Part One
General Process of M & A
General Procedure of Acquisition
P Information Disclosure
P Preliminary Research
P Project Evaluation
P Due Diligence
P Asset Appraisal
P Acquisition Agreement
Some Key Questions
Choice of Target Companies
State-owned company
Approval by State-owned Assets Supervision and Administration Commission assets / equity verification
Private company
Foreign-invested company
Listed company
Choice of Investing Vehicles
Offshore company (Cayman Island
* taxation
* confidentiality
Hong Kong company
* taxation
* CEPA
Special purpose vehicle
Approval Processes
National Development and Reform Commission Project
State-owned Assets Supervision and Administration Commission purchase of state-owned assets or equity
Ministry of Commerce
* establishment and alteration of foreign-invested enterprises
Administration for Industry and Commerce
* registration
Part Two
Amendments and Updates of Laws and Rules
Revision of the provisions on the merger and acquisition of domestic enterprises by foreign investors, effective as of Sep. 8, 2006
New vehicle: share swaps
Domestic trade protection
Limitation on domestic companies’ listing abroad and round-trip investment
New Corporate Income Taxation Law, effective as of Jan. 1, 2008
Unification of tax rates
Orientation of tax incentives
Development Policy of Paper Industry
by National Development and Reform Commission on Oct.15, 2007
1. Targets of policy
2. Industry structure
3. Fibre Raw Materials
4. Technology and equipment
5. Products structure
6. Organization structure
7. Resoureces saving
8. Environment protection
9. Entry to the industry
10. Investment and financing
11. Consumption of paper products
New Challenges
1. Limitation of off-shore vehicles
2. Requirement for the entry to the industry
3. New record of CPI
4. RMB value increase
5. Policy orientation by the government
Part Three
Legal Due Diligence
the Importance of Due Diligence
evaluating the reliability of the target company
determining the scheme of the transaction
ensuring the assignment of the target rights & interests
drafting and structuring acquisition agreement
Concept of Legal Due Diligence
Ø investigation on the legal status of the target company
Ø Evaluation of the existent and potential legal risks in the acquisition
Ø Comment and Suggestion on the feasibility of the transaction
Procedure of Legal Due Diligence
P confidential agreement
P questionnaires
P interview with the relevant persons of the target company
P investigation in governing authorities examination of the documents, materials and information collected in the interview and investigation
P futher interview and investigation (if necessary)
P due diligence report
Contents of Legal Due Diligence
« Basic Information
« History Evolution
« Ownership and Organization
« Personnel Operations (licences, approvals)
« Finance
Contents of Legal Due Diligence
« Assets
« Contractual Obligations
« Legal Proceedings
Focus
« Land and Building
« IP Rights
« Licenses and Approval
« Long=term Contracts
Can we do too much due diligence?
« more due diligence, more security
« flexible methods in accordance with the current situation and environment of Chinese market when facing legal risks
Part Four
Negotiations and Acquisition Agreement
Deal Option
Equity Purchase or Asset Purchase?
Equity or Asset
Equity purchase is generally the simplest and quickest method to complete, and it will help the company to retain some special license or qualification.
In an asset acquisition, the acquirer may acquire select assets and liabilities of the target. There, consequently, is an opportunity to carve out unwanted assets and liabilities, and avoid some legal risks.
Legal Form Option
WFOF or JV?
WFOE or JV
In a WFOE, the foreign investor will have its exclusive decision-making power.
If case of JV, the domestic investor’s commercial resources in the local area may help the development of the company.
Please note: any restriction for WFOE?
Main Terms and Conditions
Prerequisite
Prices and Schedules
Representations and Warranties
Default Remedies and Indemnification
Dispute Resolution
Assets:
Condition of Assets
Quantity and Quality Assurance / Inspection
Equity:
Base Day
Right of First Refusal of other Shareholders
Part Five
Case Analysis
Case Summary
In 2004, we were retained to provide our whole-procedure legal service to a foreign company in its acquisition of a paper mill in North China .
The Target company is a leading company in Chinese market. The total amount of investment involved in this case exceeds USD 20,000,000.
The services we have rendered in this case included:
Legal due diligence, design of the transaction scheme, coordination and negotiation, and preparation for legal documents.
Case Analysis
Background of the Target Company
- private company
- advanced technology and facilities
- actually controlled by a “group company”
Case Analysis
the work we did during the investigation
- issued questionnaires to the management of the Target and the management of the “Group Company”;
- conducted the interviews with the officials of the Target and the “Group Company”;
Case Analysis
The work we did during the investigation
- conducted the investigation in the local governing authorities, including the Administration for Industry and Commerce, Environment Protection Bureau, Labor and Social Security Bureau, Land Resources Bureau, the House Property Bureau and other related authorities.
Case Analysis
The problems we focused on
A. the Connection between the Target and the “Group Company”
I. Most of the target’s shareholders are also the shareholders of the “Group Company”; all the target’s directors are directors of the “Group Company”
II. when Establishing the target, its shareholders, to fulfill the contribution, have taken the assets which should legally belong to the “Group Company”;
Case Analysis
III. The ownership of the land used by the target is owned by the target while the buildings was built by the “Group Company”
IV. The production equipment of the Target are purchased by the “Group Company” and provided to the Target;
V. The raw materials used by the Target is imported by the “Group Company”;
Case Analysis
VI. Part of the electric power used by the target is supplied by the electricity company controlled by the “Group Company”;
VII. The Target is using the trademark belonging to the “Group Company”’
IX. Both parties have no written documents evidencing that the Target has owed a huge amount of debt to the “Group Company”
Case Analysis
X. There is a mixture of the assets, funds and expenses between the “Group Company” and the Target.
Case Analysis
the problems we focused on
B. the Confirmation of the Target’s Property
a. Land
b. Buildings
c. Material equipments
Case Analysis
The problems we focused on
C. Environment Protection
The Target does get underground water in its production while not obtaining the Permit for Taking Groundwater.
Case Analysis
The problems we focused on
D. Labor and Social Security
a. The Target has not paid social security fee complying with the laws and regulations of the state.
b. The employees of the target sould be lawfully settled, and the labor relationship with some key persons of the Target shall be well kept.
Case Analysis
Solution:
P Set up a WFOE in
P Purchase the assets of the Target;
P Enter into non-competition agreement and long-term supply agreement with the “Group Company”.
