Transfer of offshore state-owned property rights by central SOEs is particularly worthy of attention. According to the Interim Measures for the Administration of Offshore State-owned Property Rights of Central State-owned Enterprises (Order No. 27), “offshore state-owned property rights” are equities arising from investment by central SOEs, and their subsidiaries of various tiers, through various approaches in their offshore enterprises, which refer to enterprises incorporated according to local laws by central SOEs and their subsidiaries of various tiers in locations outside mainland China, including in Hong Kong, Macau and Taiwan.
Are the property rights required to be transferred through exchanges? Pursuant to Article 12 of Order No. 27, central SOEs and their subsidiaries should compare interested buyers in many aspects before selecting the transferees of their offshore property rights. Where possible, they should (1) solicit interested buyers publicly and select the transferees through a competitive bidding process, or (2) have their property rights listed on pilot exchanges for state-owned property rights of central SOEs for sale. According to this provision, central SOEs and their subsidiaries of various tiers are not mandatorily required to transfer their offshore property rights via exchanges. Although comparing interested buyers in diverse aspects is required before the transferees are determined, a competitive bidding process or listing on designated exchanges for sale is not mandatory. In particular, if central SOEs and their subsidiaries lack the above conditions (1) or (2), the seller and buyer may effect the transfer with an agreement.
However, according to the Measures for the Supervision and Administration of Trading of State-Owned Assets of Enterprises (Order No. 32), generally onshore state-owned property rights must be traded publicly through asset markets.
Therefore, when it comes to the venue of transferring state-owned property rights (i.e., whether transfer must be implemented via exchanges), offshore and onshore state-owned property rights of central SOEs are subject to varied requirements under laws and regulations in effect. Given the special nature of transferring offshore state-owned property rights and the complexity of cross-border transactions, it is advisable that as transferors, central SOEs or their subsidiaries of various tiers take reasonable care when deciding whether to have the transfers implemented via exchanges, especially taking into account their internal policies and the particulars of the transfers.
Is it mandatory to go through asset valuation and filing/approval procedures? According to Article 12 of Order No. 32, in connection with any asset transfer that is required by laws and regulations to undergo a valuation procedure, the transferor should engage an appropriately qualified valuation agency to perform a valuation procedure for the transferred asset, and the transfer price of the asset should be based on the approved or filed valuation results.
According to Article 10 of Order No. 27, when an offshore company wholly owned or controlled by a central SOE, or a subsidiary of a central SOE at any tier, carries out economic activities that include, but are not limited to, transferring or accepting the transfer of any asset overseas, making capital contribution with any non-monetary asset, allowing its non-listed state-owned corporate shareholders to change the equity percentage, or merger, division, dissolution or liquidation, it should engage an appropriately qualified and reputable professional agency with relevant professional experience to perform an assessment or valuation procedure on the subject matter, with the results of such procedure to be filed by the central SOE.
Where the transfer will result in a central SOE changing its control over an important subsidiary, for example, changing from a state-owned shareholder with 100% control to an absolute controller, or from an absolute controller to a relative controller, or losing its control over the subsidiary, the results of the assessment or valuation procedure should be filed with or approved by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). Besides, in connection with any transaction of an offshore company wholly owned or controlled by a central SOE or its subsidiary at any tier for which such assessment or valuation procedure is performed, the transaction price should be based on the filed assessment or valuation results.
In general, transferring central SOEs’ property rights should undergo state-owned property rights valuation and filing/approval procedures, whether occurring in or outside mainland China. When a central SOE transfers any offshore property right, it should engage a professional institution with appropriate qualifications, professional experience and good reputation to perform an assessment or valuation procedure on the transferred asset. Moreover, the assessment or valuation results need to be submitted to the central SOE for filing, or if appropriate, to the SASAC for filing or approval. Transaction parties should take this process into account when developing an overall timetable for their transaction.
Can the transaction price be paid in any way as agreed between the parties? In accordance with Article 28 of Order No. 32, as a principle the transaction price of a state-owned property right should be paid in a lump sum within five business days from the effective date of the contract. Payment in installments is allowed if it is difficult to make payment in one lump sum due to a large amount. In the case of payment in installments, the down payment should not be less than 30% of the total price and should be paid within five business days from the effective date of the contract. The remaining amount should be secured with any legally valid guarantee acceptable to the transferor, accrue interest for the deferred period at the bank lending rate for the same period, and be paid off in a period not exceeding one year.
According to Article 14 of Order No. 27, the transfer price of an offshore state-owned property right should be paid as agreed in the asset transfer contract, and as a principle in one lump sum. The transferee must provide a legal guarantee if payment in installments is indeed necessary.
Based on the above provisions, we understand that compared with transactions of onshore state-owned property rights, transactions of central SOEs’ offshore state-owned property rights benefit from more flexible price payment methods.
In general, we advise parties to transfers of central SOEs’ offshore property rights to take the previous concerns into account at an early stage so they may make reasonable arrangements for the overall process.
Liu Xiaoyan is a partner at East & Concord Partners