Legal Issues in Private Equity and Listings for

"Legal Issues in Private Equity and Listings for Chinese Companies" Mason Ching, LL. M. Principal Mason Ching & Associates 16 October 2008

Speakers’ Profile ¡ Mason Ching is the founder of Mason Ching & Associates. He is qualified to practise in Hong Kong and England & Wales and holds an LLM degree with distinction in technology and investment laws. ¡ His experience is gained in Baker & Mc. Kenzie. His expertise is in venture investment, PRC direct investment, fund establishment, securities, listing, takeovers and other corporate finance matters.

Form of Private Equity Investment ¡ Convertible Loan ¡ Preference Shares l Series A or Series B l Convertible l Redeemable l Voting l Preference ¡ Warrants ¡ Common Shares

Terms of investment ¡ Board seats ¡ Veto rights on certain key actions ¡ Information rights ¡ Profit guarantee and price adjustment ¡ When to convert ¡ Rights of preferred shares

Protective Provisions ¡ Pre-emptive Right / Right of Participation ¡ Right of First Refusal ¡ Co-sale / Tag-along ¡ Drag-along ¡ Anti-dilution ¡ Down-side price protection – Full Ratchets or Weighed Average

Protective Provisions ¡ Non-compete covenants from controlling shareholders ¡ Put back option if IPO does not take place ¡ Confidentiality ¡ Founders’ guarantee ¡ Founders’ provision of security ¡ Founders’ indemnity

Exit - IPO ¡ Vendor sale at the time of IPO ¡ Placing after lock-up ¡ Issue of derivatives: l warrants, exchangeable / convertible bond ¡ Repurchase by issuer ¡ Private Placements / Block Trade

Exit– Aborted IPO ¡ Repurchase by investee company ¡ Put back to founders ¡ Trade sale ¡ Forced trade sale ¡ Reverse takeovers ¡ Liquidation

Hong Kong Regulatory Issues ¡ Listing Decisions l l l Conversion Price “toxic convertibles” Lock-up

Investing into China ¡ Target l l ¡ SOEs Private Enterprise Structure l l Red Chip Direct Investment

Investing into China – H Share potentials ¡ Investment in legal person shares ¡ Valuation ¡ Approval process ¡ Restrictions on disposal of promoters’ shares ¡ PRC Company Law – shares issued by a company prior to the public offering of shares shall not be transferred within one year from the Listing Date ¡ Management buy-outs ¡ Investment in H shares ¡ Discount on IPO Price

Case Studies – Ping An ¡ ¡ ¡ Ping An Insurance (Group) Company of China Ltd. (2005) Goldman Sachs and Morgan Stanley invested in 1994 Dai-Ichi Mutual Life Insurance HSBC Insurance subscribed for 10% equity interest (legal person shares) in 2002 Legal person shares converted into H Shares

Private Enterprises (non-H Share Listing) ¡ Red chip restructuring ¡ Relevant PRC Laws l Notice of the State Administration of Foreign Exchange on the Relevant Issues Concerning Foreign Exchange Administration of Financing and Returning Home Investment by Domestic Residents through Specialpurpose Companies (国家外汇管理局关于境内居民通過境外特殊目的公司融資 及返程投資外匯管理有关问题的通知) issued by The State Administration of Foreign Exchange ("SAFE") on 21 November 2005 l Notice on Relevant Issues in the Registration of the Offshore Investments of Individual Domestic Residents and Foreign Exchange Registration of Mergers and Acquisitions by Foreign Investors (国家外汇 管理局关于境内居民个人境外投资登记及外资并购外汇登记有关问题的通知) issued by SAFE on 21 April 2005 l Notice on Relevant Issues in Perfecting Foreign Exchange Control in Mergers and Acquisitions by Foreign Investors (关于完善外资并购外汇管 理有关问题的通知) issued by SAFE on 24 January 2005

No. 75 Notice ¡ ¡ ¡ “Returning home investment” - direct investment activities carried out inside China by residents inside China through a special purpose company: l to acquire or swap the interest of the Chinese party in an enterprise inside China; l to establish a FIE inside China and acquire control of assets inside China through that FIE; Foreign exchange registration Repatriation and use of funds

Private Enterprises (non-H Share Listing) ¡ Provisions of the Ministry of Commerce, State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, Securities Regulatory Commission of China and the State Administration of Foreign Exchange on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (2006 Revision) l l l Took effect on 8 September 2006 Applies to domestic enterprises only MOC and CSRC approval required for restructuring and oversea listing of a special purpose vehicle Share swap allowed Unwind after 12 months failing listing

Private Enterprises (non-H Share Listing) ¡ ¡ Notice of the General Affairs Department of the State Administration of Foreign Exchange on Printing and Distributing the Operating Rules for the Notice of the State Administration of Foreign Exchange on the Relevant Issues about Foreign Exchange Control over the Financing and Return Investment of Domestic Residents through Overseas Special Purpose Companies (No. 106 [2007] of the General Affairs Department under the State Administration of Foreign Exchange) (国家外汇管理局综合司关于印发《国家外汇管理局关于境 内居民通过境外特殊目的公司融资及返程投资外汇管理有 关问题的通知》操作规程的通知(2007修改) 汇综发 [2007]106号) 2007 -05 -29

Successful Structure for Red-Chip Original Shareholders do not retain control post-IPO ¡ Transfer of Assets ¡ Third party involvement ¡

Case Study – Solargiga Energy Holdings Limited (Stock Code 757) Mr. TAN 100% SEC 75% 25% Jinzhou Xinri (PRC) PLC Huaxin Silicon 74. 1% 25. 83% Jinzhou Huari (PRC) 75% 25% Jinzhou Yangguang (PRC) 70% 30% Jinzhou Huachang (PRC)

Solargiga – After restructuring Mr. TAN 33% WWIC 28. 42% Other Shareholders Mr. CHONG SEC 10. 61% 8. 55% 16. 3% Other Relevant Officers 3. 12% Company (Cayman Islands) 100% TIL (BVI) Solartech (Cayman Islands) 100% BVI Company 100% Jinzhou Xinri (PRC) 100% Jinzhou Huari (PRC) 100% Jinzhou Yangguang (PRC) 100% Jinzhou Huachang (PRC) 100% Jinzhou Youhua (PRC) 100% Shanghai Jingji (PRC)

Case Study – Xingfa Aluminium Holdings Limited (Stock Code 98) Messrs. Luo Su, Luo Riming and Liao Yuqing 100% Xingfa Group 91. 3% Xingfa Innovation 100% Our Company 51% Leahin Coating 100% Xingfa BVI 100% Xingfa SG 100% Xingfa Aluminium Xingfa Curtin Wall

Case Study – JES – Singapore Acquisition of assets, liabilities, operations and business ¡ Processing Agreement ¡ Restricted Cash Account Agreement ¡ Debt Repayment Agreement ¡ Fixed Assets Lease Agreement ¡ Entrusted Loan Agreement ¡

Investing in Restricted Categories ¡ Restricted for Foreign investment l Fixed line l Tobacco l ICP – Internet contents l Mobile contents – mobile phone entertainment l Digital publication – online game

Investing in Restricted Categories ¡ Special Structure l Need to consolidate accounts l Loan agreement l Option agreement l Equity pledge l Undertaking / power of attorney l Technical service / business agreement l Trade name and copyright license

Listing Decision – LD 43 -3 (2005) Company A Outside PRC 100% PRC Subsidiaries Inside PRC Structure Contracts Registered Owners 100% Structure Contracts Owning all intellectual properties OPCO Owning all operating licences to perform the Group’s business

Direct Investment ¡ Direct Investment Vehicle l Foreign-invested Enterprises ¡ l EJV, CJV and WFOE Foreign-invested Joint Stock Companies RMB Fund ¡ Set up a WFOE ¡

Direct Investment ¡ Convertible Loan / Warrants ¡ Preference Shares l Series A or Series B l Convertible l Redeemable l Voting

Direct Investment ¡ Repurchase by issuer ¡ Private Placements / Block Trade - Measures for Administration of Strategic Investment by Foreign Investors in Listed Companies（外国投资者对上市公司战略投 资管理办法） 2006 -02 -01 ¡ Put back to founders ¡ Trade sale ¡ Forced trade sale ¡ Reverse takeovers ¡ Liquidation - Measures for Liquidation of Enterprise with Foreign Investment

RMB Fund ¡ ¡ 对外贸易经济合作部、科学技术部、国家 商行 政管理总局、国家税务总局、外汇管理局令 [2003]年第 2号 （Promulgated by the Ministry of Foreign Trade and Economic Cooperation， Ministry of Science and Technology， State Administration for Industry and Commerce， State Administration of Taxation and State Administration of Foreign Exchange on 30 January 2003 and effective as of 1 March 2003. ）

RMB Fund Regulations ¡ ¡ ¡ ¡ the number of investors shall be more than two and less than 50， and there shall be at least one requisite investor as specified in Article 7； the minimum amount of capital contribution a Non-legal Person Venture Investment Enterprise US$10 million a Corporate Venture Investment Enterprise - US$5 million. having a clear organizational form； having a clear and legitimate investment direction； at least three professional management personnel with experience in venture investment business； and other conditions stipulated by laws and administrative regulations.

RMB Fund Regulation ¡ ¡ ¡ having venture investment as its main line of business； having cumulative capital under its management of not less than US$100 million in the three years before the application， and at least US$ 50 million of which has been used for venture investment. having at least three professional management personnel with not less than three years experience in venture investment business； not have been prohibited by the judicial authorities or other relevant regulatory authorities of their own countries from engaging in venture investment or investment and consultancy business，or subjected to penalty for reasons such as fraud； capital contribution - a Non-legal Person Venture Investment Enterprise – 1%; a Corporate Venture Investment Enterprise - not less than 30%

Set up a WFOE ¡ WFOE as investment vehicle

A Share Market as an Exit Channel Consent of the Commerce Department ¡ Approval of supervisory department ¡ Approval of CSRC ¡ Shanghai stock exchange ¡ Shenzhen SME ¡

Risks of Investing in China ¡ ¡ ¡ ¡ Regulatory risks Political risks Credit risks Weak in law enforcement Aggressive creditors Loose control over special structure Entrepreneurs’ Integrity Risks associated with intermediaries

- Thank You - Mason Ching Tel: 2973 6838 Fax: 2973 6608 email: mason@masonching. com