Legal issues need full service when acquiring petrol stations

Against a background of a saturated retail market for refined oil products and the rise of environmentally friendly electric vehicles, it has become more difficult to secure zoning and land norms for new petrol stations, making the zoning and land of existing petrol stations scarce resources. Accordingly, the acquisition of petrol stations has become an important means of investing in the oil product retail business.

The authors recently handled several projects for the acquisition of private petrol stations in China, and would like to provide a brief description of several key legal issues involved in petrol station acquisitions.

Foreign investor access

Since the publication of the Administrative Measures for Foreign Investment in the Commercial Sector by the Ministry of Commerce on 11 December 2004, China’s refined oil product market has been opened to foreign investors in the form of Sino-foreign equity and co-operative joint ventures, and wholly foreign-owned enterprises.

Pursuant to such regulations as the above-mentioned measures and the Administrative Measures for the Refined Oil Product Market, where a foreign investor engaging in the retailing of refined oil products in China operates at least 30 petrol stations and sells different types and different brands of refined oil products from multiple suppliers, the foreign party may not have a controlling interest.

Transaction counterparty

Most petrol stations established by oil giants and foreign investors exist in the form of companies, whereas most private petrol stations exist in the form of sole proprietorships, partnerships, etc.

The corporate nature of a petrol station has a certain impact on the determination of the transaction method, and the legal issues that require attention in the course of an acquisition include: whether the transaction counterparty has independent legal person status and is validly existing; and whether the transaction counterparty is the lawful holder of title to the petrol station assets, and has the qualifications to execute the relevant transaction documents with the investor and carry out the relevant transactions arrangements, such as asset transfer, equity transfer, etc.

The scope of business of a petrol station mainly includes the retailing of petrol, diesel oil and kerosene, and the business qualifications it requires include a Permit to Engage in the Retailing of Refined Oil Products and a Hazardous Chemical Business Permit. If it engages in petrol filling, it is additionally required to secure a Fuel Gas Business Permit.

As suggested above, a petrol station location plan is one of the reasons why an investor acquires a petrol station, and is one of the key points that lawyers need to pay attention to when conducting due diligence.

The pertinent legal issues include: whether the target petrol station has obtained a petrol station zoning confirmation document and the business qualification certificates it needs to carry on its business; the method of securing the petrol station location plan (new construction or relocation); whether the location plan and business qualification certificates are lawful and valid; where the target company has not carried out the procedures for the location plan and qualification certificates, whether the same will have an adverse impact on its business operations or cause the petrol station to bear legal liability; whether, after the acquisition, the petrol station will be required to carry out the procedures for its business qualifications and permits anew or procedures to amend the same, and whether major obstacles exist, and the means for resolving such obstacles.

Land and construction

We have discovered that the person with the use rights to the land of many private petrol stations is not the petrol station, but rather its investor (usually a natural person). Pursuant to the Property Law, the establishment, change, transfer and extinguishing of rights in rem over immovable property only enter into effect once registered in accordance with the law. Accordingly, until a petrol station has secured the use rights to the land it is occupying, it does not legally enjoy the right to possess, use, benefit from or dispose of such land. Given that land is operating land important to the sustained operation of a petrol station, from a legal perspective, the securing of land use rights by the petrol station should be a condition precedent in an acquisition transaction.

Further, the means by which the earliest established private petrol stations obtained their land were often non-compliant. Accordingly, when stepping in, a lawyer needs to pay attention to the following: the means by which the land use rights were obtained (allocation or grant); whether it is collective land; whether the purpose of the land is petrol station commerce and trade land; whether it is encumbered by a mortgage; whether a land certificate has been secured therefor; whether a situation exists where the procedures for the conversion of agricultural land into construction land have not been carried out; whether any compensation agreement has been executed with the local villagers or village committee; and whether the land and/or premises have been leased out.

The lawyer also needs to verify such issues as: whether the lease rights can be transferred, whether the right to lease out can be recovered early; whether the construction land planning permit, construction project planning permit and construction permit are in order; whether construction has been completed and accepted; whether the environmental protection, fire safety and other such approval and acceptance documents are in order; and whether a road access permit has been secured.

Equipment and facilities

The key machinery and equipment of a petrol station mainly include the fuel pumps, petrol tanks, awnings, etc. The legal issues that require attention include: whether the petrol pumps have metering signs, ex-factory quality certificates and inspection quality certificates; and whether the above-mentioned equipment and facilities are encumbered by such rights restrictions as mortgages, pledges, a freeze, placement under seal, etc.

Investors are obliged to consider the industry prospects – for example, the impact and development opportunities – for petrol stations brought about by such factors as the price of refined oil products, the oversight by the competent authorities over petrol stations, the trends in the state’s promotion of the electric vehicle market and charging stations, etc. This requires the investor and its lawyers to additionally pay attention to commercial risks and legal issues when formulating and implementing the acquisition plan, and actively respond to these to establish protection for the investment.

David Wang is a partner and Zhang Xiuchao is a lawyer at Concord & Partners in Shanghai