© 2005 Morrison & Foerster LLP All Rights Reserved

M&A in ChinaCurrent Issues and Practice

Charles ComeyManaging PartnerMorrison Foerster (Shanghai)

March 28, 2005

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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

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Traditional Foreign Investment Models

• Joint ventures and wholly foreign-owned enterprises• Principally greenfield investment• Inflexibility• Few M&A opportunities until now• Factors driving evolution

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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”)

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M&A RegulationsProvisional 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

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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

New M&A Regulations (cont’d.)

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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

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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

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• Filing required if: The China market share of any party has reached 20%, or will

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 than 15 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).

New Antitrust/Merger Control (cont’d.)

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• Restructure into FIE• Employee issues• Payment issues

Other Acquisitions by Foreign Investors

A. Acquisition of assets owned by non-listed State-owned Enterprises (SOE), shares in SOEs and SOE creditor rights

B. Acquisition of A shares in Chinese listed companies (QFII Rules)

C. Acquisition of equity in existing FIEs

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• 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

D. Acquisition of non-tradable shares in Chinese listed companies

Other Acquisitions (cont’d.)

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General Guidelines

• Catalogue Guiding Foreign Investment in Industry• Multiple approvals

• Encouraged• Permitted • Restricted • Prohibited

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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

Domestic Investor A

Domestic Investor B

Nokia

JV 1

Offshore

Onshore

JV 2

(1) Merger intoJoint Stock

Company

(2) Convert

into

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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

Shareholders Lucky Film Group

Kodak

Lucky Film

Offshore

Onshore

A Shares LF State-owned Legal Person Shares

LF State-owned Legal Person Shares

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