Mergers, Acquisitions, and Restructuring of State-Owned Enterprises

Interviewed by Zhang Tianhui and He Ran*

【Editor's Notes】Mergers, acquisitions, and restructuring ("MA&R") are powerful methods in reforming, re-vitalizing, and jump-starting of state-owned enterprises ("SOEs") and this economic phenomenon is gaining wide-spread attention. In this backdrop in reforming, restructuring, and elevating of SOEs, these methods have gained strong government support. Further, the merger, acquisition and restructuring of SOEs are mostly the realignment of the SOEs. With strong promotion by the central and local Chinese governments, the speed of MA&R of SOEs will further accelerate in the future.

【Interviewee】Yan Qiong is a partner of King & Wood's Merger & Acquisition Group in Shenzhen.


Q: Are there any particular laws and regulations related to MA&R of SOEs?

The Interim Measures for the Management of the Transfer of the State-Owned Property Rights of Enterprises ("Interim Measures") was jointly promulgated in early 2004 by the State-Owned Asset Supervision and Administration Commission of the State Council and the Ministry of Finance. The respective state-owned asset supervision administrations at the provincial level also have promulgated their corresponding local implementing rules and these rules have been widely applied. The Interim Measures and the corresponding local implementing rules constitute the legal basis for the transfer of the state-owned property rights in recent years.

Q: What are the new directions after the promulgation of the Opinions of the State Council on Promoting Mergers, Acquisitions, and Reorganizationof Enterprises ("Decree No. 27")?

With respect to this question, we look to the Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investments promulgated on May 7, 2010 ("Decree No.13") and Decree No. 27, (collectively the "Decrees"). The promulgation of these Decrees indicated that whether it is the merger, acquisition or restructuring of SOEs or with respect to private investment activities, they are provided under the larger direction in shifting economic development and industry structures in order to consolidate competitive advantages and to encourage reasonable industry movements, and to realize them in orderly step-wise transitions. Overall, a new round of economic reform and development is approaching.

Q: In your current SOE MA&R cases, are there any special characteristics with respect to these cases?

From recent SOE MA&R cases, there is an apparent characteristic: all these cases are conducted within the main business scope of the respective SOEs. Most of the SOEs I have counseled choose to retreat partially or entirely from businesses and/or investments that is peripheral to their main business scopes of their respective SOEs. On the other hand, with respect to businesses and/or investments that are central to the respective SOEs, the SOEs strive to make further progress through investments or MA&Rs in their main business scopes. This is especially the case with the MA&R for central SOEs, where emphasis is attached to industry structure and layout; and less importance is attached to short-term economic returns or profitability. In short, for a given SOE, MA&Rs always take place within its main business scope and less on those beyond such scope. Central SOEs are extremely active in MA&R market since they indeed possess unparalleled competitive advantages when compared with other enterprises.

Q: What are the present methods for SOE reforms?

First of all, the essence of SOE reform does not necessarily mean changes in the economic structure or type (such as changes in ownership). From the perspective of business development, I think SOE reform takes place so long as (1) the equity investor changes or (2) capital movement occurs with respect to the SOE. Hence, the "SOE reform" we talk about might be better expressed as the "reform in the entities to make investment and investment mechanisms engaged by SOEs".

Q: With respect to the hot topic of "the state retreats, while the private investor advances", what is your opinion of the future development of the SOE reform? What industries will be opened up to private investors and what will be controlled by the SOEs?

At the present stage, there is no specific direction for the industrial sectors that "the state retreats", and the industrial sectors that "the private investor advances". Under the circumstance that private investments are encouraged, more opportunities will be open up to private investors.

I think SOEs will expand their influence in the following industrial sectors: (1) the SOEs will dominate such industries that play leading roles or have great impact on national economic transformation and structural adjustment; (2) industries that the country needs to "concentrate advantageous resources to develop and expand"; and (3) key industries emphasized by the country or is "vital" to national development, such as the "automobile, steel, concrete, machinery manufacturing, aluminum electrolyte, and rare earth industries" as stated in Decree No. 27, as well as the seven industries ( energy-saving, new-generation information technology, biology, high-end equipment manufacturing, new energy, new materials and automobile based on new energy) as stated in the Decisions of State Council on Cultivating and Developing Emerging Industries of Strategic Importance.

Q: What are the major legal risks in SOE MA&R? How are employee-related problems solved?

The greatest risk in SOE MA&R is the non-compliance of relevant laws and policies. Moreover, the absence or imperfection of relevant laws or conflicts between the laws and regulations related to SOE MA&R (transfer of state-owned assets or ownership) constitute obstacles for SOE MA&R, and this may cause the MA&R transaction to fail or even lead to criminal liabilities for the parties involved.

The risk in the SOE MA&R process mainly lie in three legal flaws, that is, qualification flaws of transaction parties, flaws in the examination and approval procedures, and flaws in transaction procedures. Particularly under the circumstances that foreign investment and private investment are involved, some in-depth problems will arise in the SOE MA&R, such as the unclear demarcation of the ownership of SOEs, non-transparent (black-box) dealing by the government in certain SOE MA&Rs, loss of state-owned assets, loss of the national brands, and monopolization issues. From my experience, preliminary negotiation should be made based on a comprehensive review of the SOE. After reaching a preliminary intent for MA&R, it is recommended to quickly communicate with the relevant state-owned assets administrations. The guidance from the said administrations can help avoid some mistakes or delay in SOE MA&R transactions.

In addition to the above three risks, another risk in SOE MA&R is the legal risk related to the rights of the SOE employees, especially the SOE employee right to participate in the MA&R, the protection of their rights in the MA&R, and the settlement of the employees. Both central and local governments have promulgated many regulations regarding the employees' rights to participate in the MA&R and the settlement of the employees. When dealing with these issues, the parties needs to comply with relevant labor laws and corresponding local regulations. To some extent, the employees' level of involvement, publicity degree of the restructuring plan, and the degree that the transaction is a market-driven transaction (rather than government-arranged transactions) are all important in reducing legal risks relating to employees issues in SOE MA&R.

* Zhang Tianhui and He Ran are editors of King & Wood's Publication Group.