"Legal Issues in Private Equity and Listings for Chinese Companies"

Mason Ching, LL.M.PrincipalMason Ching & Associates 16 October 2008

Speakers’ Profile

Mason Ching is the founder of Mason Ching & Associates. He is qualified to practise in Hong Kong and England & Wales and holds an LLM degree with distinction in technology and investment laws.

His experience is gained in Baker & McKenzie. His expertise is in venture investment, PRC direct investment, fund establishment, securities, listing, takeovers and other corporate finance matters.

Convertible Loan Preference Shares

Series A or Series B Convertible

Redeemable Voting Preference

Warrants Common Shares

Form of Private Equity Investment

Board seats

Veto rights on certain key actions

Information rights

Profit guarantee and price adjustment

When to convert

Rights of preferred shares

Terms of investment

Pre-emptive Right / Right of Participation

Right of First Refusal

Co-sale / Tag-along

Drag-along

Anti-dilution

Down-side price protection – Full Ratchets or

Weighed Average

Protective Provisions

Non-compete covenants from controlling

shareholders

Put back option if IPO does not take place

Confidentiality

Founders’ guarantee

Founders’ provision of security

Founders’ indemnity

Protective Provisions

Vendor sale at the time of IPO

Placing after lock-up

Issue of derivatives:

warrants, exchangeable / convertible bond

Repurchase by issuer

Private Placements / Block Trade

Exit - IPO

Repurchase by investee company

Put back to founders

Trade sale

Forced trade sale

Reverse takeovers

Liquidation

Exit– Aborted IPO

Hong Kong Regulatory Issues

Listing Decisions Conversion Price “toxic convertibles” Lock-up

Target SOEs Private Enterprise

Structure Red Chip Direct Investment

Investing into China

Investment in legal person shares Valuation Approval process Restrictions on disposal of promoters’ shares PRC Company Law – shares issued by a company

prior to the public offering of shares shall not be transferred within one year from the Listing Date

Management buy-outs Investment in H shares Discount on IPO Price

Investing into China – H Share potentials

Ping An Insurance (Group) Company of China Ltd. (2005)

Goldman Sachs and Morgan Stanley invested in 1994

Dai-Ichi Mutual Life Insurance HSBC Insurance subscribed for 10% equity

interest (legal person shares) in 2002 Legal person shares converted into H Shares

Case Studies – Ping An

Red chip restructuring Relevant PRC Laws

Notice of the State Administration of Foreign Exchange on the Relevant Issues Concerning Foreign Exchange Administration of Financing and Returning Home Investment by Domestic Residents through Special-purpose Companies ( 国家外汇管理局关于境内居民通過境外特殊目的公司融資及返程投資外匯管理有关问题的通知 ) issued by The State Administration of Foreign Exchange ("SAFE") on 21 November 2005

Notice on Relevant Issues in the Registration of the Offshore Investments of Individual Domestic Residents and Foreign Exchange Registration of Mergers and Acquisitions by Foreign Investors ( 国家外汇管理局关于境内居民个人境外投资登记及外资并购外汇登记有关问题的通知 ) issued by SAFE on 21 April 2005

Notice on Relevant Issues in Perfecting Foreign Exchange Control in Mergers and Acquisitions by Foreign Investors ( 关于完善外资并购外汇管理有关问题的通知 ) issued by SAFE on 24 January 2005

Private Enterprises (non-H Share Listing)

No.75 Notice

“Returning home investment” - direct investment activities carried out inside China by residents inside China through a special purpose company: to acquire or swap the interest of the Chinese

party in an enterprise inside China; to establish a FIE inside China and acquire control

of assets inside China through that FIE; Foreign exchange registration Repatriation and use of funds

Provisions of the Ministry of Commerce, State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, Securities Regulatory Commission of China and the State Administration of Foreign Exchange on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (2006Revision)

Took effect on 8 September 2006 Applies to domestic enterprises only MOC and CSRC approval required for restructuring and

oversea listing of a special purpose vehicle Share swap allowed Unwind after 12 months failing listing

Private Enterprises (non-H Share Listing)

Private Enterprises (non-H Share Listing)

Notice of the General Affairs Department of the State Administration of Foreign Exchange on Printing and Distributing the Operating Rules for the Notice of the State Administration of Foreign Exchange on the Relevant Issues about Foreign Exchange Control over the Financing and Return Investment of Domestic Residents through Overseas Special Purpose Companies (No. 106 [2007] of the General Affairs Department under the State Administration of Foreign Exchange)

( 国家外汇管理局综合司关于印发《国家外汇管理局关于境内居民通过境外特殊目的公司融资及返程投资外汇管理有关问题的通知》操作规程的通知 (2007 修改 ) 汇综发[2007]106 号 ) 2007-05-29

Successful Structure for Red-Chip

Original Shareholders do not retain control post-IPO

Transfer of Assets Third party involvement

Case Study – Solargiga Energy Holdings Limited (Stock Code 757)

Mr. TAN

SEC Huaxin Silicon PLC

Jinzhou Xinri(PRC)

Jinzhou Yangguang

(PRC)

Jinzhou Huari(PRC)

Jinzhou Huachang

(PRC)

74.1% 75%25.83% 25% 70% 30%25%75%

100%

Solargiga – After restructuring

WWIC

TIL(BVI)

Company(Cayman Islands)

SECMr. TAN

Other Relevant Officers

Other Shareholders

Mr. CHONG

Solartech(Cayman Island

s)

BVI Company

JinzhouXinri(PRC)

Jinzhou Huari(PRC)

Jinzhou Yangguang(PRC)

Jinzhou Huachang(PRC)

Jinzhou Youhua (PRC)

Shanghai Jingji (PR

C)

33%

100% 100%

3.12%16.3%8.55%10.61%28.42%

100%100% 100% 100% 100%

100%

100%

Case Study – Xingfa Aluminium Holdings Limited (Stock Code 98)

Messrs. Luo Su, Luo Riming and Liao Yuqing

Xingfa Group

Xingfa Aluminium

Xingfa SG

Xingfa BVI

Xingfa Curtin Wall

Our Company

Leahin CoatingXingfa Innovation

100%

100%

100%

100%

100%100%

51%91.3%

Case Study – JES – Singapore

Acquisition of assets, liabilities, operations and business

Processing Agreement Restricted Cash Account Agreement Debt Repayment Agreement Fixed Assets Lease Agreement Entrusted Loan Agreement

Restricted for Foreign investment Fixed line Tobacco ICP – Internet contents Mobile contents – mobile phone

entertainment Digital publication – online game

Investing in Restricted Categories

Special Structure Need to consolidate accounts Loan agreement Option agreement Equity pledge Undertaking / power of attorney Technical service / business agreement Trade name and copyright license

Investing in Restricted Categories

Listing Decision – LD 43-3 (2005)

Company A

PRC Subsidiaries

Structure Contracts

Owning all operating licences to perform the Group’s bu

siness

Registered Owners

Structure Contracts

Owning all intellectual properties

OPCO

Outside PRC

Inside PRC

100%

100%

Direct Investment Vehicle Foreign-invested Enterprises

EJV, CJV and WFOE Foreign-invested Joint Stock Companies

RMB Fund Set up a WFOE

Direct Investment

Convertible Loan / Warrants Preference Shares

Series A or Series B

Convertible

Redeemable

Voting

Direct Investment

Repurchase by issuer

Private Placements / Block Trade - Measures for Administration of Strategic Investment by Foreign Investors in Listed Companies（外国投资者对上市公司战略投资管理办法） 2006-02-01

Put back to founders

Trade sale

Forced trade sale

Reverse takeovers Liquidation - Measures for Liquidation of Enterprise with Foreign

Investment

Direct Investment

RMB Fund

对外贸易经济合作部、科学技术部、国家工商行政管理总局、国家税务总局、外汇管理局令[2003] 年第 2 号

（ Promulgated by the Ministry of Foreign Trade and Economic Cooperation ， Ministry of Science and Technology ， State Administration for Industry and Commerce ， State Administration of Taxation and State Administration of Foreign Exchange on 30 January 2003 and effective as of 1 March 2003. ）

RMB Fund Regulations

the number of investors shall be more than two and less than 50 ， and there shall be at least one requisite investor as specified in Article 7 ；

the minimum amount of capital contribution a Non-legal Person Venture Investment Enterprise -

US$10 million a Corporate Venture Investment Enterprise - US$5

million. having a clear organizational form ； having a clear and legitimate investment direction ； at least three professional management personnel with

experience in venture investment business ； and other conditions stipulated by laws and administrative

regulations.

RMB Fund Regulation

having venture investment as its main line of business ； having cumulative capital under its management of

not less than US$100 million in the three years before the application ， and at least US$ 50 million of which has been used for venture investment.

having at least three professional management personnel with not less than three years experience in venture investment business ；

not have been prohibited by the judicial authorities or other relevant regulatory authorities of their own countries from engaging in venture investment or investment and consultancy business ， or subjected to penalty for reasons such as fraud ；

capital contribution - a Non-legal Person Venture Investment Enterprise – 1%; a Corporate Venture Investment Enterprise - not less than 30%

Set up a WFOE

WFOE as investment vehicle

Consent of the Commerce Department Approval of supervisory department Approval of CSRC Shanghai stock exchange Shenzhen stock exchange Shenzhen SME

A Share Market asan Exit Channel

Regulatory risks Political risks Credit risks Weak in law enforcement Aggressive creditors Loose control over special structure Entrepreneurs’ Integrity Risks associated with intermediaries

Risks of Investing in China

- Thank You -

Mason ChingTel:2973 6838Fax: 2973 6608email: mason@masonching.com