Successful Takeovers, Mergers & Acquisition in the Chinese Pulp and Paper industry

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, BVI…)


* 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 China;


P         Purchase the assets of the Target;


P         Enter into non-competition agreement and long-term supply agreement with the “Group Company”.

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