Many people have always had a misconception that the transfer of state-owned property rights between state-owned enterprises can be carried out free of charge, thinking that since they are all state-owned enterprises, mutual transfer will not lead to the loss of state-owned assets. However, this is not the case in reality. The gratuitous transfer of state-owned property rights of enterprises is carried out between specific state-owned entities, and is not applicable to all entities holding state-owned property rights.

The special regulations on the free transfer of state-owned property rights in enterprises have been issued for a long time. The latest one is the "Guidelines for the Free Transfer of State owned Property Rights in Enterprises" issued in 2009. Since then, the free transfer of state-owned property rights in enterprises has been scattered as part of the content or clauses in relevant regulations on state-owned assets.

This article is written based on current effective regulations, case handling practices, and recent responses from the State owned Assets Supervision and Administration Commission to relevant issues, including the procedures to be followed for the free transfer of state-owned property rights of enterprises, applicable subjects, transfer targets, and related disputes. It is provided for reference and guidance in handling the free transfer of state-owned property rights of enterprises

1、 Free transfer procedure

The procedures for the gratuitous transfer of state-owned property rights of enterprises are mainly stipulated in the "Interim Measures for the Administration of gratuitous transfer of state-owned property rights of enterprises" (State owned Assets Development and Property Rights [2005] No. 239) (referred to as "Document No. 239"). Based on practical experience in handling relevant programs, it mainly involves the following eight steps; However, it should be noted that the following eight steps are mainly for situations where there is no specific approval for gratuitous transfers, and not all gratuitous transfers are applicable. In special circumstances, some intermediate steps can be omitted after approval, which will be mentioned in the following text:

（1） Feasibility Study

Feasibility study is the basis for internal decision-making by both parties involved in the transfer, and is the first step in the free transfer process.

According to Document No. 239, the feasibility study report for free transfer generally includes: (1) the industry situation of the transferred enterprise and relevant national laws, regulations, and industrial policy provisions; (2) The main business situation of the transferred enterprise and its relationship with the main business and development plan of the transferring and transferring enterprises; (3) The financial condition and contingent liabilities of the transferred enterprise; (4) The personnel situation of the transferred enterprise; (5) The restructuring plan of the transferee for the transferred enterprise, including investment plan, funding source, benefit prediction, and risk countermeasures; (6) Other situations that need to be explained.

As for who will issue the feasibility study report, does it have to be issued by an external agency with relevant qualifications?

There is no mandatory requirement in the regulations. After consulting the guidelines for handling free transfers in Shanghai and other places, one of the materials is a feasibility study report, which also requires the official seal to be affixed. In the author's practical case, the feasibility study report is generally completed by the joint efforts of both parties involved in the transfer. The transfer party is responsible for drafting and preparing the report, while the transfer party cooperates to provide relevant materials, data, etc. The final report can be stamped with the official seal of the transfer party or both parties involved, depending on the review needs of the higher-level units of both parties involved. Therefore, it is necessary to communicate and confirm with the state-owned asset supervision unit in advance.

（2） Internal decision-making

After the completion of the feasibility study report, in accordance with the provisions of the Company Law, Articles of Association, and Document No. 239, the internal decision-making and approval process of both parties should be carried out to form a written resolution document.

Specifically, even if there are special provisions in the Articles of Association of both parties involved in the transfer, internal decision-making procedures must be carried out in accordance with Article 7 of Document No. 239, namely:

If the transferring party is a wholly state-owned enterprise, it shall be reviewed by the General Manager's Office Meeting; If a board of directors has been established, it shall be reviewed by the board of directors.

If the transferring party is a wholly state-owned company, it shall be reviewed by the board of directors; If a board of directors has not yet been established, it shall be reviewed by the general manager's office meeting.

3. The matters related to employee diversion and resettlement shall be reviewed and approved by the employee representative assembly of the transferred enterprise.

（3） Notify creditors

1. The provisions of Document No. 239

Article 8 of Document No. 239 stipulates that the transferring party shall notify the creditors of the enterprise (unit) of the gratuitous transfer and formulate corresponding debt disposal plans. Article 16 stipulates that when approving the gratuitous transfer of state-owned property rights of enterprises, the following written materials shall be examined:... (7) Disposal plan for the transferring party's debts... Article 18 stipulates that gratuitous transfer shall not be implemented under any of the following circumstances:... (5) If the transferring party's debts have not been properly disposed of.

According to Document No. 239, the obligation subject to notify creditors in gratuitous transfer is the "transferring party"; The transferring party shall notify the creditors, formulate a proper "Debt Disposal Plan" and submit it to the approval unit for approval, but it is not mandatory to require the transfer matters and the "Debt Disposal Plan" must seek the consent of the creditors.

The standard and customary handling of the "proper" debt disposal plan in Document No. 239

Firstly, Document No. 239 does not clearly stipulate the "proper" standard for the Debt Disposal Plan. In practice, the Debt Disposal Plan only needs to be approved through a reasonable, fair, and lawful approval process, and generally does not specifically seek the consent of each creditor.

But when lawyers give handling opinions, they should still adhere to the principle of reducing future litigation risks and analyze the specific debt situation of the drawing party. That is to say, if the drawing party only has a few simple creditors and the time and communication costs of obtaining consent are relatively low, we generally recommend obtaining a letter of consent from the creditors; But if there are a large number and different types of creditors on the drawing side, and the cost and duration of obtaining consent are relatively high, it is usually not necessary to seek the consent of each creditor one by one.

3. Relevant judicial opinions in judicial cases regarding the lack of consent from creditors

(1) The risk of joint and several liability for compensation is limited to the transferred property in terms of inclusion

If the transfer is made without the consent of the creditor, resulting in the transferor being unable to pay off or insufficient to pay off the debt, the creditor has the right to demand that the transferee bear joint and several liability within the scope of the transferred assets. If a judgment has already been made, an application can be made to add the transferee as the person subject to enforcement and bear the liability for repayment within the scope of the transferred assets.

However, it should be noted that it is not always possible to require the transferee to bear joint and several liability within the scope of receiving assets without the consent of the creditors. Instead, it is necessary to meet the situation where the transferee is unable or insufficient to repay the debt directly caused by the transfer behavior. If the transferee still has the ability to repay the debt but is passive in doing so, in this situation, the author believes that it does not meet the requirement for the transferee to bear the debt repayment within the scope of receiving assets. This viewpoint can be seen in the cases of (2022) Liao 01 Min Zhong 6916 and (2017) Supreme Court Min Zai 92.

This article lists two cases that support the transferee to assume the responsibility for repayment within the scope of the transferred assets:

Case 1: (2022) Jing 0101 Zhi Yi 251 Case

The Dongcheng District Court of Beijing believes that if a legal person or an unincorporated organization, as the person subject to enforcement, transfers its property to a third party without compensation according to an administrative order, resulting in the property of the person subject to enforcement being insufficient to repay the debt determined by the effective legal document, and the applicant for enforcement applies to change or add the third party as the person subject to enforcement and assume responsibility within the scope of the accepted property, the people's court should support it In summary, the property of the executed party, Jiaodaokou Branch Center, amounting to RMB 4.5 million, was transferred to Jiaodaokou Company without compensation during the process of enterprise restructuring, resulting in the insufficient property of Jiaodaokou Branch Center to repay the debts determined by the effective legal documents of this case. Therefore, the applicant Bai's additional request is based on law and in accordance with Article 157 (1) (11) of the Civil Procedure Law of the People's Republic of China and Article 25 of the Supreme People's Court's Provisions on Several Issues Concerning Changes and Additions of Parties in Civil Enforcement, the ruling is as follows: Jiaodaokou Company, as the executed party in the relevant civil judgment (2017) Jing 0101 Min Chu 17455, shall bear responsibility within the range of RMB 4.5 million.

Case 2: (2006) Min Er Zhong Zi No. 236 Case

The Supreme People's Court holds that: Thirdly, regarding the issue of whether public asset companies should bear joint and several liability Due to the fact that all property of the enterprise is a general guarantee for all its debts, the act of transferring the equity of Lihua Company held by Xinxing Materials Factory to a public asset company for free during the period of assuming guarantee responsibility has actually resulted in a reduction in the legal property of Xinxing Materials Factory to guarantee creditors. Moreover, neither the transfer of assets by emerging material factories nor the transfer and sale of assets by public asset companies without compensation has dealt with the original debts of the guarantor emerging material factories, nor has it obtained the prior consent or subsequent recognition of creditors. The property transfer violates the rights of the creditor Funing Rural Credit Union and objectively results in the failure of financial claims. Therefore, the original judgment that the public asset company shall bear joint and several liability with the emerging material factory within the range of the proceeds from its free acquisition and sale of 62.09% equity of Lihua Company is not improper.

(2) Resolution shareholders face the risk of joint and several liability

Article 20 of the Company Law stipulates that if a company's shareholders abuse the independent status of the legal person and the limited liability of shareholders, evade debts, and seriously damage the interests of the company's creditors, they shall bear joint and several liability for the company's debts.

According to the above regulations, if the shareholder of the transferring party who makes the decision to transfer without compensation abuses the independent status of the company's legal person and the limited liability of shareholders, they may be required to bear joint and several liability for the debts of the transferring party.

However, based on existing judgments, it is necessary to provide effective evidence to determine that shareholders have abused the independent status of the company's legal person and limited liability of shareholders, rather than just providing shareholder resolutions or decisions on gratuitous transfer matters. This places a requirement on creditors to provide evidence, which is difficult to prove. If they cannot provide evidence, they cannot add shareholder liability.

Case: (2018) Yunzhifu Case No. 102

Kunming Intermediate People's Court believes that: 1. Regarding the issue of adding Kunming Flat Glass Factory as the executed party, Kunming Boliyuan Fuel Chemical Co., Ltd.'s claim is based on Article 20 (3) of the Company Law of the People's Republic of China, which states that "if a shareholder of the company abuses the independent status of the legal person and the limited liability of shareholders to evade debts and seriously damages the interests of the company's creditors, they shall bear joint and several liability for the company's debts". However, effective evidence has not been submitted to prove that Kunming Flat Glass Factory, as the executed party and a shareholder of Kunming Glass Co., Ltd., abused the independent status of the legal person and the limited liability of shareholders to evade debts. This application is inconsistent with legal provisions and cannot be supported.

(3) Possible risk of revoking the gratuitous transfer between both parties

Article 538 of the Civil Code stipulates that if a debtor disposes of its property rights and interests without compensation by waiving its creditor's rights, waiving creditor's rights guarantees, transferring property without compensation, or maliciously extending the performance period of its matured creditor's rights, which affects the realization of the creditor's rights, the creditor may request the people's court to revoke the debtor's actions.

Article 3 of the "Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Civil Dispute Cases Related to Enterprise Restructuring" stipulates that disputes arising from administrative adjustments or transfers of state-owned assets of enterprises by government authorities shall not be accepted by the people's court if the parties file a civil lawsuit with the people's court.

Case: (2017) Supreme People's Court Case No. 92

The Supreme People's Court held in its retrial that: 1. Whether the transfer of shares held by Tunnel Company in Xilang Company constitutes the execution of an administrative order and whether it is subject to civil legal adjustments such as the Contract Law of the People's Republic of China The transfer of shares by the tunnel company is based on the decision of the investors, not an administrative decision. In other words, even if the tunnel company disagrees, it cannot file an administrative lawsuit with the municipal landscaping bureau. Therefore, the transfer of equity of Xilang Company by the tunnel company based on the decision of the Municipal Landscape Bureau is a civil act and should be regulated by civil laws such as the Contract Law. The tunnel company cannot be exempted from civil liability on the grounds of executing administrative instructions. 3、 There is no evidence to prove that the debt of Guofu Company was damaged due to the transfer of equity of Xilang Company by the tunnel company. Therefore, Guofu Company believes that the transfer of equity in Xilang Company by Tunnel Company has harmed its interests and requests revocation, which is not supported by the court's retrial.

In this case, although the Supreme People's Court did not ultimately support the revocation of the gratuitous transfer, it can be seen from the court's argument that the core point that the court did not ultimately support was that the creditor failed to provide effective evidence to prove that they had suffered losses and whether the transfer had caused the transferor to be unable to repay the debt, and recognized that gratuitous transfer was not an administrative decision, but a decision made by the investor, subject to civil legal norms.

Therefore, if creditors can provide evidence to prove that the transfer without compensation resulted in the inability of the transferor to repay the debt and caused losses to the creditors, they may actually face the possibility of the transfer being revoked by the court.

（4） Audit or asset and capital verification

Article 9 of Document No. 239 stipulates that both parties to the transfer shall organize the transferred enterprise to conduct audits or asset verification in accordance with relevant regulations. The audit report issued by the intermediary agency or the asset verification result approved by the state-owned asset supervision agency of the transferring party shall be used as the basis for the free transfer of state-owned property rights of the enterprise.

According to Document No. 239, the obligation subject for free transfer of audit or asset verification is the "transferring party".

Many people have doubts at this stage, whether to hire an intermediary agency for "audit" or choose "asset and capital verification"?

The author believes that the two are a choice relationship, and there is no mandatory requirement to choose one in certain specific situations. The transferring party may communicate with the state-owned asset regulatory agency of the transferring party in advance and make choices based on their suggestions.

However, it should be noted that the two core issues of concern are the duration of the program and the complexity of the program.

The audit conducted by the auditing party involves hiring an accounting firm, conducting on-site due diligence, and issuing an audit report. The latest deadline for issuing the audit report can be communicated with the club in advance. The advantage of choosing to conduct the audit is that the deadline is relatively controllable and the process is relatively clear.

The clearance and verification of assets and capital need to be approved by the state-owned asset regulatory agency of the transferring party. The specific deadline and complexity of the process need to be determined according to the approval requirements of the transferring state-owned asset regulatory agency. Some gratuitous transfer projects may require faster approval from the state-owned asset regulatory agency than auditing, but for more complex property rights transfers, the approval process is often longer. Therefore, in the early stage, it is necessary to communicate with state-owned asset regulatory agencies and listen to their suggestions.

（5） Sign a free transfer agreement

1. Transfer Agreement Content

According to Article 10 of Document No. 239, the transfer agreement "shall" be signed and must include nine essential contents: (1) the names and addresses of both parties involved in the transfer; (2) Basic information of the transferred enterprise; (3) The amount of state-owned property rights transferred to the enterprise and the transfer reference date; (4) The employee diversion and resettlement plan involved in the transferred enterprise; (5) The handling plan for the creditor's rights, debts (including overdue employee debts) and contingent liabilities involved in the transferred enterprise; (6) Transfer the breach of contract responsibilities of both parties; (7) Ways to resolve disputes; (8) Conditions for the effectiveness of the agreement; (9) Transfer other terms deemed necessary by both parties.

2. Effective time of transfer agreement

According to Document No. 239, the effectiveness of the transfer agreement should be based on the approval of the competent authority for this transfer. Without approval, even if the agreement signing requirements are met, it will not take effect.

Special note: Before the transfer agreement takes effect, both parties shall not perform or partially perform the transfer.

（6） Submit for approval

1. Approval Object (Approval Authority)

The approval objects for different types of gratuitous transfers vary depending on the relationship between the two parties, and the following situations have been summarized:

(1) Free transfer between enterprises invested by the same state-owned asset supervision agency

Jointly submitted by the invested enterprises for approval by the state-owned asset regulatory authority.

(2) Free transfer between enterprises funded by different state-owned asset regulatory agencies

The invested enterprises shall submit their respective reports to the same level state-owned asset regulatory agency for approval.

(3) The state-owned property rights of enterprises implementing the separation of government and enterprises shall be transferred to the invested enterprises or their subsidiaries without compensation

Approved by the same level state-owned asset regulatory agency and the competent department respectively.

(4) The state-owned property rights of enterprises invested by lower level government state-owned asset regulatory agencies shall be transferred to enterprises invested by higher-level government state-owned asset regulatory agencies or their subsidiaries for free

Approved by the lower level government and the higher-level government's state-owned asset supervision agency respectively.

(5) The state-owned property rights of the enterprise are transferred within the invested enterprise free of charge

Approved by the invested enterprise and copied to the same level state-owned asset supervision agency.

2. Submit materials for approval

According to Document No. 239, state-owned asset regulatory agencies must review the following documents and provide them in writing:

(1) Application documents for free transfer;

(2) Resolutions of the General Manager's Office Meeting or the Board of Directors regarding gratuitous transfers;

(3) Property registration certificates of both parties involved in the transfer and the transferred enterprise;

(4) Feasibility Study Report on Free Transfer;

(5) Transfer the free transfer agreement signed by both parties;

(6) The audit report issued by the intermediary agency on the benchmark date of the transferred enterprise or the approval document of the same level state-owned asset supervision agency's asset and capital verification results;

(7) Disposal plan for the party's debt;

(8) The employee diversion and resettlement plan approved by the transferred enterprise workers' congress;

(9) Other relevant documents.

3. Re approval situation

According to Document No. 239, there are two situations that require re approval:

(1) After the free transfer matters have been approved through the above procedures, the transferring party and the transferring party shall adjust the proportion of property rights transfer;

(2) If there are significant changes to the transfer agreement after the free transfer matters have been approved through the above procedures.

（7） Accounting adjustment and property registration

Accounting adjustments and property registration are the final steps of free transfer.

Both parties involved in the transfer shall make accounting adjustments and complete property registration procedures in accordance with relevant approval documents and transfer agreements.

（8） Business Registration (Limited Liability Company Equity)

If the transfer involves the equity of a limited liability company, at the same time as the seventh step, materials can be prepared and submitted for industrial and commercial registration changes in accordance with the requirements of the market supervision and management department.

The registration of industrial and commercial changes here shall be carried out in accordance with the "Regulations on the Administration of Market Entity Registration" and the "Notice on Updating the Standards for Submitting Materials for Market Entity Registration" (Shi Jian Zhu [Si] Han [2022] 169) issued by the State Administration for Market Regulation. Application forms, resolutions, and approval documents shall be submitted.

Note that according to existing judicial precedents, approval cannot replace shareholder resolutions (or shareholder decisions)

2、 Key points of concern for gratuitous transfer

（1） Applicable subject

There are strict restrictions on the applicable subjects for free transfer. As of now, it mainly includes the following categories:

1. Government agencies and public institutions; Document No. 239

2. State owned sole proprietorship enterprises; Document No. 239

3. One person limited liability companies established by state-owned sole proprietorship enterprises, state-owned sole proprietorship companies, and state-owned institutions, as well as one person limited liability companies established by reinvestment; Document No. 25

4. State owned wholly-owned enterprises; Document No. 95

The above four entities can all transfer state-owned property rights to each other without compensation.

5. State owned holding and actual control enterprises shall carry out internal restructuring and integration, and with the approval of state-owned enterprises, between the state-owned holding and actual control enterprises and their directly or indirectly wholly-owned subsidiaries, or between their directly or indirectly wholly-owned subsidiaries (comparable). Document No. 39

Note that the fifth scenario is strictly limited to the transfer between entities, namely: state-owned holding and actual controlling enterprises can only transfer without compensation between their directly or indirectly wholly-owned subsidiaries, or between their directly or indirectly wholly-owned subsidiaries. State owned holding and actual controlling enterprises cannot transfer state-owned property rights or physical assets without compensation with state-owned wholly-owned enterprises or state-owned wholly-owned enterprises (the State owned Assets Supervision and Administration Commission has clearly replied on its official website).

Except for the types specified in the above regulations, other types of entities cannot be transferred without special approval.

（2） Transfer the subject matter

In short, the transfer target refers to the rights and interests formed by the state's investment in various enterprises, mainly including:

1. The following state-owned property rights held by the enterprise

(1) Equity of Limited Liability Company (Document No. 239);

(2) Non listed limited liability company shares (Document No. 760);

(3) Shares of listed companies (Document No. 36).

2. State owned physical assets of enterprises

According to Article 21 of Document No. 239, the free transfer of physical assets and other assets of enterprises shall be carried out in accordance with these Measures.

The specific physical assets and intangible assets such as intellectual property that belong to this category will not be discussed in detail in this article. Based on the relevant information that has been publicly disclosed (reference can be made to some state-owned listed companies' free transfer announcements), intellectual property also belongs to the transfer target, which will be discussed in specific cases.

（3） The issue of preemptive rights for shareholders of limited liability companies

According to Document No. 239, the transfer of state-owned equity in limited liability companies should also comply with the relevant provisions of the Company Law of the People's Republic of China. However, the Company Law does not specify the content of gratuitous transfer, only stating in the last paragraph of Article 84 that "if the articles of association of the company have other provisions on the transfer of equity, such provisions shall prevail".

And there are also different attitudes in judicial precedents:

Firstly, it is believed that gratuitous transfer is a civil act and is subject to the pre emptive right rules of the Company Law. If the company's articles of association have other provisions, they shall be followed:

As stated in the Supreme Court's viewpoint in Case No. 92 of 2017, it is considered a civil act.

Secondly, it is believed that gratuitous transfer is an administrative act and does not apply to the pre emptive right rule of the Company Law

According to the Civil Ruling No. 74 of the Supreme People's Court in 2021, the Economic Corporation is a state-owned enterprise directly managed by the Qingyuan Municipal People's Government, and its assets belong to state-owned assets. The Qingyuan Municipal People's Government has the decision-making power over the equity transfer. The equity transfer in this case is a legal effect generated by the approval of the People's Government of Qingyuan City.

Thirdly, if there are other provisions in the company's articles of association, they shall prevail:

As stated in the Civil Judgment No. 205 of the Supreme People's Court (2017), Article 14, Paragraph 3 of the Articles of Association of Gansu Xinhui Company stipulates that shareholders are not allowed to donate their equity to others without compensation. However, according to the regulations on the free transfer of state-owned assets, this restriction does not apply, and the provisions on equity transfer do not apply to the free transfer... Gansu Huineng Company's transfer of equity to Jiuquan Huineng Company also did not agree on the consideration, and its essence is based on the decision of Gansu Electric Power Group to transfer state-owned assets. Therefore, the provisions on equity transfer should not apply to this equity transfer behavior.

In response to the dispute over the application of the preemptive right under the Company Law, in order to avoid other shareholders from filing lawsuits claiming the preemptive right, the author suggests that a clear agreement be made with other shareholders of the limited liability company before investment. It is best to specify in writing in the Articles of Association or similar documents that the free transfer of state-owned equity does not apply to the relevant provisions of the Company Law on shareholder preemptive rights.

In addition, some provinces' State owned Assets Supervision and Administration Commission (SASAC) has made special regulations on the issue of pre emptive rights for shareholders of limited liability companies involved in gratuitous transfers. In such cases, strict compliance and implementation must be carried out:

As stipulated in Article 10 of the "Management Measures for the Free Transfer of State owned Property Rights of Enterprises in Tianjin", the transferred enterprise shall obtain the consent of other shareholders of the transferred enterprise in accordance with the provisions of the "Company Law of the People's Republic of China" and the articles of association, and issue a resolution of the shareholders' meeting.

Article 10 of the "Management Measures for the Free Transfer of State owned Property Rights of Enterprises in Shanghai" stipulates that if the transfer target is part of the equity of a corporate enterprise, the consent of other shareholders of the transferred enterprise shall be obtained in accordance with the provisions of the "Company Law of the People's Republic of China" and the company's articles of association.

（4） Employee diversion and resettlement

According to Document No. 239, the matters related to employee diversion and resettlement shall be reviewed and approved by the representative assembly of the transferred enterprise's employees.

However, not all gratuitous transfers will involve the issue of employee diversion and resettlement. The transfer of some non equity assets or the transfer of some equity without affecting the continued existence of the transferring party may not involve the issue of employee diversion and resettlement. Employee placement often occurs in the case of equity transfer, especially in cases where the transfer involves changes in the entity or the transferring party ceases to operate. At this time, it is necessary to prepare an employee placement plan, convene a workers' congress for review, and form an effective written resolution.

（5） Free transfer under specific circumstances

Article 19 of Document No. 239 stipulates that: "The following matters of gratuitous transfer shall be directly adjusted in the accounts based on the audit report of the transferred enterprise issued by the intermediary agency in the previous year (or the latest) or the results of asset and capital verification approved by the state-owned asset supervision agency, and the property registration and other procedures shall be handled in accordance with the regulations. (1) The state-owned property rights of the invested enterprise decided by the government shall be transferred gratuitously to other invested enterprises of the same level state-owned asset supervision agency; (2) The state-owned property rights of the invested enterprise decided by the higher-level government shall be transferred gratuitously between the state-owned asset supervision agencies of the higher-level and lower level governments; (3) The state-owned property rights of the invested enterprise decided by the transferring and transferring governments shall be transferred gratuitously between the state-owned asset supervision agencies of non affiliated governments. Transform; (4) Enterprises decided by the government to implement the separation of government and enterprises, whose state-owned property rights are transferred to state-owned asset regulatory agencies without compensation; （5） Other free transfer matters determined by the government or state-owned asset regulatory agencies based on the needs of state-owned economic layout, structural adjustment, and restructuring

According to Article 19 above, in addition to directly adjusting accounts and handling property registration, is it necessary to perform other procedures such as feasibility study, internal decision-making, notifying creditors, and signing transfer agreements? The State owned Assets Supervision and Administration Commission has responded to this (the following is an excerpt from the response on the State owned Assets Supervision and Administration Commission's official website on June 9, 2022):

Question: When applying this provision (Article 19 of Document No. 239) for the free transfer of property rights, is it still necessary to follow the procedures of feasibility study, internal deliberation and decision-making, notifying creditors to formulate debt disposal plans, auditing or asset verification, and signing transfer agreements in accordance with Chapter 2 of the Interim Measures?

Reply from the State owned Assets Supervision and Administration Commission: In accordance with Article 19 of the "Notice on Issuing the Interim Measures for the Management of Free Transfer of State owned Property Rights of Enterprises" (State owned Assets Supervision and Administration Commission [2005] No. 239), the free transfer matters can be directly adjusted in accounting. Whether to perform feasibility studies, internal deliberation decisions, notify creditors to formulate debt disposal plans, audit or asset verification, sign transfer agreements and other procedures should be handled according to the requirements of the government or state-owned asset regulatory agency that made the decision.

（6） Prohibition or restriction of gratuitous transfers

According to Document No. 239, the following situations are not allowed to be transferred without compensation:

(1) State owned property rights of enterprises with unclear ownership relationships or ownership disputes shall not be transferred without compensation;

(2) The main business of the transferred enterprise does not comply with the main business and development plan of the transferee;

(3) The intermediary agency issues a negative opinion, disclaimer of opinion, or qualified audit report on the financial report of the transferred enterprise on the transfer reference date;

(4) The relocation and resettlement of employees involved in the gratuitous transfer has not been approved by the employee representative assembly of the transferred enterprise;

(5) The transferred enterprise's contingent liabilities have not been properly resolved;

(6) There is no proper disposal plan for the debt of the party involved.

In addition, special attention should be paid to the following three situations:

(1) The gratuitous transfer of state-owned property rights of enterprises designated as security interests shall comply with the relevant provisions on security interests in the Property Rights section of the Civil Code;

(2) The transfer of state-owned equity in a limited liability company shall also comply with the relevant provisions of the Company Law;

(3) The transfer of state-owned property rights of enterprises to overseas without compensation and the transfer of state-owned property rights of overseas enterprises without compensation are not subject to Document No. 239, and specific measures will be formulated separately. Central enterprises can refer to the "Interim Measures for the Administration of Overseas State owned Property Rights of Central Enterprises" (State owned Assets Supervision and Administration Commission Order No. 27) and the "Notice on Further Strengthening the Administration of Overseas State owned Property Rights of Central Enterprises" (State owned Assets Supervision and Administration Commission Property Rights Regulations [2020] No. 70), while other state-owned enterprises can refer to the regulations on state-owned asset supervision in various provinces and consult relevant policies of state-owned asset supervision departments.

3、 Free transfer of current effective regulations

As of November 2024, the following regulations regarding the gratuitous transfer of state-owned property rights of enterprises are all valid, but there are slight differences in their scope of application:

The "Regulations on the Handling of Free Transfer Procedures for State owned Assets of Enterprises" (Cai Guan Zi (1999) No. 301), abbreviated as "Document No. 301", was released and implemented on September 27, 1999. This document is a regulation on the procedures for free transfer, but since the issuance of Document No. 239, the application of Document No. 301 has been put on hold, and most relevant parties have followed the relevant procedures in accordance with Document No. 239;

The Interim Measures for the Management of Free Transfer of State owned Property Rights of Enterprises (State owned Assets Development and Property Rights [2005] No. 239), abbreviated as "Document No. 239", was issued and implemented on August 29, 2005;

The "Guidelines for Free Transfer of State owned Property Rights of Enterprises" (State owned Assets Development and Property Rights [2009] No. 25), abbreviated as "Document No. 25", issued and implemented on February 16, 2009, mainly regulates the free transfer work of central enterprises;

The Notice on Promoting the Transfer of State owned Property Rights in Enterprises (State owned Assets Development and Property Rights [2014] No. 95), abbreviated as "Document No. 95", was issued and implemented on July 11, 2014, expanding the scope of application for gratuitous transfer;

The "Measures for the Supervision and Administration of State owned Equity of Listed Companies" (Order No. 36 of the State owned Assets Supervision and Administration Commission, the Ministry of Finance, and the China Securities Regulatory Commission), which was released on May 16, 2018 and implemented on July 1, 2018, is referred to as "Document No. 36". It mainly regulates the changes in state-owned equity of listed companies, and Chapter 5 specifically stipulates the "free transfer of shares held by state-owned shareholders in listed companies";

The Notice on Further Clarifying Matters Related to the Management of State owned Equity of Non listed Joint Stock Limited Companies (State owned Assets Supervision and Administration Commission Property Rights [2018] No. 760), abbreviated as "Document No. 760", issued and implemented on November 19, 2018, mainly regulates the management of state-owned equity of non listed joint stock companies;

The Notice on Matters Related to the Transaction and Circulation of State owned Assets of Enterprises (State owned Assets Development and Property Rights Regulations [2022] No. 39), abbreviated as "Document No. 39", was issued and implemented on May 16, 2022, expanding the scope of application for gratuitous transfers.

4、 Summary

The gratuitous transfer of state-owned property rights of enterprises is a transfer behavior aimed at the national investment rights and interests between specific entities. Not all state-owned entities can be transferred, nor can all property rights be used as transfer targets. There are restrictions or prohibitions on gratuitous transfer.

The gratuitous transfer of state-owned property rights of enterprises must be carried out in accordance with legal procedures. Partial steps can be omitted and accounting adjustments and property registration can be directly carried out under specific approval conditions.

Although the gratuitous transfer of state-owned property rights of enterprises is a transfer behavior of preserving and increasing the value of state-owned assets, it also involves the risk of infringing on the rights and interests of civil subjects and leading to disputes. Therefore, it is necessary to fulfill the entire transfer process in accordance with laws and regulations, and take risk prevention measures in advance.

Finally, due to the long time since the special regulations related to the gratuitous transfer of state-owned property rights of enterprises were promulgated, many situations were encountered in reality that were not covered by the regulations at that time, including whether creditor consent was required and disputes over shareholder preemptive rights mentioned in the article. We look forward to the State owned Assets Supervision and Administration Commission issuing new detailed regulatory rules on gratuitous transfers in the near future, and further clarifying any doubts encountered in related practical handling. In addition, if you encounter any physical operational issues related to the free transfer of state-owned property rights of enterprises that cannot be solved, you can also leave a message on the interactive communication section of the State owned Assets Supervision and Administration Commission. Through your feedback on the issues, I believe it can also help with future regulatory regulations.