As private equity funds are booming, state-owned enterprises (SOEs) become increasingly involved in these funds. Arrangements where SOEs serve as general partners (GPs) of partnership funds are not uncommon. However, it seems that these arrangements are not lawful, because Article 3 of the Partnership Law prohibits solely state-owned enterprises (SSOEs) and SOEs from acting as general partners.
The aforesaid conflict between legislation and practice gives rise to two questions: what are SSOEs and SOEs? Can SSOEs and SOEs serve as GPs?
What are SSOEs and SOEs? The latest legal definition of SOEs is provided in the Administrative Measures for the Regulation over Trading of State-owned Assets by Enterprises dated 24 June 2016, also known as “Decree No. 32.” According to the principle of new laws taking precedence over old laws, it is understood that Decree No. 32 shall prevail as far as the definition of SOEs is concerned.
Pursuant to Article 4 of Decree No. 32, SOEs include SSOEs, wholly state-funded enterprises (WSFEs), state-controlled enterprises and enterprises under actual control of the state. Their definitions are as follows:
1. SSOE: an enterprise (company) whose equity is 100% held by a government authority or agency or public institution;
2. WSFE: an enterprise with 100% equity directly or indirectly held by one
or more government authorities or agencies, public institutions and/or SSOEs;
3. State-controlled enterprise: an enterprise with over 50% equity held by one or more government authorities or agencies, public institutions, SSOEs and/or WSFEs, one of which is the largest shareholder of the enterprise; or (2) a subsidiary (at any level) of, and with more than 50% equity held by, a SSOE, WSFE or state-controlled enterprise;
4. Enterprise under actual control of the state: an enterprise with less than 50% equity directly or indirectly held by a government authority or agency, public institution, SSOE, WSFE or state-controlled enterprise, which as the largest shareholder of the enterprise is able to exercise control or direction over the enterprise through contractual arrangement or any other means.
In general, “SSOE” is defined by Decree No. 32 and the Partnership Law as a company solely funded by one government authority or agency or public institution, while “SOEs” are defined more broadly to encompass SSOEs, WSFEs, state-controlled enterprises and enterprises under actual control of the state.
Cases of SOEs serving as GPs. In spite of the provisions of the Partnership Law that prohibit SSOEs and SOEs from serving as GPs, in practice there are SOEs that act as GPs. We have conducted searches for some selected SOEs and the findings are summarized below:
1. Jilin Equity Fund Investment (Jilin Investment). As shown on the industrial and commercial registration information, Jilin Investment is a limited liability company (solely state-owned) owned by the Department of Finance of Jilin Province. It is an SSOE according to Decree No. 32. Our search results show that Jilin Investment is not the GP of any partnerships in which it invests.
2. Fujian SOE Reform Investment Fund Management (SOE Reform Investment). SOE Reform Investment is controlled by Fujian State-owned Assets Management, which as the largest shareholder holds 51% equity in SOE Reform Investment. Fujian State-owned Assets Management is an SSOE incorporated solely by the State-owned Assets Supervision and Administration Commission of Fujian Provincial Government. Therefore, SOE Reform Investment is a state-controlled enterprise as defined in Decree No. 32. The publicly available information of the Asset Management Association of China (AMAC) shows that SOE Reform Investment is managing only one fund, which is known as Fujian SOE Reform and Restructuring Investment Fund (Limited Partnership). SOE Reform Investment is the GP of the fund.
3. Held by Nanjing Yangzi State-Owned Assets Investment Group, a company 100% owned by the Management Committee of Nanjing Jiangbei New District, Yangtze River is a WSFE as defined in Decree No. 32. The publicly available information of the AMAC shows that Yangtze River is managing three partnership funds, for which it serves as the GP. Our search results find that Yangtze River is also the GP of another four limited partnerships.
Although our search results show no SSOE serving as a GP, in practice there are partnerships with WSFEs and state-controlled enterprises as GPs that have succeeded in completing incorporation procedures with competent administrations for industry and commerce as well as the AMAC’s filing procedures. The rules under the Partnership Law prohibiting SOEs to act as GPs have virtually been broken.
Article 3 of the Partnership Law may have originally been designed to avoid exposing state-owned assets to unlimited liability. In our opinion, somehow this objective can be achieved with the support of two principles, namely, independence of corporate personality and limitation of corporate liabilities. To ensure consistence between legislation and legal practice, it may be advisable to revise Article 3 of the Partnership Law and delete the prohibitive rules about SOEs being unable to serve as GPs.
(This video is only in Mandarin.)
Shi Yubin is a senior partner and He Wei is a paralegal at AllBright Law Offices