To deepen the implementation of the Party Central Committee’s decisions and plans for state-owned enterprise and state-owned asset reform, both central and local authorities have successively issued policy documents to guide the reform process in a standardized manner. While policies play an important role in driving reform, they tend to be short-term and subject to fluctuations. By contrast, legislative safeguards offer long-term stability and consistency. It is indispensable to provide rule-of-law guidance and protection for the reform of state-owned enterprises and state-owned assets. In this field, it is imperative to carefully identify new issues arising during the reform process and address practical problems in strict compliance with the law. Only by doing so can we effectively implement the Party Central Committee’s decisions and plans for deepening the reform of state-owned enterprises and state-owned assets and ensure a smooth transition from policy-driven initiatives to rule-of-law-led reform.

First, state-owned enterprise reform—particularly in the area of “mixed-ownership reform”—still faces numerous bottlenecks and challenges.

1. Issues in Mixed-Ownership Reform Risk Assessment

The ultimate goal of mixed-ownership reform in state-owned enterprises is to enhance their economic efficiency, preserve and increase the value of state-owned capital, and enable enterprise employees to share in the benefits and achievements of the reform. Therefore, once the mixed-ownership reform is completed, enterprises should not rest easy; rather, the key focus should be on whether the reform can achieve its intended outcomes. On the one hand, during the formulation of mixed-ownership reform plans for state-owned enterprises, the lack of professional guidance may increase the risk of loss of state-owned assets. On the other hand, after the completion of mixed-ownership reform, the entry of private capital may bring certain disruptions to the traditional management systems and employee relations of state-owned enterprises, indirectly affecting the interests of existing employees. Following the completion of mixed-ownership reform, some employees may be forced into a state of unemployment due to the needs of the enterprise’s business development. If the enterprise fails to properly reassign employees in strict accordance with applicable laws, regulations, and policies, or if it fails to develop a comprehensive employee resettlement plan, or if there are instances of harm to employees’ interests, this could lead to social problems and negative public perceptions for the enterprise. The formulation of employee resettlement and employee stock ownership plans also represents a major risk factor in the mixed-ownership reform process.

2. Issues related to the shareholder exit mechanism

In the practice of mixed-ownership reform in enterprises, the relevant laws and regulations for protecting the rights and interests of small and medium-sized shareholders are still imperfect, making it relatively difficult in practice to provide legal remedies for these shareholders and creating a legal environment that lacks adequate safeguards for their interests. In current mixed-ownership reforms, the occurrence of situations where majority shareholders infringe upon the legitimate rights and interests of small and medium-sized shareholders has seriously undermined the motivation of small and medium-sized investors to participate in state-owned enterprise reforms. As a result, from the perspective of enterprise operational efficiency, state-owned assets not only fail to appreciate in value but may even experience a decline in value—a phenomenon that essentially constitutes a loss of state-owned assets. In reality, it is extremely challenging for small and medium-sized shareholders and majority shareholders to achieve equality in management rights. In enterprises undergoing mixed-ownership reform, small and medium-sized shareholders generally hold a relatively weaker position, unable to exert substantial influence on corporate management and operations, and their legitimate rights and interests remain inadequately protected. Although the Company Law stipulates that under certain conditions, shareholders have the right to request share repurchase, the fair price should fundamentally serve as the basis for shareholders’ acquisition of equity. However, due to high actual operating costs, some dissenting small and medium-sized shareholders choose to give up contesting the issue and instead transfer their shares at prices below market value. At its core, this situation is still determined by the unequal status between state-owned major shareholders and small and medium-sized shareholders in areas such as corporate governance and decision-making. Moreover, the Company Law does not clearly specify the detailed procedural steps for dissenting shareholders exercising their right to request share repurchase, leaving a significant gap in procedural safeguards and further complicating the practical protection of small and medium-sized shareholders’ interests.

The reform of the mixed-ownership structure in state-owned enterprises is an important approach for China to deepen the reform of state-owned enterprises and improve the market economy. The positive safeguarding role played by high-quality institutional supply in the field of mixed-ownership reform of state-owned enterprises lies in promoting such reforms in a lawful and orderly manner, effectively preventing various legal risks and problems that may arise during the process, and striking a balance among the interests of all parties involved in the reform—thereby ensuring that the mixed-ownership reform of state-owned enterprises achieves its original objectives of preserving and enhancing the value of state-owned capital, expanding the functions of state-owned capital, and stimulating enterprise vitality.

3. There are asset valuation issues in China’s mixed-ownership reform.

Accurately assessing the market value and creditworthiness of various types of assets, especially intangible assets, is crucial to ensuring that the mixed-ownership reform proceeds fairly. In the process of mixed-ownership reform of state-owned enterprises, accurately evaluating the market value and creditworthiness of all types of assets is an essential prerequisite for fair transactions. From the perspective of state-owned assets, overvaluation of these assets would hinder the attraction of other capital investments, while undervaluation could lead to the loss of state-owned assets. From the perspective of non-public-sector capital, undervaluing assets would undermine the fundamental interests of non-public enterprises, diminishing their incentive to integrate with state-owned capital; conversely, overvaluation would encroach upon the interests of state-owned capital. Therefore, the operational status and creditworthiness of state-owned capital, collective capital, and other non-public-sector capital participating in the development of mixed-ownership enterprises are also critical factors that cannot be overlooked. Whether they are state-owned, private, or foreign enterprises, all must demonstrate sound business performance and strong credit standing; otherwise, the mixed-ownership reform could fail. To advance the mixed-ownership reform of state-owned enterprises, it is imperative to establish an objective and impartial system for asset and credit evaluation, ensuring that the reform proceeds fairly and smoothly and that newly established mixed-ownership enterprises can operate and develop successfully in the future. It is recommended to set up an expert review system for enterprise state-owned asset valuation reports and a credit qualification assessment system for non-state-owned capital participating in mixed-ownership reform.

A particularly important issue to pay attention to is the loss of intangible assets in state-owned enterprises during mixed-ownership reform. One scenario involves the loss of ownership rights—where state-owned intangible assets are acquired or controlled by non-state-owned entities, such as the loss of trade secrets and proprietary technologies. Another scenario is the depreciation of the value of state-owned enterprises’ intangible assets due to improper management, use, or maintenance; this also includes situations where the use of state-owned enterprises’ intangible assets, such as trademark rights, is restricted or abandoned altogether, thereby preventing their value from continuing to appreciate.

In addition to the loss of state-owned intangible assets caused by weak awareness of their protection among state-owned enterprises, the absence of legislative frameworks for managing state-owned intangible assets is also a major contributing factor. Therefore, it is essential to establish and improve the basic management system for intangible assets, thereby creating a comprehensive and well-defined process for managing state-owned intangible assets.

4. Improve the investment management system for state-owned enterprises and optimize the allocation and structure of state-owned capital.

Foreign investment by state-owned enterprises is one approach to promoting mixed-ownership reform in these enterprises. On August 2, 2016, the General Office of the State Council issued the "Opinions of the General Office of the State Council on Establishing a System for Holding State-Owned Enterprises Accountable for Irregular Business and Investment Activities" (Guobanfa [2016] No. 63), setting forth requirements for establishing such a system of accountability. On January 7, 2017, the State-owned Assets Supervision and Administration Commission of the State Council released the "Measures for the Supervision and Management of Investments by Central Enterprises" (Order No. 34 of the SASAC), outlining specific measures for the supervision and management of investments made by central enterprises. On July 13, 2018, the SASAC issued the "Implementation Measures for Holding Central Enterprises Accountable for Irregular Business and Investment Activities (Trial)" (Order No. 37 of the SASAC), which took effect on August 30, 2018, and set forth detailed requirements for enforcing accountability for irregular business and investment activities by state-owned enterprises. All provinces and municipalities directly under the central government have also responded swiftly to the central government’s directives, promptly introducing local policies and regulations on compliance with business and investment practices. The policy documents issued by various provinces generally remain consistent with the central government’s guidelines.

Investment by state-owned enterprises is an important business activity for their own development, and it also has a significant impact on the country’s economic growth. Therefore, while pursuing economic benefits, these enterprises must proactively identify and mitigate risks and ensure that their investments are conducted in strict compliance with the law. Through research, our team has found that some enterprises currently overemphasize “diversified development,” straying from their core businesses and venturing into other sectors. As such, foreign investments by state-owned enterprises should align with and serve the national and provincial development strategies, conform to the overall layout and structural adjustment of state-owned assets, and remain firmly focused on their core businesses. By continuously enhancing their core competitiveness, these enterprises can play their role as the “mainstay” of the socialist economy. Local state-owned enterprises’ investment activities should likewise adhere to the fundamental principles of strategic guidance, legal compliance, capability matching, and reasonable returns. They must stay true to their core businesses, follow standardized procedures, and make investments in compliance with regulations. The scale of their investments should be commensurate with their capital strength, financing capacity, industry experience, management level, and risk-resistance capabilities, thereby ensuring the preservation and appreciation of state-owned assets. To further optimize the state-owned asset management system—from managing enterprises to managing capital—while fulfilling investor duties in accordance with the law and strengthening supervision and regulation, we should strive to build a modern state-owned enterprise system characterized by more standardized investment practices, a more rational allocation of state-owned capital, and a more optimized structure. To this end, we need to refine the “Measures for Investment Supervision and Management” in several key areas: building an investment regulatory framework, conducting pre-investment management, implementing in-process management, performing post-investment management, managing investment risks, and establishing mechanisms for accountability.

II. Legal Service Recommendations on State-Owned Enterprise Reform, Particularly on Mixed-Ownership Reform

1. In mixed-ownership reform, we adopt a “case-by-case” approach, assisting clients in tailoring customized reform plans and standardizing the exercise of state-owned equity.

There are many approaches to mixed-ownership reform, such as making equity investments, exchanging equity interests, conducting overall public listings, issuing convertible bonds, establishing equity investment funds, and converting debt into equity, among others. The overarching goal is to bring private capital into state-owned enterprises with state ownership, thereby transforming these SOEs into entities with diversified shareholding structures. In the current process of mixed-ownership reform in state-owned enterprises, a key issue has emerged: different types of capital—whether state-owned or privately owned—often hold shares at par but enjoy unequal rights, particularly in corporate governance, where non-public entities frequently find themselves at a disadvantage compared to state-owned capital. To address this, it is crucial to ensure that, following the reform, the state retains absolute control over strategically important state-owned enterprises, guaranteeing the effective implementation of both their strategic and potential objectives, as well as their long-term stability and sustainable operation. This will help prevent enterprises from making significant changes to their original goals or seriously deviating from their core business objectives after the reform, thus safeguarding national and public interests. While absolute state control over equity can also lead to excessive government intervention in SOEs, which may hinder their market-oriented operations, the system for regulating the exercise of state-owned equity should clearly stipulate that state-owned shares carry the same operational rights, voting rights on ordinary matters, rights to claim dividends, and rights to claim residual assets as ordinary shares. At the same time, the scope of special equity provisions and veto rights over specific matters that state shareholders can establish in the company’s articles of association must be strictly limited. This approach aims to avoid granting state-owned capital an absolute say in corporate decision-making, ensuring that while state capital maintains control in certain key areas, it can still achieve the dual objective of state oversight and market-oriented management. Ultimately, this will enable the true separation of ownership from management, promoting the goal of enhancing and preserving the value of state-owned capital.

2. Assist clients in perfecting the assessment system for major matters related to state-owned enterprise reform.

The reform of state-owned enterprises is a complex, systematic undertaking. In particular, major decisions such as the reform of mixed-ownership structures and significant overseas investment projects should be accompanied by rigorous pre-decision assessments of their scientific validity and feasibility, ongoing monitoring of implementation progress, and post-decision evaluations of their actual outcomes and social impacts. These evaluations should enable timely adjustments and refinements to decision-making processes, thereby enhancing both the scientific rigor and the effectiveness of policy implementation. Third-party evaluation refers to a comprehensive assessment conducted by organizations or institutions that are independent of the policy-making bodies, implementing agencies, and the entities subject to the decisions themselves. Using scientific, systematic, and standardized evaluation methodologies, these third parties assess all stages and aspects—before, during, and after—the implementation of major decisions, and then produce evaluation reports for government reference in its decision-making process.

3. Assist clients in perfecting the tracking and subsequent assessment and evaluation systems for state-owned enterprise and state-owned asset projects, including those related to mixed-ownership reform.

In recent years, the mixed-ownership reform—seen as a crucial breakthrough in state-owned enterprise reform—has continued to gain momentum. Although certain achievements have been made, the effects of many mixed-ownership reforms remain inconspicuous. The problems encountered in practice include: First, there is insufficient understanding of mixed-ownership reform; some entities focus more on “mixing” than on “reform,” engaging in mere “mixing without reform,” and even resorting to “sham mixed-ownership reforms.” Second, the approach to capital mixing lacks clarity: enterprises undergoing mixed-ownership reform tend to attract financial investors more than strategic investors, and even fewer manage to achieve meaningful industrial synergy. Third, reforms of corporate governance structures and market-oriented operational mechanisms remain superficial.

Establish a system for tracking and conducting post-evaluations of state-owned enterprise (SOE) reform projects—including those involving mixed-ownership reform—to strengthen oversight of the implementation of reforms and assessment of their effectiveness. Enhancing the competitiveness, innovation capacity, control, influence, and risk-resistance of the state-owned economy is the overarching goal of SOE reform, which can help address issues such as inadequate state asset supervision and the problem of “sham mixed-ownership reforms.” This will compel SOEs to genuinely embrace mixed-ownership reform, with particular emphasis on “reforming mechanisms.”

4. Assist clients in perfecting the regulatory system for the selection and management of professional managers in state-owned enterprises.

Explore local legislation on contractual management of tenure systems for managerial personnel in state-owned enterprises. Institutionalize fundamental principles such as standardized hiring practices, tenure management, scientifically defined contractual objectives, rigid implementation of compensation, and stringent assessment and exit mechanisms. Develop and refine relevant supporting systems, including regulations on the management of enterprise leaders, assessment and evaluation methods, and supervision and management measures. Establish a market-oriented system for selecting, employing, and compensating personnel.

5. Tailor strategies to individual enterprises and assist clients in exploring the establishment of differentiated governance and control systems for state-owned enterprises following their mixed-ownership reform.

Building on the central government’s emphasis on continuing to advance mixed-ownership reform in a categorized and tiered manner, we must further shift the focus of state-owned enterprise mixed-ownership reform from “mixing capital” to “reforming mechanisms.” We need to innovate regulatory systems and requirements, avoiding excessive “administrative” and “bureaucratic” control measures. At the same time, we must guard against the practice of “investing without management,” thereby addressing issues such as overreach, underperformance, and misalignment in state asset supervision. We should scientifically delineate the boundaries of rights and responsibilities between state-owned shareholders and mixed-ownership enterprises, establish differentiated governance models, and implement governance-oriented oversight based on equity relationships and supported by appointed directors. Moreover, we should explore the establishment of more flexible and efficient regulatory systems, ensuring that state-owned enterprises maintain robust decision-making capabilities while enhancing the flexibility of their institutional and operational mechanisms.