Provisional Rules on Using Foreign Investment to Reorganize State-owned Enterprises 

(Promulgated by the State Economic and Trade Commission, the Ministry of Finance, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange on 8 November 2002 and effective as of 1 January 2003.)

Article 1: These Provisions have been formulated pursuant to the PRC, Company Law, the PRC, Contract Law and State laws and regulations concerning foreign investment and administration of State-owned assets, in order to attract and regulate the use of foreign investment to reorganize State-owned enterprises, promote the strategic restructuring of the State-owned economy, accelerate the pace at which State-owned enterprises establish modern corporate systems and safeguard social stability.

Article 2: These Provisions shall govern the use of foreign investment to reorganize State-owned enterprises and company system enterprises with State-owned equity (with the exception of financial enterprises and listed companies) or to establish them as company system foreign-invested enterprises (hereafter, Use of Foreign Investment to Reorganize State-owned Enterprises).

Article 3: For the purpose of these Provisions, the Use of Foreign Investment to Reorganize State-owned Enterprises shall include the following:

1. the owner of State-owned property rights in a State-owned enterprise assigns all or part of the property rights to a foreign company, enterprise or other economic organization or individual (Foreign Investor) and the enterprise is reorganized as a foreign-invested enterprise;

2. the owner of State-owned equity in a company system enterprise assigns all or part of the State-owned equity to a Foreign Investor and the enterprise is reorganized as a foreign-invested enterprise;

3. the domestic creditor of a State-owned enterprise assigns its claim to a Foreign Investor and the enterprise is reorganized as a foreign-invested enterprise;

4. a State-owned enterprise or a company system enterprise with State-owned equity sells all or its main assets to a Foreign Investor and the Foreign Investor uses the assets that it purchased, alone or together with the enterprise that sold the assets, to establish a foreign-invested enterprise; or

5. a State-owned enterprise or a company system enterprise with State-owned equity attracts investment from a Foreign Investor to increase its capital and its shares and the enterprise is reorganized as a foreign-invested enterprise.

Article 4: The State-owned enterprises and company system enterprises described in Items (1), (2), (3) and (5) of Article 3 hereof shall be termed "Enterprises to be Reorganized".

The State-owned property rights of State-owned enterprises and the State-owned equity of company system enterprises shall collectively be termed "State-owned Property Rights". The owners of State-owned property rights and State-owned equity shall collectively be termed "Owners of State-owned Property Rights".

The term "Owner of State-owned Property Rights" means a department authorized by the State or an organization, an enterprise owning State-owned capital or other economic organization authorized to invest by the State. The Owners of State-owned Property Rights, creditors of State-owned enterprises that assign their claims and enterprises that sell their assets shall collectively be termed the "Reorganizing Party".

Article 5: The Reorganizing Party shall select a Foreign Investor that satisfies the following conditions:

1. having the business qualifications and technical level required by the Enterprise to be Reorganized;

2. having a fine business reputation and management capabilities; and

3. having a solid financial position and economic strengths.

The Reorganizing Party shall require the Foreign Investor to submit a restructuring programme to improve the enterprise's corporate governance structure and promote the sustained growth of the enterprise. The restructuring programme shall include the development of new products, technical transformation and a related investment plan, measures to strengthen corporate management, etc.

Article 6: The following principles shall be complied with when Using Foreign Investment to Reorganize State-owned Enterprises:

1. abiding by State laws and regulations and ensuring the economic security of the State;

2. satisfying the requirements of State industrial policy; if the business scope of the enterprise (including those enterprises in which it has a direct or indirect interest) is in an industry in which foreign investment is prohibited by the Foreign Investment Industrial Guidance Catalogue, Foreign Investors may not participate in the reorganization; if the enterprise is one in which the Chinese party must have a controlling interest or a relative controlling interest, the Chinese party shall maintain its controlling interest or relative controlling interest after the reorganization;

3. being beneficial in the economic restructuring effort and promoting the optimal deployment of State-owned capital;

4. emphasizing the introduction of advanced technology and management experience, establishing a compliant corporate governance structure and promoting corporate technical advance and industrial upgrading;

5. adhering to the principles of openness, fairness, impartiality and good faith, preventing the loss of State-owned assets, not evading, repudiating or suspending the claims of banks and other creditors, not prejudicing the lawful rights and interests of staff and workers and safeguarding the lawful rights and interests of Foreign Investors; and

6. promoting fair competition and not leading to monopolization of the market.

Article 7: Prior to the assignment of the property rights of a State-owned enterprise or a wholly State-owned company or the State-owned equity of a limited liability company invested in and established by two or more State-owned enterprises or two or more State-owned investment entities other than State-owned enterprises, the Reorganizing Party shall seek the opinions of the staff and worker congress of the Enterprise to be Reorganized. The assignment of the State-owned equity of a company system enterprise shall require the consent of the shareholders' meeting of the Enterprise to be Reorganized. If claims against a State-owned enterprise are to be assigned, the consent of the Owner of the State-owned Property Rights of the Enterprise to be Reorganized shall be required. Prior to selling all of or its main assets, the enterprise shall obtain the consent of the Owner of the State-owned Property Rights of the enterprise or the shareholders' meeting of the enterprise and notify its creditors thereof.

Article 8: The Use of Foreign Investment to Reorganize a State-owned Enterprise shall satisfy the following requirements:

1. Prior to the reorganization of the enterprise, the Owner of the State-owned Property Rights shall arrange for an inventory of the assets, a determination of the property rights and a screening of the claims and debts of the Enterprise to be Reorganized, engage qualified intermediary organizations to conduct a financial audit and to conduct an asset appraisal in accordance with such relevant regulations as the Administration of State Asset Valuation Procedures (State Council Order No.91), the Several Issues Concerning the Administration of State Asset Valuation Provisions (Ministry of Finance Order No.14), etc. After the appraisal results have been approved or placed on the record in accordance with regulations, they shall serve as the basis for determining the price of the State-owned Property Rights or assets.

2. If the controlling interest in the enterprise is to pass to, or if all or the main business assets of the enterprise are to be sold to, the Foreign Investor after the reorganization, the Reorganizing Party and the Enterprise to be Reorganized shall formulate an appropriate plan to settle the staff and workers that shall be subject to the approval of the staff and worker congress. The Enterprise to be Reorganized shall use its existing assets to pay in full all such expenses as the wages of its staff and workers, non-refunded pooled wages, unpaid social insurance premiums, etc. The Enterprise to be Reorganized shall offer its staff and workers two options. It shall, in accordance with the law, execute new labour contracts with, or amend the labour contracts of, its staff and workers who are kept on. It shall, in accordance with the law, pay severance pay to those staff members and workers whose labour contracts are terminated and for those staff and workers, the responsibility for whom is transferred to the social insurance authority, it shall pay in full in one lump sum the social insurance premiums. The funds required shall be deducted from the net assets of the Enterprise to be Reorganized before the reorganization or on a priority basis from the proceeds derived by the Owner of the State-owned Property Rights from the assignment of the State-owned Property Rights.

3. If the reorganization is to be effected through the sale of assets, the original enterprise shall succeed to the enterprise's claims and debts, otherwise the reorganized enterprise shall succeed to the enterprise's claims and debts. The assignment of mortgaged or pledged State-owned Property Rights or assets shall comply with the relevant provisions of the PRC, Security Law. The successor to the debts shall execute relevant agreements for the disposal of claims and debts with the creditors.

4. The Reorganizing Party shall publish information on the reorganization, recruit Foreign Investors extensively and investigate the Foreign Investors' qualifications, reputation, financial position, management capabilities, payment guarantees, business ethics, etc. It shall give priority consideration to medium and long-term Foreign Investors that can offer advanced technology, management experience and a high degree of industrial compatibility.

The Reorganizing Party and the Foreign Investor shall respond to the reasonable demands of the opposite party by providing relevant truthful and detailed information and data, may not mislead or deceive the opposite party and shall bear the appropriate confidentiality obligations.

5. If the enterprise reorganization is to be effected through the assignment of State-owned Property Rights or the sale of assets, the Reorganizing Party shall preferentially opt for an open competitive pricing method to determine the Foreign Investor and assignment price. When selecting an open competitive pricing method of assignment, the relevant procedures shall be carried out in accordance with the law and the relevant details on the State-owned Property Rights to be assigned or the assets to be sold shall be announced publicly. If assignment by agreement is opted for, such assignment shall be conducted in an open manner.

Regardless of the assignment method opted for, the Reorganizing Party and the Foreign Investor shall execute an assignment agreement in accordance with the relevant State regulations and these Provisions. The terms of the assignment agreement shall mainly include the basic information on the State-owned Property Rights to be assigned, the settlement arrangements for the staff and workers, the disposal of claims and debts, the assignment ratio, the assignment price, the method of payment and payment conditions, matters relating to the delivery of the property rights, corporate restructuring, etc.

Article 9: The Use of Foreign Investment to Reorganize State-owned Enterprises shall be effected in accordance with the following procedure:

1. The Reorganizing Party (if there are two or more Reorganizing Parties, one shall be selected as the Reorganizing Party) shall submit a reorganization application to the competent department in charge of foreign trade and economic cooperation at the same level. Such documents as a feasibility study, details of the Reorganizing Party and the Enterprise to be Reorganized, details of the Foreign Investor (including its financial statements for the most recent three years audited by a certified accountant and the market share accounted for by the products or services of the enterprises in the same industry in China actually controlled by the Foreign Investor), the reorganization program (including the arrangements for the settlement of staff and worker and for the disposal of claims and debts and the corporate restructuring program), the business scope and equity structure of the reorganized enterprise (including the enterprises in which it has a direct or indirect interest) shall be included with the reorganization application materials.

The department in charge of foreign trade and economic cooperation that received the application shall examine the same in accordance with the authority bestowed by the Guiding the Direction of Foreign Investment Provisions and the relevant laws and regulations. If an enterprise operated by the central government or Party authorities and its wholly-owned enterprises or the enterprises in which it has controlling interest is to be reorganized, or if the Enterprise to be Reorganized directly or indirectly holds equity in a listed company or if the reorganized enterprise is to have total assets of not less than US$30 million, the examination shall be conducted by the State Council department in charge of foreign trade and economic cooperation. If the reorganization of such an enterprise might lead to monopolization of the market or impede fair competition, hearings shall be organized before the examination. The department in charge of foreign trade and economic cooperation shall issue its official reply on whether or not it consents to the reorganization within 45 working days after receipt of the reorganization application materials. If hearings are held, the official reply shall be issued within three months.

If the State has other regulations on the use of foreign investment in the industry of which the Enterprise to be Reorganized and the enterprises in which it has a direct or indirect interest are a part or on the change in the nature of the State-owned shares of the Owners of the State-owned Property Rights in a listed company arising due to the change in the property rights, such regulations shall prevail.

2. The assignment agreement executed by the Reorganizing Party and the Foreign Investor shall be submitted for approval in accordance with the relevant provisions of the Ministry of Finance, Issue of the <Administration of the State-owned Capital and Financial Affairs of Enterprises Tentative Procedures> Circular (ref. Cai Qi [2001] No.325). The assignment agreement shall enter into effect upon approval.

Such documents as the State-owned Property Rights Registration Certificate, information on the approval or record filing of the audit report and asset appraisal report of the Enterprise to be Reorganized, the staff and worker settlement program, the claim and debt agreement, the corporate restructuring program, the relevant resolutions of the Reorganizing Party and the Enterprise to be Reorganized, the opinions or resolution of the staff and worker congress of the Enterprise to be Reorganized, etc. shall accompany the assignment agreement.

3. The Reorganizing Party or the Enterprise to be Reorganized shall, on the strength of the approval documents for the reorganization application and assignment agreement, carry out examination and approval procedures for foreign-invested enterprises in accordance with the law. If the reorganized enterprise is to be a company limited by shares, matters shall be handled in accordance with the relevant provisions of the PRC Company Law.

4. The reorganized enterprise or the investors shall, on the strength of the approval documents specified in Items (1) and (3) of this Article and in accordance with laws and regulations on the administration of registration, carry out registration procedures with the original registration authority, if it has the authority to register foreign-invested enterprises, or the registration authority with the authority to register foreign-invested enterprises of the place where the enterprise is located. If the reorganized enterprise is to be a company limited by shares, matters shall be handled in accordance with the relevant provisions of the PRC Company Law.

5. The Reorganizing Party shall, on the strength of the approval documents for the reorganization application and assignment agreement, the foreign investment exchange registration certificate and the relevant documents, carry out the procedures for the delivery of State-owned Property Rights and the procedures for registration of the change of ownership in accordance with relevant provisions and engage a certified accountant to issue a capital verification report in accordance with the law. If the land to be used by the reorganized enterprise is State-owned allocated land, the procedures for the examination and approval and granting of leaseholds shall be carried out in accordance with the law.

6. The foreign exchange proceeds derived by the Reorganizing Party from the assignment of State-owned Property Rights or claims or the sale of assets shall be settled after reporting to the foreign exchange department for its approval on the strength of the approval documents for the reorganization application and assignment agreement and the relevant documents.

If the Enterprise to be Reorganized is to be reorganized through a capital and share increase effected through the attraction of investment from Foreign Investors, it may, subject to the approval of the foreign exchange department, open a foreign exchange capital account to retain the foreign exchange funds injected by the Foreign Investors.

7. The reorganization applications, assignment agreements and the approval certificates therefor of key State enterprises, enterprises whose debt to equity swaps have been approved by the State and enterprises in the restricted category of industries in the Foreign Investment Industrial Guidance Catalogue that are under the investment limit and that are subject to the examination and approval of local departments in charge of foreign trade and economic cooperation and finance shall be submitted to the State Council departments in charge of foreign trade and economic cooperation and finance respectively for the record.

Article 10: Foreign Investors shall pay the assignment price or make their capital contributions in the form of a freely convertible currency or other lawful property rights remitted from overseas. Subject to the approval of the foreign exchange department, they may also pay the assignment price or make their capital contributions in the form of net Renminbi profits or other lawful property rights obtained in China. The afore-mentioned other lawful property rights shall include the following:

1. property obtained by Foreign Investors originating from the liquidation of, the assignment of the equity of, the advance recovery of investment from or the reduction in the capital of other foreign-invested enterprises established by them in China;

2. the State-owned Property Rights or assets of State-owned enterprises or company system enterprises with State-owned equity acquired by Foreign Investors;

3. the claims acquired by Foreign Investors of creditors of State-owned enterprises; and

4. other capital contribution methods specified in laws and regulations.

When a certified accountant conducts a capital verification for a Foreign Investor, he shall carry out the capital verification procedure and issue a capital verification report in accordance with the Ministry of Finance and State Administration of Foreign Exchange, Further Strengthening the Work of Capital Verification for Foreign Investment Enterprises and Improving the System of Registration of Foreign Capital and Foreign Exchange Circular (ref. Cai Kuai [2002] No.1017).

Article 11: If the reorganization is effected through an assignment, generally, the Foreign Investor shall pay the entire price within three months after the date on which the foreign-invested enterprise is issued its business licence. In the event that the Foreign Investor truly experiences difficulty in doing so, 60% or more of the total price shall be paid within six months after the date of issuance of the business licence, security shall be provided for the remaining amount and such remaining amount shall be paid in full within one year.

Article 12: If the controlling interest in the enterprise is to pass to, or if all or the main business assets of the enterprise are to be sold to, the Foreign Investor after the assignment of the State-owned Property Rights, the Reorganizing Party has the right, prior to the Foreign Investor paying the price in full, to be kept informed of and supervise the production, operational and financial situation of the reorganized enterprise and the Foreign Investor and the reorganized enterprise shall appropriately facilitate the Reorganizing Party's staying informed and supervising.

Prior to using the acquired assets to invest in and establish a foreign-invested enterprise, the Foreign Investor may not use the aforementioned assets to engage in business activities.

Article 13: The proceeds derived from the assignment of State-owned Property Rights or assets shall be received by the Reorganizing Party and managed and used in accordance with the relevant provisions of the State Council department in charge of finance.

Article 14: The share of the net profits of the reorganized enterprise obtained by the Foreign Investor, proceeds it derives from an equity assignment, the share of the funds that it obtains after the expiration of the business term or termination of the enterprise and other lawful revenues may be remitted abroad in accordance with the law or, subject to the approval of the foreign exchange department, may be reinvested in China.

Article 15: In the course of Using Foreign Investment to Reorganize State-owned Enterprises, tax policies in respect thereof shall be handled in accordance with relevant State laws and administrative regulations on taxation and fee policies in respect thereof shall be handled in accordance with the State Development Planning Commission, State Economic and Trade Commission, Ministry of Supervision, Ministry of Finance, Auditing Administration and the Office for Checking Unhealthy Tendencies in Business Activities of the State Council, Reduction or Exemption of Charges for Enterprises Undergoing Reform, Reorganization or Restructuring Circular (ref. Ji Jia Fei [1998] No.1077).

Article 16: If a member of the personnel of the Reorganizing Party or the Enterprise to be Reorganized acts ultra vires, is derelict in his duties, secretly colludes with the Foreign Investor, practises graft or accepts bribes thus prejudicing the lawful rights and interests of the State, creditors, staff members and workers, he shall be subjected to administrative penalties and sanctions by the relevant department in accordance with the law; if a criminal offence is constituted, his criminal liability shall be pursued in accordance with the law.

Article 17: If a member of the working personnel of a government authority responsible for examination and approval violates these Provisions by granting approvals without authorization or uses his authority in the examination and approval process for private gain thus prejudicing the lawful rights and interests of the State, creditors, staff members and workers, the administrative liability of the person directly in charge and the personnel in authority shall be pursued by the relevant authority in accordance with the administrative authority of cadres; if a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

Article 18: The participation of investors from the Hong Kong Special Administrative Region, the Macao Special Administrative Region and Taiwan and of established foreign-invested enterprises in the reorganization of State-owned enterprises shall be handled with reference to these Provisions.

Article 19: The State Economic and Trade Commission, the Ministry of Finance, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange are in charge of interpreting these Provisions.

Article 20: These Provisions shall be implemented as of 1 January 2003.