Hankun Law - Cross Border US China Fund Formation and Investment 11172016

Cross-border Fund Formation, VC/PE Investment
&
Transaction Risk Management
James Wang & Mike Chiang
2016.11.16

 Introduction to Han Kun Law Offices
 Part I. How to Form a China Fund (with/out Cross-border Element)
I. Purely Domestic RMB Fund vs. RMB Fund with Foreign Element vs. Cayman Fund
II. Role of Fund Lawyer
III. Formation of Purely Domestic RMB Fund
IV. Formation of RMB Fund with Foreign Element
V. Outbound Investment Fund
 Part II. Cross-border PE/VC Investment and Financing
1. Corporate Structure (Illustration of several common structure adopted by PRC Ventures)
2. PRC FDI Industrial Policies
3. Corporate Control
 Part III. Dispute Resolution in China-focused PE/VC Investments
Table of Content

Introduction to Han Kun
Introduction

12-Year Leading Investment & Financing Law Firm
Investment Funds
Leading National
Investment & Financing
Law Firm
Capital Markets
Antitrust
&
Competition
Banking/
Aircraft
Leasing
Intellectual
Property
Litigation
& Dispute
Resolution
FDI
VC/PE Transaction
2004
Beijing
Beijing
Shanghai
Shenzhen
Hong Kong
M&A
PE/VC Transactions
5 Lawyers
2016
250+Lawyers

Office Location
Beijing (HQs) Shanghai Shenzhen Hong Kong

Market Accolades
Tier 1 TMT China Firm, Legal500 Asia Pacific (2016-2017)
Private Equity Law Firm of the Year, ALB (2016)
Tier 1 Private Equity - Local Firms, IFLR1000 (2013-2017)
Tier 1 Investment Funds - Local Firms, IFLR1000 (2014, 2017)
Outstanding PRC Firm for Corporate/M&A, Investment Funds, IT, Telco & Media,
Private Equity, Asialaw Profiles（2017）
Band I Investment Funds PRC Firm, Chambers Asia Pacific (2016)
Private Equity & Venture Capital Firm of the Year, China Law and Practice (2016)
Most innovative Firm of the Year, China Law and Practice (2016)
Tier 1 M&A China Firm, ALB (2014-2016)
Outstanding PRC Firm in Capital Markets, Corporate/M&A and IT, Telco & Media,
Asialaw Profiles（2016）
Tier 1 Corporate and M&A China Firm, Legal500 Asia Pacific (2015)
PRC firm of the year- TMT, China Law and Practice (2014-2015)
Top 10 Power Law Firms, ALB (2015-2016)

Market Accolades (Cont’d)
Firm of the Year in China - Corporate and M&A, Asian-Mena Counsel (2015)
Top 10 law firms for China PE exit deals (by value), Top 10 PRC law firms by value of
M&A deals in China, China Business Law Journal (2016)
M&A Deal of the Year, ALB (2014-2015)
Private equity deal of the year - Yongye International privatization, Outbound deal of
the year - COFCO’s acquisition of Noble Agri and Nidera, China Law and Practice
（2015)
Top 10 PRC law firms by inbound M&A deal value, Top 10 PRC law firms by the
number of inbound M&A deals, China Business Law Journal (2015)
Leading PRC Law Firm in Capital Markets, Corporate/M&A, Investment Funds,
Private Equity, Chambers Asia Pacific (2013-2015)
Technology, media and telecommunications firm of the year, China Business Law
Journal (2015)
Private equity & venture capital firm of the year, China Business Law Journal (2014-
2015)
Band 1 Healthcare PRC Firms, Chambers Asia Pacific (2013-2014)

Market Accolades (Cont’d)
Top 5 China Venture Capital & Private Equity Legal Advisor of the Year, China
Venture (2014)
Tier 1 PRC Domestic PE Firms, ALB（2013）
Top 10 VC/PE-backed Overseas IPO Lead Legal Advisors, Zero2IPO Group (2011-
2012, 2014）
China M&A Legal Advisor of the Year (Domestic),China IPO Legal Advisor of the
Year (Cross-border),Top 5 China Venture Capital & Private Equity Legal Advisor of
the Year, China Venture (2013)
Debt & Equity-linked deal of the year - Baidu SEC-registered bond, China Law and
Practice (2013)
Boutique PRC Law Firm of the Year, Chambers China（2012）
Up-and-Coming Firm of the Year, China Law and Practice （2012）
Chinese Private Equity Law Firm of the Year, Acquisition International（2012）
M&A Law Firm of the Year, DealMakers（2012）
Tier 1 TMT Domestic Firm, Asialaw Profiles（2011-2012）
China Employer of Choice, ALB（2012, 2014-2016）

But I know what’s on your ...
Introduction

What really makes us different?
Introduction

What really makes us different
Law Firm of the New Generation → 3things that make us different
New Economy
VC&PE Cross-border

New Economy

New Economy – But Not By Choice…
 Example - Domestic M&A: 6 high profile mergers of No. 1 + No. 2 players in TMT
market in China in past 2 years. Our involvement → 100%
+
+ + + + + +
 Outbound M&A: Ranked by Thompson Reuters as No. 1 Firm for Outbound
Investment by both # of Deals and Volume of Deals

VC&PE

PE & VC
One of the first PRC law firms to specialize in providing high-end
professional legal services to Western VC/PE firms such as Sequoia,
IDG, Matrix on VC/PE investments and financings in China.
We have represented more than 200 VC/PE firms and companies in
over 2,000 transactions such as Sequoia, Qiming Ventures, KPCB,
MBK, FountainVest, IDG, DCM, Fidelity Asia, GGV, Northern Light,
Legend Capital, FreeS Fund, Gobi, Vertex, Zhen Fund, 01VC,DT
Capital, Spring Capital, JAFCO Asia, Vivo Ventures, SIG, Vickers
Venture, Burrill, OrbiMed, Merrill Lynch, GE Capital, Intel Capital,
Bertelsmann and Siemens Venture, closing 400-500 of VC/PE
investments/year on average in recent years.

 National fund team of dedicated fund lawyers
600+ funds formed (PRC / Cayman / BVI / HK / US / EU)
 Total capital commitments in excess of RMB 300 billion
Investment Fund & Asset Management

Representative Investment Fund & Asset Management Clients

Cross-border

Cross-border is in the firm’s genes.
Most of our partners were with leading international law
firms for many years or held senior in-house positions at
major global corporations.
Most of our 200+ lawyers are dual-qualified in the US (or
another foreign jurisdiction) in addition to China.

How To Form a China Fund (with/out Cross-border Elements)?
PART I

 Where to form the fund?
 Purely RMB Fund?
 RMB Fund with Foreign Element (foreign “tainted”)?
 Foreign Fund (Cayman vs. BVI vs. Delaware vs. European)?
 3 Key Considerations
 Who are your LPs (currency of capital and nationality)?
 Who are your GP team members (nationality / tax residency)?
 Where do you want to invest?
How To Form a China Fund (with/out Cross-border Elements) - General

If RMB Fund, 3Key Considerations too!
How To Form a China Fund (with/out Cross-border Elements) - General

I. Fundamentals of RMB Fund Formation
GP/MC
(LLC)
RMB Fund I
(LLP)
Investors
PRC
Venture
PRC
Venture
 Structure: Common Structures for RMB Funds
GP LP
GP
(LLP)
RMB Fund II
(LLP)
Investors
PRC
Venture
PRC
Venture
GP LP
UGP
(LLC)
Team
GP LP
GP
(LLP)
RMB Fund III
(LLP)
Investors
PRC
Venture
PRC
Venture
GP LP
UGP
(LLC)
Team
GP LP
MC
Management agreementOption I:UGP as MC
Structure I1 Two-layered Structure Structure 2: Three-Layered
Structure
Structure 3: Three-Layered Structure + Separate MC
Option II:GP as MC

 Role of Fund Lawyer

As GP Lawyer → Soldiers Laying Landmines

As LP Lawyer → Soldiers Removing Landmines

What happens if try to go thru landmine field w/o a good fund lawyer

 Fund Terms : Top 10 Most Negotiated Terms
1. Carry Construct (US vs. European waterfall; GP/All Partner Clawback)
2. Management Fee
3. Term, Extension, Who has to approve
4. Re-investment (recycling)
5. Successor Fund (often tied to investment period / % invested)
6. Conflicts / Affiliated Transactions
7. Allocation of Investment Opportunity
8. Key Man Provision / Time & Attention Commitment (Suspension/Termination of Investment Period,
Termination of Fund)
9. LP Remedies against GP Bad Acts (Fault/No-fault GP Removal/Termination of Fund, Carry Hair-cut)
10. Investment restrictions (concentration risk, investment in public companies, other funds, real estate,
oil & gas, hostile deals, bridge financing, borrowing)

 Fund Terms: Top 10 Most Negotiated Terms – Distribution Waterfall
1、Return of such
LP’ Contribution
(all /attributable to
realized investment)
2、Such LP’s
Preferred Return
3、GP Catch-up on
such LP Preferred
Return
4、GP 20% Carried
Interest, LP 80%
1、Return of All
Partners’
Contribution (all
/attributable to
2、All Partners
Preferred Return
(including GP and LP)
3、GP Catch-up on
all Partners Preferred
Return
4、GP 20% Carried
Interest, all Partners
80%
1、Return of all
LPs’ Contribution
(all /attributable to
2、All LPs’
Preferred Return
3、GP Catch-up
on all LP s’
Preferred Return
4、GP 20%
Carried Interest, all
LPs 80%
#1 Without
Preliminary
Apportionmen
t of GP
#2 With
Preliminary
Apportionmen
t of GP
Partner by
Partner
Accounting
Return to All
Partners

 Fund Terms: Top 10 Most Negotiated Terms – GP Clawback
Upon liquidation vs.
Mid-term Clawback
before tax vs. after
tax（team
members）
Individual members’
carry clawback
guarantee
Do not forget PR
Escrow :
• 25%-50%
• Until satisfaction of Fair
Value Test / Minimum
Valuation Test / other

 Terms: Top 10 Most Negotiated Terms – All Partners Clawback
Amount Limit:
 [25%] of capital Commitment , and/or
 [100%//50%] of aggregated distribution
Temporal Limit:
 [1.5-2 yrs] after fund liquidation, and/or
 [2//3 yrs] after receiving such distribution
Distinguish btw :
 clawback obligation relating to indemnification obligation of the fund
 clawback obligation relating to portfolio investment

 Fund Terms: Top 10 Most Negotiated Terms - Management Fees

 Allocation of Carry
Founding
Member
Others Members
carry
Member
Member
carry
Member Member
Member
Member
Others?

II. Formation of RMB Fund with Foreign Element
 What does “foreign element” mean?
1. Foreign LPs,
2. Foreign GP members, or
3. Foreign investment destination

III. Formation of China Fund with Foreign Elements
PRC OFFSHORE
PRC ONSHORE
FIE PFM
QFLP Fund I
Foreign
PFM
Qualified Foreign
Investors
GP QFLP
 Foreign Private Fund Manager (PFM)
− Restrictions on operation of Foreign PFM in PRC
 Foreign-invested PFM (FIE PFM)
− Private Securities Investment Fund Manager vs. Private PE/VC Fund Manager
− Obstacles in establishing a FIE PEM in PRC (Requirements & Procedures)
− AMAC Registration of FIE PFM
 Qualified Foreign Limited Partnership (QFLP) Pilot Programs
− Shanghai, Tianjin, Beijing, Shenzhen, etc.
− Source of Fund: QFLP, PRC LPs, or Both
− Pros & Cons
 Foreign Element adds complexity to an already overly complex
fund formation process in China
QFLP Fund II
PRC
Investors
GPLP
PRC Venture
PRC Venture
PRC Venture
PRC Venture
 Foreign-invested PFM & QFLP Fund

 PROS & CONS
− RMB Fund may invest in all industries, including those are prohibited or
restricted from foreign investment.
− Additional turnover tax burden
− Uncertainties and risks still exist with regard to:
− Compliance with PRC Laws；
− Effective control over operational of RMB GP;
− Enforcement of contractual arrangement
III. Formation of China Fund with Foreign Elements
 Domestic RMB Fund with VIE Structure

IV. Formation of Outbound Investment Fund
 Procedures of ODI by RMB Fund
− Filing for ODI record filing with NDRC or its local counterpart
− Applying for ODI approval by MOFCOM or its local counterpart
− Applying for ODI foreign exchange registration with SAFE or its local counterpart
− Applying for ODI approval by other competent authorities (if any)
 Limitation on ODI
− ODI in oversea financial institutions (including offshore investment funds) may not be allowed,
as ODI is defined as investment by PRC non-financial enterprises into offshore Non-Financial
enterprise
− Large amount of investment is subject to higher level of scrutiny and PRC authorities’
discretional approvals
 Other channel for Outbound Investment
− Qualified Domestic Institutional Investor(QDII)
− Qualified Domestic Limited Partnership (QDLP)
− Qualified Domestic Investment Enterprise (QDIE)

Cross-border PE/VC Investment & Financing
- Key Legal Issues to Consider from Founder’s Perspective -
PART II

 5 Key Factors to Consider When Determining Corporate Structure for a PRC Venture
 Where are you from? → Background of Founder(s)
− Sole Founder or Co-Founders
− PRC citizen or Non-PRC citizen
 What do you do? → Type of Business & Foreign Restrictions
− Prohibited, Restricted, Permitted or Encouraged Industries from Foreign Investment in PRC
(whether it is subject to restrictions imposed by PRC FDI Industrial Policies)
 Where are your investors from? → Channels for Financing
− Own Money, Friends and/or Relatives, Banks, Angel Investors, VC/PE, IPO, strategic investor
(such as BAT)…
 How do you plan to sell the business? → Exit Routes for Investors
− IPO (PRC or Overseas) or Trade Sale…
 Tax Consideration
I. Choosing the Right Corporate Structure

4Options:
Pure
Domestic
Co.
VIE WOFE
JV Structure

PRC OFFSHORE
PRC ONSHORE
PRC Venture
PRC
Founder(s)
VC/PE
PRC OFFSHORE
PRC ONSHORE
PRC Venture
PRC
Founder(s)
VC/PE
Structure 1: Pure Domestic Co.
 Operating in industries prohibited and/or
restricted from foreign investment (O)
 Financing from PRC VC/PE (O)
 Financing from Oversea VC/PE (X)
 Listing on PRC Stock Exchange (O)
 Listing on Oversea Stock Exchange (X)
Structure 2: JV Structure
 Operating in industries prohibited and/or restricted from
foreign investment (*)
 Financing from PRC VC/PE (O)
 Financing from Oversea VC/PE (O)
 Listing on PRC Stock Exchange (O)
 Listing on Oversea Stock Exchange (X)
VC/PE
 Common Corporate Structures of VC/PE-backed PRC Ventures (1/2)
(Assuming Founders are all PRC citizens)
* PRC Ventures adopting Structure II
may not operate in industries prohibited
from foreign investment, but may
operate in certain industries restricted
from foreign investment, provided
restrictions imposed (e.g., limitation on
shareholding structure) are all complied
with.

HK Co.
WFOE
PRC Venture
PRC
Founder(s)
Contractual Arrangement
Cayman Co.
PRC
Founder(s)
BVI Holding
Co.
PRC OFFSHORE
PRC ONSHORE
VC/PE
HK Co.
PRC Venture
Cayman Co.
PRC
Founder(s)
BVI Holding
Co.
PRC OFFSHORE
PRC ONSHORE
VC/PE
Structure 3: WOFE Structure
 Operating in industries prohibited and/or restricted
from foreign investment (X)
 Financing from PRC VC/PE (*)
 Listing on PRC Stock Exchange (X)
 Listing on Oversea Stock Exchange (O)
Structure 4: VIE Structure
 Operating in industries prohibited and/or
restricted from foreign investment (O)
 Financing from PRC VC/PE (*)
 Listing on PRC Stock Exchange (X)
 Listing on Oversea Stock Exchange (O)
VC/PE VC/PE
 Common Corporate Structures of VC/PE-backed PRC Ventures (2/2)
(Assuming Founders are all PRC citizens)
* Investment by PRC VC/PE in to PRC Ventures adopting Structure III and IV
constitute round-trip investments by domestic enterprises, and whether such
investments may be made are subject to PRC authorities' discretional approval.

II. PRC Foreign Investment Regulation Regime
Foreign Investment Guidance Catalogue
Updated every few years
1.Prohibited
2.Restricted
3.Encouraged
4.Permitted
Revamping Foreign Investment Regime (as of 10/1/2016)
From Approval to Registration (Negative List) Regime

PRC OFFSHORE
PRC ONSHORE
 PRC FDI Industrial Policies – further explained (1/4)
Foreign Investors
PRC Venture
（FDI Permitted or
Encouraged)
PRC Venture
（FDI Restricted)
PRC Venture
（FDI Prohibited)
WFOESino-Foreign JV
Sino-Foreign
Cooperative JV
Foreign Investors
Foreign-invested
investment
company
PRC Venture
（FDI Permitted or
Encouraged)
PRC Venture
（FDI Restricted)
PRC Venture
（FDI Prohibited)
PRC OFFSHORE
PRC ONSHORE
Foreign Direct Investment by Foreign Investors Re-Investment by Foreign-invested Enterprises (FIEs)

Investment by Enterprises invested by FIEs
WFOESino-Foreign JV
Sino-Foreign
Cooperative JV
Foreign Investors
Foreign-invested
investment
company
PRC Venture
（FDI Permitted or
Encouraged)
PRC Venture
（FDI Restricted)
PRC Venture
（FDI Prohibited)
PRC OFFSHORE
PRC ONSHORE
Enterprises invested by FIEs
(Categorized as domestic enterprises for business registration purpose, but for other purposes?)
Categories of
Investors with foreign
investment
Whether such Investors will be deemed as
domestic companies for deciding application
of PRC FDI Industrial Policies
H-share Companies
(i.e., PRC established
Companies listed on
Hong Kong Stock
Exchange)
may be deemed as a domestic company if: (1)
percentage of shares held by foreign investors in
it is less than 10%; or (2) it has obtained an
approval from competent authority to classify it as
a domestic company
A-share Companies
with foreign factor
(i.e., PRC established
Companies listed on
PRC Stock Exchange)
may be deemed a domestic company if: (1）
percentage of shares held by foreign investors in
t is less than 10%; and (2) it does not have any
foreign strategic Investors
Offshore enterprises
established by state-
owned enterprises
Controversies exist, but there are several
precedents in which such investors are treated as
domestics enterprises
Others Unless it has obtained an approval from
competent authority to classify it as a domestic
company, it will be deemed as a “foreign investor”
no matter how may layers of intermediary
companies have been inserted between it and
PRC Venture, and regardless of specific
shareholding percentage of its investors with
foreign investment

WFOESino-Foreign JV
Sino-Foreign
Cooperative JV
Foreign Investors
Foreign-invested
company limited
by Shares
PRC Venture
（FDI Permitted or
Encouraged)
PRC Venture
（FDI Restricted)
PRC Venture
（FDI Prohibited)
PRC OFFSHORE
PRC ONSHORE
Enterprises invested by FIEs
(Categorized as domestic enterprises for business registration purpose, but for other purposes?)
PRC Authorities Reviews on application of FDI Industrial Policies
MIIT and its
Local
Counterparts
- Regulator for Telecommunication industry
- Will conduct substantial review and look through to
ultimate investors to determine whether an
enterprise has any foreign investment and therefore
shall be subject to restrictions imposed by FDI
Industrial Policies
MOC and its
Local
Counterparts
- Regulator for Cultural industry
- Will not conduct substantial review but rely on
representation made by each enterprise to determine
whether it shall be subject to restrictions imposed by
FDI Industrial Policies
SAPPRFT and its
Local
Counterparts
- Regulator for Press, Publication, Radio, Film and
Television industry
- Will not conduct substantial review but rely on
representation made by each enterprise to determine
whether it shall be subject to restrictions imposed by
FDI Industrial Policies
CSRC and its
Local
Counterparts
- Regulator for securities industry and approval of
company listing
- De facto Controller are required to disclose its
ultimate investors, and other shareholder are only
required to disclose its direct investors
Investment by Enterprises invested by FIEs

Work-around: VIE Structure (Revisited)
HK Co.
WFOE
PRC Venture
PRC
Founder(s)
Contractual Arrangement
Cayman Co.
PRC
Founder(s)
BVI Holding
Co.
PRC OFFSHORE
PRC ONSHORE
VC/PE
VC/PE
 Initially adopted by Sina.com in its U.S. IPO, and currently employed by
numerous PRC Ventures, especially in TMT sector(such as Tencent, Baidu,
Alibaba, VIPS, NOE, etc.).
 The contractual arrangement consists of a series of agreements and documents
that allow the WFOE to exercise effective control over the PRC Venture, receive
substantially all of the economic benefits of the PRC Venture, and have an
exclusive option to purchase all of the equity interests in the PRC Venture when
such purchase is permitted by the PRC law.
 Uncertainties and risks still exist with regard to:
− Compliance with PRC Laws；
− Effective control over operational of PRC Venture (Moral Hazard)
（disputes concerning Alipay, XDF, Tudou, etc.）;
− Enforcement of contractual arrangement (Rely on PRC court to
enforce the contractual arrangement).
On VIE Structure:

III. Diversifying Ownership while Keeping Control over PRC Venture
 Key Factors Affect Control over Venture (1/2)
 Within team - Preliminary Allocation of Equity Interests among Founders
− Startup capital put in by each Founder
− Willingness to work for the Venture (full time or part time indefinitely or for a period only)
− Contributions to the operation of the Venture (technology, management, marketing, etc.)
− Resources each Founder may bring to the Venture (financing, strategic cooperation, etc.)
 Toward outside investors - Arrangement to Guarantee Founder’s Control over Venture
− Partnership-like Arrangement
− Voting Trust Arrangement
− Dual-shares Structure
− Agreement to Act in Concert

III. Diversifying Ownership while Keeping Control over PRC Venture
 Key Factors Affect Control over Venture (2/2)
 Partnership-like Arrangement
− Alibaba adopted a partnership-like arrangement in its articles of association
that allow the “partners” consist of Founders and key management to
nominate more than half of the Board members, which in fact allows the
“partners” an effective control over Board.
− Allowed in U.S., but not allowed in PRC or Hong Kong.
 Voting Trust Arrangement
− JD adopted voting trust arrangement before its U.S. IPO. As a pre-
condition to accept the investment by investor, JD required investors
to sign a POA to entrust their voting rights to Richard Liu.
− Only applicable when PRC Ventures have adequate leverage to
negotiate, and not allowed when PRC Ventures go public.
 Dual-shares Structure
− Baidu, JD, and various PRC Ventures with oversea structure (WFOE or
VIE structure) have adopted dual-share structure. The PRC Ventures issue
different classes of shares to Founders and investors, respectively, and
each share issued to the Founders have multiple of voting rights that each
share issued to the Investors have.
− Allowed in U.S., but not allowed in PRC or Hong Kong.
 Agreement to Act in Concert
− Founders of Tencent have entered into an Agreement to Act in
Concert with investor MIH back in 2004, according to which the MIH
agrees to act in concert with Founders with respect to matters
including significate investment, re-organization, etc.
− Only applicable when PRC Ventures have adequate leverage to
negotiate, and not allowed when PRC Ventures go public.

 Risks inherent in Vagueness of PRC Law / Regulation
→ 3things about law you may not know :
1. What the law means;
2. How it will be implemented in practice; and
3. Where the law is
• Access to law and regulation (to select group of industry participants)
Managing Risks of Doing Business in China

 State policy
 Swift changes and unpredictability
 Forex/ODI Policy 2014 vs. 2015-2016
 Financial innovation vs. cramming down (CBRC innovation department)
 Regulation on private funds
 Local government attitude toward certain industries such as private fund
and P2P
 Window guidance (in areas such as financial regulation)
 Summer 2015 Stock Crash
 Insider trading and violation of securities regulation allegations
 Foreign hedge funds and domestic stock market participants were penalized
Managing Risks of Doing Business in China

One Advice
Two Things to Keep in Mind when Doing Business in China
One Observation: Chinese law, regulation and policy could
change overnight, so always have a Plan B.
: Get it a good lawyer. Resist the temptation to
ask for heavy fee discount - it may not serve your own
interest at the end of the day.

Resolving Disputes in China-focused PE & VC Investments
PART III

Typical Investment Structures
Introduction to
VIE Structure
 Without VIE Arrangement
Founders
BVI or Cayman
Holding Company
Investors
Hang Kong
Holding Company
WFOE
Offshore
PRC
100%
100%

Typical Investment Structures
 With VIE Arrangement
Founder A Founder B
BVI Co. BVI Co. VC/PE Investors
Cayman Holding Company
Hong Kong Holding Company
WFOE Domestic Company (OPCO)
Founder A Founder B
100% 100%
100%
100%
100%
100%
VIE Agreements
Offshore
PRC

Transaction Documents
Introduction to
VIE Structure
1. Share Subscription and/or Share Purchase Agreement(s)
2. Shareholders Agreement or Investors’ Rights Agreement
3. Ancillary Agreements
 VIE Agreements
 Founder’s Employment Agreement
 Non-Compete and Confidentiality Agreement
 Share Charge or Pledge Agreements

Typical Governing Law and Dispute Resolution Provisions in the Transaction Documents
Introduction to
VIE Structure
 Governing Law
Any dispute, controversy or claim arising out of or in connection with this Agreement shall be governed by and
construed in accordance with the Laws of Hong Kong regardless of the Laws that might otherwise govern under
applicable principles of conflicts of law.
 Dispute Resolution
Any dispute, controversy or claim arising out of or relating to this Agreement, including the existence, validity,
interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising
out of or relating to it shall be referred to and finally resolved by arbitration administered by the Hong Kong
International Arbitration Centre (the “HKIAC”) under the Hong Kong International Arbitration Centre Administered
Arbitration Rules (the “Rules”) then in effect when the Notice of Arbitration is submitted. The arbitration shall be
conducted in English language by three arbitrators with one arbitrator appointed by the claimant(s), one arbitrator
appointed by the respondent(s) and the third arbitrator appointed by the mutual agreement of the two arbitrators
appointed by the parties of the arbitration, and if no agreement can be reached for the appointment of the third
arbitrator within thirty (30) Working Days after the other two arbitrators have been appointed, then the third arbitrator
shall be appointed by the HKIAC. The arbitration shall take place in Hong Kong and the judgment upon any award
rendered in such arbitration will be final and binding.

Possible Disputes
 Breaches of Protective Covenants
Sample Protective Covenants Clause.
Prior to the Listing of the Company, each of the Group Companies (where applicable) shall not,
without the prior approval of sixty-six point seventy percent (66.70%) of the total number of the
Board of such Group Company (which shall include the approval of the Investor Director for such
Group Company), take or do or agree to take or do any of the following actions or transactions:
(a) alter or change the rights, preferences, privileges, or powers of, or the restrictions of
provided for the benefit of, the Target Shares;
(b) authorize, create, issue any shares of the Group Companies or increase or decrease
the number of issued shares in any of the Group Companies;

Possible Disputes
(c) reclassify any outstanding securities, registered capital or other equity interest in any
Group Company;
(d) authorize, create or issue of any debt securities or interest, or any securities or
interest exercisable, convertible or exchangeable for any shares or other equity or debt
securities or interest by each such Group Company to any third party;
(e) lend money to, borrow money from third parties;
(f) declare or pay any special dividend;
(g) conduct any acquisition, merge, consolidation, expansion, scheme of arrangement,
recapitalization, reclassification, split–off, spin-off or sale or other disposition of all or
substantially all of the business, goodwill, assets and/or equity equivalents of any of the
Group Companies;

Possible Disputes
(h) purchase, repurchase, redeem or cancel, directly or indirectly of any share capital or
other equity securities (or any securities exercisable for or convertible or exchangeable
into such securities of any Group Company), except as expressly provided in the M&AA
in respect of the redemption of the Target Shares at the election of the Investors;
(i) sell, lease, charge, pledge, mortgage, grant a security interest in, encumber, transfer
or dispose of the assets or equity interest of the Group Companies;
(j) adopt or amend the annual business plan and/or budget of the Group Company or
adopt any items which deviate any Group Company’s business from the core business as
contained in the annual business plan or budget;
(k) incur capital expenditures in excess of US$500,000 during any fiscal year, except for
capital expenditures incurred pursuant to the then current business plan or annual budget
approved by the Board;

Possible Disputes
(l) conduct transactions with any related or affiliated parties (other than the enterprises
included in the consolidated financial statement of the Group Companies, or those
transactions which occurred in previous year(s) and subsisting as at the Closing Date);
(m) adopt any amendment to the M&AA, articles of association, certificate of
incorporation, by-laws or any similar constitutive documents;
(n) materially change its accounting principles, procedures, policies (other than those
required under the applicable accounting standards);
(o) appoint or change an auditor of the Group Companies that is not a Big-four
international accounting firm;

Possible Disputes
(p) proceed with dissolution, liquidation, winding-up, re-capitalization, reorganization, or
bankruptcy (other than for the purpose of the Listing) of any Group Company;
(q) initiate or settle any material lawsuit, proceedings, or disputes that involve amounts of
more than five percent (5%) of any Group Company audited net assets, except those
lawsuits, proceedings, or disputes arising from or in connection with matters in relation to
the ordinary course of business of the Group Companies;
(r) determination of the listing venue, timing, valuation, auditor, underwriter(s) and other
terms of any initial public offering of the Company's ordinary Shares; and
(s) adopt any employee incentive plan, including but not limited to cash bonus and share
option plan.

Possible Disputes
 Failure to meet the performance benchmark
Sample Performance Adjustment Clause.
The Total Subscription Price is calculated based on that the post-money valuation of the Company
on a fully-diluted basis (the “Post Money Valuation”) immediately after the Closing and without
taking into account any adjustment as provided in this Subscription Agreement, equaling to sixty
million US dollars (US$60,000,000).
The Parties agree that (i) the Net Profit for the fiscal year ended on December 31, 2017 (i.e.
January 1, 2017 to December 31, 2017) (the “2017 Net Profit”) shall not be less than six million
US dollars (US$6,000,000) (the “2017 Target Net Profit”).

Possible Disputes
In addition to any other rights the Investors may be entitled to hereunder, in the event that the
2017 Net Profit is lower than the 2017 Target Net Profit, the Investors shall have the right to
request a one-time performance adjustment. Such right shall be exercised by the Lead Investor
on behalf of the Investors by a written notice to the Existing Shareholder (the “2017 Adjustment
Notice”). Upon receipt of such 2017 Adjustment Notice, the Company shall adjust the
shareholding percentage of the Investors pursuant to Section XXX below, or (ii) provide cash
compensations pursuant to Section XXX below, or (iii) a combination of a shareholding percentage
adjustment and cash compensations such that the Investors receive the same aggregate
economic benefit as they would be entitled to ……..

Possible Disputes
Sample Qualified IPO Clause.
The Group Companies shall, with the goal of achieving the Qualified IPO within twenty-four (24)
months after the Closing or such later date as the Company and the Lead Investor mutually agree
to, submit an application for the Listing at a time that can be reasonably expected to achieve the
Qualified IPO by the above date.
In the event that the Company fails to achieve the Qualified IPO within twenty-four (24) months
after the Closing or such later day as mutually agreed to by the Company and the Lead Investor,
the Investors shall be entitled to exercise the First Put Option Right as set forth in Section XXX of
this Agreement.

Possible Disputes
 Unable to honor Investor’s put option right
Sample Put Option Right Clause.
In the event that (i) the Company fails to meet the Qualified IPO requirements or the Qualified IPO as set forth
in Section XXX has not been accomplished within twenty-four (24) months after the Closing Date; or (ii) the
Company fails to meet its 70% of 2017 Target Net Profit, each of the Investors shall have the right (“Put
Option Right”) to sell all or any part of (as specified in the Put Option Notice (as defined below)) the Target
Shares (for the purpose of this Section XXX, Target Shares shall include all 2017 Compensation Shares or
other shares or Securities of the Company (if any) held by the Investors at time of exercise of the Put Option
Right) (“Put Option Right Shares”) to the Guarantors, at the sole discretion of the Lead Investor, and the
Guarantors shall purchase all of the Put Option Right Shares from the Investors at a purchase price (“Put
Option Right Price”) equal to the Subscription Price and/or the Purchase Price applicable to such Put Option
Right Shares plus an annual interest of 10% on a compounding basis (in US$ terms) (the “Put Option
Interest”) and all accrued and unpaid dividends on the First Put Option Right Shares…………..

Possible Disputes
 Unable to honor the Investor’s redemption rights
Sample Redemption Clause.
In addition to other rights the Investors may have under the Transaction Documents or the
applicable laws and regulations, the Investors shall be entitled to request the redemption of the
remaining Convertible Bonds (if not converted in full) and the payment in cash and US$ of the
principal amount of such remaining Convertible Bonds and an amount of interest representing
20% of the internal rate of return (“IRR”) of the Principal Amount from the date of issuance of the
Convertible Bonds to the payment date, upon giving forty-five (45) days’ notice in writing, if:-
(1) the Company has breached the use of proceeds provisions as stipulated in this Agreement and
failed to cure such breach within two (2) months upon receiving notification of the breach from the
Investors; or

Possible Disputes
(2) the Company has involved in any material misrepresentation regarding the financial statements
or Latest Audited Accounts of the Company; or
(3) the Company ceases to be listed or admitted to trading suspension up to thirty (30) days on the
Hong Kong Stock Exchange; or
(4) if there has been a breach of any representation, warranty, covenant or agreement on the part
of the Company set forth in the Transaction Documents, which breach has not been cured within
two (2) months after receiving the notification of breach from the Investors, except for which that
will not, individually or in the aggregate, have a material adverse effect on the operation or
financial position of the Company; or

Possible Disputes
(5) the Company issues any new Shares in aggregate in excess of its general mandate starting
from the date of the issuance of the Convertible Bonds to the maturity of the Convertible Bonds,
except for the issuance pursuant to the refreshed general mandate to be approved by the
shareholders in the extraordinary general meeting to be held prior to May 31 2019 provided that
the number of which shall not be more than XXXXX; or
(6) the occurrence of any of the following events (a) the insolvency of the Company, (b) the
commission of any act of bankruptcy by the Company, (c) the execution by the Company of a
general assignment for the benefit of creditors, (d) the filing by or against the Company of a
petition in bankruptcy or any petition for relief under the applicable bankruptcy law or the
continuation of such petition without dismissal for a period of ninety (90) days or more, (e) the
appointment of a receiver or trustee to take possession of the property or assets of the Company
or (f) the appointment by the Company of an administrator or administrative receiver.

Possible Disputes
 Breaches Founders’ and the company’s representations and warranties
Sample Representations and Warranties Clause.
Each of the Company, PRC Co., PRC Co. Shareholders (with respect to PRC Co. Shareholders,
only with respect to the representations and warranties applicable to PRC Co. and PRC Co.
Shareholders) and the WFOE (each, a “Representing Party” and collectively, the
“Representing Parties”) hereby represents and warrants to the Investor, except as set forth in
the Disclosure Schedule (the “Disclosure Schedule”) attached to this Agreement as Exhibit E,
as of the date hereof and, where appropriate, the date of each Closing, as follows:

Possible Disputes
 Organization, Standing and Qualification.
 Due Authorization.
 Compliance with Laws; Consents and Permits.
 Compliance with Other Agreements and Documents.
 Capitalization.
 Use of Proceeds.
 Valid Issuance of Series A Shares and Common Shares.
 Financial Statements.
 Title to Properties and Assets.

Possible Disputes
 Intellectual Property.
 Material Liabilities.
 Litigation.
 Tax Matters.
 Employee Matters.
 Material Contracts and Obligations.
 Interested Party Transactions.
 Changes in Condition.

Possible Disputes
 Breaches Founder’s post-closing covenants
Sample Post-Closing Restructuring Clause.
(a) Within three (3) months after the Closing, the Selling Shareholder, Mr. X and Mr. Y shall
complete the sale and purchase of XXXX Ordinary Shares of the Company and obtain all the
governmental approvals and registrations required for such sale and purchase of XXXX Ordinary
Shares, including but not limited to the approvals and registrations required under Circular 37, and
upon the completion of such sale and purchase, the Selling Shareholder, Mr. X and Mr. Y shall
own XXX, XXX and XXX Ordinary Shares of the Company respectively, being approximately XXX
percent (XXX%), XXX percent (XXX%) and XXX (XXX%) of all the issued shares of the Company
as enlarged by the Subscribed Shares agreed to be subscribed for by the Investors under this
Agreement.

Possible Disputes
(b) If for any reason, Mr. X and Mr. Y cannot complete their respective individual foreign exchange
registration in accordance with Circular 37 for their respective purchase of XXX and XXX Ordinary
Shares of the Company from the Selling Shareholder: (i) Mr. X and Mr. Y shall jointly establish a
limited liability company in the PRC (the “Founder Holding Co.”), while Mr. X and Mr. Y shall
respectively hold XXX percent (XXX%) and XXX (XXX%) of the total equity interest of the Founder
Holding Co.; (ii) Mr. Z shall sell to the Founder Holding Co., and the Founder Holding Co. shall
purchase from Mr. Z XXX shares of the Selling Shareholding, and upon the completion of such
sale and purchase, Mr. Z and the Founder Holding Co. shall own XXX and XXX shares of the
Selling Shareholder respectively…..

Possible Disputes
Sample Circular 698 Filing Clause.
Within thirty (30) days after the signing date of this Agreement, the Selling Shareholder and WOFE
shall submit tax filing documents to the competent PRC tax authority with respect to the Purchase
Price to be paid by the Investors and received by the Selling Shareholder in accordance with the
provisions of Circular 698 and Circular 7 and other requirements of the relevant tax authority. The
Investors are hereby authorized to use any or all of the Withheld Tax Amount to pay any enterprise
income tax amount imposed by the relevant tax authority on the Selling Shareholder. The costs of
the foregoing tax declaration and any amount of the enterprise income tax imposed by the tax
authority which exceeds the Withheld Tax Amount shall be solely borne and promptly paid by the
Selling Shareholder.

Possible Disputes
Sample Full Time Commitment Clause.
Each of the Founders respectively undertakes and covenants to the Investors that commencing
from the date of this Agreement until a Qualified IPO of the Group Companies, he shall commit all
of his efforts to furthering the business of the Group Companies and shall not, without the prior
written consent of the Investors, either on his own account or through any of his Affiliates, or in
conjunction with or on behalf of any other person, (i) possess, directly or indirectly, the power to
direct or cause the direction of the management and business operation of any entity whether (A)
through the ownership of any equity interest in such entity, or (B) by occupying half or more of the
board seats of the entity; or (C) by contract or otherwise; or (ii) devote time to carry out the
business operation of any other entity.

Mechanism for Resolving Disputes
 Arbitration vs. Court Litigation
 Neutrality
 Expertise
 Confidentiality
 Flexibility
 Finality
 Speed and Cost
 Enforceability
New York Convention
Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland
and the Hong Kong Special Administrative Region (“Arrangement”)
 Others

Venue for Resolving Disputes
 Hong Kong International Arbitration Centre (“HKIAC”) vs. Singapore International Arbitration
Centre (“SIAC”)
 China International Economic and Trade Arbitration Commission (“CIETAC”) a new option
 Ancillary Proceedings
 Actions on offshore holding company level
 Actions in connection with onshore operation or onshore companies

Arbitration/litigation a means but not an end
 Exit by forcing the Founders to buy back the Invested Shares
 Exit by having the Invested Shares purchased by the new investors
 Exit by having the Invested Company or its assets bought by the new investors or third party
 Other Exit Strategies

Q&A
Question
Answer Discussion

James Yong Wang (王勇)
Han Kun Law Offices
Email: james.wang@hankunlaw.com
Cell (China) & WeChat : (86) 138 1149 9450
Cell (China) : (86) 185 1188 0418
Cell (New York) : (001) 646 285 1100
Mike Chiang （蒋尚仁）
Han Kun Law Offices
Email: mike.chiang@hankunlaw.com
Cell (China) : (86) 136 6189 6350
General: (86) 216080 0909
Direct: (86) 216080 0919

Hankun Law - Cross Border US China Fund Formation and Investment 11172016

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