Efficiency of equity transfers bolsters growth of restructured enterprises

The speed with which centrally governed enterprises have grown in recent years has been incredible, due to their active internal asset restructuring, improved mechanism for the flow of state-owned capital, etc. This column analyses the methods of transfers of equity by agreement in connection with the internal asset restructuring of centrally governed enterprises.

Scope of transfers by agreement

The Interim Measures for the Administration of the Transfer of the State-Owned Property Rights of Enterprises specify that an enterprise may transfer its state-owned property rights by auction, invitation and submission of bids, transfer by agreement, etc. The Notice of the State-Owned Assets Supervision and Administration Commission of the State Council and the Ministry of Finance on Matters Relevant to the Transfer of the State-Owned Property Rights of Enterprises (document 306) specifies that transfers by agreement are permitted: (1) when there are special requirements in respect of the transferee in the structural adjustment of a key industry or sector of the national economy; and (2) when there is a genuine need to adopt a direct transfer by agreement in an internal asset restructuring of an investee enterprise. The latter requires that both the transferor and the transferee be the investee enterprise, or a wholly owned subsidiary of it, or an enterprise absolutely controlled by it.

Pursuant to document 306, if in the course of an internal equity transfer of a centrally governed enterprise the transferee is a foreign enterprise, other economic organisation or individual, this method may be adopted if the transferee satisfies the above conditions for a transfer by agreement. However, such a transfer should also comply with the Catalogue for Guiding Foreign Investment in Industry on categories in which foreign investment is restricted or prohibited.

Sarah Zhang is a senior associate at Concord & Partners in Shanghai