Deals of the Year 2018

China Business Law Journal’s editorial team selected outstanding china-related deals and cases in 2018, applauding remarkable legal efforts

DEALS IN CHINA OVERSEAS DEALS DISPUTES AND INVESTIGATIONS BELT AND ROAD

DEALS IN CHINA01

Allianz secures approval as the first wholly foreign-owned insurance holding company in China

CATEGORIES: Foreign investment; insurance

LEGAL COUNSEL: Dentons served as legal counsel for Allianz.

KEY POINTS: Aiming at integrating its investment resources in China, Germany-based Allianz Group planned to establish a wholly-owned insurance holding company in China with an investment of RMB10 billion (US$1.47 billion). The deal was one of the most notable signals that China would open up its insurance sector further to foreign investors.

According to Dentons, no foreign insurance companies had previously been permitted to own any insurance holding company in China. Therefore, the application materials and inception proposal can only be prepared with reference to cases in respect of PRC-funded insurance holding companies. For any contents not applicable to foreign-funded entities, they had to communicate and confirm with the China Banking Regulatory Commission (CBRC) upon analysis and study from the perspectives of legislative intent and regulatory orientation.

DEALS IN CHINA02

Apple’s investment in Guizhou

CATEGORIES: Cybersecurity; FDI

LEGAL COUNSEL: Herbert Smith Freehills served as legal counsel for Apple.

KEY POINTS: Apple made a US$1 billion high-tech investment in Guizhou, including a massive new data centre of more than 1 million square feet.

To comply with cyber security and telecom laws, and improve customer experience, the iCloud service for all Chinese users of Apple devices will be shifted from the US to new data centres run by Guizhou-Cloud Big Data Industry Development (GCBD), the Chinese partner of Apple. Apple is the first major international tech company to do so, and in such a large scale.

According to Herbert Smith Freehills, this is one of the first such cases in China and there are few precedents. The lack of transparency in telecom laws and practice in China makes it challenging to serve the commercial interest of the parties as well as ensure compliance with the law.

The project involves intensive exchange of documents, negotiation and discussion with the local state-owned data centre company, provincial government of Guizhou, and also the Ministry of Industry and Information Technology (MIIT).

DEALS IN CHINA03

CALC issues asset-backed specific programme on Shanghai Stock Exchange

CATEGORIES: Asset securitization; aircraft lease

LEGAL COUNSEL: Broad & Bright served as legal counsel for China Aircraft Leasing Group Limited (CALC).

KEY POINTS: This was the first asset-backed specific programme in the Chinese market denominated in foreign currency, and also the first one with assets from an aircraft lease business as underlying assets. The programme, issued by China Aircraft Leasing Group Limited (CALC), engaged Huatai Securities (Shanghai) Asset Management Company Ltd as its manager. It was denominated in US dollars.

According to Broad & Bright, being the first asset backed security (ABS) product on the domestic market denominated in foreign currency. The specific programme has filled a gap in China in this regard and contributed to the diversification of financial products on the domestic capital market. Recognized as a significant financial innovation, the programme represented a milestone in the country’s ABS development.

DEALS IN CHINA04

China Construction Banks’ Jianyuan 2018-11 residential mortgage-backed securitization programme

CATEGORIES: Asset securitization; real estate

LEGAL COUNSEL: Zhong Lun Law Firm served as legal counsel for the deal.

KEY POINTS: It is the first AAA-rated (AAA is the highest possible rating assigned by international rating agencies) asset securitization programme issued to international investors through Bond Connect, a new market access scheme that allows northbound trading.

Zhong Lun says the deal was designed to comprise several complex arrangements in order to be assigned the said rating. For example, an offset reserve mechanism was adopted in line with relevant PRC legal provisions, taking into account international experiences. Specifically, in the event of failure to maintain the required rating level, the originator will undertake to fulfill the agreed obligation of depositing a certain amount of offset reserve into the account held in trust, and the custodian will use the reserve to make up the deficit in the receivables that arises out of the borrower’s exercising of the right to offset in respect of the underlying loans.

DEALS IN CHINA05

CYPA’s rental income asset-backed specific programme (quasi-REIT programme)

CATEGORIES: Asset securitization; real estate

LEGAL COUNSEL: Zhong Lun Law Firm served as legal counsel for the deal.

KEY POINTS: As the first quasi-REIT programme in China backed by rental incomes from long-term leases of apartments, the deal involves complex asset restructuring and the “listing” of a quasi-REIT programme. Zhong Lun says that the asset restructuring comprises complex transaction steps that include equity investment, disbursement of entrusted loans, acquisition of equities and creditor rights, and the transformation of a lease relationship. To ensure “listing” of the quasi-REIT programme, the transaction documents are drafted to include the trigger conditions for the programme manager to authorize (on behalf of the specific programme) disposal of the underlying assets by the fund manager, as well as an implementation process, rules for generating an effective disposal plan, arrangements for exercise of pre-emptive rights, and the order of income distribution. They also contain arrangements concerning, for instance, potential lock-up period and allocation of REIT shares in the event of a future public offering of the programme.

Leveraging on the experience of quasi-REIT programmes in mature markets, the deal is structured without reliance on the issuer’s credit support. Instead, it reflects the essence of asset-backed securities: cash payments during the term of the programme are supported by rental incomes only, while payments upon maturity rely solely on disposal of the apartments. Therefore, this is considered the most typical quasi-REIT programme available on the Chinese market.

DEALS IN CHINA06

Establishment of central enterprises’ poverty alleviation fund and management of its investment and financing

CATEGORIES: Investment fund; poverty relief

LEGAL COUNSEL: East & Concord Partners served as legal counsel for the deal.

KEY POINTS: As required by the central government, the Central SOEs Industrial Investment Fund in Poverty-Stricken Areas Co Ltd (SOEs Alleviation Fund) was established, with leading efforts from the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and co-ordination from authorities that included, but were not limited to, the Ministry of Finance (MOF) and the State Council Poverty Alleviation Office, as a joint-stock fund with capital contributions from 104 centrally administered SOEs directly regulated by the SASAC and the MOF. With a registered capital of RMB15.386 billion, the SOEs Alleviation Fund will focus on investing in resource development and utilization, industrial park construction, and new urbanization projects in poverty-stricken areas. SDIC Chuangyi Industry Fund Management Co Ltd was appointed manager of the fund.

East & Concord says the fund aims to support industrial developments and promote local economic development in poverty-stricken areas by taking full advantage of SOEs’ strengths in respect of industrial development, funding, technologies and management. The relevant activities will be conducted in line with SOEs’ relocation, industry restructuring and fixed-point poverty alleviation programmes. Unlike previous poverty alleviation programmes focusing on “blood transfusion”, the SOEs Alleviation Fund is committed to new poverty alleviation principles and approaches. It will use investment and management models that fully promote industrial development in poor areas and motivate local poverty-stricken residents.

DEALS IN CHINA07

Establishment of Lu Guanqiu’s Sannong Spiritual Support Fund

CATEGORIES: Equity trust; philanthropic activities

LEGAL COUNSEL: Jincheng Tongda & Neal (JT&N) provided full legal services for the deal.

KEY POINTS: Lu Guanqiu’s Sannong Spiritual Support Fund was a charitable trust established to commemorate Lu Guanqiu, the founder of Wanxiang Group. As the largest equity trust of a charitable nature in the country, the trust was launched by Lu Weiding (the son of Lu Guanqiu) and his family members in October 2018. Establishment of the fund enabled Lu Weiding to continue fulfilling obligations as the actual controller of the listed company, in spite of the transfer of all his economic interests in Wanxiang Sannong Group Co Ltd. All assets held in the trust and all incomes from it were intended for philanthropic purposes.

Wanxiang Trust Co Ltd, JT&N and Caitong Securities played key roles in launching the fund, which appointed Wanxiang Trust Co Ltd as its trustee. During the inception process, the JT&N team extensively reviewed existing cases in the fields of family trusts and charitable trusts in foreign jurisdictions, and took inherent characteristics of the PRC legal system into full consideration before designing the internal governance mechanism in respect of management and decision-making of trusted assets, as well as iterative inheritance. Based on these efforts, and in line with the permanent nature of the fund, JT&N developed an internal governance mechanism that required decisions to be made by the board of directors, and management activities to be conducted by the trustee under supervision from the supervisor.

The fund plan and trust documents were drafted by the counsel’s team and the custodian’s team in line with the objectives of the founder. The core trust documents, including but not limited to the charter, the articles of association and the trust contract, were drafted with reference to corporate governance structures, and with full consideration to the contractual nature of trust funds.

DEALS IN CHINA08

Establishment of Shanghai Kechuang Centre equity investment fund

CATEGORIES: Investment fund

LEGAL COUNSEL: Zhong Lun Law Firm provided full legal services for the deal.

KEY POINTS: Shanghai Technology Innovation Centre Equity Investment Fund (STIC Fund) is the only equity investment fund named after Shanghai Technology Innovation Centre, a national strategic programme. Focusing on the major innovative functional platforms, crucial strategic projects and important innovation areas of Shanghai, the fund will concentrate its investments in strategic emerging industries including information technology, biomedicine, advanced manufacturing and environmentally friendly new energy.

The fund is a market-oriented fund of funds established by a group of state-owned cornerstone investors led by Shanghai International Group. Participating investors include Shanghai Guosheng Group Co Ltd, Guotai Junan Securities Co Ltd, Shanghai International Trust Co Ltd and Shanghai International Port (Group) Co Ltd. With a target asset under management of RMB30 billion, the fund plans to raise RMB6.52 billion through its initial fundraising.

Zhong Lun says it was very challenging to meet the needs of all investors in designing the fund structure and its terms and conditions, as investors of the STIC Fund included various types of entities such as large state-owned enterprises affiliated to the Shanghai government, well-known listed companies, top securities houses and trust companies, which were subject to distinctive compliance requirements and regulations. From the start date to the initial closing date, the project has gone through dozens of rounds of negotiations, and the relevant documents of the fund have undergone numerous revisions by parties concerned.

DEALS IN CHINA09

Foxconn Industrial Internet’ A-share IPO

CATEGORIES: PRC capital market

LEGAL COUNSEL: King & Wood Mallesons served as PRC and Hong Kong legal counsel for the issuer, Foxconn Industrial Internet Co Ltd, while Fangda Partners acted as legal counsel to the sponsor and lead underwriter.

KEY POINTS: Foxconn Industrial Internet Co Ltd succeeded in going public on Shanghai Stock Exchange in June 2018. As a “unicorn” in the high-end manufacturing sector, Foxconn made a record debut by raising approximately RMB27.12 billion as of the IPO date, making the deal the largest A-share IPO in the past three years, and also the largest IPO of Chinese manufacturers to date.

According to King & Wood Mallesons, the deal included the restructuring of many subsidiaries and business segments of Hon Hai Precision Industry Co Ltd (Foxconn’s parent company). Shareholders of the subsidiaries to be restructured were from countries and regions that included the Cayman Islands, Samoa, the British Virgin Islands, and Hong Kong. Having to solve many challenging and arduous tasks within a tight schedule, the restructuring needed to go through complicated approval and filing procedures in domestic and foreign jurisdictions.

Specific issues addressed included designing the domestic and overseas restructuring plans, implementation of assets, business and personnel reorganization plans, completion of domestic and foreign approval procedures necessary for completing the spin-off of Hon Hai Precision Industry Co Ltd (listed in Taiwan) and having the relevant asset listed on the A-share market, making arrangements regarding an employee stock ownership plan, and completion of filing procedures with the Asset Management Association of China.

DEALS IN CHINA10

Great Wall Motor and BMW form a joint venture in China

CATEGORIES: Sino-foreign joint venture; new energy vehicle

LEGAL COUNSEL: Zhong Lun Law Firm served as legal counsel for Great Wall Motor. Allen & Overy served as legal counsel for BMW. FerradaNehme completed antitrust clearance procedures on behalf of the joint venture parties in Chile.

KEY POINTS: In July 2018, in the presence of the Chinese and German prime ministers, Great Wall Motor Co Ltd and BMW Group signed a joint venture contract in Berlin, pursuant to which they would form a joint venture named Spotlight Automotive Limited in China, with a registered capital of RMB1.7 billion and a total investment of RMB5.1 billion to promote in-depth co-operation in the field of new energy vehicles.

The project was the first electric vehicle joint venture that BMW had entered into. It was also an important arrangement as part of Great Wall Motor’s “going global” strategy.

According to Zhong Lun, challenges in handling the deal involved legal issues spanning across several jurisdictions (including the PRC, Germany and Chile), and practice areas such as cross-border investment, industry policies for foreign investment, domestic and international intellectual property rights, domestic and foreign antitrust clearance, product liability, and engineering & construction.

As Great Wall Motor Co Ltd was a public company on both the A-share and H-share markets, counsel also needed to assess how the deal may be potentially affected by the capital market regulatory requirements of the PRC and Hong Kong. Besides, on the precondition of keeping the deal secret, it had to assist Great Wall Motor in fulfilling its disclosure obligations in a timely manner so that investors’ rights and interests could be protected.