| Generally speaking, corporatization of a state-owned enterprise (“SOE”) in China means converting a SOE into a limited liability company or a joint-stock limited company according to the Company Law of China. Its legal nature depends on the approach of restructuring, which could be division, merger, changing in the whole, transfer of business, or paying contribution with business.In most cases, corporatization is expressed as establishing a new company with contributions paid by a SOE or its own investor. Terms such as “converting the net asset of enterprise into shares” and “converting operating assets and debts of enterprise into shares” are usually used to describe the process. But neither “net asset” nor “operating assets and debts” is a lawful contribution under the Company Law. The first reason to use such expressions and terms may be that the newly established company intends to avoid the rules for division and merger, which require both the new company and the SOE to be jointly and severally liable for the obligations of the SOE. The second reason may be that the new company tries to avoid the rules for contribution, which do not acknowledge business contribution.When a creditor of the SOE which retains after its partial business corporatized into a new company claims her right and brings both the SOE and the new company to a court, the question of the legal nature of corporatization would arise. However, the expressions above often mislead the courts. Even the judicial interpretation from the Supreme People’s Court also lost in the misreading of “converting net asset into shares”. The conflicts and confusions between legislation, legal practices and expressions due to law itself. It is necessary to revise the rules for division and contribution in the Company Law of China. |
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