STAMFORD LAW CORPORATION 27 March 2004

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

2. Contents • Introduction • Understanding & Negotiating PRC M&A • Recent M&A Developments in PRC • PRC Due Diligence Perspectives • Other Issues • Case Study • Question & Answer

3. Contents • Introduction • Understanding & Negotiating PRC M&A • Recent M&A Developments in PRC • PRC Due Diligence Perspectives • Other Issues • Case Study • Question & Answer

4. Understanding and negotiating PRC M&A - Common M&A issues • Government approvals. • Investment Catalogue – to check if the target company is in an economic sector that is closed to foreign investment or that requires a higher level of government approval. • If the target is an SOE – may need additional approvals from the Ministry of Finance and the National Development and Reform Commission.

5. Understanding and negotiating PRC M&A - Common M&A issues • If the target is a SOE, the valuer shall be approved by the Ownership Administration Bureau • Cultural integration – key to management, competitiveness and employees • Ownership system in China • Representations and Warranties • Management Buy Out issues • Exit mechanism

6. Contents • Introduction • Understanding & Negotiating PRC M&A • Recent M&A Developments in PRC • PRC Due Diligence Perspectives • Other Issues • Case Study • Question & Answer

7. Recent M&A Developments in PRC

8. Recent M&A Developments in PRC

9. Recent M&A Developments in PRC * Mergers # First among Chinese companies seeking to acquire major overseas assets in the power-generating sector

10. Contents • Introduction • Understanding & Negotiating PRC M&A • Recent M&A Developments in PRC • PRC Due Diligence Perspectives • Other Issues • Case Study • Question & Answer

11. PRC Due Diligence • Nature of Foreign Investments in China • 1980s – “Open door” policy • 1990s • Current

12. PRC Due Diligence Realities • Lack of public access to documents and legal instruments • Non-conformity with international norms and standards • Language barrier

13. PRC Due Diligence Perspectives Before • Remember it’s China • Quality of Information • Language • History • Sensitive Yes, Taboo No! • Understand Your Requirements …. Explain, Calibrate and Discuss

14. PRC Due Diligence Perspectives During • The Motorcade Effect

15. PRC Due Diligence Perspectives After • Working and Rapport with the PRC party • Restate and Refine Purpose of Transaction

16. Contents • Introduction • Understanding & Negotiating PRC M&A • Recent M&A Developments in PRC • PRC Due Diligence Perspectives • Other Issues • Case Study • Question & Answer

17. Common M&A structuring techniques M & A options • Offshore Transactions • Onshore-Offshore Transactions • Transactions within the PRC

18. Offshore Transactions Before After Buyer Seller Buyer Seller Holding Co. Holding Co. Offshore China JV/WFOE JV/WFOE

19. Onshore-Offshore Transactions Foreign A Foreign B Offshore China PRC Co JV

20. Transactions Wholly in China Before Foreign Investor Chinese Partner B Chinese Partner A EJV A EJV B After Payments Chinese Partner A Foreign Investor Chinese Partner B EJV A/B

21. Transactions Wholly in China Before Foreign B Foreign A Chinese A EJV A EJV B Chinese B After Foreign A Foreign B Payments EJV A/B Chinese B Chinese A

22. M&A Legislations

23. Other Issues • Creditors’ Rights • Employee • State Asset • Acquisition of Listed company • Foreign Exchange Control • Due Diligence

24. Other Issues • Creditor’s Rights • Notice Requirements • Creditors’ Powers • Time Limits

25. Other Issues • Employee Issue - Redundancy • No ‘Safety Net’ provided by Government • Potential minefield • Resettlement plan approved by workers congress (SOE)

26. Other Issues • Employee Issue (cont’d…) - Non-competition and confidentiality obligations - Years of services (include years in Chinese partner) - Open term contract (after 10 years) - Social insurances

27. Other Issues • Acquisition of State Assets • Applicability: • Target is an ‘SOE’ • A company with State owned interest • Transfer of equity or asset • Asset valuation

28. Other Issues • Acquisition of State Assets (cont’d…) • Public bidding preferred • Approval by State Asset Commission or Bureau • Payment of consideration • Requirements on acquirer

29. Other Issues • Acquisition of Listed company • 30% triggering point for general offer • Exemption • Stated owned or legal person shares • Independent directors’ views

30. Other Issues • Foreign Exchange Controls • Strict capital controls for transaction in China • Offshore payment • Sale of FIE interest --‘Capital Account’

31. Other Issues • Financial and Legal Due Diligence • Foreign investor should resolve all irregularities before entering into the M & A transaction

32. Contents • Introduction • Understanding & Negotiating PRC M&A • Recent M&A Developments in PRC • PRC Due Diligence Perspectives • Other Issues • Case Study • Question & Answer

33. Company A Company D PRC Partner (51%) Company B Singapore Investor Individuals in Company A Foreign Subsidiary Company C Foreign Investor (49%) Facts of the Case Shareholding Labour Unions Trust Agreemt Shareholding Shareholding Shareholding Shareholding Shareholding

34. Main Issues Main issues: • The current PRC legal regime; • Issues relating to the companies; & • Key issues.

35. Issue 1: The current PRC legal regime • Law in relation to MBO of private companies yet to be formalized; • Indefinite suspension of the approving process applied in prior MBO of domestic listed companies; • SASAC commented that MBO might cause severe problems over state-owned assets.  Conclusion: Uncertainty of law & suspension of approval process

36. Issue 2: Issues relating to the companies Company B • Company B to set up overseas subsidiary as the vehicle for JV with the Singapore investor to acquire Company C • Issue: Whether Company B has obtained the relevant approvals • Company that invests in overseas entity needs approvals needed from various authorities • If investment exceeds USD 1 million, Company B will need approval from state or provincial level

37. Issue 2: Issues relating to the companies Company C • Company C is JV company, where PRC party holds 51%, on trust for Company D, owned by individuals working in Company A • Issue: 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) • Issue: 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 manner

38. Issue 3: Key issues Approvals • Issue: Whether relevant consents / approvals have been obtained for the investment arrangements • Given the sizes of the companies in question, this should not be a difficulty Asset Transfer • Issue: Whether the transfer of assets from individuals working in Company A to Company C were legitimate • Potential problems: • Illegality, Ulta vires acts by Directors, Potential allegations of breach of fiduciary duty and/or corrupt conduct

39. Issue 3: Key issues Ownership of IP Rights • Issue: Whether IP rights have been transferred to Company C • Under technology development agreement between Company A and university, technology jointly developed are owned by both parties Employees • Issue: Whether there are any restrictions on personnel transfer from Company A to Company C • Management and key technicians from Company A have a 3-year restriction on working for companies similar in nature after ceasing to be employed by Company A

40. Contents • Introduction • Understanding & Negotiating PRC M&A • Recent M&A Developments in PRC • PRC Due Diligence Perspectives • Case Study • Question & Answer

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