© 2005 Morrison & Foerster LLP All Rights Reserved M&A in China Current Issues and Practice Charles Comey Managing Partner Morrison Foerster (Shanghai) March 28, 2005

2 M&A in China Traditional foreign investment models in China Key Government Agencies New M&A Regulations New SAFE Regulations Antitrust Issues Other Transaction Models General Guidelines Case Studies

3 Traditional Foreign Investment Models Joint ventures and wholly foreign-owned enterprises Principally greenfield investment Inflexibility Few M&A opportunities until now Factors driving evolution

4 Key Government Agencies Ministry of Commerce (“MOFCOM”) State-owned Assets Regulatory Commission (“SARC”) State Development and Reform Commission (“SDRC”) State Administration for Industry and Commerce (“SAIC”) China Securities Regulatory Commission (“CSRC”) State Administration of Foreign Exchange (“SAFE”) State General Taxation Administration (“SGTA”)

5 M&A Regulations Provisional Regulations on the Acquisition of Domestic Enterprises by Foreign Investors Effective April 2003 Provide legal basis for converting domestic enterprises to Foreign-Invested Enterprises (“FIEs”) What is minimum foreign interest? Introduce antitrust/merger control Approval in areas where previously none required

6 New M&A Regulations cover: Share Acquisition Acquire existing shares or new shares Domestic Enterprise (DE)  Foreign-Invested Enterprises (FIE) Asset Acquisition Establish new FIE to acquire operating assets from DE Acquire operating assets from DE for contribution as capital to establish new FIE Restrictions: Pricing linked to valuation Payment period Creditors’ rights New M&A Regulations (cont’d.)

7 New SAFE Notice (Strengthening Foreign Exchange Control in Foreign Acquisitions) Effective on January 24, 2005 No implementation rules as yet State Administration of Foreign Exchange (SAFE) approval required for domestic enterprises acquiring interest offshore using domestic assets or shares offshore enterprises acquiring domestic enterprises

8 Antitrust/Merger Control Regulations Application to M&A in China and outside of China Required filing a Notification with MOFCOM and SAIC Public hearing may be conducted within 90 days (MOFCOM/SAIC discretion per market factors) Parties may apply for an exemption from the examination by MOFCOM and SAIC

9 Filing required if:  The China market share of any party has reached 20%, or will reach 25% as a result of the Transaction; or  The current year China market turnover of any party exceeds RMB1.5 billion (approximately US$181 million); or  For onshore deal - The foreign investor has merged with or acquired over 10 domestic enterprises in related industries within one year; or  For offshore deal - Any party will have direct or indirect equity interest in more than 15 foreign-invested enterprises in the corresponding industry; or  For offshore deal - Any party holds assets in China worth over RMB3 billion (approximately US$362 million). New Antitrust/Merger Control (cont’d.)

10 Restructure into FIE Employee issues Payment issues Other Acquisitions by Foreign Investors A.Acquisition of assets owned by non-listed State- owned Enterprises (SOE), shares in SOEs and SOE creditor rights B.Acquisition of A shares in Chinese listed companies (QFII Rules) C.Acquisition of equity in existing FIEs

11 Shares currently held by state or industry bodies/corporates Approval Required: SARC, MOFCOM, CSRC Acquisition of control (30% or above) triggers general offer to purchase all remaining shares ■ Parties may apply for waivers Consideration D.Acquisition of non-tradable shares in Chinese listed companies Other Acquisitions (cont’d.)

12 General Guidelines Catalogue Guiding Foreign Investment in Industry Multiple approvals Encouraged Permitted Restricted Prohibited

13 Case Study I: Nokia Merger Merger of two limited liability JVs into a single JV and convert the post- merger JV into a joint stock company No veto rights for minority investors in the post-merger joint stock company Qualified foreign-invested joint stock companies may be listed in PRC Major matters only require 2/3 shareholder approval MOFCOM approval Domestic Investor A Domestic Investor B Nokia JV 1 Offshore Onshore JV 2 (1) Merger into Joint Stock Company (2) Convert into

14 Case Study II: Acquisition of Lucky Film by Kodak First acquisition ever of non-tradable State-owned shares by a foreign investor Target is a listed joint stock company CSRC/SARC approval Shareholders Lucky Film Group Kodak Lucky Film Offshore Onshore A Shares LF State-owned Legal Person Shares

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