State-owned properties, broadly speaking, are various forms of property that arise as a result of state-made investments. Corporate mergers and acquisitions (M&A) are generally divided into asset and equity M&A. As asset acquisitions involve such issues as title to the assets, and taxes and levies, in practice corporate M&A, where the subject matter is equity, are more common. In corporate M&A, the issue of the transfer of state-owned properties exists regardless of whether an ordinary joint stock limited company, listed company, or unlisted public company is involved.
Joint stock limited companies. The state-owned properties issue in these companies was most commonly handled by a negotiated transfer, before the implementation of the Interim Administrative Measures for the Transfer of the State-Owned Property Rights of Enterprises (Order No. 3), issued by the State-owned Assets Supervision and Administration Commission (SASAC). This is despite the issuance and implementation, as early as 1991, by the State Council of the Administrative Measures for the Valuation of State-Owned Assets, which required the carrying out of the appropriate valuation procedures for transfers of state-owned properties. The most important contribution of Order No. 3 is further regulating from the perspective of preventing the squandering of state-owned assets, the transfer of state-owned properties, and, it expressly requires, for a transfer of state-owned assets that property rights be demarcated, that assets and capital be verified, that assets be valued and that the outcome of the valuation be filed for the record or submitted for approval. The transfer of the state-owned properties may not be carried out until the floor transaction procedures have been carried out. Accordingly, in practice, where a joint stock limited company that encompasses state-owned equity is to be acquired, the provisions concerning floor transactions need to be carried out, except under the special circumstances where a negotiated transfer of state-owned properties is applicable.
Relevant legislation, such as the Administrative Measures for the Transfer of the State-Owned Assets of Financial Enterprises, is applicable to the acquisition of financial state-owned enterprises (SOEs).
Listed companies. The issue of state-owned equity in acquisitions of listed companies is mainly reflected in:
(1) transfers of shares of the listed companies by state-owned hareholders; and (2) acquisitions of shares of listed companies by state-owned shareholders.
For (1), it is accomplished pursuant to the Interim Administrative Measures for the Transfer of Shares of Listed Companies Held by State-Owned Shareholders (Order No. 19). Order No. 19 addresses such operations as: the reduction of the holding of state-owned shares by way of the secondary market; the negotiated transfer of such shares; the allocation without consideration thereof; and indirect transfer of the same. The authority for the recordal and approval of this type of transfer lies, at present, in the hands of SASAC of the State Council.
For (2), it is handled pursuant to the Notice on Matters Relevant to the Regulation of Asset Restructurings Carried Out by State-Owned Shareholders and Listed Companies. When a state-owned entity wishes to acquire shares of a listed company by negotiation, it is required to engage a financial adviser to issue an opinion, and the authority for the approval of such acquisition lies with the provincial-level SASAC, whereas the transfer of the shares is subject to the approval of the SASAC of the State Council.
Unlisted public companies. Pursuant to the Measures for the Oversight of Unlisted Public Companies, the unlisted companies that are currently covered are mainly New Third Board companies, i.e., joint stock limited companies listed and traded on the National Equities Exchange and Quotations (NEEQ). The transfer of shares of unlisted public companies on the NEEQ can be accomplished either through a negotiated transfer or market maker transfer. For a market maker transfer of a company listed on the NEEQ there is a clear price and the corresponding transaction volume. A client previously asked the author’s firm if a market maker transfer could be compared to the pricing mechanism for the transfer of shares of listed companies where the NEEQ transaction price or average price could serve as the pricing mechanism for the transfer.
After a certain investment company had invested in the equity of an unlisted enterprise, the enterprise listed on the New Third Board and adopted the market maker transfer transaction method, following which it was continually actively traded. The state-owned investment company, proposing to transfer the shares it held in the enterprise on the NEEQ to achieve a divestment, asked the author’s firm if it could carry out the transfer at the NEEQ trading price. This transfer price greatly exceeded the price at which the state-owned investment company had acquired its equity interest in the enterprise.
The author’s firm argued that since New Third Board companies are essentially unlisted companies, the pricing mechanism was not entirely equivalent or comparable to the pricing mechanism and decision-making procedure for the transfer of state-owned shares of listed companies. Instead, the floor transaction or negotiated transfer method should apply. The firm made inquiries with the NEEQ about this. At present, the NEEQ does not have any determined regulations for the transfer of state-owned shares on the New Third Board and, specifically, transfer issues relating to the disposal of state-owned shares remain subject to relevant regulations of the state-owned asset authority.
Recent regulations. On the basis of Order No. 3, the Measures for the Oversight of Transactions Involving the State-Owned Assets of Enterprises of 24 June 2016 further regulate capital increases by state-owned and state-controlled enterprises, and enterprises de facto controlled by the state, and add a provision that the capital increases of such enterprises also require floor transactions. In terms of the transaction method, the method of investing in a minority stake of the equity of state-owned and state-controlled enterprises, and of enterprises de facto controlled by the state, has been changed from the existing method of executing a capital increase agreement to the method requiring a floor transaction.
When an SOE invests in the equity of a non-SOE, i.e., when it participates in the capital increase of a non-SOE, the same will continue to be accomplished by way of an agreement executed between the investor and investee on the basis of an asset valuation. Where the method of divestment is concerned, the regulations applicable to one of the three types of companies mentioned above are to be selected based on the stage at which the investee enterprise finds itself.
Du Guoping is a partner at East & Concord Partners