STAMFORD LAW CORPORATION 27 March 2004 Mergers & Acquisitions in PRC.

STAMFORD LAW CORPORATIONSTAMFORD LAW CORPORATION

27 March 200427 March 2004

MergersMergers & & AcquisitionsAcquisitions in PRCin PRC

ContentsContents

• 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.Government approvals.

– Investment Catalogue – to check if the target Investment Catalogue – to check if the target

company is in an economic sector that is company is in an economic sector that is

closed to foreign investment or that requires closed to foreign investment or that requires

a higher level of government approval. a higher level of government approval.

– If the target is an SOE – may need additional If the target is an SOE – may need additional

approvals from the Ministry of Finance and approvals from the Ministry of Finance and

the National Development and Reform the National Development and Reform

Commission. Commission.

Understanding and negotiating PRC Understanding and negotiating PRC M&A - Common M&A issues M&A - Common M&A issues

– If the target is a SOE, the valuer shall be If the target is a SOE, the valuer shall be approved by the Ownership Administration approved by the Ownership Administration BureauBureau

– Cultural integration – key to management, Cultural integration – key to management, competitiveness and employeescompetitiveness and employees

– Ownership system in ChinaOwnership system in China

– Representations and WarrantiesRepresentations and Warranties

– Management Buy Out issuesManagement Buy Out issues

– Exit mechanismExit mechanism

Understanding and negotiating PRC Understanding and negotiating PRC M&A - Common M&A issues M&A - Common M&A issues

ContentsContents








Recent M&A Developments in PRCRecent M&A Developments in PRC

ACQUIRERACQUIRER TARGETTARGET DEAL SIZEDEAL SIZE LOCATIONLOCATION

Yahoo! Holdings Yahoo! Holdings (Hong Kong) Ltd(Hong Kong) Ltd www.3721.comwww.3721.com US$ 120 milUS$ 120 mil Hong KongHong Kong

TPA Strategic TPA Strategic Holdings LHoldings Ltdtd

Subsidiary of Subsidiary of Sichuan Haite High-Sichuan Haite High-

Tech Co. LtdTech Co. LtdUS$ 2.24 milUS$ 2.24 mil SichuanSichuan

Comfort Delgro Comfort Delgro Shenyang Taxi Co Shenyang Taxi Co LtdLtd S$ 23 milS$ 23 mil ShenyangShenyang

GIC / The Ascott GIC / The Ascott LimitedLimited

China Merchant China Merchant GroupGroup US$ 21 milUS$ 21 mil BeijingBeijing

Sinopec CorpSinopec Corp Xi'an and Tahe Xi'an and Tahe PetrochemicalPetrochemical US$ 43 milUS$ 43 mil Shaanxi & Shaanxi &

HeilongjiangHeilongjiang



Hang Seng BankHang Seng Bank Industrial Bank in Industrial Bank in Fujian ProvinceFujian Province US$ 207.95 milUS$ 207.95 mil FujianFujian

China Mobile (Hong China Mobile (Hong Kong)Kong)

10 provincial 10 provincial networks from networks from State-owned parentState-owned parent

US$ 7.25 bilUS$ 7.25 bil ChinaChina

China Netcom CorpChina Netcom Corp Jitong Jitong CommunicationsCommunications US$58 milUS$58 mil BeijingBeijing

ITT IndustriesITT IndustriesLocal private waste-Local private waste-

water treatment water treatment companycompany

-- ShanghaiShanghai

Dayen EnvironmentalDayen Environmental SAC General SAC General Product IndustryProduct Industry US$ 2.4 milUS$ 2.4 mil ShenyangShenyang



TCL International TCL International Holdings*Holdings* Thomson*Thomson* -- Hong KongHong Kong

Gillette Co.Gillette Co. Nanfu Battery Co Nanfu Battery Co LtdLtd -- FujianFujian

Hai’er-CCT Holdings*Hai’er-CCT Holdings*Qingdao Hai’er & Qingdao Hai’er & Pegasus Telecom Pegasus Telecom

Qingdao*Qingdao*-- Hong KongHong Kong

China Huaneng China Huaneng GroupGroup## OzGenOzGen US$227 milUS$227 mil AustraliaAustralia

* * MergersMergers

# # First among Chinese companies seeking to acquire major overseas assets in the power-generating sectorFirst among Chinese companies seeking to acquire major overseas assets in the power-generating sector

ContentsContents








PRC Due DiligencePRC 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 RealitiesPRC Due Diligence Realities

• Lack of public access to documents Lack of public access to documents and legal instrumentsand legal instruments

• Non-conformity with international Non-conformity with international norms and standardsnorms and standards

• Language barrierLanguage barrier

PRC Due Diligence PerspectivesPRC Due Diligence Perspectives

BeforeBefore

• Remember it’s ChinaRemember it’s China– Quality of InformationQuality of Information– LanguageLanguage– HistoryHistory

• Sensitive Sensitive YesYes, Taboo , Taboo NoNo!!• Understand Your Requirements …. Understand Your Requirements ….

Explain, Calibrate and DiscussExplain, Calibrate and Discuss

DuringDuring

• The Motorcade EffectThe Motorcade Effect


AfterAfter

• Working and Rapport with the PRC partyWorking and Rapport with the PRC party

• Restate and Refine Purpose of TransactionRestate and Refine Purpose of Transaction


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Common M&A structuring techniquesCommon M&A structuring techniques

M & A optionsM & A options

– Offshore TransactionsOffshore Transactions

– Onshore-Offshore TransactionsOnshore-Offshore Transactions

– Transactions within the PRCTransactions within the PRC

Offshore TransactionsOffshore Transactions

Seller

BeforeBefore AfterAfter

Buyer

JV/WFOE

Holding Co.

OffshoreOffshore

ChinaChina

Buyer Seller

Holding Co.

JV/WFOE

Onshore-Offshore TransactionsOnshore-Offshore Transactions

PRC Co

JV

Foreign A Foreign B

ChinaChina

OffshoreOffshore

Transactions Wholly in ChinaTransactions Wholly in China

BeforeBefore

AfterAfter

Chinese Partner A Foreign Investor Chinese Partner B

EJV A EJV B

Chinese Partner A Foreign Investor Chinese Partner B

EJV A/B

PaymentsPayments

BeforeBefore

AfterAfter

Foreign A

Chinese A Chinese BEJV A EJV B

EJV A/B

Payments

Foreign B

Foreign A Foreign B

Chinese A Chinese B

Transactions Wholly in ChinaTransactions Wholly in China

M&A LegislationsM&A Legislations

Other IssuesOther 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 Notice Requirements

Creditors’ Powers Creditors’ Powers

Time Limits Time Limits


• Employee IssueEmployee Issue

- - RedundancyRedundancy

No ‘Safety Net’ provided by Government No ‘Safety Net’ provided by Government

Potential minefieldPotential minefield

Resettlement plan approved by workers Resettlement plan approved by workers

congress (SOE)congress (SOE)


• Employee Issue (cont’d…)Employee Issue (cont’d…)

- - Non-competition and confidentiality Non-competition and confidentiality

obligations obligations

- - Years of services (include years in Years of services (include years in

Chinese partner)Chinese partner)

- - Open term contract (after 10 years)Open term contract (after 10 years)

- - Social insurancesSocial insurances


• Acquisition of State AssetsAcquisition of State Assets

Applicability: Applicability:

Target is an ‘SOE’ Target is an ‘SOE’

A company with State owned interestA company with State owned interest

Transfer of equity or asset Transfer of equity or asset

Asset valuation Asset valuation


• Acquisition of State Assets (cont’d…)Acquisition of State Assets (cont’d…)

Public bidding preferred Public bidding preferred

Approval by State Asset Approval by State Asset

Commission or Bureau Commission or Bureau

Payment of consideration Payment of consideration

Requirements on acquirerRequirements on acquirer


• Acquisition of Listed companyAcquisition of Listed company

30% triggering point for general offer30% triggering point for general offer

ExemptionExemption

Stated owned or legal person sharesStated owned or legal person shares

Independent directors’ viewsIndependent directors’ views


• Foreign Exchange ControlsForeign Exchange Controls

Strict capital controls for transaction Strict capital controls for transaction

in Chinain China

Offshore paymentOffshore payment

Sale of FIE interest --‘Capital Sale of FIE interest --‘Capital

AccountAccount’


• Financial and Legal Due DiligenceFinancial and Legal Due Diligence

Foreign investor should resolve all Foreign investor should resolve all

irregularities before entering into irregularities before entering into

the M & A transactionthe M & A transaction


ContentsContents








Facts of the CaseFacts of the Case

Company ACompany A

Company BCompany B

Foreign Foreign SubsidiarySubsidiary

Singapore Singapore InvestorInvestor

Company CCompany C

PRC Partner PRC Partner (51%)(51%)

Company DCompany D

Foreign Foreign Investor (49%)Investor (49%)

Labour Labour UnionsUnions

ShareholdingShareholdingShareholdingShareholding

ShareholdingShareholding


Trust AgreemtTrust Agreemt


Individuals in Individuals in Company ACompany A


Main IssuesMain Issues

Main issues:Main issues:

1.1. The current PRC legal regime;The current PRC legal regime;

2.2. Issues relating to the companies; &Issues relating to the companies; &

3.3. Key issues.Key issues.

Issue 1: The current PRC legal regimeIssue 1: The current PRC legal regime

• Law in relation to MBO of private companies yet to Law in relation to MBO of private companies yet to be formalized;be formalized;

• Indefinite suspension of the approving process Indefinite suspension of the approving process applied in prior MBO of domestic listed companies; applied in prior MBO of domestic listed companies;

• SASAC commented that MBO might cause severe SASAC commented that MBO might cause severe problems over state-owned assets.problems over state-owned assets.

Conclusion: Uncertainty of law & suspension of Conclusion: Uncertainty of law & suspension of approval processapproval process

Issue 2: Issues relating to the companiesIssue 2: Issues relating to the companies

Company BCompany B

• Company BCompany B to set up overseas subsidiary as the to set up overseas subsidiary as the vehicle for JV with the Singapore investor to acquire vehicle for JV with the Singapore investor to acquire Company CCompany C

– Issue: Whether Issue: Whether Company BCompany B has obtained the has obtained the relevant approvalsrelevant approvals

– Company that invests in overseas entity needs Company that invests in overseas entity needs approvals needed from various authoritiesapprovals needed from various authorities

– If investment exceeds USD 1 million, If investment exceeds USD 1 million, Company BCompany B will need approval from state or provincial levelwill need approval from state or provincial level

Company CCompany C

• Company CCompany C is JV company, where PRC party holds 51%, on trust for Company D, owned by is JV company, where PRC party holds 51%, on trust for Company D, owned by individuals working in individuals working in Company ACompany A

– Issue: Whether it is likely for these individuals to have such a large source of fundsIssue: 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 obligationIssue: 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 mannerBusiness license may be revoked if investor fails to fulfill contribution in timely manner

Issue 2: Issues relating to the companiesIssue 2: Issues relating to the companies

ApprovalsApprovals

• Issue: Whether relevant consents / approvals have Issue: Whether relevant consents / approvals have been obtained for the investment arrangementsbeen obtained for the investment arrangements

• Given the sizes of the companies in question, this should Given the sizes of the companies in question, this should not be a difficultynot be a difficulty

Asset TransferAsset Transfer

• Issue: Whether the transfer of assets from individuals Issue: Whether the transfer of assets from individuals working in working in Company ACompany A to to Company CCompany C were legitimate were legitimate

• Potential problems:Potential problems:– Illegality, Ulta vires acts by Directors, Potential Illegality, Ulta vires acts by Directors, Potential

allegations of breach of fiduciary duty and/or corrupt allegations of breach of fiduciary duty and/or corrupt conductconduct

Issue 3: Key issuesIssue 3: Key issues

Ownership of IP RightsOwnership of IP Rights

• Issue: Whether IP rights have been transferred to Issue: Whether IP rights have been transferred to Company CCompany C

• Under technology development agreement between Under technology development agreement between Company A and university, technology jointly developed are Company A and university, technology jointly developed are owned by both partiesowned by both parties

EmployeesEmployees

• Issue: Whether there are any restrictions on personnel Issue: Whether there are any restrictions on personnel transfer from transfer from Company ACompany A to to Company CCompany C

• Management and key technicians from Management and key technicians from Company ACompany A have a have a 3-year restriction on working for companies similar in nature 3-year restriction on working for companies similar in nature after ceasing to be employed by Company A after ceasing to be employed by Company A

Issue 3: Key issuesIssue 3: Key issues

ContentsContents







Thank YouThank You Stamford Law Corporation

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STAMFORD LAW CORPORATION 27 March 2004 Mergers & Acquisitions in PRC.

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Transcript of STAMFORD LAW CORPORATION 27 March 2004 Mergers & Acquisitions in PRC.