STAMFORD LAW CORPORATION 27 March 2004 Mergers & Acquisitions in PRC

Contents IntroductionIntroduction Understanding & Negotiating PRC M&AUnderstanding & Negotiating PRC M&A Recent M&A Developments in PRCRecent M&A Developments in PRC PRC Due Diligence PerspectivesPRC Due Diligence Perspectives Other IssuesOther Issues Case StudyCase Study Question & AnswerQuestion & Answer

Contents IntroductionIntroduction Understanding & Negotiating PRC M&AUnderstanding & Negotiating PRC M&A Recent M&A Developments in PRCRecent M&A Developments in PRC PRC Due Diligence PerspectivesPRC Due Diligence Perspectives Other IssuesOther Issues Case StudyCase Study Question & AnswerQuestion & Answer

–Government approvals. –Investment Catalogue – to check if the target company is in an economic sector that is closed to foreign investment or that requires a higher level of government approval. –If the target is an SOE – may need additional approvals from the Ministry of Finance and the National Development and Reform Commission. Understanding and negotiating PRC M&A - Common M&A issues

–If the target is a SOE, the valuer shall be approved by the Ownership Administration Bureau –Cultural integration – key to management, competitiveness and employees –Ownership system in China –Representations and Warranties –Management Buy Out issues –Exit mechanism Understanding and negotiating PRC M&A - Common M&A issues

Contents IntroductionIntroduction Understanding & Negotiating PRC M&AUnderstanding & Negotiating PRC M&A Recent M&A Developments in PRCRecent M&A Developments in PRC PRC Due Diligence PerspectivesPRC Due Diligence Perspectives Other IssuesOther Issues Case StudyCase Study Question & AnswerQuestion & Answer

Recent M&A Developments in PRC ACQUIRERTARGET DEAL SIZE LOCATION Yahoo! Holdings (Hong Kong) Ltd US$ 120 mil Hong Kong TPA Strategic Holdings Ltd Subsidiary of Sichuan Haite High- Tech Co. Ltd US$ 2.24 mil Sichuan Comfort Delgro Shenyang Taxi Co Ltd S$ 23 mil Shenyang GIC / The Ascott Limited China Merchant Group US$ 21 mil Beijing Sinopec Corp Xi'an and Tahe Petrochemical US$ 43 mil Shaanxi & Heilongjiang

Recent M&A Developments in PRC ACQUIRERTARGET DEAL SIZE LOCATION Hang Seng Bank Industrial Bank in Fujian Province US$ mil Fujian China Mobile (Hong Kong) 10 provincial networks from State-owned parent US$ 7.25 bil China China Netcom Corp Jitong Communications US$58 mil Beijing ITT Industries Local private waste- water treatment company -Shanghai Dayen Environmental SAC General Product Industry US$ 2.4 mil Shenyang

Recent M&A Developments in PRC ACQUIRERTARGET DEAL SIZE LOCATION TCL International Holdings* Thomson*- Hong Kong Gillette Co. Nanfu Battery Co Ltd -Fujian Hai’er-CCT Holdings* Qingdao Hai’er & Pegasus Telecom Qingdao* - Hong Kong China Huaneng Group # OzGen US$227 mil Australia * Mergers # First among Chinese companies seeking to acquire major overseas assets in the power-generating sector

Contents IntroductionIntroduction Understanding & Negotiating PRC M&AUnderstanding & Negotiating PRC M&A Recent M&A Developments in PRCRecent M&A Developments in PRC PRC Due Diligence PerspectivesPRC Due Diligence Perspectives Other IssuesOther Issues Case StudyCase Study Question & AnswerQuestion & Answer

PRC Due Diligence Nature of Foreign Investments in ChinaNature of Foreign Investments in China 1980s – “Open door” policy1980s – “Open door” policy 1990s1990s CurrentCurrent

PRC Due Diligence Realities Lack of public access to documents and legal instrumentsLack of public access to documents and legal instruments Non-conformity with international norms and standardsNon-conformity with international norms and standards Language barrierLanguage barrier

PRC Due Diligence Perspectives Before Remember it’s ChinaRemember it’s China –Quality of Information –Language –History Sensitive Yes, Taboo No!Sensitive Yes, Taboo No! Understand Your Requirements …. Explain, Calibrate and DiscussUnderstand Your Requirements …. Explain, Calibrate and Discuss

During The Motorcade EffectThe Motorcade Effect PRC Due Diligence Perspectives

After Working and Rapport with the PRC partyWorking and Rapport with the PRC party Restate and Refine Purpose of TransactionRestate and Refine Purpose of Transaction PRC Due Diligence Perspectives

Contents IntroductionIntroduction Understanding & Negotiating PRC M&AUnderstanding & Negotiating PRC M&A Recent M&A Developments in PRCRecent M&A Developments in PRC PRC Due Diligence PerspectivesPRC Due Diligence Perspectives Other IssuesOther Issues Case StudyCase Study Question & AnswerQuestion & Answer

Common M&A structuring techniques M & A options M & A options –Offshore Transactions –Onshore-Offshore Transactions –Transactions within the PRC

Offshore Transactions Seller BeforeAfter Buyer JV/WFOE Holding Co. Offshore China BuyerSeller Holding Co. JV/WFOE

Onshore-Offshore Transactions PRC Co JV Foreign A Foreign B China Offshore

Transactions Wholly in China Before After Chinese Partner A Foreign InvestorChinese Partner B EJV AEJV B Chinese Partner AForeign InvestorChinese Partner B EJV A/B Payments

Before After Foreign A Chinese A Chinese B EJV A EJV B EJV A/B Payments Foreign B Foreign AForeign B Chinese A Chinese B Transactions Wholly in China

M&A Legislations

Other Issues Creditors’ RightsCreditors’ Rights EmployeeEmployee State AssetState Asset Acquisition of Listed companyAcquisition of Listed company Foreign Exchange ControlForeign Exchange Control Due DiligenceDue Diligence

Creditor’s RightsCreditor’s Rights  Notice Requirements  Creditors’ Powers  Time Limits Other Issues

Employee IssueEmployee Issue - Redundancy  No ‘Safety Net’ provided by Government  Potential minefield  Resettlement plan approved by workers congress (SOE) Other Issues

Employee Issue (cont’d…)Employee Issue (cont’d…) - Non-competition and confidentiality obligations - Years of services (include years in Chinese partner) - Open term contract (after 10 years) - Social insurances Other Issues

Acquisition of State AssetsAcquisition of State Assets  Applicability:  Target is an ‘SOE’  A company with State owned interest  Transfer of equity or asset  Asset valuation Other Issues

Acquisition of State Assets (cont’d…)Acquisition of State Assets (cont’d…)  Public bidding preferred  Approval by State Asset Commission or Bureau  Payment of consideration  Requirements on acquirer Other Issues

Acquisition of Listed companyAcquisition of Listed company  30% triggering point for general offer  Exemption  Stated owned or legal person shares  Independent directors’ views Other Issues

Foreign Exchange ControlsForeign Exchange Controls  Strict capital controls for transaction in China  Offshore payment  Sale of FIE interest --‘Capital Account  Sale of FIE interest --‘Capital Account ’ Other Issues

Financial and Legal Due DiligenceFinancial and Legal Due Diligence  Foreign investor should resolve all irregularities before entering into the M & A transaction Other Issues

Contents IntroductionIntroduction Understanding & Negotiating PRC M&AUnderstanding & Negotiating PRC M&A Recent M&A Developments in PRCRecent M&A Developments in PRC PRC Due Diligence PerspectivesPRC Due Diligence Perspectives Other IssuesOther Issues Case StudyCase Study Question & AnswerQuestion & Answer

Facts of the Case Company A Company B Foreign Subsidiary Singapore Investor Company C PRC Partner (51%) Company D Foreign Investor (49%) Labour Unions Shareholding Shareholding Shareholding Shareholding Trust Agreemt Shareholding Individuals in Company A Shareholding

Main Issues Main issues: 1.The current PRC legal regime; 2.Issues relating to the companies; & 3.Key issues.

Issue 1: The current PRC legal regime Law in relation to MBO of private companies yet to be formalized;Law in relation to MBO of private companies yet to be formalized; Indefinite suspension of the approving process applied in prior MBO of domestic listed companies;Indefinite suspension of the approving process applied in prior MBO of domestic listed companies; SASAC commented that MBO might cause severe problems over state-owned assets.SASAC commented that MBO might cause severe problems over state-owned assets.  Conclusion: Uncertainty of law & suspension of approval process

Issue 2: Issues relating to the companies Company B Company B to set up overseas subsidiary as the vehicle for JV with the Singapore investor to acquire Company CCompany B to set up overseas subsidiary as the vehicle for JV with the Singapore investor to acquire Company C –Issue: Whether Company B has obtained the relevant approvals –Company that invests in overseas entity needs approvals needed from various authorities –If investment exceeds USD 1 million, Company B will need approval from state or provincial level

Company C Company C is JV company, where PRC party holds 51%, on trust for Company D, owned by individuals working in Company ACompany C is JV company, where PRC party holds 51%, on trust for Company D, owned by individuals working in Company A –Issue: Whether it is likely for these individuals to have such a large source of funds Foreign shareholder has not fully paid up consideration of USD 3.59 million (in the form of equipment)Foreign shareholder has not fully paid up consideration of USD 3.59 million (in the form of equipment) –Issue: Whether there will be any implications if foreign shareholder does not fulfill obligation –Business license may be revoked if investor fails to fulfill contribution in timely manner Issue 2: Issues relating to the companies

Approvals Issue: Whether relevant consents / approvals have been obtained for the investment arrangementsIssue: Whether relevant consents / approvals have been obtained for the investment arrangements Given the sizes of the companies in question, this should not be a difficultyGiven the sizes of the companies in question, this should not be a difficulty Asset Transfer Issue: Whether the transfer of assets from individuals working in Company A to Company C were legitimateIssue: Whether the transfer of assets from individuals working in Company A to Company C were legitimate Potential problems:Potential problems: –Illegality, Ulta vires acts by Directors, Potential allegations of breach of fiduciary duty and/or corrupt conduct Issue 3: Key issues

Ownership of IP Rights Issue: Whether IP rights have been transferred to Company CIssue: Whether IP rights have been transferred to Company C Under technology development agreement between Company A and university, technology jointly developed are owned by both partiesUnder technology development agreement between Company A and university, technology jointly developed are owned by both partiesEmployees Issue: Whether there are any restrictions on personnel transfer from Company A to Company CIssue: Whether there are any restrictions on personnel transfer from Company A to Company C Management and key technicians from Company A have a 3-year restriction on working for companies similar in nature after ceasing to be employed by Company AManagement and key technicians from Company A have a 3-year restriction on working for companies similar in nature after ceasing to be employed by Company A Issue 3: Key issues

Contents IntroductionIntroduction Understanding & Negotiating PRC M&AUnderstanding & Negotiating PRC M&A Recent M&A Developments in PRCRecent M&A Developments in PRC PRC Due Diligence PerspectivesPRC Due Diligence Perspectives Case StudyCase Study Question & AnswerQuestion & Answer

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