Transfers of State-owned Property

New regulations streamlining the assessment and transfer of State-owned property have recently been enacted. The “Temporary Regulations on Administration of State-owned Property Assessment ” (the “Regulations”) came into effect on August 1 st 2004. These Regulations replace the original examination and approval system with simpler registry procedures. Other requirements on property transfer and Administration of Industry and Commerce (“AIC”) registration procedures have also been modified to comply with these new provisions.

•  Properties to which the Regulations Apply

The Regulations require that enterprises or institutions that hold State-owned Property (“SOP”) shall have the property assessed before transferring its interest in that property.

Potential investors who are not sure about the nature of a property need to be cautious when making a determination on whether a particular parcel is SOP or not. Various agencies have different procedures, for example, AIC may require a limited company whose AIC registry files shows that all its investors are individuals to apply to the Regulations only because it has a wrong registry code, which would be exclusive to a company with SOP.

Confirmation of whether property is State-owned or not can be made by having an attorney check the records (business license, AIC registry record, articles of association) of he enterprise or institution. In typical property transfer cases, the AIC is often the final agency to go through. When it comes to SOP however, checking with them early regarding the property's status can save a great deal of time and frustration.

II SOP Assessment

•  Property to be Assessed

The Regulations state that all SOP must be assessed prior to transferring ownership/use-right interests. The exceptions are when the transfer is between wholly state-owned organizations with the decision of People's government or administrations of state-owned property and is free of charge.

If a transferred company holds both SOP and non-SOP, it will be assessed as a whole. The value of the SOP will be decided based on its proportion to the whole property.

•  Assessment Agency

In an acquisition, the target company should be audited before the assessment, and should be arranged by the contributor of the SOP instead of the target company itself. The assessment agency should have an A grade qualification if the target company is a public listed company. For other companies a B-grade agency is acceptable.

Under special circumstances, assessment agencies may issue an audit report instead of an assessment. Such circumstances would be where the target company has no concrete or fixed assets. However, the AIC has the right to confirm the value of the target company and determine whether such an assessment report can be replaced with an audit report.

III Confirmation and Registry of Assessment

Unless the transfer is a significant project approved by the Shanghai Municipal Government or district-level government, whose assessment shall be confirmed and registered by the Shanghai Municipal SOP Administration or corresponding district-level administrations, The Regulations hold that a project's assessment shall only need to be registered.

The following shall be noted in the registry:

•  The Registry Form of SOP Assessment shall be completed with both the official chop of the target company and its supervisor for confirmation;

•  The value of assessed property shall be confirmed by a related authority. In Shanghai, this is the Shanghai Property Assessment Center.

IV Property Right Exchange

Property use right exchanges in Shanghai are also governed under the Temporary Regulations on Transfers of Enterprise's SOP, which came into effect on February 1 st 2004. These regulate asset and equity exchanges in Shanghai. Currently, The Shanghai United Assets & Equity Exchange is the exclusive entity to provide these exchanges, and the Shanghai Assets and Equity Exchange Rules and Shanghai Management Rules on Assets and Equity Exchange are applicable.

The following should be noted in a transfer:

•  A resolution agreeing to the transfer and issued by the target company (usually a shareholders' resolution) is necessary. The transfer also requires a decision made by the contributor of the SOP. Sometimes, the party who makes the contribution directly does not have the right to agree with such transfer. In such a case, approval shall be made by the superior organization that has the right to make such a decision.

•  A copy of common legal documents on direct contributors or the parent of the target company (such as articles of association) will also be required.

•  Transfers can only be made through agencies, and not law firms. Such agencies will provide parties to the transfer with standard legal documents, such as the share transfer agreement, to which lawyers may give professional comments and amendments so as to protect his client's interests.

•  Assessment reports are valid for one year from the date of issue. Transfers should be completed promptly. Otherwise, additional statements or a reassessment may be required.

•  The actual transfer price may be modified due to some financial consideration. However, the price may not be lower than 90% of the assessed price, otherwise the transfer will be suspended until the actual transfer price is confirmed in writing by the original confirmation authority. Such confirmation is necessary to complete the registration of the new entity with the AIC.

•  In some of the cases, it will take about 45 calendar days to complete a transfer through the Exchange. Agencies can accelerate the procedure, but lawyers should take this timeline into consideration when their clients have specific time requirements for the project.

V AIC Registry

AIC registry is the final step in a share transfer. Besides the general requirements, the AIC will focus on the assessment report (or audit report), the confirmation of the SOP's value, the Assets and Equity Transfer Statement issued by the Exchange, the transfer price, and the share transfer agreement with its attachments in a whole package prepared by the Exchange.

Conclusion

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