Crossborder M

1
Cross-border MA in China A Comparative Analysis

• Robert D. Lewis AmCham China MA Presentation
• Managing Partner 28 February 2007
• Lovells Beijing Beijing, China

2
Cross-border MA in China
Looking at both sides
New Regulations
Domestic Seller
Foreign Buyer
vs
vs
Old Regulations
FIE Target
Private Target
SOE Target
Listco Target
VS
VS
VS
3
The New Market Realities in China

• Other Factors
• Company Law revisions
• Share reform
• Domestic industry consolidation
• Out-bound investment

4
Old vs. New Regulations Cross-border MA
Regulations
5
Old vs. New Regulations Public Company Takeover
Regulations
6
Old vs. New Regulations Public Company Takeover
Regulations
7
Harmonization of New Regulations

• Foreign Acquisitions of Domestic Listed Targets
  in China
• General Rule both the 2006 Takeover Regs and the
  2006 MA Regs are applicable

8
National Economic Security (NES) Review

• Central MOFCOM NES approval required for
  following categories of acquisitions
• important industries (not defined)
• elements that may affect national economic
  security (not defined)
• famous trademarks and old established Chinese
  tradenames/companies (not defined)
• If application for NES review not submitted,
  MOFCOM may unwind any transaction which has or
  may have material adverse effect on NES or take
  other measures to eliminate adverse NES impact.

9
Foreign Shares as Consideration Qualification
Requirements
10
Foreign Shares as Consideration Approvals
China
Off-shore
Seller
Buyer
Target
Initial Approval in-bound investment and
conversion of Target into FIE approved with 6 mos
validity (MOFCOM and possibly NDRC) Final
Approval out-bound investment verification and
registration (MOFCOM and SAFE) upon issuance of
Overseas Investment Approval Certificate, final
in-bound investment approvals issued (MOFCOM)
11
New Obstacles for Red Chips

• 2006 MA Regs
• CSRC approval required
• Clear ownership
• Complete business operation structure
• Corporate governance and internal management
  system
• No violations in past 3 years
• IPO proceeds ? valuation
• IPO to launch within 1 year of round-trip
  acquisition by SPV
• IPO proceeds to be repatriated to China, e.g.
• Commercial loan to domestic companies
• Establishment of new FIEs in China
• Acquisition of domestic enterprises

12
Governing Law for Cross-border Acquisitions
13
Practical Aspects of Cross-border MA in China
Know Your Counterparty
Legend Takeover 2006 Takeover Regs NES
National economic security review MA 2006 MA
Regs PRE Property Rights Exchange SAV State-Ass
et Valuation
14
Practical Aspects of Cross-Border MA in China
China
Off-shore
Buyer
Seller
Advisors prior intl deal experience?
Advisors prior China deal experience?
SPA Negotiations Due
Diligence CPs Payment Escrow Closing
Conditions Reps Warranties Indemnities Pre-closi
ng covenants
15
Cross-border MA in China a Case Study
WFOE Holdco
Foreign Parent
SOE Seller
International Holdco
SPA
Public Shareholders
Mandatory offer
40
60
B-share Listco Target
Key terms Buyer wishes to acquire ? 51 but ?
60 seller wishes to sell down ? 45 but ? 55
both wish Seller to retain 5-9 public shares
have traded at 15 above Buyers target offer
price