mergers and acquisitions in china - charltons law · (ii) equity merger or acquisition leading to...
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Mergers and Acquisitions in China
0www.charltonslaw.com
March 2004
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I. Introduction – Background to M&A in China
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I. Introduction – Background to M&A in China
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II. Structuring the Optimum China M&A Deal
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II. Structuring the Optimum China M&A Deal
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i. Direct Acquisition
• purchase all or part of the non-listed equity interest• subscribing for increased capital of the target company
II. Structuring the Optimum China M&A Deal (cont’d)
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ii. Indirect Acquisitions
• acquire or increase control of the target company via purchasing offshore some orall of the shares held by the target company’s foreign parent(s)
• available if the PRC target company has foreign investors’ equity
II. Structuring the Optimum China M&A Deal (cont’d)
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iii. Asset Acquisition
• investor uses a new foreign invested enterprise or an existing foreign invested enterprise as an acquiring vehicle
• allows a foreign investor to select the preferred assets and businesses of the target company
II. Structuring the Optimum China M&A Deal (cont’d)
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iv. Acquisition of corporation with State-Owned Interests
• usual process for direct equity and asset acquisition applicable
• certain special regulations governing acquisitions of State-owned interests
II. Structuring the Optimum China M&A Deal (cont’d)
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III. Current Government Policy
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i. Resolutions of CPC Central Committee
“further strengthen the vitality of public ownership, actively develop a mixed sector of the economy and realize the diversification of investment sources, making the joint-stock system one of the major forms of public ownership”
III. Current Government Policy (cont’d)
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III. Current Government Policy (cont’d)
ii. Support from SASAC
iii. Entry into WTO
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iii. Entry into WTO
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IV. Laws and Regulations and the Opportunities Created
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IV. Laws and Regulations and the Opportunities Created
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1. Provisional Regulations on the Merger and Acquisition of
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1. Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003)
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1. First comprehensive regulation aimed at making all types of mergers and acquisitions involving foreign investment subject to consistent standards
2. Represent another step toward the overall modernization and rationalization of China’s foreign investment laws and regulations
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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A. Scope
(a) Share Acquisition
(i) acquisition by agreement of equity in a domestic company and its conversion into a foreign invested enterprise; or
(ii) subscription of additional registered capital in a domestic company and its
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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conversion into a foreign invested enterprise
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(b) Asset Acquisition
(i) establishment of a new foreign invested enterprise and its acquisition by
agreement of the assets of a domestic company and operation of the assets; or
(ii) acquisition of assets in a domestic company by a foreign investor by agreement
and injection of those assets as registered capital into a foreign invested enterprise
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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and injection of those assets as registered capital into a foreign invested enterprise
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B. Foreign Investors’ Qualifications
(i) all foreign investments must follow the Foreign Investment Industry Guidelines
(ii) delineate the categories of encouraged, permitted, restricted and prohibited industries for foreign investment
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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C. A New Type of Foreign Invested Enterprise
(i) foreign investment of less than 25% in a company is permitted for all transactions covered
(ii) but not able to take advantage of any preferential treatment available to a foreign invested enterprise with 25% or more foreign investment
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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D. Asset Appraisal
(i) transfer price based on an asset appraisal
(ii) transactions involving state-owned equity interests or assets must comply with special regulations on the management of state-owned assets
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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E. Creditors’ Rights
• equity transaction does not affect debts and creditors’ rights of a domestic enterprise
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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F. Payment of Consideration
(i) general rules
• the seller must pay the consideration within three months after issuance of the business license of the foreign invested enterprise
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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(ii) equity merger or acquisition leading to an increase of the registered capital
• if provide for a one-time payment, then make payment in full within six months
• if payment in installments is provided, then must pay at least 15% of the fullsubscription price as the first installment, remainder in full within three
months of issue of the new business license
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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G. Registered Capital
(i) an acquisition of equity interests from existing domestic shareholders, registered capital remains the same
(ii) subscribing for the increased portion of registered capital
• registered capital will be the sum of the original registered capital and the newly subscribed capital
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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• relative ownership percentages will be negotiated between the parties based on the appraised value of the assets
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H. Ratios Between Registered Capital And Total Investment
• sets forth the upper limits for total capital based on the registered capital of the resulting foreign invested enterprise
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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I. Application, Examination and Approval Procedures
• similar to those currently required for the conversion of a domestic entity into an FIE
• Documents including:
- shareholder approval- application for conversion- joint venture agreement and articles of association of the resulting FIE
equity transfer agreement
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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equity transfer agreement
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• increase capital or asset transfer
• corporate and creditworthiness documents
• corporate documents of the domestic entity
• plan of disposition of employees
• additional requirements
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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• additional requirements
• timeframe for approval and the requirements for registration with the SAIC are similar to existing rules
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J. Anti-Competition
• turnover of a party exceeds RMB1.5 billion in the current year
• foreign investor acquired more than 10 domestic enterprises in related industries within one year
• China market share of a party exceeds 20%
• China market share of a party reaching 25%
Provisional Regulations on the Merger and Acquisition of Domestic Enterprises (“M&A Rules”) (12 April 2003) (cont’d)
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• China market share of a party reaching 25%
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2. Provisional Regulations on Reforming State Owned Enterprises with Foreign Investment (“SOE Reforming Regulations”) (1 January 2003)
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Regulations”) (1 January 2003)
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Applicability and Scope
i. Acquiring all or part of the State interest in an SOE
ii. restructure a “company with state interests” into an FIE by acquiring all or part
iii. Acquire from domestic creditors debt owed to them by the SOE
iv. Acquire all or the majority of the assets of a SOE and subsequently establish a FIE
Provisional Regulations on Reforming State Owned Enterprises with Foreign Investment (“SOE Reforming Regulations”) (1 January 2003)
(cont’d)
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v. Purchasers of an equity stake become shareholders in an SOE and convert such SOE into an FIE
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Required Reorganization Plan
i. in many respects similar to the “feasibility study report” required for all FIEs
ii. highlighting information about the foreign investor, its financial status, its business scope and equity structure, and plan for settlement of staff
iii. introduction of sound corporate governance into the target SOE
Provisional Regulations on Reforming State Owned Enterprises with Foreign Investment (“SOE Reforming Regulations”) (1 January 2003)
(cont’d)
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Employee Protection
i. First seek the opinions of the staff and worker’s congress of the SOE
ii. Reorganizing party of the SOE must formulate a plan for settling the staff, and such plan is subject to the staff’s approval
Provisional Regulations on Reforming State Owned Enterprises with Foreign Investment (“SOE Reforming Regulations”) (1 January 2003)
(cont’d)
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Approvals
i. Mirror in many respects existing foreign investment rules
ii. The same US$30 million threshold used in establishing an FIE is used
Provisional Regulations on Reforming State Owned Enterprises with Foreign Investment (“SOE Reforming Regulations”) (1 January 2003)
(cont’d)
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Several documents are required to be submitted along with the acquisition agreement, including but not limited to
i. An audit and asset appraisal report of the SOE;
ii. A staff and worker settlement program;
iii. An agreement for settling claims and debts;
iv. A restructuring plan;
Provisional Regulations on Reforming State Owned Enterprises with Foreign Investment (“SOE Reforming Regulations”) (1 January 2003)
(cont’d)
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iv. A restructuring plan;
v. Resolutions of the reorganizing party of the SOE; and
vi. The opinions or resolution of the congress of the staff and workers of the SOE.
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3. Provisional Regulations on Administration of the Transfer of State-owned Assets (1 February 2004)
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State-owned Assets (1 February 2004)
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1. Approval Procedures and Documents
• Submitted to State-owned Assets Supervision and Administration Commission
Provisional Regulations on Administration of the Transfer of State-owned Assets (1 February 2004) (cont’d)
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2. Procedures on Transfer of State-owned Assets
• Research on Feasibility
• Asset Appraisal
• Announcement
• 2 or More Purchasers – Auctions or Bids
Provisional Regulations on Administration of the Transfer of State-owned Assets (1 February 2004) (cont’d)
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• 2 or More Purchasers – Auctions or Bids
• Payment of Consideration
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Qualified Foreign Institutional Investors (“QFII Regulations”)
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V. Reducing Acquisition Risks – Due Diligence
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Reasons for Conducting Due Diligence Exercises
1. Protection
2. Regulatory Compliance
3. Investigation of the Company
4. Assess the Risks and Understand the Parameters
V. Reducing Acquisition Risks – Due Diligence
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Case Study
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Case Study of Acquisition of Steel Plant
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Case Study of Acquisition of Steel Plant
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Due Diligence
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Shoreline Issues
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Valuation Issues
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Practical Structuring Factors
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Sources: Bloomberg, World Federation of Exchanges, Dealogic, World Economic Forum, The Heritage Foundation and Wall Street Journal, Fraser Institute and Economic Freedom Network, Economist Intelligence Unit and Ernst & Young, International Institute for Management Development, The Chinese Academy of Social Sciences (as at end of 2012), IMD World Competitiveness Centre, Dealogic
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Case Study
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Source: Hong Kong Exchanges and Clearing Limited
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Case Study (cont’d)
PRC Listed Cement Plant
• Acquisition by Strategic Investor
• US $30 million Investment
• Listed shares
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Source: WFE, SGX (as at end of 2011), HKEx, Dealogic
• Approximately 25 per cent of issued share capital
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Case Study (cont’d)
Time Frame:
• 2/3 years
• 1 year of intensive professional involvement
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Source: Blomberg, WFE, WEF, WSJ
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Importance of Understanding:
• the legal/business environment
• the industry
Case Study (cont’d)
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Source: Hong Kong Exchanges and Clearing Limited Note: Trading of 35 issuers (including 8 GEM companies) is suspended as of Jan 2010
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Case Study (cont’d)
PRC
• Legal Norms
• Business Practices
• Management Behaviour
• “Neibu” Information
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Case Study (cont’d)
Understanding the Cement Industry
• capital intensive
• long-term view required
• long-term finance essential
• title to land/mining/building rights crucial
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Case Study (cont’d)
Professionals
• Lawyers (Hong Kong and PRC)
• Technical experts
• Accountants
• Valuers
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Business Approach
• “Partnership”
• Ensure all legal formalities effected
• Business Planning
• Human Resources Planning
Case Study (cont’d)
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• Capital Investment Planning
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Case Study (cont’d)
Regulatory Application
• China Securities Regulatory Commission
• Shanghai Stock Exchange
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Source: Hong Kong Exchanges and Clearing Limited
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Case Study (cont’d)
Initial Meetings
Site Meetings
Information Gathering
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Due Diligence Areas
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Huaxin’s Operations
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History and Overview
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Shareholdings and Capitalisation
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Relationship with MajorShareholders and the Municipality
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Management Structure
Intellectual Property
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Intellectual Property
Land Use Rights and Building Ownership Certificate
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Products and Production Arrangements
Particulars of Kiln Project
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Particulars of Kiln Project
Raw Materials Supply
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Energy Supply
Transportation
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Transportation
Distribution
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Market Position and Competition
Financing Arrangements and Indebtedness
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Financing Arrangements and Indebtedness
Insurance
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Labour and Welfare Arrangements
Taxation
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Environmental Compliance
Miscellaneous
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Legal Due Diligence Report
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Major Issues
Land
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Land
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Mining Rights
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Asian Development Bank
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Asian Development Bank
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Tax
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Tax (cont’d)
A. Subsidiaries and Joint Ventures
B. Questionnaire
C. Summary of further information required
D. List of documents relating to Huaxin’s operations supplied and inspected andreviewed
E. Assumptions and Qualifications
• Assumptions
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• Assumptions
• Qualifications
F. Summary of Articles of Association
G. List of assets in excess of RMB in value
H. List of International Equipment Purchase Agreements using ADB Loan
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Tax (cont’d)
I. List of local environmental protection rules and regulations
J. PRC Legal System
• Overview of the PRC Legal System
• PRC Company Law
• Securities Law
• Tax Laws and Regulations
6868
• Foreign Exchange
• The Mineral Resources Law
• PRC Environmental Protection Law
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Tax (cont’d)
Further Process
Tax Laws and Regulations
• Review
• Negotiation
• Solutions
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• Finalisation
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Importance of Legal Opinions
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Importance of Legal Opinions
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The Final Outcome
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Q & A
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Contact us
Hong Kong Office
12th Floor
Dominion Centre
43 – 59 Queen’s Road East
Hong Kong
73
Telephone:
Fax:
Email:
Website:
(852) 2905 7888
(852) 2854 9596
http://www.charltonslaw.com
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Other Locations
China
Beijing Representative Office
3-1703, Vantone CentreA6# Chaowai AvenueChaoyang DistrictBeijingPeople's Republic of China100020
Shanghai Representative Office
Room 2006, 20th FloorFortune Times1438 North Shanxi RoadShanghaiPeople's Republic of China200060
In association with:
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Telephone: (86) 10 5907 3299Facsimile: (86) 10 5907 [email protected]
Telephone: (86) 21 6277 9899Facsimile: (86) 21 6277 [email protected]
Myanmar
Yangon Office of Charltons Legal Consulting Ltd
161, 50th [email protected]
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