This document summarizes Winston & Strawn LLP's presentation on recent legal and business trends in China. It discusses China's growing economy and two-way investment trends between China and other countries. It also outlines China's rising consumer market, key PRC regulatory issues foreign companies face, and common Chinese deal structures. Recent enforcement of China's Anti-Monopoly Law is also summarized.

1. © 2014 Winston & Strawn LLP
China is Changing - Is Your Company Prepared?
September 2014

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Today’s Speakers
Daniel Tang Partner Hong Kong dktang@winston.com +852-2292-2152
Mabel Lui Head of Corporate – Asia Hong Kong mlui@winston.com +852-2292-2282
Giovanni Marino Partner Hong Kong gmarino@winston.com +852-2292-2229

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Today’s Topics
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Winston’s Asia Corporate Practice
2.
Two-way Investment Trends
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Players
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Opening up
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New IFCs
3.
Rise of Consumer Market
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Evolving distribution/franchise models
4.
PRC regulatory and tax Issues
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Key issues
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Deal Structures
5.
Recent Developments
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Winston’s Asia Corporate Practice

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Winston’s Asia Corporate Practice
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Mabel Lui
Head of Corporate – Asia
Hong Kong
+852-2292-2282
mlui@winston.com
Simon Luk
Chair of Asian Practice
Hong Kong
+852-2292-2222
sluk@winston.com
Daniel Tang
Partner, Corporate
Hong Kong
+852-2292-2152
dktang@winston.com
Marco Pocci
Partner, Corporate
Hong Kong
+852-2292-2151
mpocci@winston.com
Giovanni Marino
Partner, Corporate
Hong Kong
+852-2292-2229
gmarino@winston.com
Hong Kong

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Winston’s Asia Corporate Practice
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Laura Luo
Partner, Corporate
Shanghai, Beijing
+86-21-2208-2623
lluo@winston.com
Bertrand Théaud
Shanghai Office Managing Partner
+86-21-2208-2620
btheaud@winston.com
Brinton Scott
Partner, Corporate
Shanghai, Beijing
+86-21-2208-2654
bscott@winston.com
Matthew Durham
Partner
Shanghai, Beijing
+86-21-2208-2712
mdurham@winston.com
Shanghai / Beijing
Taipei
Horng-Dar Lin
Partner, Corporate
Taipei
+886 (2) 8729 7306
hdlin@winston.com
David E. Wang
Partner
Taipei, Silicon Valley
+1 (650) 858-6588 dewang@winston.com

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Two-way Investment Trends

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Two-Way Trends – Setting the Scene
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China’s Growing Economic Powers
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China surpassed Japan as the world’s second largest economy in 2010
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3 Chinese banks topped Forbes’ Global 2000 ranking in 2014
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Slower domestic growth + cheaper overseas assets
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Outbound M&A deal values exceed inbound figures since 2006
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Two-Way Trends – Players
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Cash-rich PRC companies, e.g.:
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China International Marine Containers (CIMC)
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Ping An Insurance (Group) Company of China, Ltd. (Ping An)
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Anbang Insurance
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Others: Fosun, Yue Xiu, Dalian Wanda, Shuanghui
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High-net worth private clients / family offices seeking investment opportunities elsewhere
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Tax planning
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Assets preservation
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Substantial investment amounts
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Two-Way Trends – Inbound Transactions
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As of Q1 of 2014:
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Top-3 sectors by market shares
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real estate (30.5%)
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consumer (17.0%)
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technology (14.7%)
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Total inbound M&A deal values = 31.4% of inbound total deal values in 2013 (US$23.7 billion)
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Two-Way Trends – Notable Deals
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Increasing focus on luxury brands and life-style related business:
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Fosun bought 9.5% in Folli Follie, a Greek luxury retailer for US$121 million
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Chinese buying French vineyards, as they become the #1 consumer for red wine
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HK tycoon Peter Woo’s family bought 8% of Salvatore Ferragamo
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Strategic acquisitions or investment by US or European businesses
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a leading British marketing group actively buying marketing and PR firms
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Wal-Mart Stores, Inc.’s entry into PRC e-commerce sector
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Abbott and Fonterra’s US$300 million JV for the development of dairy farm hub
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Two-Way Investment Trends – New JVs
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Chinese companies forming JVs with world industry leaders:
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Danone’s joint ventures with Mengniu and COFCO for the production and sale of chilled yogurt products in China
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Microsoft and BestTV’s joint venture (US$237 million) in the Shanghai Free Trade Zone for the sales of home entertainment devices
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Dongfeng Motors buying into PSA Peugeot Citrogen Group, paying Euro 800 million for 14% stake
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Amazon to partner with Shanghai FTZ and sell to PRC customers directly 12

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Guernsey
•Protected cell company (PCC), comprising “cells”
•Statutorily ring-fenced from the PCC core or its other cells
•Isolates investments without multiple holding companies
•Allocates assets among different beneficiaries
•Consolidates control through a single board of directors
Jersey
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Treated as part of the EU for the purposes of free trade in goods and non-discrimination amongst EU members, but otherwise is not a part of the EU and its legislation does not apply
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Popular for the incorporation of listing entity
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Robust and comprehensive trust law and jurisprudence
Two-way Trends – New IFCs
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Shanghai Free Trade Pilot Zone (FTZ)
•Approved in August 2013
•Merging 4 existing bonded zones
•Key innovations / concessions:
•Negative List
•Concessions in value-added telecom services, financial leasing etc
•Free conversion of forex for capital items
•Liberalization of interest rates
Qianhai SZ-HK Modern Services Cooperation Zone
•Approved in August 2010
•Key reforms
•Explore repatriation of offshore RMB funds, and enhance cross-border RMB movements including two-way loans
•Explore new mechanism to convert forex for RMB equity investments
•Reduce EIT to 15% for qualified tax payers
•Allow HK arbitration institutions to set up branches
•Allow HK investors to set up 100% owned private schools and hospitals
Two-Way Trends – Opening Up
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Rise of Consumer Market

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Rise of Consumer Market
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Chinese consumers outspent its Japan counterpart in 2013
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The World’s #1
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online retail market, with more than 333 million online shoppers
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red wine buyer, with 1.86bn bottles sold in 2013
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car manufacturer by unit since 2008
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Rise of Consumer Market (Cont’d)
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Rethinking Distribution and Franchising Models
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Phase 1/Pre-2004: restricting foreign investment in distribution and retail sectors
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Phase 2/2005 to 2010: opening up
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Phase 3/Last 3 to 4 years: rethinking of distribution & retail strategies in China
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Chinese consumer market is large and fragmented
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Increasingly challenging to manage logistics and supply chain
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Consumer behavior differs substantially in tier-1, 2 and 3 cities
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Foreign brands are adapting to this new business model, eg Topshop
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Foreign companies tapping into rising middle class consumers:
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rapid expansion of luxury brands in China
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In 2012, KKR’s China Growth Fund invested US$30 million in Novo, a privately held apparel retailer in China
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In 2013, CVC Capital Partners acquired majority stake in Qiao Jiang Nan (South Beauty), a high-end catering group
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Fonterra invests US$514 million for 25% stake in Beingmate
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Rise of Consumer Market (Cont’d)
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HK as the testing ground and management headquarters
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lower tax on general corporate income and IP licensing
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more familiar legal system and commercial environment
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more efficient management personnel
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Examples:
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Starbucks
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Greyhound
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Diesel
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Pandora
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LVMH
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The Richmond Group 18

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PRC Regulatory and Tax Issues

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Government approvals required depending on:
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the business sector;
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investment size; and
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whether a “fixed asset project”
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Principal regulators:
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MOFCOM
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NDRC
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SAIC
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Sector-specific: CSRC, CIRC, CBRC, MIIT etc
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National economic security review
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Merger filing
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Location-specific concessions
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Foreign exchange control
Glossary A
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Foreign Investment Catalogue: a catalogue dividing business sectors into “encouraged”, “restricted” and “prohibited” for foreign investment, last revised in 2011
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Fixed Asset Project / Investment: investment projects that involve fixed assets such as the construction or acquisition of buildings and other fixed assets.
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Total investment amount: the total investment size of a project including equity and debt financing
PRC Regulatory and Tax Issues
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PRC Regulatory and Tax Issues (Cont’d)
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Offshore share transfer is subject to filing with PRC tax authorities if:
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the target company has one or more PRC subsidiaries; and
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the target company’s place of incorporation has a CPG less than 12.5%
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PRC tax authorities may adjust taxable income/gain that has been reduced through “arrangement that do not have a reasonable business purpose”
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Alternatively, transfer of shares in a Cayman entity listed in Hong Kong is taxable if it is deemed a “tax resident enterprise”
Glossary B
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Circular 698: a tax circular issued by SAT in 2009 imposing tax filing obligations
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CGT: capital gain tax, which is currently 20% for non-PRC resident, unless otherwise reduced or exempted by applicable tax treaty
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Deemed PRC tax resident enterprise: an offshore entity is deemed to be a PRC tax resident if its actual management bodies are located in China
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PRC Deal Structures – HK HoldCo
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HK as the preferred location for JV/holding companies
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Geographic proximity
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Familiar legal system and commercial environment
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Bilateral tax arrangements and CEPA concessions
•Recent examples
•Abbott/Fonterra JV
•Danone, COFCO and MengNiu JV
•Outbound JVs
Closer Economic Partnership Arrangement (CEPA) framework agreement signed in 2003 to offer concessions in trade of services 28 sectors liberalized for HK- based companies, e.g.: Telecommunications – set up JVs in Guangdong Province to provide online data processing services Technical testing and analysis services – allow Hong Kong testing organizations to issue certifications for use in China Audiovisual – allow motion pictures co- produced by Hong Kong and the Mainland to be distributed and screened in the Mainland Online games – allow HK investors to design and distribute online games
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PRC Deal Structures - Funds
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Fund Structure – USD vs RMB funds
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RMB funds:
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Fund vehicles (eg LLPs) located onshore
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Easier to raise funds and exit
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Predominantly LPs’ market
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PE/VC funds currently available in pilot cities such as Beijing, Tianjin, Shanghai, Guangzhou and Shenzhen
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Different models with varying degree of “foreign” elements
Evolution of PRC PE/VC funds in Mainland China 2005/2006: restrictions on round-trip investment and cross- border equity swap 2007: LLPs formally introduced 2010: LLPs available nationwide 2011: NDRC started filing system for pilot cities 2014: CSRC as the new regulator and pilot scheme to allow conversion of forex into RMB for equity investment in selected cities
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Deal Structures – VIE Structures
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VIE Structures
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Obtain de facto control through contractual arrangements
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Consolidation for accounting purposes
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Commonly used for sectors subject to foreign ownership restrictions
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HK new Listing Decision (LD43-3)
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Restricted to cases subject to foreign ownership restrictions
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PRC counsel to confirm compliance with PRC laws and regulations
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Nominee shareholders to undertake refund to ListCo
VIE Structure
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Investor
Investor
1st Tier Holdco
2nd Tier Holdco
WFOE
OpCo
Founder/Nominee

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Deal Structures – Alternatives to VIE
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Alternative A: Slow-Walk
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Founder transfers PRC business to 3rd-party controlled SPV
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Founders receives call option to buy shares in the SPV in stages and at a nominal price
•Alternative B: Trusts
•Founder transfers PRC business to an offshore trust pre-IPO
•Under settlor-friendly trusts, settlor can exercise considerable reserved powers to revoke/amend trust deed, give binding instructions to trustee, etc
Regulatory Restrictions on Foreign Investors’ Entry/Exit Options
forex registration required for PRC founder to lawfully hold shares in offshore holdco (SAFE Circular 37 of 2014)
Limited options for round-trip acquisition of PRC affiliated entities + CSRC approval for indirect offshore listing Circular 10 of 2006, issued by MOFCOM, CSRC, SAFE and SAIC)
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Recent Developments

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PRC’s Anti-monopoly Regime
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PRC Anti-Unfair Competition Law (1993)
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prohibits unauthorized or fraudulent uses of 3rd trademarks, abuse of market dominance and administrative monopoly
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enforced by SAIC
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PRC Price Law (1997) and Provisional Regulations Against Pricing Monopolistic Behaviors (2003)
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prohibit price manipulations through market dominance, or acting in concert
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enforced by NDRC
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PRC Anti-Monopoly Law (2007)
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prohibits monopolistic agreements and abuse of market dominance
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regulates merger control
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HK’s new Competition Ordinance
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“1st conduct rule” prohibits practices that have as their object or effect the prevention, restriction or distortion of competition
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“2nd conduct rule” prohibits undertakings that have a substantial degree of market power in a market from engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition
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“Merger rule” prohibits mergers that have or are likely to have the effect of substantially lessening competition in Hong Kong, but the scope of application is limited to carrier licenses issued under the Telecommunications Ordinance
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draft guidelines expected in September 2014
Recent Developments – PRC Anti-monopoly
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Recent PRC Anti-Monopoly Enforcement Actions
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July 2013: SAIC investigated Tetra Pak for abuse of market dominance
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Aug 2013: NDRC fined imported formula milk powder brands RMB 668.73 million for price fixing
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Q3 of 2013: NDRC identified 6 industries for anti-monopoly investigations:
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Airlines
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Household chemicals
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Automobile
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Telecommunications
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Pharmaceuticals
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Electrical appliances
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Nov 2013: Quantum announced commencement of NDRC investigation
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Jul/Aug 2014: SAIC raided offices of Microsoft and its financial service provider Accenture across 13 provinces in China
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Aug 2014: NDRC fined 12 Japanese companies RMB1.235 billion (about US$200 million) for price rigging in submitting tenders for automobile components
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Penalties under the PRC AML:
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Cease and desist order
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Confiscation of illegal profits
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Fines between 1% to 10% of sales revenue for the past year
Recent Developments – PRC Anti-monopoly (Cont’d)
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HK’s New Companies Ordinance Came into Effect in March 2014
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a complete rewrite to modernize Hong Kong’s company law
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“Part 2” rewrite on corporate insolvency is underway
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Court-free intra-group merger now available
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Simplified regime for providing financial assistance
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Revision to headcount test for approving scheme of arrangement
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Other highlights
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Strengthening the accountability of directors, esp. codification of directors’ duty of care, skill and diligence
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improving the disclosure of company information
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fostering shareholder protection
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ensuring shareholder engagement in the decision making process
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various measures for facilitating business
Recent Developments - HK
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April 2013: Direct-marketing provisions under Personal Data (Privacy) Ordinance become effective
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July 2013: amendments to Trade Description Ordinance came into effect
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new prohibitions and an enforcement mechanism to deter specified unfair trade practices that traders may deploy against consumers
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trader-consumer transactions
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guidelines detailing enforcement objectives
Unfair Trade Practices
•False trade descriptions
•Misleading omissions
•Aggressive commercial practices
•Bait advertising
•Bait & switch
•Wrongly accepting payment
Recent Developments – HK (Cont’d)
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Oct 2013: amendments to the PRC Consumer Protection Law
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imposes a 7-day no-fault refund requirement for sales via internet, TV/telephone or mail orders
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requires customer consent for the collection and use of personal data
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imposes joint and several obligations on C2C platforms who fail to prevent practices that infringe consumer interests
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December 2013 / August 2014: amendments to the PRC Company Law + new Enterprise Information Disclosure Regulations
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migrate from “paid-in capital” to “authorized capital” regime
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filing of annual report in lieu of government-led annual inspection
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mandate public disclosure of basic corporate information
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ad hoc public disclosures of significant events/changes
Recent Developments – PRC
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Draft regulations on service inventions commenced public consultations in April 2014
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Employees to notify employers about any invention relevant to the latter’s business and assert whether the invention should be considered “service invention”
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Minimum rewards (set by reference to average monthly salary of employees within the company) stipulated if no written agreements
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Contractual provisions cancelling or restricting inventor’s rights are void
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August 2014: NPCSC approved proposal to establish specialized IP courts
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The fourth type of specialized courts after the military, railway and maritime courts.
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Will be set up in Beijing, Shanghai and Guangzhou as pilot projects
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Will have the status of a “intermediary people’s court”, from which appeals will be handled by the relevant higher people’s court
Recent Developments – PRC (Cont’d)
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Questions?
Daniel Tang Partner Hong Kong dktang@winston.com +852-2292-2152
Mabel Lui Head of Corporate – Asia Hong Kong mlui@winston.com +852-2292-2282
Giovanni Marino Partner Hong Kong gmarino@winston.com +852-2292-2229

34. © 2014 Winston & Strawn LLP
Thank You