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  1. M&A in ChinaCurrent Issues and Practice Charles Comey Managing PartnerMorrison 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 (cont’d.) 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

  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. New Antitrust/Merger Control (cont’d.) • Filing required if: • The China market share of any party has reached 20%, orwill 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 than15 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).

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

  11. Other Acquisitions (cont’d.) D. Acquisition of non-tradable shares in Chinese listed companies • 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

  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 Nokia Offshore Onshore Domestic Investor A Domestic Investor B (2) Convert into (1) Merger into Joint Stock Company JV 1 JV 2

  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 Kodak Offshore Onshore Shareholders LF State-owned Legal Person Shares Lucky Film Group A Shares LF State-owned Legal Person Shares Lucky Film

  15. How to Launch a Successful IPO THANK YOU The International Law Firm for Israeli Companies Visit us at www.mofo.com Or www.mofo.co.il (Hebrew)