Transfer your assets prior to concluding a newspaper restructuring process

Professional papers and other publishing entities began restructuring after the State Council and Communist Party Central Committee promulgated the Opinions on Deepening Structural Reform of Non-Current Affairs Newspaper and Periodical Publishing Units in 2011.

Restructuring here refers to the publisher restructuring from a work unit into an enterprise, structurally becoming a limited liability or joint stock limited company. The publisher’s profit model, which previously enjoyed security from a part of the state system, would also be transformed into an independent and self-financing model.

The opinions also actively promote resource integration in industry paper publishing. They encourage and promote publishing units with enormous potential to take the lead and integrate resources from other papers within their field to foster the formation of large specialized newspaper publishing media groups.

The authors have participated in these restructurings in our capacity as lawyers. One of the main integration methods witnessed at that time was transferring a regional industry paper to a state-level one, thereby optimizing the available publishing resources overall.

This transfer of assets – the local newspaper to the top-level paper – is a normal aspect of an M&A transaction. After the publisher restructured, however, there were some developments resulting in the issue being raised of whether the assets were to be transferred or assigned. This is a situation that ought to be noted during M&A work.

Transfer vs assignment

Transfer and assignment are both methods of moving the ownership of assets, but there is a big distinction between the two.

Each has its own administrative rules. For transfers, the State-owned Assets Supervision and Administration Commission’s (SASAC) Provisional Measures for the Administration of Gratis Transfer of State-owned Property of Enterprises set out that the gratis transfer of state-owned property refers to the movement of state-owned property between government agencies, institutions, entities and state-owned enterprises without payment.

By contrast, the SASAC and Ministry of Finance’s Provisional Measures on the Administration of Assignment of State-owned Property of Enterprises set out that the measures are applicable to the assignment, at an agreed price, of state-owned assets by state-owned assets supervision authorities and enterprises holding state-owned assets to enterprises, individuals and other entities located in China or abroad.

In brief, the gist of the two measures is that transfer is not compensated and is limited to an assets transfer between state-owned entities, while assignment is compensated and lacks restrictions as to where the assets can be assigned.

The industry newspapers were all conventional state-owned entities, institutions or wholly state-owned enterprises prior to restructuring, so adopting a transfer model to move assets presented no obstructions. After restructuring commenced, they were modern enterprises such as limited liability companies within the industry paper system, which all changed the environment for the gratis transfer method.

At first, this change was not recognized. Central-level industry papers which were tasked with receiving the regional industry papers often took the approach of dispersing with the difficult aspects of the process by choosing to first restructure, then transfer the regional paper’s assets.

Were papers to truly adopt this procedure, however, it would be difficult to transfer the assets gratis once the publisher has been restructured into an enterprise. According to the provisions of the gratis transfer measures, the limited liability company resulting from the restructuring is not an entity to which assets can be transferred for free.

Clearing up misunderstandings

It has been raised by some that the gratis transfer measures include wholly state-owned companies as the subjects of gratis transfers. And the restructured newspapers have governing bodies and organizers, the office of the central culture leading group state-owned assets supervision and administration and other state-owned units as their shareholders. The restructured newspaper companies thus are also wholly state-owned enterprises, it is argued, so they too can be subjects of this gratis transfer.

This is, however, a misunderstanding. A limited liability company with state-owned shareholders cannot be a state-owned enterprise. One must look to the Company Law to gain an understanding, as it sets out definitions of the various forms a company can take. Article 64 stipulates that wholly state-owned company refers to “a limited liability company of which the State is the sole investor and the State Council or a local people’s government authorizes a state-owned assets supervision and administration authority of the people’s government at the same level to perform the responsibilities of the investor”. Article 57 further stipulates that a one-person limited liability company refers to “a limited liability company that has only one natural person shareholder or one legal person shareholder”.

It should be noted that the “state-owned assets supervision and administration authority” quoted in the legislation above refers to SASAC offices at every government level.

It is evident from the two definitions that wholly state-owned companies must have the SASAC as shareholders. If a newspaper restructures itself into a limited liability company and has only one shareholder that is a state-owned entity, it is but a state-owned limited liability company rather than a state-owned company. The gratis transfer measures have language on this, specifying that “the transfer of assets into or out of a wholly state-owned company shall comply with the relevant provisions of the Company Law”.

Proposal

Lawyers must be sure to explain to the relevant party in charge of the newspaper the difference between transfers and assignment of assets. They must also take effort to explain differences between wholly state-owned companies and state-owned limited liability companies.

It is suggested that firms who intend to include an assets transfer during restructuring execute the transfer prior to completing the restructuring process, so as to avoid incurring higher restructuring costs due to being forced to assign assets.

Song Chang’an is an associate of East & Concord Partners