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Private Chinese companies drawn to U.S. initial public offerings by the cachet and strong returns from a U.S. stock offering are being courted by a cadre of American corporate law firms jockeying for a piece of the burgeoning China market. A spate of U.S. IPOs by Chinese companies since last year has engaged lawyers as managers’ or issuers’ counsel from such firms as Latham & Watkins; Shearman & Sterling; Skadden, Arps, Slate, Meagher & Flom; and Sullivan & Cromwell � all of which have offices in China and Hong Kong. Even firms without an Asian presence, such as Loeb & Loeb and Philadelphia’s Cozen O’Connor, have found room on the field. Cozen, for example, has represented special purpose acquisition corporations (SPACs), a type of public equity fund formed to target companies with a certain industry or geographic profile, such as a Chinese company. Private equity investment in China is driving the trend toward U.S. listings and fueling the need for U.S. lawyers to assist Chinese companies and attorneys. The bottom line for Chinese companies is often just that: the chance to raise more cash in the public markets than they could by listing elsewhere, such as Hong Kong. “In China, everyone wants to get registered to raise funds in the public markets in the U.S.,” said Latham’s David Zhang, a partner in the firm’s Hong Kong office who has worked on many such deals. “It’s a good opportunity for firms like us in the U.S.” Strong interest from the Chinese companies in the U.S. markets, coupled with the intricacies of such deals, translates to a glut of corporate work for those with the language skills, ties to the investment banking community and Chinese deal-making experience to stake a claim in the China market. Work can include setting up an offshore holding company in the British Virgin Islands or the Cayman Islands, instructing the Chinese companies in the U.S. regulatory requirements, drafting the prospectus of the offering for the Chinese law firms and helping to oversee the company’s shift to U.S. accounting standards. Once the deal is closer to fruition, U.S. lawyers perform the standard work with the U.S. Securities and Exchange Commission and the chosen stock exchange. “Our role is to be the international law firm that knits it together, that weaves together the various threads,” said Skadden’s Michael Gisser, a Los Angeles lawyer who co-leads the New York firm’s Asia Pacific practice. Skadden was issuer legal adviser for the IPOs of JA Solar Holdings Co. Ltd. and 3SBio Inc., both of which were listed on Nasdaq in February. A ‘strong pipeline’ Up until a few years ago, most of the IPO action came from state-owned Chinese companies that went public. Such deals frequently top the billion-dollar mark, and they’ve shifted to the Hong Kong public markets in the past few years. China’s mushrooming private economy has since boosted the number of deals, pushing U.S.-listed Chinese IPOs from the low-to mid-single digits each year from 1995 through 2003, to an era of abundance, according to data from New York-based Dealogic, which provides software to the investment banking industry. The eight to 10 annual deals from 2004 through 2006 is likely to expand this year, since five IPOs have already listed as of mid-March. New York Stock Exchange (NYSE) and Nasdaq data are similar. More Chinese IPOs are on the way, according to NYSE spokesman Christiaan Brakman. “We have a very strong pipeline of those more entrepreneurial companies,” Brakman said. “Several leading companies are planning to do IPOs in April or May.” The typical Chinese IPO in the United States involves an offshore holding company that owns most or all of the Chinese entity. Although the IPO process theoretically should only take as long as a U.S. IPO, such deals take longer in practice, said Mitch Nussbaum, a New York Loeb & Loeb partner who chairs the firm’s corporate securities group and who served as issuer legal adviser for Fuwei Films (Holdings) Co. Ltd., which issued on Nasdaq last December. Getting the company in shape for a U.S. IPO, which is typically called restructuring, drives the bulk of the work, since the U.S. regulatory system is a new concept, agreed William Chua, a partner in the Hong Kong office of New York’s Sullivan & Cromwell. Chua led the firm’s work as managers; legal counsel for Mindray Medical International Ltd., which listed on New York Stock Exchange last September, and Solarfun Power Holdings Co. Ltd., which went to Nasdaq in December. “You tend to deal with very smart people who have less experience,” Chua said. “There’s a lot more hand-holding and education as a legal adviser that you’d need to do.” Zhang noted that many of the companies in question have no in-house counsel, so the U.S. lawyer works directly with the management team to solve problems. Adding to the legal work is the need for immediate compliance with Sarbanes-Oxley Act of 2002 corporate governance regulations once the IPOs close, Gisser said. “We’ve got to translate a lot of legal advice over a relatively intense time period and into the Chinese language and a different legal culture,” Gisser said. China’s red-hot economy is also welcoming to intricate nontraditional investment vehicles, and legal advisers are following closely behind to help construct them. Cozen has worked on IPOs and SPACs, formed to raise money to purchase a Chinese company. Late last year, the firm served as issuer’s counsel to Middle Kingdom Alliance Corp., a SPAC listed on the OTC Bulletin Board, a trading vehicle for publicly reporting companies that submit regular financial reports but are not required to meet minimum asset, income or equity thresholds. Although SPACs were not historically targeted to a geographic area, they evolved to capture opportunities in the China market, said Ralph De Martino, a member in Cozen’s Washington office. “China represented a new frontier,” De Martino said. “Opportunities were significant. It was natural that there would be SPACs that would look to invest in emerging markets.” Mid-capitalization companies, with assets in the $150 million to $200 million range, along with small companies, are ideal for SPACs, and also very prevalent among Chinese private companies, said De Martino. With a wide array of U.S. firms in the China IPO game, getting the nod from a company is increasingly a matter of relationships, experience � and sometimes fees. Solid relationships with investment bankers who underwrite the offerings helps because the underwriter is selected first and often introduces the Chinese company to the American law firm, said Gisser. “The selection process is not particularly different than it would be in the U.S. except for the fact that many of these companies don’t have a pre-existing relationship with an American law firm,” Gisser said. Firms debate the importance of a China or Hong Kong outpost, with many calling on-the-ground presence critical. New York-based Shearman plans to open a Shanghai office in May and it has started to shift resources to China in recent years, growing from nine to 19 lawyers in Beijing since 2005, said Beijing partner Alan Seem. “Shanghai[-area] clients place a high value on having counsel that are accessible to them and able to attend meetings in person on short notice,” Seem said. “The same is true in Beijing.” Loeb & Loeb affiliated with a Chinese law firm, and Cozen turns to local counsel for help as needed. De Martino insisted that expertise and perceived credibility is more important than proximity. “They need to be sure of compliance on this side of the pond so to speak,” De Martino said. “Credibility in terms of expertise in our marketplace ends up being more important than a physical presence in Hong Kong or one of the Chinese provinces.” The influx of newer U.S. firms in the China market has also created price pressures, said Seem. Seem described some of the newer firms as “less profit-oriented” and “willing to work at significant discounts in order to gain market share.” “It often requires a lot of education regarding what we, as a U.S. firm, bring to the table and what sort of work we perform to justify our fees,” Seem said. Reading the new rules New rules governing mergers and acquisitions of Chinese companies by foreign investors kicked in last September, but the effect is unclear. The regulations call for Chinese Securities Regulatory Commission approval of overseas listings of some companies with Chinese assets. This creates an extra layer of uncertainty for deals, but how the Chinese government will implement the law is unclear, lawyers say. The legal change primarily illustrates the “fast-evolving nature of the Chinese regime,” Zhang said. “New laws come out every month that may or may not have a bearing on these kind of IPOs,” Zhang said. Although Zhang has heard anecdotal stories that the new rules are stalling deals, he believes people are simply figuring out how to structure deals under the current regime. “The overall market sentiment is still very favorable,” Zhang said. “It may have some effect, but it’s too early to tell.” China’s private companies share the growth and acquisition goals of their U.S. counterparts, and having a U.S. stock listing is a competitive advantage against other Chinese companies, similar to a brand name, said Nussbaum of Loeb & Loeb. “In terms of selling globally, it provides legitimacy and transparency,” Nussbaum said. Despite the risks and shifting regulatory climate, lawyers say the market outlook is the key factor driving the deals. “As long as the securities markets remain strong, there’s going to be a continued flow of IPOs from China,” Gisser said.

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