The Dragon Awakens Why You Can't Ignore China's New Merger Control Regime

1. The Dragon Awakens Why You Can't Ignore China's New Merger Control Regime The second of three webinars designed to help clients understand & comply with China's new Anti-Monopoly Law Hannah Ha Partner +852 2843 4378 hannah.ha@mayerbrownjsm.com Christopher J. Kelly Partner +1 202 263 3285 cjkelly@mayerbrown.com Gerry O'Brien Senior Associate +852 2843 4355 gerry.obrien@mayerbrownjsm.com 9 December 2008

2. Mayer Brown is a global legal services organisation comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

3. Agenda • Background - Brief history of merger control in China • China's new merger control regime • Notification requirements • Areas of uncertainty & how to tackle them • Tips for new deals and notifications • How we can assist

4. Brief history of merger control in China • No antitrust merger control in China prior to 2003 • April 2003: Interim Regulations on Merger with and Acquisition of Domestic Enterprises by Foreign Investors (M&A Regulations) • Application: Only to foreign entities involved in 'offshore' or 'inbound' deals • Mandatory filing: If certain China asset/turnover/market share thresholds met • Focus of review: Determines if deal leads to "excessive centralization", "hinders" competition, or "harms" consumers (all in the domestic market) • Regulator's powers: Transaction could be "disapproved". However, no penalties for non-compliance & no express 'blocking' powers • Impact: Initially a mere procedural process, but more substantive review developed as the regulations were amended & filing guidelines introduced. However >400 transactions notifications & none blocked on antitrust grounds • Status: Not repealed; but a 'lower level' than the AML (which thus prevails)

5. Brief history of merger control in China • AML - Drafting commenced in 1994, but a more sophisticated approach to the issues only developed after extensive input from mature jurisdictions • Concept of a "concentration" • Mergers • Acquisitions of assets or shares (2001 draft - acquisition of more than 1/3 of shares, 2006 draft - acquisition of shares with voting rights "to an adequate extent") • Acquisition of direct or indirect control over a party (2006 draft only) • Ability toimpose"determinative effects" by contract/othermeans (2006 draft only) • Mandatory notification: • 2001 - If merged entity's market share is more than 50%, or one of the parties has a market share of 25% prior to the merger - Turnover thresholds (to be specified) are met • 2006 - If each party has global turnover exceeding RMB 12 billion & one party has China turnover exceeding 800 million.

6. Agenda • Background - Brief history of merger controlin China • China's new merger control regime • Notification requirements • Areas of uncertainty & how to tackle them • Tips for new deals and notifications • How we can assist

7. China's new merger control regime Anti-Monopoly Law of the People's Republic of China • Promulgated 30 August 2007, commenced 1 August 2008 • Effectively replaces merger control under the M&A Regulations • Extends merger control to: • M&A between domestic China entities that aren't foreign-invested • Transactions not involving mergers, or asset/equity acquisitions • Transactions that raise "national security" concerns A basis for review in a manner broadly consistent with mature regimes, but unique China elements & concerns

8. China's new merger control regime • Anti-Monopoly Law - Substantive provisions • Provisions of the State Council on Notification Thresholds of • Concentrations of Undertakings - Filing thresholds • Regulations on the Acquisition of Domestic Enterprises • by Foreign Investors - "National economic security" review, etc Legislation • Clayton Act - Substantive provisions • Hart-Scott-Rodino Act - Filing thresholds & merger review process • EC Merger Regulation (Council Regulation (EC) 139/2004) • EU Member State laws

9. China's new merger control regime • MOFCOM • Note: Also charged with approving foreign investment and related • responsibilities • Role in industrial policy implementation raises concerns about • conflicting priorities Regulator Federal Trade Commission, Antitrust Division of the Department of Justice, and State Attorneys General • European Commission • (National Competition Authorities competent to investigate deals • under national merger control rules if no 'Community dimension')

10. China's new merger control regime Participation in a "concentration" that has the effect or likely effect of eliminating or restricting competition Note also the AML provisions dealing with national security review, and the related provisions in the M&A Regulations What is prohibited? (antitrust focus) Concentrations that maysubstantially lessen competitionor tend to create a monopoly Concentrations that significantly impede effective competition.

11. China's new merger control regime What transactions are subject to the regime? "Concentrations" are subject to the regime, being: • Merger activity • Acquisition of "control"* over other companies through the purchase of shares or assets or • Acquiring "control"* or capability of imposing "determinative effects"* on other companies by contract rights / other means *Not defined Acquisition of 'Control' not the determining factor. Filings are required for any non-exemptacquisitions of assets (including I.P., etc) or voting securities that meet jurisdictional thresholds "Concentrations": (i) Merger (ii) acquisition of direct/indirect control (by purchase of securities or assets, by contract or otherwise) of all or part of an undertaking (iii) establishment of 'full-function' JV

12. China's new merger control regime Mandatory notification thresholds Yes Notification is mandatory if either Test 1 or 2 is achieved Other transactions "shall be investigated" if "facts and evidence" indicate they may eliminate or restrict competition. Primary focus is on transaction value (> $63.1 million). If transaction value exceeds $252.3 million, size of parties doesn’t matter. Higher 'size of party' aggregate threshold (i.e. requirement that combined aggregate worldwide turnover of parties exceed €2.5 or €5 billion) and 'Community dimension' element

13. China's new merger control regime Calculation of turnover Affiliates included? Yes* Turnover of Seller included with Target? Yes* Taxes / Other? No guidance provided to date Special rules for some sectors?Indications that special rules will apply for sectors including banking, securities, insurance * Based only on comments by MOFCOM officials Turnover includes ultimate parent & entities it directly or indirectly controls • Acquirer - group* turnover assessed (*extends beyond 'legal control'). Target - Assess turnover of company/business part relevant to deal (i.e. exclude Seller). Focus on 'net' turnover, • after sales rebates, VAT (etc) deducted

14. China's new merger control regime Exemption for intra-group transactions? Yes- But Where one Business Operator owns 50% or more of the voting shares/assets of each of the other Business Operators involved in the concentration not broad OR Where 50% or more of the voting shares/assets of each Business Operator involved in the concentration are owned byanotherBusiness Operatornotinvolvedintheconcentration Yes: Broad - Exemption applies for certain 'intra-person' transactions such as buying out minority shareholders, mergers of subsidiaries, company repurchase of own securities Yes: Broad - Many intra-group transactions will fall outside of "change of control" definition of a concentration

15. China's new merger control regime Who notifies, and when? • Filing is the obligation of the acquirer* • AML does not specify when filing must occur, but MOFCOM has previously required filings by the later date of • (i) public announcement of deal; or • (ii) date of antitrust filing in target's domestic jurisdiction • No filing fee * Based on practice under M&A Regulations & draft AML regulations All parties to transaction that meet thresholds must submit filings. No deadline, but must factor in waiting period when determining closing. Filing fee applies There is a pre-notification procedure to follow before formal notification is submitted. However, no deadline or filing fee. All parties acquiring 'control' must jointly/individually notify.

16. China's new merger control regime Review period Deadline for preliminary review to decide if further investigation is required Review may be further extended by 60 days in certain circumstances 0 30 days 120 days 180 days Pre-Notification (Collecting info, preparing filing & consultation) Further review must occur within 90 days of notice to parties about intention to continue review Initial waiting period: 30 days post-notification. May be extended by a '2nd request' (30 additional days after compliance with request) • Phase 1 review: 25-35 days, Phase 2 review: 90-105 days.

17. China's new merger control regime Penalties and remedies • Where a concentration is implemented contrary to the AML or prior to a MOFCOM decision, MOFCOM may: • Order termination of implementation of the concentration • Order disposal of relevant shares/assets, transfer of the relevant business, or other measures necessary to restore the status quo • Impose a fine of up to RMB 500,000 Penalty for non-compliance is up to US$11,000 per day and court may order injunction or rescission of transaction Non-compliance can result in fines of up to 10% of turnover, periodic penalty payments (for ongoing non-compliance), and the Commission can require a transaction to be unwound, etc

18. China's new merger control regime Other forms of review • AML: Provides for review of foreign acquisition of domestic enterprises, and participation in concentrations of undertakings by foreign investors, where they have a possible impact on "national economic security" • M&A Regulations: M&A deals involving foreign investors involving "major industries", or potentially impacting "national security" or transferring the ownership of famous Chinese trademarks or time-honoured brands • Foreign Investment and National Security Act, Exon-Florio Amendment • Scrutiny of deals threatening national security, including such sectors as defence, telecom, energy, infrastructure, and technology.  • None (investment screens may be imposed at the level of member • states rather than at the EU level)

19. Agenda • Background - Brief history of merger control in China • China's new merger control regime • Notification requirements • Areas of uncertainty & how to tackle them • Tips for new deals and notifications • How we can assist

20. Notification requirements AML specifications Other forms of review Note requirement for Chinese language & official documents • Notifications must include: • Application for clearance • Analysis of the deal's impact on the relevant China market • Transaction agreement • Financial statements • "Other documents and information" as required by MOFCOM • MOFCOM Guidelines (under M&A Regulations) • MOFCOM filing receipt "Checklist" Note extensive China market data required Further guidance

21. Agenda • Background - Brief history of merger control in China • China's new merger control regime • Notification requirements • Areas of uncertainty & how to tackle them • Tips for new deals and notifications • How we can assist

22. Areas of Uncertainty -What is a Concentration? Incorporation of equity JVs and cooperative JVs? Short-term acquisitions of shares? What is a Concentration? Control over production facilities? Minority acquisitions Licensing and technology transfer? Other

23. Areas of Uncertainty -How to calculate turnover? Consider 'affiliates' of the transaction parties? Use consolidated accounts? Consider the 'Seller' turnover along with the 'Target' turnover? Consider factors such as sales rebates and value-added taxes? Special rules for banking, insurance, securities, futures, etc? When is it prudent to engage in consultation versus self-assess?

24. Areas of Uncertainty- What is your market / market share? • Consideration of China's 'Special Administrative Regions' • The difficulty obtaining accurate data on China markets • The'Microsoftissue': • What istheeffectofpiracyonmarketshare?

25. Areas of Uncertainty- What factors are considered? Market share May be a concern for foreign companies Other factors Degree of market concentration Analysis Factors Impact on market access & Technological advancement Impact on national economic development Impact on consumers & competitors

26. Areas of Uncertainty- Equal treatment for foreign entities? • Perceived risk that MOFCOM may give greater scrutiny to deals involving high-profile international companies • Is this a fair assessment? • Yes: • Political & industrial policy considerations "hardwired" into process • Article 7 of the AML – State Owned Enterprises • Article 31 of the AML – national security review • No: • Extensive,ongoing efforts to train officials in appropriate methodology • Early signs are positive, although no compelling test cases to date (i.e. InBev/Anheuser acquisition) • Handling of Coca-Cola /Huiyuan merger will be instructive Yes No

27. Agenda • Background - Brief history of merger control in China • China's new merger control regime • Notification requirements • Areas of uncertainty & how to tackle them • Tips for new deals and notifications • How we can assist

28. Tips for New Deals and Notifications Weighing up whether to proceed with a deal • Consider impact of the lengthy potential review period (up to 180 days) and administrative burden • Where multiple bidders, those with no portfolio companies in sectors overlapping with a target may have a distinct advantage • Likelihood of close scrutiny? • Key industry sectors or brands impacted? • Strength and sophistication of customers and competitors in China (prospect of submissions to MOFCOM?) • High market share acquired? • Has the target been involved in any previous notifications to, or dealings with, MOFCOM? • Consider the impact of other AML provisions post-closing (i.e. abuse of dominance)

29. Tips for New Deals and Notifications Deal negotiation and transaction documentation • Prudent to limit 'control' rights for minority acquisitions? • Account & apportion liability for adverse review outcomes • Consider impact timing of other filings can have on when a China filing must be made • Ensure China approval is a condition precedent of deals • Divestments prudent? • Consider China sensitivities (i.e. when acquiring a China entity, consider commitments to retain key China branding & personnel) • Possibility of expedited review/ exemption/ direction on review focus • MOFCOM consults widely - get to customers/ associations first! Consult early - with MOFCOM & "stakeholders"

30. Tips for New Deals and Notifications Notifications • Notifications • Don't rely on foreign clearances / market assessments • Focus is the China impact, even where the relevant market is broader (i.e. regional or global) • Start the information gathering process ASAP (market share data, China business licences, info on competitors and customers, etc) • Consider business representative attendance at consultations - especially for 'technical' products • Need for document translation, involvement of China agent • Also .... exercise caution in media statements after notification

31. Agenda • Background - Brief history of merger control in China • China's new merger control regime • Notification requirements • Areas of uncertainty & how to tackle them • Tips for new deals and notifications • How we can assist

32. How Mayer Brown JSM can Assist We can provide: We can provide: • Extensive expertise - Involvement with China merger filings since 2003 • Beneficial relationships - Strong links with key MOFCOM officials • Inside knowledge - Mayer Brown involvement in the AML drafting process & as facilitator for MOFCOM relations with European officials • The advantage of a 'local' presence - Reflecting MOFCOM's preference for dealing with local lawyers, & allowing extensive ongoing consultation, China information gathering, and translation assistance • Multi-jurisdiction experience - 'One stop shop' for international filings & advice on transactions with an international impact • Regular updates - see our dedicated AML resource page at: www.mayerbrown.com/chinaantimonopolylaw

33. Q & A Thank you

34. Disclaimer • These materials are provided by JSM and reflect information as of 9 December 2008. • The contents are intended to provide a general guide to the subject matter only and should not be treated as a substitute for specific advice concerning individual situation. • You may not copy or modify the materials or use them for any commercial purpose without our express prior written permission.