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



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





«       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







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



Prices and Schedules

Representations and Warranties

Default Remedies and Indemnification

Dispute Resolution



Condition of Assets

Quantity and Quality Assurance / Inspection



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



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”.