Analysis of Legal Issues in Foreign Mergers and Acquisitions of State-Owned Enterprises

Author: Zhang Yuanzhong
Publisher:
Publish Date: 2004-03-01
Features: How to transform the operational mechanisms of state-owned enterprises (SOEs), achieve their profitability, and ensure the preservation and appreciation of state assets are key challenges in SOE reform. Over nearly two decades, various attempts have been made, from initial contract management to subsequent mergers and acquisitions, but none have successfully pulled SOEs out of. The critical reason is that these measures were not fully market-oriented; almost all reforms were government-driven. Even the initially promising mergers and acquisitions failed to deliver their expected outcomes, leading to the alienation of this investment behavior, which clearly optimizes market resource allocation in the West, in China. In China, mergers and acquisitions have become "quasi-mergers," and the domestic M&A market has fallen into a vicious cycle of "merger after merger."
Of course, implementing mergers and acquisitions for SOEs in China is an extremely complex task. SOEs often carry out functions that should be handled by the government, making them burdened and unable to enter the market with light steps. In M&A, enterprises' government functions is often very difficult: one party in the merger hopes the government will take over these functions, while the government prefers to retain them within the enterprise. Another obstacle to SOE M&As is local protectionism. Mergers and acquisitions imply a reallocation of interests, and as the direct beneficiaries, local governments, driven by self-interest, are reluctant to allow enterprises to enter the market freely. As a result, SOE restructuring is heavily influenced by administrative allocation, making cross-regional M&As particularly challenging. Without a unified national strategy, the role of M&As in expanding scale, improving efficiency, effectively allocating resources, and restructuring industries cannot be fully realized.
The third factor hindering SOE M&As is the lack of domestic capital. For vast state assets, domestic capital lacks the capacity to absorb them. Meanwhile, China imposes high barriers on foreign and private capital in acquiring SOEs, especially large and medium-sized ones, preventing strong external capital from entering the "SOE market" smoothly. In practice, there are many SOEs willing to be acquired, but few willing and financially capable acquirers. Relying on internal circulation among SOEs to revitalize them has proven to be a dead end. Therefore, despite the state encouraging M&As of small and medium-sized SOEs since the mid-1980s, there has been no surge in SOE M&As, and the widespread losses of SOEs have not been reversed. This starkly contrasts with the booming foreign M&A markets during the same period.
To break free from the paradox of SOE reform, the 15th National Congress proposed that state capital should strategically withdraw, allowing foreign and private capital to participate in SOE reform, especially large and medium-sized SOEs, and leveraging market forces to accelerate the reform process. To achieve this strategic goal, China has successively introduced multiple policies on foreign M&As of SOEs, particularly since 2002, when relevant government departments significantly accelerated legislative efforts to encourage such M&As. It can be said that China has created a favorable policy and legal environment for foreign M&A of SOEs. Since 2002, not only has foreign capital shown strong interest in acquiring SOEs, but the state and local governments have also taken proactive steps to prepare for the wave of foreign M&A.
We have every reason to believe that by introducing foreign capital to reform SOEs, the problems of SOEs will be gradually resolved, and the strategic withdrawal of state capital will be successfully achieved.