Legal analysis of merging state-owned enterprises under the new Company Law (part 1)

Under article 218 of the new Company Law, a merger by absorption is a legal form of company merger where two or more companies merge into one, with the remaining relevant companies dissolved. This article explores legal pathways for state-owned enterprise (SOE) absorption mergers following implementation of the new law.

Offering strategic guidance and practical advice, the article explains the merger process and tax handling, integrates the application of legal provisions with typical cases, and delves into underlying legal issues.

The article is in two parts, with the second following in the next edition of China Business Law Journal.

Merger process

Merger by absorption involves several key steps: drafting the merger plan by the board of directors; decision-making and approval procedures; preparing balance sheets and property lists; auditing and evaluation; signing the merger agreement; notifying creditors and public announcements; accounting treatment; and registration changes and cancellations. The following is a simple introduction to these steps.

Drafting merger plan. According to article 67(6) of the new Company Law, the board of directors is responsible for drafting the merger plan.

This plan should detail: basic information of the merging parties; purpose and reasons for the merger; merger method; registered capital of the post-merger company; adjustments to the equity structure; asset evaluation and pricing; debt handling; employee placement plan; post-merger business strategy and timeline; and tax and accounting treatment.

Decision making and approval. Article 59(7) of the new Company Law says the shareholders’ meeting exercises authority to make merger resolutions. Article 66(3) requires a merger resolution to be passed by shareholders representing more than two-thirds of the voting rights. Article 172 specifies that for wholly state-owned companies, the institution performing duties of the capital contributor exercises the authority of the shareholders’ meeting.

Thus, the merger resolution should be made and approved accordingly by such institution. It is important to note that company mergers are considered major decision-making matters related to enterprise mergers and re-organisations, which should be decided collectively by the party committee, according to the Opinions on Further Promoting the Implementation of the “Three Majors and One Large” Decision System in State-Owned Enterprises.

For major matters that significantly affect employees’ interests, it is also required that opinions of the enterprise’s trade union be considered, and that feedback and suggestions be solicited from employees through the workers’ congress or other means.

Balance sheets and property lists. Article 220 of the new Company Law requires the merging parties to sign a merger agreement and prepare balance sheets and property lists. The merging parties must prepare accurate and detailed balance sheets and property lists to reflect the actual property status of the companies.

The pre-merger balance sheet should list the company’s assets, liabilities and owners’ rights and interests in detail to ensure its authenticity, accuracy and completeness. The property list should include fixed assets, current assets, intangible assets, and other assets, detailing each asset’s nature, quantity, value and status for post-merger property evaluation and distribution.

The surviving company inherits the debts and liabilities of the merged companies.

Auditing and evaluation. State-owned asset-holding units must evaluate state-owned assets in cases of enterprise mergers to ensure no loss of state-owned assets, according to article 3 of the Administrative Measures for the Evaluation of State-Owned Assets.

Based on the balance sheets and property lists, the merging parties should commission qualified auditing institutions to audit the company’s financial status, and evaluation institutions to assess the company’s assets, ensuring fairness and reasonableness in the merger.

Signing merger agreement. Based on the audit and evaluation results, merging parties finally sign the Merger by Absorption Agreement. The written merger agreement should clearly state the terms and conditions of the merger. This should include:

• Basic information of the merging parties;
• Purpose and reasons for the merger;
• Merger method;
• Basic information of the post-merger company (name, registered capital, registered address, business scope, etc);
• Equity structure of the merging parties (including each shareholder’s capital contribution, contribution method, equity ratio, etc);
• Organisational structure of the post-merger company;
• Asset evaluation results and debt handling plans;
• Rights and obligations of the merging parties; and
• Dispute resolution mechanisms along with other specific matters deemed necessary by the parties.

Additionally, the steps for notifying creditors and public announcements are referenced in article 222 of the new Company Law. Accounting treatment refers to the processes conducted after a merger announcement, including adjustment of accounts and consolidation of financial statements.

Key takeaway

Implementation of the new Company Law makes SOE mergers more flexible and efficient, enhancing market competitiveness and structural optimisation.

Exploring the legal pathways for SOE mergers under the new law can help enterprises achieve efficient and compliant mergers and re-organisations, ensuring the preservation and appreciation of state-owned assets while safeguarding the legitimate rights and interests of all parties.

Zhang Dandan is a partner at DOCVIT Law Firm.