LLP O'Melveny & LLP4th... · 21st November 2012 Hong Kong Fourth Annual Private Equity Seminar . O'Melveny & Myers LLP O'Melveny & Myers LLP O'Melveny & Myers LLP • Going-Private:

21st November 2012 Hong Kong

Fourth Annual Private Equity Seminar

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'Melveny & Myers LLP

O'Melveny & Myers LLP


• Going-Private: Taking Chinese Companies Listed in the US Private

• Private Equity Secondary Transactions

• Regulatory Update

4th ANNUAL PRIVATE EQUITY SEMINAR

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Going Private: Taking Chinese Companies Listed in the

US Private




The “Going Private” Phenomenon

First of the recent wave of “going privates” involving US listed Chinese issuers:

• Sinoenergy Corporation (announced Oct 2009 / closed Sep 2010)

• Tonjitang Chinese Medicine (announced Oct 2010 / closed April 2011)

• Since Sinoenergy and Tonjitang, 37 other Chinese companies have announced “going private” transactions:

– 18 are incorporated in Cayman Islands; 21 are incorporated in the U.S.

• This does not include the following “traditional” M&A transactions: – BMP Sunstone’s US$520.6 million acquisition by Sanofi-aventis in 2011,

– Global Education & Technology’s US$294 million acquisition by Pearson PLC in 2011; or

– China Kanghui Holding’s US$816 million acquisition by Medtronic, Inc. in 2012 (which were all).

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Going-private transactions involving US-listed Chinese companies signed or closed in 2011

Target Jurisdiction Signing date Closing date Deal Value ($) Business Sponsor(s)

Tongjitang Chinese Medicines

Cayman Islands 29 October 2010 14 April 2011 24 million Modernized traditional Chinese medicines

None

Chemspec Cayman Islands 21 March 2011 19 August 2011 141 million Speciality chemicals Primavera Capital

China Security & Surveillance

Delaware 21 April 2011 16 September 2011 595 million Electronic surveillance and safety products

None

China Fire & Security

Florida 20 May 2011 4 November 2011 290.4 million Fire protection systems Bain Capital

Funtalk China Cayman Islands 31 May 2011 25 August 2011 120 million Wireless communications devices and accessories

ARC Capital; Golden Meditech; PAG Asia

Harbin Electric Nevada 19 June 2011 1 November 2011 768.5 million Development and manufacture of electric motors

Abax Global Capital

China Advanced Construction Materials

Delaware 24 October 2011; terminated on 9 July 2012

- 56 million Ready mix concrete materials

None

Shanda Interactive Cayman Islands 22 November 2011 14 February 2012 713.6 million Online gaming None

China Real Estate Information Corporation

Cayman Islands 28 December 2011 23 April 2012 321.6 million Real estate information and consulting services

None

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Going-private transactions involving US-listed Chinese companies signed or closed in 2012


Jingwei International Nevada

N/A (through reverse stock split)

30 March 2012 - Data mining and interactive marketing and software services

None

China GrenTech Cayman Islands 12 January 2012 17 April 2012 44.3 million Wireless coverage products and services

None

Pansoft British Virgin Islands

17 May 2012 9 November 2012 8.4 million Enterprise resource planning software solutions and services

None

Gushan Environmental Energy

Cayman Islands 4 June 2012 17 October 2012 21.5 million Biodiesel and related products

None

China TransInfo Technology

Nevada 8 June 2012 31 October 2012 200.3 million

End-to-end intelligent transportation systems and related technology solutions

SAIF Partners

Fushi Copperweld Nevada 28 June 2012 Pending 260 million Bimetallic wire products Abax Global Capital

Winner Medical Nevada 24 July 2012 Pending 33.5 million Cotton-base medical dressings and medical disposables

None

Yucheng Technologies

Delaware 13 August 2012 Pending 51.5 million

Information technology, software, solutions and services for China’s banking sector

None

China Nuokang Bio-Pharmaceutical Cayman Islands 27 September 2012 Pending 47.9 million

Hospital-based medical products

None

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Ongoing going-private transactions involving US-listed Chinese companies (announced but not yet signed)

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Zhongpin Delaware Pending; announced on 27 March 2012 Expected to be around 418 million

Meat and food processing and distribution business

N/A

ShangPharma Cayman Islands Pending; announced on 6 July 2012 Expected to be around 62 million

Pharmaceutical and biotechnology research and development outsourcing

TPG

Focus Media Cayman Islands Pending; announced on 13 August 2012 Expected to be around 2.9 billion

Multi-platform digital media

FountainVest Partners; Carlyle Group; CITIC Capital; CDH Investments; China Everbright

LJ International British Virgin Islands Pending; announced on 17 August 2012 Expected to be around 56 million

Retail jewelry business FountainVest Partners

Syswin Cayman Islands Pending; announced on 7 September 2012 Expected to be around 58 million

Real estate sales agency services

N/A

3Sbio Cayman Islands Pending; announced on 12 September 2012 N/A Bio-pharmaceutical products CPEChina Fund

7 Days Group Cayman Islands Pending; announced on 26 September 2012 Expected to be around 635 million

Operation of limited service economy hotels

Sequoia Capital; Carlyle Group; Actis

Feihe International Utah Pending; announced on 3 October 2012 Expected to be around 80 million

Milk powders, soybean milk powder and related dairy products

Morgan Stanley

Ninetowns Internet Cayman Islands Pending; announced on 12 October 2012 Expected to be around 52 million

Enterprise software and provision of the related after-sales maintenance services

N/A

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Ongoing Going-private transactions involving US-listed Chinese companies (announced but not yet signed) (Cont’d)

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Yongye International Nevada Pending; announced on 15 October 2012

Expected to be around 238 million

Fulvic acid based crop and animal nutrient products

Morgan Stanley; Abax Global Capital

American Lorain Nevada Pending; announced on 15 October 2012 Expected to be around 30 million

Food products N/A

Trunkbow Nevada Pending; announced on 2 November 2012

Expected to be around 30 million

Mobile application platforms

N/A

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Why Are Chinese Companies Going Private? Pros:

• Historically low valuations

• Cost of complying with U.S. listing requirements

• Opportunity to relisting in Hong Kong or China where the trading multiples tend to be higher

• Management can focus on long-term objectives rather than short-term profits

• Acquiror and Target can realize benefits of a more leveraged capital structure

• No periodic disclosure of competitive or strategic business information

• No inflexible corporate governance requirements

• Reduce the distraction (and litigation) from dissatisfied public shareholders

Cons:

• Loss of “listed company” prestige

• Loss of access to public financing

• Cannot use public shares as M&A acquisition currency

• Liquidity of shares, particularly for employee equity incentives 9

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Attraction of Going Private for PE Sponsors

• Opportunity to invest capital at a favorable price in a company that is at a later stage of maturity than many private companies seeking equity financing.

– Distrust on the US markets has pushed even the prices of solid profitable companies down.

– Possible to offer a good premium and still get a company with a good track record of profitability at very low valuations:

Average market-to-book of Chinese companies that have received going private proposals 3 days prior to the proposal is just under 1.

The average implied market-to-book of the offers was 1.31 and there are companies where the implied market-to-book of the offers was under 1.

• Companies which are good candidates to go private often have a large cash position and strong cash flow relative to market capitalization, limited analyst following, and a need to restructure to achieve profitability.

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What is a “Going Private”?

• "Going private" is a term used to describe a transaction (or series of transactions) with a controlling shareholder or other affiliated person(s) that reduces the number of shareholders of a public company, allowing the company to terminate its public company status and related reporting obligations under the Securities Exchange Act of 1934 (Exchange Act).

• Essentially, a “going private” is any one of the following M&A transactions that has either a reasonable likelihood or a purpose of causing, directly or indirectly, a company’s shares to be held by fewer than 300 persons or otherwise become deregistered or de-listed:

– a purchase of any of a company’s shares by the company or an affiliate;

– a tender offer for a company’s shares by the company or an affiliate; or

– the distribution of an Information Statement in connection with (a) a merger, consolidation, recapitalization, or similar corporate transaction; (b) a sale of substantially all of a company’s assets to an affiliate, or (c) a reverse split of a company’s shares involving the purchase of fractional interests.

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What is a “Going Private”?

• Assumed Profile for Today’s Discussion

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[To come] [To come] [To come]

Buyer Group:

• Third Party Sponsor or Significant/Controlling Shareholder aligns with senior management of Target to initiate a negotiated acquisition of Target

• Classic “conflict of interest” scenario

Target: • China-based company incorporated in the

• US or Cayman Islands and listed in the US:

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What are the Challenges? Overview of Key Issues and Considerations

What makes a Going Private transaction more challenging than a typical arm’s length transaction?

The Structure of the Transaction

Increased Litigation Risk

Heightened Judicial Scrutiny

Procedural Safeguards – Role of the Special Committee

Extended Negotiation Process

Enhanced Disclosure Obligations

Full Disclosure by Management/Controlling Shareholder

Inadvertent First Step Disclosure

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Common Transaction Structures

• Going private transactions are generally completed by one of two alternative methods: a tender offer or a merger.

• With either of these going private transactions a Schedule 13E-3 must be filed with the SEC, which requires the company to disclose the reasons for the transaction as well as a statement as to the fairness of the transaction to unaffiliated holders.

• Additionally, if the going private transaction involves a transaction (such as a merger) which requires shareholder approval, the company will be required to file a proxy statement or an Information Statement with the SEC in addition to the Schedule 13E-3.

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Common Transaction Structures: Merger • Acquiror forms Merger Sub, which is merged with target, resulting in target continuing as the

surviving company in the merger.

• Acquirer negotiates and executes a merger agreement with target’s board of directors, and then the shareholders vote on the merger agreement.

• If all conditions to the merger are satisfied, target merges with Merger Sub, and the shares of target’s share, other than shares owned by the acquirer, are converted into the right to receive the merger consideration (or assert appraisal rights in lieu thereof).

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Acquiror $

Merger

T

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Merger Sub

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Common Transaction Structures: Merger (Cont’d) Vote/Approvals Required

• US: Depends on state of incorporation, but typically 50+% of outstanding shares of the company (e.g., Delaware)

• Cayman: At least 66 2/3% of the votes cast at a shareholder meeting (unless higher threshold is specified in the Articles)

• Minority shareholders forced to participate if required shareholder vote achieved - but have appraisal rights

Timing

• 4 - 6 months

Additional Considerations • U.S. proxy rules requires delivery of proxy statement to shareholders • Companies incorporated outside the United States (including the recent going-private

targets incorporated in the Cayman Islands) are generally foreign private issuers (‘FPIs’), which means, among other things, they are not ordinarily subject to US proxy rules.

• However, FPIs are still subject to 13e-3 disclosure obligations and are required to include as an exhibit to their 13e-3 filings most of the information that is required to be disclosed in a proxy statement by a US domestic issuer.

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Common Transaction Structures: Merger (Cont’d) Advantages

Straightforward process well known to market Relatively low approval threshold Relatively quick No court process/review

Disadvantages Cayman: Consent of Company’s creditors, with fixed/floating security interest

required (but may be waived by court) Almost all going private transactions involving Chinese issuers listed in the US have been structured as a one-step, negotiated merger (as opposed to a two-step transaction consisting of a first-step tender offer followed by a second-step squeeze-out merger, which is the other basic approach to acquiring a US public company).

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Common Transaction Structures: Merger (Cont’d) Indicative Timeline for Negotiated Merger involving US Company Listco 1 Receive SEC comments 30 days from filing, plus 30 days (estimate) to clear comments. 2 Information must be provided to shareholders no later than 20 business days prior to a vote. 3 Post-closing items include de-listing and de-registering (file Form 15).

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Day 1

•Buyer Group makes formal offer

•Company forms special committee; hire special committee advisors

Day 2 - 30

•Special committee negotiates merger agreement

•Financial advisors prepare fairness opinion

Day 31-32

•Board meeting; approve special committee’s recommendation

•Merger agreement executed

Day 33 Day 34-48

•SEC comment and review period1

Day 49-109 Day 110

•Mail definitive proxy statement2

Day 140

•Special meeting of shareholders

Day 1413

•Closing •File final amendment to Schedule 13E-3 reporting results of the transaction

•Company issues press release; files form 8-K or 6-K

•Company files preliminary proxy statement and Schedule 13E-3

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Common Transaction Structures: Tender Offer • Acquirer purchases outstanding shares directly from the company’s shareholders.

• Once statutory threshold reached, acquirer can compulsorily squeeze-out minority shareholders.

• SEC review for tender offers is generally done on expedited basis.

• If the board of directors takes action to assist the acquirer, then target is generally required to form a special committee that advises the shareholders to sell their shares.

• The tender offer must remain open for at least 20 business days and is usually subject to a number of conditions, including the tender of the minimum number of shares necessary to ensure that the acquiror will own, following the offer, a number of shares sufficient to complete the “back-end merger”

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Acquiror

$

T shares ≥ 90%

S

T

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Common Transaction Structures: Tender Offer (Cont’d) • Squeeze-out

– If the acquiror owns more than 90% of the target’s shares when tender offer closes, the acquiror will within a day or two complete a squeeze out of the minority shareholders via either: Compulsory acquisition (Cayman companies) or Short-form merger (US companies)

• Cayman Compulsory Acquisition – Cayman compulsory acquisition: right to exercise squeeze-out can be made no earlier than 4 months

from date of posting offer document, and once exercised, acquiror must wait a further 1 month to complete squeeze-out

• Failure to Get 90+% Tender – If 90% ownership level is not reached as a result of the tender offer and the merger agreement

included a “top-up option,” the acquiror may purchase newly issued shares from the target to increase its ownership to be able to complete a short-form merger.

– If the acquiror was not able to complete a short-form merger, the back-end merger to “squeeze out” the minority shareholders may take up to two months to complete. Although the acquiror will have the requisite vote to approve the merger, the acquiror will either have to approve the merger by written consent, if permitted, or if written consent is not permitted, file a proxy statement, which will be subject to the SEC review process discussed above, and take all the other necessary steps in order to hold a shareholders meeting to approve the back-end merger.

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Common Transaction Structures: Tender Offer (Cont’d)

Timing • US Company: 1 - 3 months (depends on % of shares tendered)

• Cayman Company: minimum 5 months from date of posting offering document (in order to effect second-step compulsory acquisition)

Additional Considerations • U.S. tender offer rules apply (procedural and disclosure requirements), including All

Holders/Best Price rules

• Acquirer files a Schedule TO which identifies the source of funds and the purpose of the transaction

• Target board must publicly respond and file a Schedule 14D-9 within 10 business days of the commencement of offer discussing its reasons for recommending acceptance

• If 90% of shares are not tendered, acquiror must complete 2nd step / back-end merger at same price

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Common Transaction Structures: Tender Offer (Cont’d) Advantages

Frequently provide payment faster than mergers since the SEC must first review merger proxy statements whereas tender offers do not require prior SEC review.

Buyer group is in control of the process – requires relatively little cooperation from target other than Board recommendation

Lower litigation risk and fiduciary standard for directors (for US companies) Flexible Relatively quick (for US companies)

Disadvantages High threshold to effect second step squeeze-out – may not obtain sufficient

shares for short-form or compulsory “squeeze out” in tender offer Relatively slow for Cayman Island companies Financing is more difficult to obtain

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What are the Challenges? Increased Litigation Risk All going private transactions involving US-domiciled companies have been challenged in court

Lawsuits are commonplace but very often quickly settled (US companies) for non-substantial settlement fee to plaintiffs' counsel ̶ may impact acquiror price

Claims usually based on breach of fiduciary duties and inadequate or misleading disclosure

Mitigate exposure by running a good process

So far, no going private transactions involving Cayman Islands-domiciled companies have been challenged in court on a derivative claim

Fiduciary duty breach claims are much more difficult to bring against Cayman company directors

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What are the Challenges? Heightened Judicial Scrutiny • Going Private transactions are subject to heightened judicial scrutiny by the

courts if challenged Directors have fiduciary duties, which must be satisfied in a “going private” transaction Unlike typical arm’s-length transactions, going private transactions present inherent

conflicts of interest and the potential for self-dealing Ordinarily, “Business Judgment Rule” applies but In transaction with a controlling

shareholder or affiliate, a conflict exists, and “entire fairness” review is used

• Entire Fairness Test – Delaware standard Transaction will be evaluated under “Entire Fairness Test” in which transaction must be

“entirely fair” both in terms of procedure and price to the minority shareholders Burden on directors to establish transaction is entirely fair (but shifts back to plaintiffs if

certain safeguards are implemented)

• Cayman Islands Directors must act reasonably, but that standard is not as well-developed compared to

Delaware Practitioners advise following market best practices (i.e., Delaware)

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What are the Challenges? Procedural Safeguards – Certain Customary Terms for “Going Privates” Implementing procedural safeguards can shift the burden of proving procedural and substantive fairness back to parties challenging the transaction • Use of an Independent Special Committee to Exclusively Evaluate and

Negotiate Transaction on behalf of Target

• Obtain Fairness Opinion

• “Majority of the Minority” Shareholder Vote – In 10 of the transactions (including three Cayman Islands companies) the parties negotiated some

form of a majority of the minority shareholder voting requirement

• Market‐Check – In 7 of the transactions, the target company conducted either a full or limited pre‐signing

market‐check

– In 5 of the transactions (but none of the Cayman Island companies) the parties negotiated a “go‐shop” provision. “Go‐shop” provision in these transactions did not result in the termination of the initial transaction

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What are the Challenges? Enhanced Disclosure Obligations In a Going Private transaction, expect: Additional disclosure requirements

Increased scrutiny of disclosure

Likelihood of litigation relating to such disclosure

Going Private rules (Rule 13e-3 of the Exchange Act) focused on disclosures regarding actual or potential conflicts

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[To come] [To come]




What are the Challenges? Enhanced Disclosure Obligations (Cont’d) Schedule 13E-3: The SEC extensively scrutinizes going private transactions. Parties should plan to spend 4-6 weeks or more clearing SEC comments on disclosures.

Certain “hot button” disclosure issues include: • Valuation

– Metrics, multiples, ranges, and comparables used in determining price and fairness, the foundation of and assumptions underlying all such metrics, and, if applicable, why certain metrics are not used

– Public filing of all written proposals, budgets, projections, opinions (other than legal), and other information used to determine price

• Transaction background, – Negotiation history, alternatives considered, and relationships between the parties (2-year look back)

• Fairness (Key Focus of SEC) – Statement as to why acquiror and the target board believe going private transaction is fair to minority

shareholders

– Independence of directors and special committee

– Reasons why the price is fair

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Recent Issues / Other Considerations

• Relationship between PE Sponsors and Management – Negotiation of post-closing inter se governance rights between PE sponsors and

management (typically occurs “behind the scenes” during negotiation of acquisition documents).

– Acquisition of China Fire by Bain Capital is the first Chinese going private to involve a third-party private equity investor acquiring a controlling stake in the target company (in the China Fire deal, the founders exchanged a portion their shares for a stake of approximately 25 per cent in the post-closing company and cashed out the remainder of their shares on the same terms as the public shareholders).

– Potential conflict in valuation between PE sponsors who are injecting cash equity and target management who are rolling over equity at “going private” offer price.

– PE Sponsor due diligence typically puts a strain on relationship with target management.

• Short Attacks

• Insider Trading Prior to Announcement

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Recent Issues / Other Considerations

• MOFCOM / VIE ISSUES – China Fire, which does not have a VIE structure, is the only going-private transactions

that was subject to MOFCOM antitrust review. Other transactions escaped antitrust review either because they did not involve a change of control (as the founders had a controlling stake in the company both before and after the transaction) or the parties did not meet the sales thresholds set out in the AML.

– MOFCOM has yet to approve a VIE transaction that was subject to an antitrust approval process and it is generally believed that the presence of a VIE structure would be an impediment to a PE investor seeking to acquire a controlling stake in a company.

• Financing – Limited ability to obtain acquisition financing for PRC-based operating entities.

• Re-List on HKSE? – Listing requirements can affect timing for relisting.

– “Controlling ownership” continuity – 1 full fiscal year.

– “Management continuity” – 3 years.

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Recent Issues / Other Considerations (Cont’d)

• US Tax Considerations for those Targets which are US companies – §7874 Anti-inversion “tainting” rules: Post-acquisition, Target is treated as if it is still a US company

for US tax purposes notwithstanding the fact that it was merged into a Cayman Islands company or otherwise redomiciled outside of the US.

– §367 Anti-inversion “toll charge” rules: In order to leave the US taxing jurisdiction, all Target built-in gains are taxed in connection with the take private transaction. This usually means a 35% tax on the fair market value of the group less any basis in subsidiary shares less applicable foreign tax credits.

• PRC Tax Considerations – Circular 698 requires certain selling shareholders to notify PRC tax authorities about sale

– PRC tax authorities review disclosure to determine whether Target had sufficient “business purpose”

– Upon finding insufficient business purpose, sellers are taxed as if sold a PRC entity, i.e., suffer a 10% capital gains tax in the PRC.

– Various controversial issues regarding enforcement of this tax, including threat of withholding, loss of tax basis, etc. Very contentious issue which enters into negotiations and deal documentation.

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[To come] [To come]

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

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Questions?

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Private Equity Secondary Transactions O




The Market in 2012

• 2012 global transaction volumes expected to be c.US$25bn

• H1 volume estimated at US$13bn*

• Principal Sellers: – banks/financial institutions

– public pension plans (especially in US)

– funds of funds

• Pricing broadly consistent with 2011 – overall average high bid @ 80% of NAV*

– average high bid for buyout funds @ 85% of NAV*

– average high bid for venture funds @ 74% of NAV*

* Source: Cogent Partners “Secondary Pricing Trends & Analysis” July 2012

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Secondaries in Asia

• Asian participation in the secondaries market is increasing: – Sellers: (GIC; BoA; smaller LPs)

– Buyers: specialist funds; SAFE

• Asian PE divisions of banks and insurance companies are not immune from the pressures driving divestments of PE portfolios globally

• Maturing market will see further growth of “tail-end” transactions

• With over US$450* billion raised by Asian funds since 2000 and early funds at or nearing the end of their term, it is inevitable that an increasing volume of Asian private equity assets will be transferred in the secondary market (globally, 3-5% of capital raised is ultimately traded in the secondary market)

* Source: Prequin. Data as at August 2012

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Key Drivers

• Increasing regulation ̶ Dodd/Frank: Volcker rule ̶ Capital adequacy/Basel III ̶ Solvency III

• Stressed/distressed sellers ̶ denominator effect

• Focus on core business/portfolio management ̶ dispose of non-core subsidiaries ̶ tail-end funds

• End of fund life ̶ need to realise final assets in portfolio to wind up a legacy fund

A secondary sale is a legitimate and logical tool for managing a mature portfolio

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Emerging trends

• Increasing use of deferred consideration – Cogent study suggests effective interest rates of up to 10% on deferred portion

– deferred portion usually 50% or less of total transaction value

• GP-led transactions – as funds mature and with exits remaining difficult, an increasing number of GPs are

looking to the secondary market to refinance their existing funds and provide liquidity to LPs

• Globally, transaction sizes are increasing – but most Asian transactions are still sub-US$100m

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Emerging trends: transaction terms

• Deferred payment – structure of deferral: treatment in hands of seller?

• traditional deferred consideration vs. “new loan”

– security arrangements

– covenant packages

– guarantees

– cash sweep

• Conditions to closing – consents

– MAC?

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Emerging trends: transaction terms

• Warranties – up to two years

– scope of warranties

– secondary direct transactions

• Treatment of givebacks – pre/post valuation date

• “Problem” Transfers – detailed understanding of portfolio documents

– “structured’ transfers

– economic transfers

– need for holistic risk/reward assessment

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Potential tripwires

• GP Consent – on a sale, engage early

– structural alternatives to obtaining consent?

• Tax – buyers may not have the same tax preferences as seller

– FIRPTA withholding

• Investment Company Act – some non-US sellers may have invested in vehicles which buyer cannot participate in

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RMB Secondaries

• RMB market has many factors in common with the offshore market as a source of secondary transactions

– capital raised

– full exit hard to achieve

– shorter fund lives

• At least in theory, the RMB market presents an attractive opportunity

• Four key obstacles to execution for offshore buyers: – currency

– Foreign Investment Catalogue

– asset quality

– foreign “tainting”

• Solutions?

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Spin-outs: Key Considerations

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Management Team

• Purchase Price • Funding of Purchase

Price (equity/debt) • Consortium

Arrangements

• Structure of New Firm • Economics • Startup Cost • Regulatory Authorizations

• Governance • Carry/Management Fees • Availability of new capital • Investment Discretion • Keyman • Capitalization • Next Fund

• Track Record/Access to Information

• Separation Agreements • Ongoing Relationship • Consents under

Fund Agreements • Investor Relations

• Regulatory Approvals

• Portfolio Valuation • Secondary Sale

Agreement (Fund Interests and/or Direct Interests)

• Sale of GP interest?

• Consents • Transition Services

Financial Institution

Secondary Buyer(s)




Example Structure: Clean Sale

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Seller Buyer(s)

Single Vehicle

Transfer of Interests

Directs

Earnout Payments

Cash

Third Party Fund Manager

Portfolio Companies

Portfolio Companies

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Example Structure: Spin-out

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New Fund Vehicle/Entity

Existing Portfolio

Companies

Portfolio Companies

Seller Buyer(s)

Manager

Interests and Assets

Cash & Commitment

Cash Management

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Example Structure: Buy-in

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New Fund Vehicle/Entity

Portfolio Companies

Seller Buyer(s) Interests and

Assets Cash

Cash & Residual Interest Manager

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“Synthetic” Secondaries and fund resets: Key Fund Terms

Broadly similar to blind pool fund but

• management fees lower (linked to agreed budgets)

• may be stepped carried interest depending on return (both IRR and cash multiple)

• removal of GP often resisted in spin-out situation

• management warranties

• Default? unpopular with buyers/funders

• New investments?

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Regulatory Update O




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Note: we are not qualified to advise on China law: advice from local counsel should be taken

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China regulatory update: RMB FDI

• PBOC account formats – Pre-establishment expenses account

– Reinvestment account

– Capital increase account

– M&A account

– Share transfer account

– Foreign loan accounts

• QFLP program reactions – RMB accepted in Chongqing

– Shanghai authorized RMB without need for quota

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China regulatory update: NDRC

• “Blackstone decision” status – Restricted and prohibited industries

– Administrative practice by MOFCOM/AIC to date

– Administrative practice of CSRC to date

• NDRC recordals – National level

– Local level

– More disclosure

• NDRC opinions on recorded managers and publication – More annotations released regarding net worth test

– Implementation of look through rules

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China regulatory update: QFII

• Asset manager applicants – PE managers start to get approved

• Asset class – Inter-bank products

– SME bonds

– More to come?

• R-QFII – Fixed income focused asset class

– More rigid structures for managers seeking their own quota

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China regulatory update: QDII

• Insurance rules

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Onshore Offshore GP/Manager minimum registered capital or committed capital of

RMB100 million; have an AUM (means RMB denominated balance of actual paid-in assets and capital in China) of RMB3 billion

actual paid-in capital or net assets of at least US$15 million; have cumulatively managed assets of not less than US$1 billion

Team at least ten private equity related professionals, two of whom must have more than five years of experience and three of whom must have more than three years of experience, and at least one of the senior management member with more than eight years of experience; the relevant professionals must also have experience covering exits from at least three projects.

at least ten private equity related professionals, and at least two of the senior management members with more than eight years of experience that have experience covering exits from at least five projects, and at least three of the professionals have worked together for at least 3 years.

Fund have raised a minimum amount of RMB500 million private equity fund must have committed capital of not less than US$300 million and a portion of its commitments must have been contributed (it is not clear how much capital will be required to have been paid in to be approved and this will be subject to interpretation by CIRC)

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China regulatory update: QDLP

• Platform for hedge fund managers

• Allows for direct fundraising and conversion

• Feeder fund and management vehicles need to be in Shanghai

• Feeder invests into offshore Master Fund

• $100 million expected for each quota

• Applicants to be approved in batches with emphasis on managers who have previously managed CIC money

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Note: we are not qualified to advise on Singapore law: advice from local counsel should be taken

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• Consultation: 27 April 2010

• Effective: 7 August 2012

• Implementation Deadline: 6 February 2012

Singapore regulatory update – key dates

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Singapore Regulatory Update • “Enhanced regulatory regime” announced by Monetary Authority of Singapore

(MAS) • All corporations engaged in “fund management” must either be:

– Licensed FMCs (LFMCs); or

– Registered FMCs (RFMCs)

• “Fund management” means “undertaking on behalf of a customer (whether on a discretionary authority granted by the customer or otherwise), the management of a portfolio of securities or future contracts;...” (Schedule 2 to Securities and Futures Act of Singapore)

– in a limited partnership, typically the general partner shall be an FMC, but can be controlled by another FMC provided owned by key officers and/or shareholders of an FMC

– are investment advisors/sub-advisors included?

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Investment Advisers? “A person that acts as investment advisor, sub-advisor or provides research to other investment managers (either in Singapore or overseas) would be considered to be conducting fund management activity if the person is able to exercise direct or indirect control over the management of the investment portfolio. In determining whether such a person is able to exercise control over the investment portfolio, MAS may consider factors such as whether the person is involved in the construction of the investment portfolio; has knowledge of, or access to the holdings of the portfolio beyond what is publicly available; or is named or referred to in the fund’s prospectus, offering documents or marketing materials.”

– If purely internal function: probably no need to register

– Note section 339 Securities and Futures Acts: “extra-territoriality” provision makes life difficult

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Singapore – Categories of FMCs

(1) In general terms, LFMCs are required to obtain a capital markets service license from MAS and RMFCs are required to registered with MAS.

(2) This refers to the net value of AUM, excluding undrawn commitments or any leverage to which AUM are exposed

Category (1) Permissible Activities

LFMCs Retail LFMCs Fund management for all types of investors

Accredited Investor LFMCs

Fund management for unlimited number of qualified investors

RFMCs Fund management for - • < 30 qualified investors (of which < 15 funds or LLP) and • < $250 million AUM (2)

EXEMPTED Manager solely managing immovable assets and subject to conditions

Managing fund that invests solely in immovable assets and where the fund is offered only to accredited and/or institutional investors

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Singapore – Licensing/Registration Criteria and Ongoing Requirements

• Criteria for licensing or registration – Competency of key individuals

• E.g., for RFMCs, at least two relevant professionals (each with a minimum of 5 years of relevant experience) residing in Singapore

– Base capital requirements (+ risk capital requirements for LFMs)

– Putting in place regulatory compliance arrangements and risk management framework – Subject to adequate internal audit and independent annual audit

• Ongoing requirements – AUM may be subject to independent custody – Independent valuation and customer reporting – Appropriate measures for mitigating conflicts of interest – Adequate disclosure to customers

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Category Capital Requirements

Fund management of “collective investment scheme” (CIS) offered to investors other than an accredited or institutional investor

$1,000,000

Fund management of non-CIS for customer other than an accredited or institutional investors

$500,000

Fund management other than that described in (a) or (b) above $250,000

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International Reach

approximately 800 lawyers

16 offices 3 continents nearly 30 languages

SAN FRANCISCO

SILICON VALLEY

LOS ANGELES

CENTURY CITY

NEWPORT BEACH

WASHINGTON, D.C.

NEW YORK

LONDON BRUSSELS

BEIJING SEOUL*

TOKYO

SHANGHAI

HONG KONG

SINGAPORE

JAKARTA**

* O’Melveny & Myers LLP Foreign Legal Consultant Office ** O’Melveny & Myers LLP in Association with Tumbuan & Partners

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Los Angeles 400 South Hope Street Los Angeles CA 90071-2899 United States T: +1-213-430-6000 F: +1-213-430-6407

Newport Beach 610 New port Center Drive 17th Floor New port Beach CA 92660 United States T: +1-949-760-9600 F: +1-949-823-6994

New York Times Square Tow er 7 Times Square New York, NY 10036 United States T: +1-212-326-2000 F: +1-212-326-2061

San Francisco Tw o Embarcadero Center 28th Floor San Francisco CA 94111-3823 United States T: +1-415-984-8700 F: +1-415-984-8701

Shanghai Plaza 66, 37th Floor 1266 Nanjing Road West Shanghai, 200040 People's Republic of China T: +86-21-2307-7000 F: +86-21-2307-7300

Singapore 9 Raff les Place #22-01/02 Republic Plaza 1 Singapore 048619 T: +65-6593-1800 F: +65-6593-1801

Washington, DC 1625 Eye Street, NW Washington, DC 20006 United States T: +1-202-383-5300 F: +1-202-383-5414

Beijing Yin Tai Center Off ice Tow er 37th Floor No. 2 Jianguomenw ai Ave. Chao Yang District Beijing, 100022 People's Republic of China T: +86-10-6563-4200 F: +86-10-6563-4201

Brussels Blue Tow er 326 Avenue Louise Brussels, 1050 Belgium T: +32-2-642-4100 F: +32-2-642-4190

Century City 1999 Avenue of the Stars 7th Floor Los Angeles CA 90067-6035 United States T: +1-310-553-6800 F: +1-310-246-6779

Hong Kong 31st Floor, AIA Central 1 Connaught Road, Central Hong Kong S.A.R. T: +852-3512-2300 F: +852-2522-1760

London Warw ick Court 5 Paternoster Square London, EC4M 7DX England T: +44-20-7088-0000 F: +44-20-7088-0001

Tokyo Meiji Yasuda Seimei Building, 11th Floor 2-1-1, Marunouchi Chiyoda-ku Tokyo 100-0005 Japan T: +81-3-5293-2700 F: +81-3-5293-2780

Jakarta* Tumbuan & Partners Gandaria Tengah III/8 Kebay oran Baru Jakarta Selatan 12130 Indonesia The Plaza Of f ice Tower 41st Floor Jl. M. H. Thamrin Kav ling 28-30 Jakarta 10350 Indonesia T: +6221-2992-1988 F: +6211-2992-8198

*O'Melveny & Myers LLP in Association with Tumbuan & Partners

Silicon Valley 2765 Sand Hill Road Menlo Park CA 94025-7019 United States T: +1-650-473-2600 F: +1-650-473-2601

Seoul 23F Meritz Tow er 382 Gangnam-daero Gangnam-gu Seoul 135-934 Korea T: +82-2-6281-1700 F: +82-2-6281-1798

Office Locations

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Documents

LLP O'Melveny & LLP4th... · 21st November 2012 Hong Kong Fourth Annual Private Equity Seminar . O'Melveny & Myers LLP O'Melveny & Myers LLP O'Melveny & Myers LLP • Going-Private: