Going Private Transactions: Chinese Companies Listed in the
United States
Presented by
Howard Zhang / Miranda So
August 2011
Davis Polk & Wardwell, Hong Kong Solicitors
Topics to be Covered
Introduction
Legal Issues and Process
Financing Considerations
Relisting in Hong Kong
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Introduction
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Introduction
What are “going private” transactions?
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“Going private” generally refers to a transaction or series of transactions by a controlling or significant
stockholder, or a leveraged buy-out by a PE fund working together with a controlling stockholder / the
management, to acquire all of the publicly traded shares of a listed company
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The transaction takes the company “private”, by reducing the number of its stockholders, allowing the
company to deregister and cease its SEC reporting obligations
Why do companies go private?
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Traditional reasons
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Allow the management to focus on long-term objectives
Allow the company to have a more leveraged capital structure that might not be acceptable for a public company
Enable the company to save costs and avoid disadvantages of complying with U.S. reporting obligations and the
Sarbanes-Oxley Act
“New” trend – Many Chinese companies dissatisfied with valuations in the U.S., compared with their
counterparts listed in Hong Kong or other Asian exchanges, may consider “going private”, sometimes
with a goal to relist the company in Hong Kong or other Asian exchanges
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Recent Examples
Chemspec International Limited
CNinsure Inc.
Funtalk China Holdings Limited
Fushi Copperweld, Inc.
Harbin Electric, Inc.
SOKO Fitness & Spa Group, Inc.
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Legal Issues and Process
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Preliminary Questions
Where is Listco incorporated? This will impact…
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Structuring – merger / amalgamation / scheme / tender offer / etc. – each with different voting
requirements for stockholder approval and/or for squeezing out the minority
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Fiduciary duty, legal standard of review – e.g., use of special committee or other procedural safeguard
Litigation risk and strategy
Is Listco a “Foreign Private Issuer”? This will impact…
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Timing and substance of disclosure obligations
Application of SEC rules and exemptions – e.g., U.S. proxy rules, Tier I or II exemption for U.S. tender
offer rules
Other deregistration options available for FPI only
Is PE fund an existing stockholder? This will impact…
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Strategy and approach
Disclosure – e.g., may have obligation to update 13D disclosure
Other considerations – e.g., Section 16 issues if it has sold any Listco stock in the last 6 months
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Typical Structures
First, controlling stockholder forms acquisition vehicle (Bidco)
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Controlling stockholder (and, if applicable, PE fund) will “roll over” Listco stock into Bidco
PE fund / bank / other investors will provide additional equity or debt financing to Bidco to fund the
transaction
If Listco is incorporated in a U.S. state, transaction is generally accomplished by
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One-step merger
Tender offer followed by back-end merger
If Listco is incorporated in BVI or Cayman Islands, transaction is generally accomplished by
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Scheme of arrangement
Consolidation and merger
General offer
Other possible structures (but much less common)
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Reverse stock split
Asset acquisition
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Key Legal Considerations
UNDERSTANDING BOARD DUTIES AND POWERS
Board fiduciary duties
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Governed by state / local law
Standard of scrutiny – Enhanced scrutiny vs. business judgment rule
Special committee and its powers
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In the U.S., use of special committee is common.
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Special committee should consist of disinterested and independent directors, have a clear mandate,
and have its own financial and legal advisors
Just say “no” is a possible response, even if offer is at a substantial premium to market
For one-step merger, special committee will negotiate deal terms with bidder
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One-step merger requires approval of special committee
Special committee may use delaying tactics to frustrate a bidder into increasing its offer price
Special committee will likely demand that the merger be subject to majority-of-the-minority stockholder approval
For tender offer, bidder can theoretically acquire 90% in tender offer and then complete short-form
merger without needing to obtain special committee or stockholder approval
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In Delaware, this shifts burden of proving “entire fairness” to minority stockholders
However, special committee’s decision to recommend or reject the offer (or express no opinion) will likely influence
stockholder decision to tender, thereby prompting bidder to revise its offer price
Controlling stockholder should make clear that the company is not otherwise for sale
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Key Legal Considerations
(cont.)
DISCLOSURE, TIMING AND OTHER CONSIDERATIONS
Disclosure obligations
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Disclosure obligations under local law
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In Delaware, directors have duties to ensure all “material facts” relevant to stockholders are disclosed
Disclosure obligations under U.S. federal securities law
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Section 13(d) obligations – Is bidder a 13D or 13G filer? Is bidder a grandfathered 13G filer?
Proxy statement (Schedule 14A) – Is Listco a FPI? If so, it is exempted from the U.S. proxy rules
Tender offer statement (Schedule TO) – Is Listco a FPI? Is Tier I or Tier II exemption available?
Schedule 13E-3 – requires enhanced disclosures regarding purpose of transaction, fairness of transaction, and
reports, opinions, appraisals received
Timing considerations
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Be patient when negotiating with special committee
SEC review process may also add to timetable
Risk (and likelihood) of litigation
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Going private transactions are often challenged in court
State antitakeover statutes
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Can imposes certain restrictions on “business combination” with “interested stockholder” for a
specified period of time
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Overview of Legal Process
Evaluation Stage
Negotiation Stage
Execution Stage
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Perform due diligence
Consider feasibility and risk
Consider offer price and key conditions
Consider terms of sponsor / consortium agreement
Consider financing options and availability
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Submits written proposal to Target board
Consider 13D disclosure obligations (if any)
Target board forms special committee
Special committee appoints financial and legal advisors
Special committee evaluates offer, discloses its response, and where
appropriate, negotiate terms
Finalize all deal terms and financing
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Sign definitive documents
Public announcement of signed deal
File proxy statement/13E-3 (if merger) or Schedule TO (if tender offer)
Receive and respond to SEC comments
If one-step, hold stockholders meeting and complete merger
If two-step, complete tender offer and short-form merger
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Financing Considerations
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Financing Considerations (cont.)
TYPICAL COMPONENTS OF SPONSOR-BACKED “GOING PRIVATE” FINANCING
Equity tranche
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Controlling stockholder (and if applicable, other select stockholders) rollover equity into Bidco
Cash infusion by PE sponsor into Bidco
Subordinated debt
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High yield bonds or interim subordinated “bridge” facility
Senior secured debt
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Secured by pledge over assets
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Financing Considerations (cont.)
CHALLENGES AND POSSIBLE SOLUTIONS
U.S. margin regulations may limit amount of debt financing used to acquire “margin stock”
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Regulations U and X apply to acquisition debt secured by “margin stock”
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“Margin stock” includes equity securities traded in the U.S.
Debt financing for Bidco would generally be limited to 50% of the margin stock’s current market value
Possible solutions
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Extend credit “outside the United States” – Regulations U and X do not apply if
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Each lender is “outside” the United States
Loans are negotiated and disbursed outside the United States
Listco securities are “non-U.S. securities” – Listco is not U.S. organized and its principal place of business is
outside the U.S.
Structure transaction as one-step merger
Exemption for friendly acquisition effected pursuant to a definitive merger agreement
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Financing Considerations (cont.)
CHALLENGES AND POSSIBLE SOLUTIONS
Challenges on the PRC side
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Structural subordination: offshore lending is structurally subordinated to liabilities of PRC subsidiaries
PRC subsidiaries cannot provide guarantee or security in favor of foreign debt owed by foreign parent
PRC subsidiaries subject to restrictions on payment of dividends and repayment of intercompany
loans or advances
Lenders / investors attracted by the China story willing to accept risks?
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Relisting in Hong Kong
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Relisting in Hong Kong
QUALIFICATIONS FOR LISTING IN HONG KONG
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Recognized jurisdiction of incorporation
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Financial track record requirements
Ownership continuity and control for most recent audited financial year
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If not on the “recognized” list of jurisdictions, need to apply to the HKSE for approval
Refers to beneficial ownership and control by the controlling stockholder (stockholder holding 30% or more voting
interest in the company) or, if none, the single largest stockholder
General requirement to demonstrate trading record of at least 3 full financial years and management
continuity for at least the 3 financial years before listing
Public float and market capitalization requirements
The HKSE will want to know if the minority stockholders were fully informed about the re-listing plans
when the company was privatized, especially if only a short period of time has elapsed between the
privatization and the re-listing
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86 10 8567 5002 tel
howard.zhang@davispolk.com
Howard Zhang
PARTNER
Mr. Zhang is a member of Davis Polk’s Corporate Department and a resident partner in the
Beijing office. He focuses on mergers and acquisitions, including private equity portfolio
investments, buyouts, joint ventures and strategic investment transactions. He also advises
clients on cross-border securities and general corporate matters.
In his private equity practice, Mr. Zhang has represented many private equity firms on
numerous transactions, including Bain Capital, Carlyle, CDH, CCMP Asia, Goldman Sachs,
IDG/Accel, Merrill Lynch, SAIF Partners, Sequoia and Warburg Pincus.
WORK HIGHLIGHTS
Mergers and Acquisitions Representations
 Baidu on its US$306 million investment in Qunar
 Stable Investment Corporation, a wholly owned subsidiary of China Investment
Corporation (CIC), on its investment in China Lumena New Materials
Bar Admissions
 State of Massachusetts
Professional History
 Warburg Pincus in its acquisition of a majority stake in Beijing Fanhua Datong Investment
Management Company
 Charles River Laboratory International in its proposed agreement to acquire Wuxi
Pharmatech for $1.6 billion
 Tianwei New Energy in its acquisition of a controlling stake in Hoku Scientific, a Nasdaqlisted company
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86 10 8567 5002 tel
howard.zhang@davispolk.com
Howard Zhang (cont.)
PARTNER
 Partner, Davis Polk, 2008-present
 Partner, O’Melveny & Myers,
Beijing office, 2002-2008
 Associate, Partner, Foley, Hoag &
Eliot, 1993-2002
 Warburg Pincus in its agreement to acquire a significant stake in China Biological
Products, a Nasdaq-listed company
 A consortium led by the management team of Amdocs China and IDG Capital Partners in
its agreement to acquire the China operations from Amdocs, a Nasdaq-listed company
 IDG Capital Partners and the management team in its acquisition of a controlling stake in
Kongzhong, a wireless value-added service provider listed on Nasdaq
 COFCO in connection with its investment in Smithfield Foods
 Baring Private Equity Asia in financing a management buyout of Asian American Gas
 CCMP Asia in connection with its acquisition of the flue gas desulphurization business
from a publicly listed company in China
 Merrill Lynch on several investments in China
 Yahoo’s acquisition of a Chinese search engine
 Focus Media’s acquisition of Framedia and Allyes Information Technology
 Shanda’s acquisition of a significant stake in Sina
Securities Offerings
 Representing the underwriters in the initial public offerings of 21Vianet Group, Xueda and
ChinaCache
 Representing the underwriters in China Unicom’s convertible bonds offering
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86 10 8567 5002 tel
howard.zhang@davispolk.com
Howard Zhang (cont.)
PARTNER
 China Lodging in its SEC-registered initial public offering
 Synutra International in its common stocking offering
 The initial public offering and notes offering of Shanda Interactive Entertainment
 The initial public offerings of Acorn International, China Finance Online, China Sunergy and ATA
RECOGNITION
Listed as a leading lawyer in several legal industry publications, including:
 Chambers Global: The World’s Leading Lawyers for Business
 Chambers Asia
 Legal Media Group’s Expert Guide to the World’s Leading Private Equity Lawyers
OF NOTE
Membership
 Member, Dean’s Advisory Board, Boston University Law School
EDUCATION
 B.A., Shanghai International Studies University, 1981
 J.D., Boston University School of Law, 1993
 American Jurisprudence Award
 Topics Editor, International Law Journal
19
852 2533 3373 tel
miranda.so@davispolk.com
Miranda So
PARTNER
Ms. So is a Davis Polk partner resident in Hong Kong. Her work focuses on public and
private company mergers and acquisitions, strategic investments, private equity
transactions, securities offerings, and general corporate matters. She regularly advises
major corporations and private equity clients on investments, dispositions and joint ventures
across Asia and on cross-border transactions. She has also advised clients on a wide range
of U.S. public company transactions, including takeovers, going private transactions, PIPEs,
spinoffs and restructurings. Ms. So is admitted to practice in both New York and Hong Kong.
WORK HIGHLIGHTS
 Kerry Mining’s auction and US$464.5 million sale of Baruun Naran coal mine in Mongolia
to Mongolian Mining Corporation, a Hong Kong-listed company
 Charoen Pokphand Group’s concurrent sales of US$45 million of convertible preference
shares in C.P. Pokphand, a Hong Kong-listed company, to the Carlyle Group and other
investors
 Warburg Pincus’s acquisition of a significant stake in China Biologic Products, Inc., a
Bar Admissions
 State of New York
Professional History
 Partner, 2011
 Associate, 2003-2011
Nasdaq-listed company
 IDG Capital Partners’ acquisition of the China operations from Nasdaq-listed Amdocs, in
consortium with the management team of Amdocs China
 Canon Investment Holdings Limited’s proposed US$57 million acquisition of a majority
stake in Altair Nanotechnologies, a Nasdaq-listed company
 Shanda Games Limited’s reorganization and business separation from its parent, Shanda
Interactive Entertainment Limited, and subsequent IPO on Nasdaq
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852 2533 3373 tel
miranda.so@davispolk.com
Miranda So (cont.)
PARTNER
WORK HIGHLIGHTS (cont.)
 Advanced Semiconductor Engineering’s US$780 million going-private acquisition of its subsidiary ASE Test Limited, a Nasdaqlisted company
 Morgan Stanley’s spinoff of Discover and related restructurings
 Health Management Associate’ US$3.25 billion recapitalization
 Huntington Bancshares’ US$3.6 billion merger with Sky Financial Group
 Commonwealth Telephone Enterprises’ auction and US$1.6 billion merger with Citizens Communications Company
RECOGNITION
Ms. So is listed as a leading lawyer in Chambers Global: The World’s Leading Lawyers for Business and Chambers Asia.
EDUCATION
 B.S., Molecular Biophysics and Biochemistry, Yale University, 2000
 summa cum laude
 Phi Beta Kappa
 M.S., Molecular Biophysics and Biochemistry, Yale University, 2000
 summa cum laude
 J.D., Harvard Law School, 2003
 magna cum laude
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