Opinions on Promoting Corporate Mergers and Restructuring

Issuing Body: State Council
Issuing Date: August 28, 2010
Effective Date: August 28, 2010

Seeking to further stimulate China's domestic economy, in August the State Council released a set of broad guidelines primarily intended to promote the transformation and restructuring of state-owned enterprises, especially in the automobile, steel, cement, machinery manufacturing, aluminum, and rare earth industries. The stated goal of the Opinions on Promoting Corporate Mergers and Restructuring (Merger and Restructuring Opinions), which were released and took effect on August 28, 2010, is to address problems such as "redundant construction, low industrial centralization, poor independent innovation ability, [and] weak market competitiveness." Though in practice the Merger and Restructuring Opinions will apply most directly to domestic and state-owned enterprises, they will certainly affect the landscape on which foreign enterprises compete inside China and against Chinese businesses abroad.The key elements of the Merger and Restructuring Opinions are summarized below.

• The Merger and Restructuring Opinions provide that the State Council will revise or repeal various provisions of law that restrict or prevent corporate mergers, restructurings, and fair competition, especially provisions promulgated by local authorities that limit mergers and the restructuring of local enterprises by enterprises from outside the region.
• Based on the scale of assets and profitability of enterprises undergoing merger or restructuring, the relevant authorities in different districts may enter into tax benefit allocation agreements regarding the merger or restructuring, provided that such allocation is in compliance with state policies. Clearly the State Council hopes authorities will share the benefits of mergers and restructurings by allowing them to allocate tax benefits. But since this language is very vague and general, more detailed guidelines may well be issued in the near future.
• Tax and fiscal policies in support of corporate mergers and restructuring should be improved, the Merger and Restructuring Opinions say. Tax preferences should be granted in cases of asset evaluation appreciation, debt-restructuring gains, and land or property ownership transfers associated with corporate mergers and restructuring. Details of such tax preference treatment should be implemented in accordance with relevant regulations of the State Administration of Taxation.
• Commercial banks are encouraged under the Merger and Restructuring Opinions to "actively and prudently carry out M&A loan business," expanding the scale of loans and setting reasonable loan terms. Commercial banks are further encouraged to implement comprehensive credit to enterprises undergoing merger and restructuring. Securities companies, asset management companies, equity investment funds, and industrial investment funds are allowed to participate in corporate mergers and restructurings, and to provide direct investment, entrusted loans, bridge loans, and other financial support to such enterprises. The State Council also aims to support transnational mergers and acquisitions by means of M&A loans, domestic and foreign syndicated loans, and discounts of loan interest.
• Qualified enterprises are encouraged by the Merger and Restructuring Opinions to establish technology centers in order to improve research and development standards and independent innovation ability, and to speed up the translation of technological advances into economically productive products and services. The State Council opinions also encourage and guide enterprises to eliminate outdated production capacity through mergers and restructuring and effectively prevent expansion where industries are over capacity or construction is redundant.
• Where the land involved in a merger or restructuring already satisfies conditions for land allocation, the land may continue to be used as allocated land, without additional land-use charges, upon approval of the competent people's government above the county level. In situations where the land does not satisfy conditions for allocated land, users of the land shall be charged a land-use right fee in accordance with relevant laws. In such cases, the price for the land-use right fee secures the legitimate rights and interests of the land user.

Conclusion

While the language of the Merger and Restructuring Opinions is broad and addresses policy more than law, the opinions nevertheless send important signals about priorities at the highest levels of the Chinese government. As such, implementing legislation is likely to follow.