Rhe past few years have seen an increase in IPOs of design institutes nationwide. So far, more than 30 design institutes have signed up, while other strong and well-known candidates are preparing their own IPOs. In an increasingly competitive economic environment, IPOs have become essential for design institutes wishing to grow and strengthen.
The planning and design industry is part of the special technical services sector, upstream of construction, characterized by intensive intelligence and localized exploitation.
With industry-specific characteristics, the industry faces a series of common legal issues. Based on his personal experience and the analysis of design institute listings, the author here summarizes the common legal challenges related to the listing of national design institutes in China.
REFORM AND TRANSFORMATION
Judging from the cases of listed design institutes such as JSTI, ARTS Group, Tus-Design and Shenzhen New Land Tool, a considerable number of them have reformed or changed from public institutions to state-owned enterprises or private – result of China’s institutional reform of survey and design institutes. Prior to 1999, most of China’s engineering and design entities were public institutions under government agencies at different levels. Since 1999, the central and local study and design entities have carried out institutional reforms, causing some problems in the reform and transformation of design institutes into enterprises.
After comprehensive audit, evaluation and approval procedures, the assets of a public institution are transferred to the public system, and the local Public Assets Supervision and Administration Commission or designated entities will establish a public enterprise (SOE) with assets of the original public institution. The assets and related activities are managed by the limited company after the reform, the registration of the original public institution being cancelled; while the original employees are transferred to the limited company or other public institutions, depending on their personal preferences.
BECOME PRIVATE COMPANIES
After comprehensive audit, evaluation and approval procedures, the management and employees of the original public institution purchase all or part of its net assets to form a limited company. The net assets not purchased by the employees are transferred to other public institutions or kept in the original institution, while the original employees are also transferred to the limited company or other public institutions, depending of their personal preferences.
The main issues in reforming or transforming public institutions into corporations are whether the procedures are compliant and comprehensive, and whether this leads to a loss of state-owned assets.
Generally, assets of public institutions transferred to public enterprises have less risk of loss, as they remain public assets before and after. However, for public institutions transformed into private enterprises, the potential loss of state-owned assets often becomes a focal point of scrutiny, due to the purchase of net assets by employees.
In the IPO process, in addition to fully demonstrating compliance and completeness of procedures, intermediaries must also obtain written confirmations of the reform process and results issued by provincial governments.
Employee ownership mainly occurs during the transformation of public institutions into private companies, where some employees buy the net assets of the original public institution and become shareholders of the limited company. However, if there are a large number of employees buying shares, to respect the rigid ceiling of 50 shareholders of a public limited company, certain companies, including research institutes, opt for the shareholding entrusted to employees of the hard core. Others like JSTI, ARTS Group, Tus-Design and Shenzhen New Land Tool hold shares on behalf of trade unions or an employee shareholder conference.
As early as 2002, the China Securities Regulatory Commission stopped considering and approving the issue application of a company having an employee shareholder conference or a trade union as the promoter or shareholder, the trade union or the employee shareholders no longer qualified as a legitimate organization. shareholder. Thus, for companies whose unions or conferences of employee shareholders still hold shares, these shares must be transferred and held in the name of specific employees.
In case of capital reserved for the union, this capital should be quantified and transferred to specific employees. After the clean-up for the employee shareholder conference or the delegated shareholding, the intermediaries must also interview the employees concerned to confirm that their shareholding is real and voluntary, and to identify any disputes or controversies.
Due to the characteristics of the industry, design institutes face many business-related compliance issues, including:
Affiliation of professional and technical personnel. As a study and design entity, a design institute should have appropriate business qualifications, including those for urban and rural planning, engineering design and survey, with different expertise requirements corresponding to different qualification levels. As a result, many design institutes accept external membership to fulfill application requirements for business qualifications.
Compliance in securing business. Most of the main clients of design institutes are government agencies, public institutions or state-owned enterprises, with tenders being the main method of obtaining business. During the review, attention is usually diverted to bid compliance and any irregularities such as collusive bidding, bid rigging or failure to bid.
Illegal subcontracting. Most design institute suppliers are their outsourcing entities. Due to the great similarity between outsourcing and illegal subcontracting, it is necessary to analyze and judge whether there is illegal subcontracting in the outsourcing of acquired projects, based on the content, amount and results of the work of the main project contract and outsourcing.
The trade compliance issues mentioned above are highly concealable and difficult to verify. Thus, to remove all obstacles to the referencing of design institutes, intermediaries must carry out an exhaustive sorting of a company’s commercial contracts and propose precise compliance schemes.
Yuan Yueyun is a partner at Grandway Law Offices
Grandway Law Firms
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