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Overview of Mergers & Acquisitions and Investment in the

People’s Republic of China

Sherry YinTel Aviv, Israel

May 4, 2011

| hk

-113

336

This is MoFo. 2

1.China M&A Market Annual Review

2.China M&A Basics

3.RMB Funds

4.Exits in China

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I. China M&A Market Annual Review

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China M&A Market Annual Review

China's M&A market yielded a burst of growth in 2010 622 M&A deals were completed in 2010, up 111.6% year-on-year; among those deals, 501 ones disclosed a total transaction value of US$34.80B.

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China M&A Market Annual Review57 outbound M&A deals were completed, disclosing an aggregate value of US$13.20B, with a year-on-year increase of 50.0% in the number of deals from 38 in 2009.

44 inbound deals were closed in 2010, with merely US$2.22B disclosed, producing an increase of 33.3% in the number of deals from 33 in 2009.

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China M&A Market Annual Review

Real estate, energy & mineral industries led the M&A surge

The year 2010 completed 69 deals and US$11.89B transaction value, representing 11.1% and 34.2% of the totals respectively. Among the top 10 deals in China's M&A market in 2010, resources-related industries took five positions, for instance, CNOOC Limited paid US$3.10B for acquiring Bridas Corporation, the largest M&A transaction in the energy & mineral industry.

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II. China M&A Basics

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Acquisitions of different types of Chinese targets are subject to different regulatory regimesForeign-invested Enterprises (“FIEs”) Limited Liability Companies Joint Stock Companies

Non-listed Joint Stock Companies Listed Joint Stock Companies

State-owned Enterprises (“SOEs”) Offshore Holding Companies / Onshore Operating Companies

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Some of the Key Regulators:MOFCOM: Ministry of Commerce

(with potentially significant differences between national and local offices)CSRC: China Securities Regulatory CommissionSDRC: State Development and Reform Commission

SASAC: State Owned Assets Supervision and Administration CommissionSAFE: State Administration of Foreign Exchange

SAIC: State Administration for Industry and CommerceSAT: State Administration of Taxation

Additional regulators, depending on:topic (such as national security)industry (such as banking)

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2003 2011

SAFE Notices

11/29/75

Acquisition Financing Guidelines

Revised SH/SZ Listing Rules

RMB Fund Rules

2004 2005

Company Law

Listed Company Reform

Measures

Securities Law Strategic

Investment Measures

IPO / Listing Admin

Measures

Takeover Measures

New M&A Rules

QFII Measures

2006

Interim M&A Rules

2007

SAFE 106

EnterpriseIncome Tax

Law

Labor contract

Law

2008State Council Acquisition Filing

Thresholds

Catalog Guiding Foreign Investment

(Revised 2007)

Implementation Rules on

Enterprise Income Tax Law

2009

MOFCOM Delegates Foreign Investment Approval Authority to Local Levels

Watershed Anti-Monopoly

Decisions

Anti-Monopoly Law(effective August 2008)

SAFE 142

New Equity Pledge Rules

Rules on Foreign-Invested Partnerships (eff. March 2010)

2010

State Council Notice on National Security Review

(eff. 3/5/11)

Shanghai RMB Fund Pilot Measures (1/11)

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Catalogue Guiding Foreign Investment

Revisions effective December 1, 2007(A new draft revision has been published to solicit public opinion)

Policy Objective: Sustainable economic development

“Prohibited” Category UpdatesRadio and television program production and operation companies; film production companies; news websites; and internet-based video and audio programs have been added to this category.Heighten control over foreign participation in news and cultural services.

“Restricted” Category UpdatesLimited to majority Chinese controlled joint ventures.Wholesaling business (30 or more branch stores, designated products).Futures trading, and underwriting of A-shares and underwriting and trading of B-shares, H-shares and government and corporate bonds.High-end real estate development and operation subject to MOFCOM or NDRC approval (per deal size).

“Encouraged” Category UpdatesMost additions in the “encouraged” category are businesses in the broadly defined “manufacturing” sector.

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Regulations on the Merger and Acquisition of Domestic Companies by Foreign InvestorsEffective September 8, 2006Also known as Circular 10

Replaced the 2003 Interim Provisions on the Acquisition of Domestic Enterprises by Foreign Investors

MOFCOM confirmed as key M&A and antitrust regulatorActs as gatekeeper/coordinator with other agencies

Application may be flexibleAnti-circumvention and other discretion allowed

Advance notice/approval to MOFCOM required if an acquisition involves:a “key industry”affects “national economic security” orresults in transfer of control of well-known trademark or historic China brand

MOFCOM approval required for “round trip” investmentsCSRC approval required for offshore IPO by an SPV holding China assets

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Anti-monopoly Law — Filing Thresholds

Filing Thresholds – Effective August 3, 2008Notification required if either of the following thresholds is met:

All parties to the transaction had aggregate global sales revenues exceeding RMB10B ($1.4B) collectively, and at least two parties to the transaction each had more than RMB400M ($57.1M) in revenues from sales within China, all during previous FY; orAll parties to the transaction had aggregate revenues from sales within China exceeding RMB2B ($300M) collectively, and at least two parties to the transaction each had more than RMB400M ($57.1M) in revenues from sales within China, all during previous FY.

Even if the filing thresholds are not met, MOFCOM may investigate and review transaction for compatibility with AML

Lobbying by customers, competitors, industry associations, or other governmental authorities could trigger inquiry, public hearing and review

Supersedes filing thresholds in the M&A Rules

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New National Security Review SystemThe review process will be “crossing the river by feeling the stones”

Effective from March 5, 2011Scope – loosely defined; no dollar value threshold

Foreign acquisitions involving defense and military industries, enterprise adjacent to key or sensitive military facilities and other industries relevant to national security

Foreign acquisitions involving a change of “actual control” of an enterprise in key agricultural, energy, basic infrastructure, transportation, technology and equipment manufacturing sectors

Review authority – “Panel”To be established by State Council and led by NDRC and MOFCOM, in coordination with relevant industrial authorities

Process – no separate filing requiredApplication to MOFCOM

MOFCOM may submit the case to Panel Panel may require additional filing and information

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Notes:

Flexible capital structure, preferred stock, stock options, convertible debt OK

PE economics: Valuation adjustment mechanism, liquidation preference, antidilution provisions OK

Flexibility to select U.S. or HK listing

Minimize regulatory approvals required for major transactions (financing, restructuring or exit)

In general, 180-day contractual lock-up for U.S. and HK listings

Practically difficult for domestic PRC companies to restructure offshore under current rules

Difficult to structure back onshore for A-share listing

Offshore Holding Structure

Investor Founder(s) ESOP

OffshoreHoldCo

Cayman Company

Hong Kong Company

WFOE(s)

Offshore

PRC

Investor

InvestorSPV / Fund

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Notes:Foreign ownership/ form of ownership restrictions apply (per Catalogue Guiding Foreign Investment) Investment subject to prior approvals from MOFCOM and potentially other PRC governmentalAt closing, PRC target converts to a joint venture (JV) by virtue of receiving foreign investmentPrior to IPO, JV to be restructured into a foreign-invested company limited by shares (FICLS) (additional approval)

Foreign Direct Investment / JV Model

EJV FICLS

PRC Founder(s)/ Shareholder(s)

A-share Listing

Investor

InvestorSPV

Overseas Listing

Offshore

PRC

H-share Listing

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Notes:Contractual agreements among WFOE, PRC founders and captive domestic affiliate(s) Structure enables consolidated financial accounting while complying with PRC foreign ownership restrictions for overseas listing:

WFOE control over ownership and operations of PRC businessTransfer of revenues from PRC business to WFOE

Relevant contracts may include:Financing Support / Loan AgreementShare Pledge, Exclusive Option AgreementsIP Licensing AgreementConsulting Services AgreementTechnical Support AgreementProxy / Voting AgreementIndemnification Agreement

VIE Structure

Contractual Arrangements- Control - Revenue transfer

Offshore

PRC

Investor(s)

Hong Kong Company

Offshore Holdco

Captive Domestic Affiliate

Founder(s)

WFOE

Founder

Overseas Listing

Offshore SPV

Option Pool

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Licenses and permitsBooks and recordsReal Estate – proof of titlePayment of social insuranceMaterial contracts with suppliers or customersIntellectual Property

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Transaction ApprovalsPost-deal Operations licensing and permitsTransition ServicesIndustry-specific LiabilityDue Diligence is CriticalCan You Operate What You Buy?Evaluate Risk of Permit/License Loss or Inability to Obtain

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Common mistakes include:

• Failure to uncover improper related-party transactions

• Over-reliance on personal relationships

• Not anticipating possible inconsistent regulatory interpretation between local and state-level officials

• Not recognizing or not anticipating changes in the regulatory environment

• Ignoring industry-specific regulations

• Violation of foreign exchange rules

• Failure to capture specific tax incentives

And all the usual ones…

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III. RMB Funds

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Continuing PRC Government policy line of promoting domestic VC/PE industry and further development of domestic capital markets (tax revenues)

Access to significant onshore LP capital pool

Appeal of RMB fund to certain local founders and companies

Difficult to offshore a domestic PRC company today

Faster and simpler approval procedures at time of investment

Exit via PRC capital markets

Sends the message: “We’re committed to being onshore”

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RMB Fund BenefitsExpected continuing RMB appreciationPartnership entity status, flow-through tax treatmentAbility to access significant onshore LP capital poolGovernment approval process more streamlinedTax deduction equal to 70% of investment in non-listed “small / medium high-new technology companies” held for 2 years (for certain funds)RMB fund vehicle avoids difficulty of portfolio companies restructuring offshore with complex structures given Circular 10 / SAFE 75A-Share Listing

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Important to understandDomestic LP ecosystem is improving but remains at an early stage; sophistication varies widely

PRC tax treatment of relevant funds flows; important uncertainties exist

Onshore Investment CaveatsShareholder rights, preferences, and privileges are difficult to structure into a domestic JV or LLC

Limited listing options – once onshore, difficult to get offshore and vice versa

Lack of certainty on timing of CSRC approval required for a PRC listing

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Pilot Fund statute allows GP to contribute up to 5% to Fund capital without affecting domestic fund statusNational treatment for Pilot Funds – ability to invest without compliance with foreign investment restrictions that otherwise apply to foreign investment fundsBut stringent Foreign investment requirements apply: assets owned ($500m) or under management ($1B) in prior FY, 5 years’ investment experiences; only Sovereign Wealth Fund, Pension of Endowment funds, Funds of Funds, Investment companies and other approved “foreign institutional investors”are eligibleReal estate listed security investments not permitted for non-pilot funds

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IV. Exits in China

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• A-Share Listing in the PRC

• Conversion into a Foreign-Invested Company Limited by Shares (FICLS)

• Lock-Up Period

• Transferability of listed A-Shares

• Repatriation of proceeds

• Capital Gains tax

• M&A Trade Sale

• Practical challenges of dragging along local partner(s)

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Main Board (Shanghai)

Market for enterprises of large scale, with proposed number of shares to be issued being more than 100 million

SME Board (Shenzhen)

Market for small and medium sized enterprises which meet the listing requirements for Main Board

ChiNext(Shenzhen)

Market for growth enterprises

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As of March 31, 2011, Shenzhen Stock ExchangeNo. of Listed Companies 1246

Main Board 484Small & Medium Enterprise 566ChiNext 196

Total Market Capitalization RMB 8,747.5 billion(US$ 1,343.8 billion)

No. of Companies Newly Listed in 2011 78Small & Medium Enterprise 35ChiNext 43

Average P/E Ratio at March 31, 2011 (Times) 35.26Main Board 29.67

Small & Medium Enterprise 43.34ChiNext 55.50

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As of March 31, 2011, Shanghai Stock ExchangeNo. of Listed Companies 905

Total Market Capitalization RMB 19,018.7 billion(US$ 2,921.6 billion)

No. of Companies Newly Listed in 2011 12

Average P/E Ratio at March 31, 2011 (Times) 22.8

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Market / Regulatory PerspectivesChinese investors hungry for new market for investment

Growth platform for the next Lenovo, Chinese Intels, Microsofts

CSRC is mindful of stabilizing Chinese stock market and protecting relatively inexperienced Chinese investors

Listing and Exit IssuesOne-year lock-up depending on time of investment; 3-year lock-up if “de facto”controlling shareholder

Discretionary listing approval

Listing applicant traffic jam

Quality of companies getting listed

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FIE Listings on PRC Stock Exchanges

Legally permissible for foreign invested enterprises (FIEs) to go public and be listed on PRC stock exchangesMore than 20 FIEs have completed IPOs and are listed Some uncertainty regarding CSRC willingness to approve listing application by foreign-controlled FIEs Certain foreign-controlled FIEs have been successfully listed on PRC exchanges (Ningbo Dongmu)Foreign strategic investors have been acquiring controlling equity interests in PRC listed companies (Supor, Huaxin Cement)

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3-year track record period From the date of the establishment of the joint stock company“Tacking ” of prior limited liability company operations allowed where LLC converts to joint stock company using entire book value of net assets

Profit and revenueAggregate net profits > RMB 10 million during the last two years plus continuing growth; ORNet profit > RMB5 million with revenue > RMB 50 million during last year, and annual revenue growth rate > 30% for the last 2 years

Net assets > RMB 20 million as of the end of last financial year and no uncovered deficitRegistered capital > RMB 30 millionShareholding and management continuity during the last 2 yearsA major / core business (not diversified operations)No material non-compliance with PRC law by the issuer, controlling shareholder or actual controller during the last 3 years

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Lock-up period varies depending on date of purchase and whether ownership level constitutes controlCompany Law requirements

Promoters — 1 year lock-up from establishment dateAll shares issued prior to IPO — 1 year lock-up from IPO date

Shanghai / Shenzhen Stock Exchange rules Controlling shareholders — 36 month lock-up from IPO datePrior 3-year lock-up for shareholders acquiring shares via capital increase within 12 months prior to prospectus date now revised to 1-year lock-up from the listing date

ChiNextGeneral 1 year lock-ups for pre-IPO shareholdersControlling shareholder – 3 year lock-ups for IPOIf the issuer has raised additional funds from investors within 6 months prior to IPO - 1 year lock-ups for 50%, 2 year-lock-ups for other 50% of the shares newly issued prior to the IPO

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Morrison & Foerster LLP22nd Floor, China Central Place Tower 377 Jianguo Road, Chaoyang DistrictBeijing 100025 ChinaP 011-86-10-5909-3399F 011-86-10-5909-3355www.mofo.com

About Morrison & Foerster:

We are Morrison & Foerster—a global firm of exceptional credentials in many areas. Our clients include some of the largest financial institutions, Fortune 100 companies, investment banks and technology and life science companies. Our clients count on us for innovative and business-minded solutions. Our commitment to serving client needs has resulted in enduring relationships and a record of high achievement.

The information made available herein is for informational purposes only. While we hope and believe the information will be helpful as a background matter, please note that it is general in nature and does not purport to cover the many issues that can arise in each specific transaction, and may not apply to particular factual or legal circumstances. The information does not constitute legal advice and should not be relied on as such.

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