Foreign Companies Allowed To Purchase State Assets

One of the great challenges facing China in its drive for sustained economic growth is the question of how to integrate the assets and employees of state-owned enterprises into a liberalizing economy. The measures contained within the “Temporary Provisions on Utilizing Foreign Investment to Restructure State-Owned Enterprises” (the “Restructuring Provisions”) represent China’s latest attempt to resolve this dilemma. The Temporary Regulations went into effect on January 1, 2003.

Permissible Investments

The Restructuring Regulations identify the permissible means by which “a foreign company, enterprise or other economic organization or individual" (a “Foreign Investor”) may acquire equity or assets held by state-owned enterprises or unlisted companies with state shareholdings (collectively, “SOEs”). Specifically, a Foreign Investor may:

· acquire the property rights of an SOE

· acquire the existing equity held by an SOE

· inject capital into an SOE in return for newly issued equity

· acquire all or substantially all of the assets of an SOE

· assume debt of the SOE from domestic creditors

The Restructuring Regulations do not themselves restrict a Foreign Investor from investing in particular industries; however, any such prohibitions contained within the Industry Catalogue Guiding Foreign Investment will continue to apply, as will existing rules mandating Chinese control of certain enterprises.

Criteria for Investors

China’s first phase of economic liberalization focused on using foreign investment to increase exports out of China. More recently, China has sought to attract foreign investment that also advances the capabilities of China’s domestic business and industry. This policy is reflected in the criteria for Foreign Investors contained within the Restructuring Regulations. For instance, a qualified Foreign Investor must possess the business qualifications and technical expertise commensurate with the needs of the SOE, a requirement that appears to exclude purely financial investors from directly participating in foreign investments into SOEs. The Foreign Investor also must exhibit good management capabilities and a good business reputation and must operate from a solid financial position.

Restructuring Plan

The creation of a “restructuring plan” is the first step in pursuing an investment under the Restructuring Regulations. The restructuring plan is essentially a business plan for the entity into which an investment will be made, addressing internal corporate governance, product development, enhancements of technical expertise and capital investment.The SOE submits the final restructuring plan as part of its application package to the relevant governmental authority for approval.

Valuation

Under the Restructuring Regulations, the applicable SOE must perform a valuation of all assets and equity to be acquired by a Foreign Investor. This valuation, which must be conducted in accordance with the Administration of State Asset Valuation Procedures and Provisions of Certain Issues on the Administration of State Assets Valuation, serves as the basis for determining the acquisition price.

Approval

A proposed investment must satisfy multiple requirements in order to obtain governmental approval. Additionally, depending on the type of transaction, certain parties must consent to or have an opportunity to give an opinion on the proposed investment. For instance, if the investment would result in the transfer to a Foreign Investor of the controlling interest in an enterprise or of all of the main assets of an enterprise, an “appropriate plan to settle the staff and workers” is required and such plan is subject to approval by the effected employees and the worker congress. This last requirement serves as a reminder not only that the approval of investments in SOEs may be influenced by social as well as economic factors, but also that any investment may entail labor issues to which a Foreign Investor may not be accustomed.

Summation

As is common with Chinese laws, the Restructuring Regulations contain room for uncertainty and capriciousness in their application. One important example is the failure of the Restructuring Regulations to clearly identify which governmental agency holds ultimate authority to approve an investment. An additional unknown is the impact that China’s social stability concerns will have on the approval and requirements of foreign investments. If past history is a guide, these concerns will not deter foreign investors from seeking to participate in the potentially rewarding opportunity to participate in the disposition of state-owned assets in China.