On May 16, 2022, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) issued Notice on Matters Relating to the Transaction and Circulation of State-owned Enterprise Assets (Guo Zi Fa Chan Quan Gui [2022] No. 39) (hereinafter referred to as "Notice No. 39"), which further clarified the relevant matters concerning the transaction and circulation of state-owned assets. Notice No. 39 serves as an optimization and supplement to Measures for the Supervision and Administration of Transactions of State-owned Enterprise Assets (Decree No. 32 of SASAC and the Ministry of Finance) (hereinafter referred to as "Decree No. 32"). Comprising 9 articles, Notice No. 39 covers various aspects such as the transfer of enterprise property rights, enterprise capital increase, and the free transfer of state-owned assets, details are as follows:

I. Where the transfer of enterprise property rights between different state-invested enterprises and their holding enterprises involves major matters such as the optimization of the layout and structural adjustment of state-owned capital, as well as specialized restructuring, which are led and promoted by the government or state-owned assets supervision and administration authorities, and there are special requirements for the transferee, the transfer may be conducted through an agreement-based approach.

Lawyer's Interpretation：

To meet the needs of the deepening reform of state-owned enterprises, Notice No. 39, on the basis of Decree No. 32, has expanded the circumstances under which the transfer of state-owned property rights may be conducted through non-public agreement-based transfer, increasing from the original 2 types to 3 types:

Notes： Important industries and key fields related to national security and the national economic lifeline mainly refer to the Q&A responses released by SASAC on its official website:

• Lifeline Industries：Including 9 industries: military industry and national defense science and technology, power grid and electric power, petroleum and petrochemical, telecommunications, coal, civil aviation, shipping, finance, and culture;

• Key Fields：Including 9 fields: major equipment manufacturing, automobile, electronic information, construction, iron and steel, non-ferrous metals, chemical industry, survey and design, and science and technology.

II. Subsidiary enterprises whose main business is in important industries and key fields related to national security and the national economic lifeline and which mainly undertake major special tasks shall not lose the controlling position of state-owned capital due to property right transfer or enterprise capital increase. When such enterprises are involved in the internal restructuring and integration of state-invested enterprises, the following circumstances may be examined and approved by the state-invested enterprise:

• Where the enterprise's property rights are transferred between the state-invested enterprise and its holding subsidiaries;
• Where the state-invested enterprise directly or designates its holding subsidiary to participate in the capital increase;
• Where the original shareholders of the enterprise increase capital in the same proportion.

In other circumstances, the state-invested enterprise shall report to the competent state-owned assets supervision and administration authority at the same level for approval.

Lawyer's Interpretation：

Article 2 of Notice No. 39, in essence, on the basis of Decree No. 32, distinguishes the transfer of property rights in important industries and key fields intointernal transfer andexternal transfer. It delegates the approval authority forinternal transfer to the state-invested enterprise itself, while for external transfer, it continues to stipulate that the state-invested enterprise shall report to the competent state-owned assets supervision and administration authority at the same level for approval.

III. Where state-invested enterprises and their subsidiaries revitalize stock assets by issuing infrastructure Real Estate Investment Trusts (REITs), they shall conduct a feasibility analysis, reasonably determine the transaction price, make arrangements for subsequent operation and management responsibilities and risk prevention, and report the non-public agreement-based transfer of state-owned property rights involved to the competent state-owned assets supervision and administration authority at the same level for approval in accordance with regulations.

Lawyer's Interpretation：

Article 3 of Notice No. 39 actually clarifies the provisions on transactions involving state-owned enterprises issuing infrastructure REITs, making up for the drawback of the "one-size-fits-all" approach in Decree No. 32, and provides normative document support for state-owned enterprises to seek exemption from entering the trading market for infrastructure REITs.

IV. Where the transfer of enterprise property rights is conducted through a non-public agreement-based approach, and both the transferor and the transferee are wholly state-owned or wholly state-funded enterprises, the transfer price may be determined on the basis of the net asset value confirmed in the asset evaluation report or the latest audit report after performing the decision-making procedures in accordance with the Company Law of the People's Republic of China and the enterprise articles of association.

Lawyer's Interpretation：

Article 4 of Notice No. 32 supplements and optimizes Decree No. 32 in two aspects, specifically:

1. Expanding the scope of transfer prices that can be determined by audited net asset value: It is no longer limited to the transfer of property rights of state-owned and state-controlled enterprises within the same state-invested enterprise system, but expanded to the transfer of state-owned property rights between wholly state-owned or wholly state-funded enterprises under different state-invested systems.

2. No mandatory requirement that the transaction price shall not be lower than the audited net asset value; instead, the transfer price may be determined by floating up or down based on the net asset value.

V. For the internal restructuring and integration implemented by state-controlled and actually-controlled enterprises, upon approval by the state-invested enterprise, the transfer of enterprise property rights held by such state-controlled and actually-controlled enterprises to their directly or indirectly wholly-owned subsidiaries, or between their directly or indirectly wholly-owned subsidiaries, may be managed with reference to the relevant provisions on the free transfer of state-owned property rights.

Lawyer's Interpretation：

Article 5 of Notice No. 39 has expanded the scope of free transfer of state-owned property rights, no longer limited to wholly state-owned enterprises; for the internal integration of state-controlled and actually-controlled enterprises, it may be implemented with reference to the provisions on free transfer. The above provisions mean that the free transfer of state-owned property rights has broken through the subject limitation of "pure" state-owned assets.

VI. Enterprise capital increase may adopt a combination of pre-disclosure and formal disclosure of information. The capital increase information shall be disclosed to the public in phases through the website of the property rights trading institution, with a total disclosure period of not less than 40 working days, among which the formal disclosure period shall not be less than 20 working days. The pre-disclosure of information shall include, but not be limited to, the basic information of the enterprise, property right structure, main financial indicators in the audit reports of the recent 3 years, the amount of funds to be raised, etc.

Lawyer's Interpretation：

For state-owned enterprises conducting capital increase, they may adopt the method of pre-disclosure + formal disclosure, with a total disclosure period of not less than 40 working days, among which the formal disclosure period shall not be less than 20 working days.

VII. Pre-disclosure of information for property right transfer may be conducted after the directly holding unit of the property rights performs internal decision-making procedures, and pre-disclosure of information for enterprise capital increase may be conducted after the target enterprise performs internal decision-making procedures. Where the final approval procedures need to be fulfilled, corresponding prompts shall be given.