Privatization, mergers and acquisitions of SOEs

The Government would like to see more acquisitions of State owned enterprises ' (SOE) assets but few foreign companies are willing, without access to local stock exchanges and sources of equity, to assume the over- staffed SOEs with their attendant employee and social burdens. Additional deterrents include a well-founded fear, learned abroad, of trailing environmental remediation costs and liabilities, not to mention the poor state of a majority of the assets. Direct acquisitions of SOE company equity, of listed or unlisted companies, involve the additional problems of undisclosed liabilities and uncollectible accounts receivable; so this form of acquisition is even less likely in the medium term . Again, there would have to be a great deal of comfort regarding environmental liability before a foreign company would buy a site with the possibility of pre-existing environmental conditions and latent liability. Traditional merger and acquisition contract indemnification obligations and remedies would not provide such comfort , and it is doubtful that the buyer could negotiate a suitable escrow arrangement or a significant price reduction.

Indirect acquisition by foreign companies purchasing floated SOE shares has rarely been possible and requires MOFTEC approval, in consultation with other relevant agencies, on a case-by-case basis. To date only very small interests in companies like PetroChina,

Sinopec and CNOOC have been floated allowing portfolio investment but no control benefits. Nevertheless, recent reports indicate that from 1 December 2002, foreigners will be allowed to acquire controlling interests in listed companies through the stock exchanges or through contract purchases. Until then take-overs are possible only by domestic companies. According to rules entitled the Listed Company Takeover Rules, a 30 per cent stake of a listed company is considered a controlling interest. There is no indication that these rules would apply to the strategic sector industries which include petrochemicals and chemicals, and case- by-case approval is required.