2011 was full to the brim with news. Japan was hit by an earthquake. Arabs revolted. Bin Laden, Gaddafi, Jobs and Kim died. The euro teetered on the brink of collapse … China’s 2011 was quite calm, but its year in law and commerce was not silent. We now reveal the most significant deals of the year. By Robin Weir and Richard Li
Amid global turmoil, China kept calm and carried on. But its year in law and commerce was not uneventful.
Abroad, listed Chinese companies came under scrutiny for accounting irregularities and other alleged fraud. Many had listed by the back door, by means of so-called reverse merger – an arrangement in which overseas financial authorities were clearly complicit. Allegations surfaced, the political wind changed, and those same authorities took a hard line against arrangements they themselves had permitted. Fed up and missing home, Chinese companies began to delist, providing a new work stream for international law firms.
At home China built new defences against foreign acquisitions, which became subject to a national security review. The variable interest entity – a structure frequently used by foreign investors to invest in restricted sectors – attracted official attention and its future was cast into doubt. The antitrust regime evolved and grew teeth, now equally sharp for Chinese and international companies. Again applicable to all companies, the PRC Social Insurance Law took effect, establishing a national framework for pensions and benefits.
But perhaps the biggest story of the year has been neither inbound nor domestic, but outbound. Chinese companies have made acquisitions on all continents, in a panoply of sectors. And the renminbi has determinedly embarked on the path towards internationalization. RMB-denominated dim sum bonds have kept lawyers in Hong Kong busy, and kept the coffers of international companies full. Chinese banks, too, have lent increasing sums internationally, using international-standard loan documentation.
Against this background, the team at China Business Law Journal presents here our deals of the year. The winning deals have, as last year, been chosen subjectively based on submissions received from law firms and in light of our coverage of China business law in the past 12 months. We have evaluated the significance of shortlisted submissions based not merely on deal size but on uniqueness, complexity and broader interest.
We look forward to continuing to serve you in 2012 and beyond.
M&A (Inbound & Domestic)
White & Case acted as international deal counsel to Nestle on its US$1.7 billion acquisition of a 60% stake in Hsu Fu Chi, a Singapore-listed maker of confectionery and cakes with its roots in Taiwan but the lion’s share of its business in the PRC.
The deal, which was completed in mid-December, gives Nestle control of the second-biggest confectionery company in China, after Mars. It is also the first deal of this size in the food and beverage sector to be approved by the Ministry of Commerce in its capacity as antitrust regulator under the PRC Anti-Monopoly Law since the rejection of Coca-Cola’s bid to buy Huiyuan Juice.
The deal was the first Cayman law-governed scheme of arrangement to be implemented by a company listed on the Singapore stock exchange. According to White & Case, it involved several complex layers of law: Cayman law for the scheme; Singapore law relating to the takeover; Hong Kong law for a related joint venture agreement between Nestle and the founding Hsu family; Singapore law for the implementation agreement; and PRC law for the PRC elements of the transaction.
Maples and Calder acted as Cayman law counsel to Nestle. Reed Smith Richards Butler acted as international counsel to the Hsu family. Loo and Partners advised Hsu Fu Chi on Singapore law, and Conyers Dill & Pearman advised the company on Cayman Islands law.
In a deal approved by the restructuring committee of the China Securities Regulatory Commission (CSRC) at the end of September, Shanghai Media Group (SMG) acquired SVA Information Industry Company. This complex deal in the new media sector involved a number of stages. First, SMG acquired 36.6% of the shares in SVA for just under RMB2 billion, becoming by far the largest shareholder and thus acquiring effective control of the listed company. SVA then divested of certain assets and businesses, valued at just under RMB3.1 billion, to affiliates and non-related companies. Finally, SMG and nine other shareholders in BesTV New Media, a newly established new media company, subscribed for new shares in SVA in return for their shares in BesTV, other new media businesses and assets and RMB1.2 billion in cash.
The deal achieved the separation of production and broadcasting, as required by the State Administration of Radio Film and Television. Llinks Law Offices helped SMG to design and implement the restructuring, and drafted the necessary documentation. Grandall Law Firm advised SVA. Negotiations between the two parties were described as “difficult”.
The end of September saw the merger of two car dealers, Beijing Huitong Luhua and Hainan Jiahua Group. The merger involved the formation of a new company with annual revenues of over RMB10 billion, profits of over RMB1 billion, and plans for an IPO. By using mostly share capital to realize the merger, rather than cash, approximately US$5 million of tax was saved under the State Administration of Taxation’s circular 59.
According to Dacheng Law Offices, which represented Huitong Luhua, negotiations leading up to the deal were complex in a number of respects. First, an investment agreement between Goldstone – a subsidiary of CITIC – and Jiahua gave Goldstone a range of protections which were unacceptable to Huitong Luhua, necessitating its renegotiation. Second, corporate governance issues emerged due to Jiahua’s group structure and disagreements among seven of its major shareholders. These were overcome by dividing decision making power over different matters between the general manager, the board of directors and the shareholders. Haiwen & Partners acted for Jiahua.
Titan Petrochemicals Group, a Hong Kong-listed oil logistics and marine service provider, entered into a strategic alliance with Grand China Logistics in June. This involved the transfer of 95% of the shares in Titan Quanzhou Shipyard, a subsidiary of Titan, to Grand China, and the subscription by Grand China to 500 million newly issued shares in Titan. The total amount involved was RMB2 billion.
Watson & Band, which acted for Titan, reports that the transaction required input from several government departments, including the Ministry of Commerce, the State Administration for Industry & Commerce and the State Administration of Foreign Exchange, as well as approval from the Hong Kong stock exchange. This, and the close links between the two transactions, shaped the content and timing of the deal.
Cleary Gottlieb Steen & Hamilton acted for Grand China Logistics.
GlaxoSmithKline, a UK-based pharmaceutical group, acquired Nanjing MeiRui Pharmaceutical in January. Nanjing MeiRui has a portfolio of urology and allergy products. The transaction was the first in recent years in which a top international pharmaceutical company has acquired 100% of a PRC prescription drug manufacturer.
Sidley Austin acted as counsel to GlaxoSmithKline on US and Hong Kong law. King & Wood acted as the seller’s counsel.
In April, Motorola sold its worldwide networks business to Nokia Siemens Networks for US$975 million in cash. Paul Weiss Rifkind Wharton & Garrison acted for Motorola in respect of the sale in Hong Kong and mainland China.
The deal involved complex structuring globally, especially in China. It also required numerous regulatory approvals, including PRC anti-monopoly clearance. The transaction was one of few anti-monopoly review cases in China that have entered into third phase review and received unconditional approval.
Baker & McKenzie and Winston & Strawn advised Motorola. Skadden Arps Slate Meagher & Flom advised Nokia Siemens Networks
Cuatrecasas Goncalves Pereira acted as legal adviser to Motorola.
Skadden Arps Slate Meagher & Flom and Norwegian law firm Selmer advised China National Bluestar on its US$2 billion acquisition of Elkem from Orkla in April. Elkem is a Norwegian company whose main products are silicon, solar grade silicon, special alloys for the foundry industry, carbon and microsilica.
This was Bluestar’s largest overseas acquisition to date, and the first deal that prompted the European Union antitrust authorities to examine the acquisition of assets by a Chinese state-owned enterprise (SOE). Skadden says it was instrumental in educating the EU Commission about the factual intricacies of, and interrelationships among, Chinese SOEs. The deal was cleared without restriction.
Norwegian law firms Thommessen and Wiersholm Mellbye & Bech represented Orkla.
In August, Industrial and Commercial Bank of China (ICBC) agreed to acquire 80% of each of three companies which comprise the bulk of Standard Bank’s business in Argentina, at an estimated cost of US$600 million.
The deal follows ICBC’s US$5.5 billion acquisition of a 20% stake in Standard Bank Group, a South African bank, in 2007. It is only the third major Chinese acquisition in Argentina, and the first Chinese acquisition of a financial institution in that country. ICBC will be the first Chinese bank to operate a full-service retail bank with branches across Argentina. It is also the first time for ICBC to acquire a mainstream retail bank that operates in an entirely Western environment.
Linklaters acted for the purchaser, ICBC, with Hope Duggan & Silva as ICBC’s Argentine counsel. Jones Day Reavis & Pogue acted as international counsel to Standard Bank, with Bruchou Fernandez Madero & Lombardi as the bank’s Argentine counsel.
In October, Chinese white goods manufacturer Haier signed an agreement to acquire certain of Sanyo’s washing machine, consumer refrigerator and white goods sales businesses in Japan and four countries in Southeast Asia. In total, Haier will acquire two research and development centres, four factories and six sales companies. Haier will also be granted rights to sell certain goods, including washing machines, refrigerators and televisions, in Vietnam, Indonesia, the Philippines and Malaysia under the Sanyo brand for a fixed time period.
This is the first acquisition of a well-known Japanese brand by a Chinese company. As part of the deal, Sanyo transferred more than 1,200 patents to Haier, making this one of the largest transfers of intellectual property in Asia to date.
White & Case acted as international deal counsel to Haier. Haier’s local counsel were Melli Darsa & Co in Indonesia; Romulo Mabanta Buenaventura Sayoc & De Los Angeles in the Philippines; Vilaf in Vietnam, Weerawong Chinnavat & Pengpanor in Thailand and Zaid Ibrahim in Malaysia. Mori Hamada Matsumoto acted for Sanyo.
China National Agrochemical Corporation (CNAC) acquired 60% of Makhteshim Agan Industries (MAI), an Israeli company, in October. MAI consequently delisted from the Tel Aviv stock exchange. MAI is the world’s largest generic agrochemical company. This is the largest transaction concluded between a Chinese and an Israeli company to date.
CNAC was advised by GKH Law Offices, Simpson Thacher & Bartlett and Zhong Lun W&D Law Firm. MAI was advised by Kirkland & Ellis, Goldfarb Seligman & Co and Herzog Fox and Neeman.
Baker & McKenzie advised a consortium of Chinese companies, comprising CITIC, Anshan Iron & Steel, Baosteel, Shougang and Taiyuan Iron & Steel, on the consortium’s acquisition of a 15% stake in Companhia Brasileira de Metalurgia e Mineração (CBMM).
CBMM is a world leader in the development and commercialization of niobium products. Niobium is used mainly as an alloying element in the manufacture of steel, increasing strength and toughness. CBMM owns the rights to the largest and highest grade identified niobium reserves in the world.
Citic Dicastal Wheel Manufacturing bought German car-part supplier KSM Castings Gruppe from Cognetas, a private equity firm, in October. KSM makes components for automotive engines and transmissions, and is a supplier to Volkswagen and Daimler. This was the Chinese company’s first acquisition outside its home market. KSM will operate as an independent business unit within Citic, led by its current management.
Cognetas was advised by White & Case. Fangda, Hengeler Mueller and Slaughter and May advised Citic.
Fangzheng Securities is one of the few large securities dealers in the PRC, and this transaction was the first IPO in the PRC of a risk securities dealer accomplished after restructuring. Jincheng Tongda & Neal served as the issuer’s legal adviser in the deal.
Fangzheng Securities was established after the merger of two companies. However, in their pasts, the two companies had experienced material risks in the form of the diversion of customers’ securities trading clearance funds, manipulation of stock trading prices, etc., saddling Fangzheng Securities with problems left over from the past. In terms of equity, Fangzheng Securities was characterized by such past irregularities as incomplete equity transfers and holding of equity by unqualified entities. In terms of the management of state-owned assets, Fangzheng Securities was characterized by such past problems as failures to audit and appraise state-owned equity that was the subject of transfers and failures to secure the approval of the state-owned asset supervision and administration authorities.
Jincheng Tongda & Neal assisted Fangzheng Securities in completing more than 10 equity transfers before the shareholding reform, thereby resolving the irregularities in equity holding and paid visits to such state-owned asset supervision and administration authorities as the Ministry of Finance and the State-Owned Assets Supervision and Administration Commission of the State Council, to assist Fangzheng Securities in clearing up the changes in state-owned assets, thereby sweeping away the barriers to its IPO and listing.
In April, Huaxia Bank completed a placement of PRC listed common renminbi shares (A shares) with particular targets. The particular targets were the head office of Shougang, Yingda International Holdings Group and Deutsche Bank Luxembourg, and the proceeds from the placement totalled approximately RMB20 billion.
Concord & Partners served as the issuer’s legal adviser. Through the private placement, Huaxia Bank became, among listed banks, a wholly Chinese-owned commercial bank, representative of those among which a foreign-funded financial institution holds the maximum equity allowable in a wholly Chinese-owned financial institution by law (19.9%).
During the course of the private placement, the China Banking Regulatory Commission formulated and issued the Strengthening the Review of the Qualifications of the Major Shareholders of Small and Medium Commercial Banks Notice (Yin Jian Ban Fa  No. 115), setting forth new requirements in respect of the review of the major shareholders of small and medium commercial banks. As there were no precedents to go by and the regulator did not have clear guiding opinions, the Chinese and foreign placement targets held opposing views on relevant provisions of document No. 115, jeopardizing the private placement as already decided by the parties. Ultimately, Deutsche Bank Luxembourg and the other two subscribers arrived at an understanding and accepted the new requirements in respect of the qualifications of shareholders contained in document No. 115 and completed the work associated with the private placement.
Sinohydro Group is one of the largest and most influential water conservancy and hydropower construction enterprises in both the PRC and the world.
The company’s IPO plan secured the approval of the China Securities Regulatory Commission on 29 July. Sinohydro Group was listed on the Shanghai Stock Exchange on 28 October, offering a total of 3 billion A shares and securing total proceeds of RMB13.5 billion. Jiayuan Law Firm served as the issuer’s legal adviser in the listing.
As a long-standing large state-owned enterprise, a large number of hospitals, schools, training centres, kindergartens, guest houses and other such non-operating assets belonged to subsidiaries of Sinohydro Group. Jiayuan Law Firm assisted in filtering out non-operating assets unsuitable for inclusion within the scope of the listing, and ousted them from the scope of the listing through such means as spinoffs.
Jiayuan Law Firm also arranged for debts, such as corporate bonds, medium term notes and short-term financing bills, to be transferred through restructuring agreements. In terms of foreign debts, Jiayuan Law Firm assisted in securing letters of consent from PRC on-lending banks agreeing to the change in the borrower and executing debt transfer agreements with relevant parties.
Furthermore, during the Wenchuan earthquake in 2008, the company’s assets and projects located in Sichuan suffered serious losses. Jiayuan Law Firm provided legal support in respect of the plan for the disposal of the assets lost in the earthquake.
Technovator’s spinoff from its PRC-listed parent company was the first overseas spinoff of an A-share listed company. The subsequent US$17 million listing of the company’s foreign-incorporated subsidiary on the Hong Kong stock exchange (HKEx) in October necessitated a novel application of the rules of the China Securities Regulatory Commission. As Technovator is affiliated with Tsinghua University, the listing also required the approval of the PRC Ministry of Education.
According to Orrick Herrington & Sutcliffe, which advised the issuer on Hong Kong law, the deal may set a precedent for other A-share companies to raise foreign capital in Hong Kong, potentially funding cross-border acquisitions and other international business operations.
Jingtian & Gongcheng advised the issuer on PRC law. TSMP Law Corporation, BCF and Bignon Lebray advised the issuer on Singapore, Canadian and French law, respectively. K&L Gates advised the sponsor and underwriter on Hong Kong law.
Hui Xian real estate investment trust (REIT) was the first renminbi-denominated REIT to be listed on the Hong Kong stock exchange, and the first renminbi-denominated equity listing outside mainland China. The RMB10.5 billion listing in April was a significant step towards the internationalization of the renminbi and the development of offshore renminbi financing. It was also the first REIT transaction involving an offshore holding company with an interest in a PRC cooperative joint venture with a limited term of life.
The listing comprised a Hong Kong public offer of around 20% of the total units offered, and a concurrent offer of the remaining 80% to institutional and professional investors.
Linklaters advised the joint bookrunners and devised the distribution and settlement mechanisms to ensure that the offshore renminbi subscription would work. The firm worked with HKEx and the Hong Kong Securities and Futures Commission to devise a new system and set of rules to allow the offering and trading of the units in renminbi.
Maples and Calder and Commerce & Finance Law Offices acted for Hui Xian Asset Management. Woo Kwan Lee & Lo advised Hui Xian REIT on Hong Kong law. Baker & McKenzie acted for the trustee of the REIT. Wilkinson & Grist advised Hui Xian Cayman on Hong Kong law. Guantao Law Firm advised the lead underwriter and bookrunner as to Chinese law.
The US$757 million listing of Far East Horizon at the end of March was the first listing of a financial leasing company on the Hong Kong stock exchange. It was also the first red-chip listing in Hong Kong approved by the China Securities Regulatory Commission since 2009.
Far East Horizon is a unit of Sinochem. According to Paul Hastings, which acted as Hong Kong counsel to the issuer, it is rare for a state-owned Chinese company to list in Hong Kong through a Hong Kong-incorporated entity. Gaining CSRC approval was therefore “tricky”.
Orrick Herrington & Sutcliffe acted as Hong Kong and US counsel to China Hongqiao Group, a manufacturer of aluminium products, on its US$822 million listing on the Hong Kong stock exchange in March by way of a Rule 144A/Reg S global offering. Four cornerstone investors participated in the international tranche of the global offering for a total investment of US$350 million.
Environmental issues featured heavily in the pre-IPO preparations. According to Orrick Herrington & Sutcliffe, the issuer and its advisers were required to make in-depth submissions to the Hong Kong regulators to allay concerns about their environmental record.
Some adverse events occurred during the international road show, including the revolution in Egypt and the earthquake tsunami and nuclear emergency in Japan. In order to counter the uncertain market sentiment that resulted, the offer structure was modified.
Zong Heng Law Firm and Conyers Dill & Pearman acted as PRC and Cayman counsel to the issuer, respectively. Clifford Chance acted as Hong Kong and US counsel to the underwriter; Jingtian & Gongcheng was the underwriter’s PRC counsel.
The investigation of fraud allegations at Sino-Forest Corporation, a Canadian company listed on the Toronto Stock Exchange, does not obviously belong in the take private category of our deals of the year. But this was the “deal” which sparked grave concern in world markets about accounting fraud in Chinese companies listed overseas. Chinese companies – particularly companies which had listed by reverse merger, or “back door” listing – found themselves at the centre of regulatory attention in the US and other countries. Share prices plummeted. In the face of unwelcome regulatory and market attention, some have already chosen to delist – hence this new deals of the year category.
Sino-Forest owns and manages forests in China, sells timber, and manufactures wood products. At the beginning of June, self-confessed short-seller Muddy Waters Research published allegations of accounting and other fraud at the company. The allegations centred on the way Sino-Forest valued its timber holdings, its relationships with suppliers and customers, and its accounting practices.
Before publication of the allegations, Sino-Forest’s market capitalization was C$4.8 billion (US$4.7 billion). By the time trading in its shares was suspended on 25 August, this had dropped to C$1.2 billion, having traded even lower in the interim. Several class action lawsuits have been launched in Canada against the company, its directors and auditors.
Mallesons Stephen Jaques acted for the independent committee of the board of directors of Sino-Forest investigating the allegations. According to the firm, perhaps the biggest challenge of the investigation was “reconciling the demands of a North American public company regulatory system with the business practices of a company operating in the Chinese forestry industry and managed largely by Hong Kong and mainland Chinese businessmen”, particularly given that Sino-Forest’s business partners are mostly privately owned companies in trading, resources and real estate sectors “where personal relationships and opportunistic business practices are the norm, and which are wary of publicity and outside scrutiny”.
Osler Hoskin & Harcourt acted as Canadian counsel to the independent committee of the board of directors, liaising with Canadian regulatory bodies. Mallesons Stephen Jaques acted as Hong Kong counsel to the committee, conducting due diligence on Sino-Forest and liaising with Hong Kong regulatory authorities. Jun He Law Offices acted as Chinese counsel to the committee, while Bennett Jones represented Sino-Forest in connection with securities investigations and gobal class proceedings.
This was the first completed going-private transaction involving a Chinese company incorporated in the US. The process took less than eight months from start to finish in September, despite an investigation by the Securities and Exchange Commission into the accounting standards of Chinese listed companies; related stockholder litigation; and the unexpected resignation of the special committee’s financial adviser and the absence of a fairness opinion at the time of signing. The main role of the special committee is to determine whether the transaction is fair, and whether it should be recommended to shareholders.
The merger agreement was amended and restated after the special committee engaged a new financial adviser who issued the fairness opinion. Shearman & Sterling acted as legal adviser to the special committee.
Formerly Nasdaq-listed Funtalk is a retailer and distributor of wireless communication devices and accessories across China, operating distribution centres, retail stores and an internet retail platform. The take-private transaction involved the acquisition of the company by a consortium, and concurrent investment by PAG Asia Capital. It was completed in August and is believed to have been the quickest of all the take-private transactions involving Chinese companies listed in the US.
Latham & Watkins acted as US counsel to the target. Cleary Gottlieb Steen & Hamilton and Conyers Dill & Pearman acted as the acquirer’s US and Cayman counsel, respectively. Skadden Arps Slate Meagher & Flom acted as US counsel to the independent committee. Han Kun Law Offices acted as PRC counsel to the founders and management of the target.
The delisting from the New York Stock Exchange of Tongjitang Chinese Medical Company, and its acquisition by Tonsun International, closed in April and was the first take-private transaction to be effected under the new Cayman Islands merger statute which came into force that month. Tonsun is a Cayman Islands exempted company controlled by Hanmax Investment and Fosun Industrial.
Tongjitang is a pharmaceutical company specializing in the manufacture and sale of modernized traditional Chinese medicine. Ashurst and Baker & McKenzie acted as Hong Kong and US counsel to the acquirer. The lender financing the acquisition and delisting was CITIC Bank International. Hogan Lovells acted as Hong Kong and New York counsel to the lender, and Walkers acted as the lender’s Cayman Islands counsel.
Harbin Electric was a US-listed, China-based manufacturer of electric motors. The year-long, US$750 million take-private closed on 1 November and was led by the company’s chairman and chief executive Yang Tianfu, who achieved it by means of a leveraged buyout. This was the largest successful take-private of an overseas-listed Chinese company to date, and was subject to intense public scrutiny throughout the process.
The transaction closed amid allegations of wrongdoing, and speculation by research analysts who were short-selling the company’s stock over the credibility of US$400 million of financing procured from China Development Bank. Skadden Arps Slate Meagher & Flom advised Yang in successfully addressing the concerns of shareholders, the special committee and the Securities and Exchange Commission with respect to numerous allegations against the company.
White & Case represented China Development Bank, with Walkers acting as the bank’s Cayman counsel.
Chemspec is a China-based manufacturer of speciality chemicals. In August it was acquired by a company indirectly owned by its chairman, other members of management and Primavera Capital. Upon acquisition, it delisted its American depositary shares from the New York Stock Exchange. The transaction involved a cash payment to shareholders of approximately US$125 million.
Shearman & Sterling acted as adviser to Chemspec’s independent committee. Maples and Calder and Simpson Thacher & Bartlett acted as legal advisers to Chemspec. O’Melveny & Myers advised Chemspec’s financial adviser. Latham & Watkins and Skadden Arps Slate Meagher & Flom acted as legal advisers to the acquirer.
Banking & Finance
Norton Rose, Haiwen & Partners and Stikeman Elliott advised a syndicate of 20 banks on a US$5 billion term loan facility to Sinopec for the refinancing of bridge loans raised for Sinopec’s acquisition of an interest in Syncrude Canada. The deal closed in April.
In July and August, Air China purchased two new Boeing 777-300ER aircraft, financed by loans from Toronto Dominion Bank which were guaranteed by US Export-Import Bank. This was the first US Ex-Im Bank financing transaction in China for more than a decade. It was also the first transaction in which a PRC airline was able to finance an aircraft without a guarantee from a Chinese bank or a sovereign undertaking from the Chinese government.
Baker & McKenzie and Run Ming Law Office acted for Air China. Vedder Price and King & Wood acted for US Export-Import Bank. Clifford Chance represented Toronto Dominion Bank.
The same firms were also involved in the purchase of another Boeing 777-300ER in November. This later transaction was financed by US Ex-Im Bank through the issue of a US dollar guaranteed bond by a Delaware trust entity – another first. Baker & McKenzie and Run Ming Law Office again acted for Air China, while Vedder Price and King & Wood again acted for US Export-Import Bank. Clifford Chance represented BNP Paribas.
In May, Lantai Partners assisted a leading trust company to finance a property development project in Guangdong. The developer used the trust’s funds to acquire a completed housing development and, employing a model more typically used in a mature property market overseas, upgraded the facilities and management of the project to that of a high-end development. Lantai designed an “equity plus loan investment” structure for the project, in which the trust company both purchased shares in, and lent money to, the developer.
In August, the Ministry of Finance issued RMB20 billion of sovereign bonds in Hong Kong – by far the largest offshore RMB bond transaction to date. The issue comprised a retail offering of RMB5 billion of the bonds, and an institutional offering in four tranches: RMB6 billion of three-year bonds, RMB5 billion of five-year bonds, RMB3 billion of seven-year bonds and RMB1 billion of 10-year bonds.
Linklaters advised the ministry to adopt an innovative offering structure which involved the issue of offer documents by licensed broker-dealers in Hong Kong. This enabled the ministry to undertake the retail offering in Hong Kong without approval from the Securities and Futures Commission.
The institutional tranches were auctioned through the Central Moneymarkets Unit (CMU) bid service. CMU is a central clearing and settlement system for debt securities. The ministry was the first non-Hong Kong government entity to utilize this bidding platform.
Linklaters also designed an innovative offering structure which combined public announcements and standalone offer documents. This enabled the retail offering to commence immediately after the tender of the institutional tranches, avoiding any delay for printing time and allowing the retail offering more closely to reflect the pricing of the institutional tranches.
In November, Linklaters advised ICBC (Asia) on an innovative offshore RMB capital issue for onshore investments.
This 10-year RMB1.5 billion dated subordinated bond issue was the first Basel III-compliant regulatory capital issue to come out of Asia. It was also the first regulatory capital issue in the offshore RMB market.
The issue was undertaken before the Hong Kong regulations implementing Basel III were promulgated. Linklaters reports that an issue arose over the definition of “non-viability event”. As previous European issues had dealt with this definition differently, there was no precedent to follow. Thus a new set of definitions was developed, tracking the Basel III guidance while also accommodating the requirements of the local regulator.
China SCE Property’s high-yield issue closed in January 2011, at a time when government policy was directed towards suppressing both inflation and the remittance of RMB funds.
The company’s subsidiaries did not need to provide any subsidiary guarantees or JV subsidiary guarantees. These subsidiaries also enjoy certain agreed exclusions from the limitations on incurrence of additional indebtedness. The deal is therefore set apart from other recent synthetic issuances by Chinese property developers.
According to Paul Hastings, since the issuer is a real estate developer and there was a real risk that it may not be able to bring RMB onshore, it advised the issuer not to do a dim sum bond.
Paul Hastings acted as counsel to the issuer, with Jingtian & Gongcheng acting as PRC counsel and Maples and Calder as Cayman counsel. Davis Polk & Wardwell acted as counsel to the initial issuer, and Jun He Law Offices acted as PRC counsel to the initial purchasers.
In July, Hong Kong-listed Intime Department Store, one of China’s largest department store operators, completed a RMB1 billion dim sum bond issue. It was the first high-yield dim sum bond offering in Hong Kong, and Intime’s first. The company stated it would use the proceeds to fund nationwide expansion.
Orrick Herrington & Sutcliffe advised Intime, with Maples and Calder advising the company on Cayman and British Virgin Islands law and Rodyk & Davidson advising on Singapore law. Linklaters acted as counsel to the joint lead managers, with Commerce and Finance Law Office advising them on PRC law. Mayer Brown JSM acted as counsel to the trustee.
In February 2011, China Petroleum & Chemical Corporation (Sinopec) issued RMB23 billion of convertible bonds, which can be converted into stocks on the A-share market.
Guantao Law Firm, which acted as counsel to the underwriters, reports that PRC law in respect of convertible bonds remains somewhat unclear, with few precedents. Lawyers were therefore called upon to advise creatively and continually throughout the process. Haiwen & Partners acted as legal adviser to the issuer.
Private Equity & Venture Capital
Morgan Stanley Private Equity Asia made private investment in public equity (PIPE) investments in two US-listed Chinese companies that, along with other similar companies, had been subject to allegations of fraud and attacked by short sellers (see Take Private).
China XD Plastics develops and manufactures modified plastics, primarily for the automotive sector. Morgan Stanley’s US$100 million investment in the company was made in September. Yongye International is an agricultural nutrient company. Morgan Stanley’s US$50 million investment in Yongye was announced in May.
Paul Weiss Rifkind Wharton & Garrison acted as lead counsel to Morgan Stanley on both deals. According to Paul Weiss, both investments were highly structured to address due diligence issues, downside protection, valuation adjustments and various rights of existing investors. DLA Piper acted as counsel to China XD Plastics. Loeb & Loeb acted as counsel to Yongye.
Goldman Sachs acquired AXA’s stake in Taikang Life, the fourth largest life insurance company in the PRC, in March for US$940 million. The deal, which was one of the largest private equity deals in China in 2011, required the resolution of some complex regulatory issues.
Fangda Partners and Sullivan & Cromwell acted for Goldman Sachs. Baker & McKenzie acted for AXA.
Kirkland & Ellis advised Bain Capital on its leveraged buyout of China-based, Nasdaq-listed China Fire & Security Group in November. This was one of the first take-private acquisitions of a US-listed Chinese company. However, of the going-private acquisitions that have occurred, this was the only one in which a third-party buyer has taken control of the target. (In the other transactions, the existing founder or shareholders simply squeezed out the public shareholders and maintained control.) Bain Capital borrowed from a syndicate of international banks to fund the deal.
Shearman & Sterling acted as counsel to the special committee of China Fire & Security’s board of directors, while DLA Piper advised the chairman.
China Patent Agent represented Haier Group in an administrative lawsuit before the intellectual property division of the Tokyo High Court in Japan. Haier had applied for a patent relating to a bi-directional movement mechanism for washing machines, but this application was rejected by the Japan Patent Office in 2008. Haier filed a request for re-examination, but the rejection was upheld in May 2010. Haier then filed a patent administrative lawsuit the following September. In October 2011, after four hearings, the court ruled that the rejection of the request for re-examination on the basis that the application lacked any inventive step was unsafe.
According to China Patent Agent, it used to be rare for Chinese applicants to lodge patent administrative lawsuits in Japan, and even rarer for them to win. The outcome of this case is therefore seen as encouraging.
Ikeuchi-Sato & Partner Patent Attorneys acted for the Japan Patent Office.
The defendant in this case was a large Chinese business-to-consumer e-commerce platform, which had used a large amount of Microsoft software without due authorization. According to Lifang & Partners, which acted for Microsoft, the US company viewed the case as strategic in its effort to promote the legalization of software among large commercial users in China.
Following several court sessions and negotiations, the parties reached a settlement awarding Microsoft compensation of US$4.4 million – a breakthrough in the amount of compensation paid. The settlement also included further cooperation between Microsoft and the defendant.
Baker & McKenzie and Shanghai Co-Effort Law Firm acted for Nokia in a successful trademark infringement lawsuit against an exporter using the mark “Nokia Egypt” on television components.
The court concluded that “Nokia Egypt” infringed Nokia’s trademark, and granted a permanent injunction and compensation of RMB120,000. It also issued a civil sanction order against the exporter to destroy the front covers of 2,250 television sets.
The case addresses a fundamental question of trademark law: whether an original equipment manufacturer (OEM) can escape liability by arguing that there is no trademark infringement in the country of origin because the goods in question are destined for export. An earlier court decision in Shanghai seemed to suggest that OEMs could rely on this defence. The Nokia case was distinguished by addressing the status of Nokia as a well-known trademark and the obvious bad faith of the exporter.
Siano Mobile Silicon manufactures silicon receiver chips for digital televisions. Norton Rose and An Tian Zhang & Partners advised Siano in relation to multiple patent litigation proceedings at the patent review board of the State Intellectual Property Office and in the First and Second Beijing Intermediate People’s Courts. The patents related to chips designed for use in mobile television technology. At stake, according to Norton Rose, was the future capability of handling television signals on personal digital assistants.
In August, global media company Legendary Entertainment entered into a joint venture with Chinese film conglomerate Huayi Brothers International and Hong Kong-listed company Paul Y Engineering Group.
The JV, Legendary East, was established to produce English-language films based on Chinese history and folklore. As foreign investment in the media industry is strictly controlled, the structure of the joint venture was complex. Ensuring compliance with official restrictions was paramount.
O’Melveny & Myers acted as US and Hong Kong counsel to Legendary Entertainment and Legendary East. Reed Smith Richards Butler was counsel to Paul Y Engineering Group. Paul Weiss Rifkind Wharton & Garrison acted as counsel to Goldman Sachs, Legendary Entertainment’s financial adviser. According to Paul Weiss, Beijing sets quotas on the number of foreign films that may be shown in Chinese cinemas each year on a revenue-sharing basis, and tightly controls film production in China by foreign producers. Rather than the conventional idea of pressing the government to relax film quotas, or seeking a per-picture approval, Legendary East was established in the local market, with local partners, in order to facilitate multiple co-productions.
Campbell Soup Company, the world’s largest soup company, entered into a 60:40 joint venture with Swire Pacific in January 2011 to manufacture and distribute soup in China. The JV was established in Hong Kong and will manufacture, package, market and distribute soup, broth and stock products through subsidiaries in China.
The structure was complex, involving contributions of existing assets and new cash to companies in both China and Hong Kong. Existing businesses were restructured prior to completion, and issues relating to intellectual property and competition clearance addressed. Mallesons Stephen Jaques acted for Campbell Soup. Slaughter and May advised Swire Pacific.
PepsiCo announced the formation of a China strategic alliance with Tingyi in November. Tingyi is listed in Hong Kong and has a market capitalization of over US$15 billion, making it one of the largest food and beverage companies in China.
Under the terms of the alliance, PepsiCo will take a 5% stake in Tingyi’s beverage subsidiary, Tingyi Asahi Beverages, with an option to increase that to 20% within four years. Pepsico will continue to supply concentrate and brand and marketing support to Tingyi under the terms of existing commercial agreements.
Freshfields Bruckhaus Deringer acted for PepsiCo. Sidley Austin advised Tingyi.
Infrastructure, Power & Project Finance
The Sino-Singapore Tianjin Eco-city is the largest strategic cooperation project entered into by the governments of the PRC and Singapore. Located 40 kilometres from Tianjin city centre and 150 kilometres from Beijing, it covers an area of 25 square kilometres and aims to set the standard for newly constructed satellite towns in China in terms of sustainability and environmentally friendly buildings and transport. Property developers from Japan, Taiwan, Hong Kong and Malaysia are also involved.
V&T Law Firm and Jun He Law Offices are legal advisers to the investors. Allen & Gledhill of Singapore is overseas legal adviser.
Vinson & Elkins represented Sinopec International Petroleum Exploration and Production Corporation in connection with its acquisition from Galp Energia, through new share subscriptions, of 30% of all Galp’s upstream interests in Brazil. The deal closed in November. In addition to the equity investment, Sinopec will also acquire 30% of Galp’s existing intercompany debt. The transaction, which was signed on 11 November, is worth over US$5 billion, comprising US$4.7 billion in equity and approximately $350 million in debt.
This transaction follows Sinopec’s $7.1 billion investment in Repsol Brazil last year.
Machado Meyer Sendacz e Opice Advogados acted as Brazilian counsel to Sinopec. Lefosse Advogados and Linklaters represented Galp.
Sichuan Hongda Group has entered into an 80:20 joint venture with National Development Corporation of Tanzania to implement two projects in that country: an integrated coal mine and power plant, and an integrated iron ore mine and steel mill.
The two projects, with a total investment of US$3 billion, were announced in September and represent the largest single investment venture in east Africa.
Cleary Gottlieb Steen & Hamilton is US counsel, and K&M Advocates are Tanzania counsel, to Sichuan Hongda. DLA Piper is acting as counsel to National Development Corporation.
Guangdong Nuclear Power Holding Corporation is to acquire Kalahari Minerals for £756 million. If the deal gains regulatory approval, it will be only the second acquisition of a UK-listed company by a Chinese state-owned enterprise.
Kalahari is a mining company with interests in uranium, gold, copper and other metals in Namibia. It is dual-listed on the Alternative Investment Market (AIM) in London and NSX in Namibia.
Guangdong Nuclear is a nuclear power producer with an interest in the procurement and production of uranium resources.
The proposed takeover is subject to approvals in China and the UK. It also requires approval from the Australian Securities and Investments Commission, as it involves acquisition of an interest in Extract Resources, an Australian uranium exploration company in which Kalahari holds a 42.8% stake. Extract Resources holds the uranium exploration permit in Namibia which is highly prized by Guangdong Nuclear.
Guantao Law Firm is acting as PRC legal adviser to Guangdong Nuclear. Ashurst is acting as the company’s US and UK legal counsel, and Minter Ellison as its Australian counsel. Lawrence Graham is acting as UK legal counsel to Kalahari.
Beijing Infrastructure Investment is a large state-owned enterprise. It is responsible for financing and operation of infrastructure projects such as construction of the city’s rail network. China Life Asset Management provided financing of RMB10 billion for the rail project.
As the project was funded by an insurer, it was subject to strict risk controls. The project creatively employed a unique guarantee structure which comprised a guarantee given proportionally by two corporate legal persons, which was unconditionally and irrevocably guaranteed jointly and severally. This was sufficient to gain the approval of the China Insurance Regulatory Commission.
Environment, Mining & Natural Resources
In March, China National Offshore Oil Corporation (CNOOC) entered into sale and purchase agreements to acquire Tullow Oil’s one-third interest in exploration areas 1, 2 and 3A in Uganda. The transaction is valued at approximately US$1.47 billion, payable in cash and subject to closing adjustments.
Herbert Smith advised CNOOC. There were a number of publicly documented challenges including the expiry of licences, adverse government actions, tax disputes and the exercise of pre-emption rights, all of which needed to be taken account of in the deal structure.
At the end of September, Minmetals Resources announced it had entered into an agreement with Anvil Mining providing for the acquisition of Anvil’s common shares by way of a takeover bid in a transaction valued at C$1.33 billion. Anvil is a Canadian company headquartered in Perth, Australia, with mining operations in the Democratic Republic of Congo.
Minmetals was advised by Davies Ward Phillips & Vineberg as to Canadian law, Freehills as to Australian law and Linklaters as to Hong Kong law. Anvil was advised by Lawson Lundell, and the independent directors by Cassels Brock & Blackwell. Anvil’s largest shareholder, Trafigura, was advised by Stikeman Elliott.
China Power International Holding concluded a long-term coal supply agreement with China First, a company owned by Australian mine magnate Clive Palmer. The contract is one of the largest coal import contracts signed by a Chinese company to date.
Jun He Law Offices acted as the lead counsel to China Power, leading the negotiations and drafting documents that embodied complex long-term offtake arrangements and allocated risk in a manner acceptable to the parties. Clayton Utz advised China Power on Australian law, while Allen and Gledhill advised China Power on Singapore law, which was the governing law.
The case of Kam Hing Trading (Hong Kong) Ltd v People’s Insurance Company of China (Hong Kong) Ltd and MST Hong Kong Co Ltd involved a cargo of logs sent by Kam Hing in October 2007. Kam Hing notified the insurers, People’s Insurance Company of China (PICC), as required by the marine cargo open cover in place, but made no mention that the carrying vessel was not classed by any classification society, as required by the Institution Classification Clause 2001 (ICC/01).
In November 2007 the vessel and its cargo sank off the southern coast of Taiwan. Kam Hing claimed against PICC for the loss, but PICC rejected the claim on the grounds that the vessel was not classed in compliance with ICC/01.
Kam Hing sued both its insurance broker and PICC. Following an eight-day hearing in the High Court of Hong Kong, the claim was dismissed on the grounds that Kam Hing had failed to comply with ICC/01 or to give notice to PICC that it was in breach of the clause, and therefore represented a potentially greater risk. This was a landmark decision on ICC/01.
Stephenson Harwood represented PICC. Holman Fenwick Willan represented Kam Hing. Ince & Co represented the insurance broker.
A PRC company and a US listed company instituted legal actions and arbitration proceedings in the PRC, the US and Singapore in an effort to secure their control under a variable interest entity (VIE) structure. The disputed amount in the case exceeded RMB300 million. The parties have now reached a settlement.
Martin Hu & Partners, which acted as legal counsel for the founder of the PRC company, reports that it formulated a “three step” strategy for the client: (1) vigorously protecting his equity interest, control and management position in the PRC company so as to ensure that the client could take subsequent legal action in the name of the PRC company; (2) in Shanghai, referring the dispute for arbitration, taking a multi-pronged approach including contract validity and prohibitory provisions of administrative statutes to convince the arbitrators to rule that the most central arrangement of the VIE structure involving the PRC was invalid; and (3) resolving pending legal actions in the other countries and regions based on a ruling of invalidity.
The dispute in respect of the VIE structure was long-standing. Previous judgments and awards by PRC courts and arbitration commissions concerning VIE have been few in number. Martin Hu & Partners believe that once new laws governing VIE are issued, this case can serve as reference for disputes involving VIE.
Appleby acted as Cayman Islands counsel, and Morrison & Foerster as US counsel, for Softbank Corporation in relation to the settlement of a dispute between Softbank, Yahoo! and the founder shareholders of Alibaba Group over Alibaba’s spinoff of Alipay, an electronic payment system. Alibaba spun off Alipay so that it could obtain a non-bank payment company licence.
Under the settlement, Alibaba will receive between US$2 billion and US$6 billion from any future IPO or sale of Alipay, while continuing to participate in the future operation of Alipay. Alipay will continue to provide payment processing services to Alibaba and its subsidiaries, including TaoBao, China’s largest domestic e-commerce platform.
According to Appleby, “the deal was noteworthy as it will serve the interests of all stakeholders of the three parties, signifying an amicable resolution to a potentially contentious matter.”
in New York served as the legal counsel of the PRC company in arbitration in the US, and Legal Solutions served as the legal counsel of the PRC company in arbitration in Singapore.