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The Project of Shanxi Securities and Deutsche Bank Establishing A Joint Venture Securities Company

The Background

China International Capital Corporation Limited (CICC), set up in 1995, was the first joint venture securities company in China, and China Euro Securities Limited, set up in 2003, was the first joint venture securities company established after China’s entry into WTO. After the establishment of UBS Securities Limited in 2006, there were seven joint venture securities companies, among which Changjiang BNP Paribas Peregrine Securities Limited later was no longer a joint venture because of the withdrawal of the foreign shareholder. After the launch of the overall regulation of securities companies in China, the approval for the establishment of securities companies (including joint venture securities companies) has been suspended.

China Securities Regulatory Commission (CSRC) revised the Rules on Establishment of Foreign-shared Securities Companies and issued the Provisions for the Establishment of Subsidiaries of Securities Companies on the end of the year 2007. China’s capital market was re-opened to foreign investment after the two-year ban due to the overall regulation of securities companies.

Shanxi Securities passed the appraisal of standard securities company in 2006 and got the qualification as an innovative trial securities company in August 2007. In the same year, it won the golden key award for securities companies with a high growth in the stock market of China conferred by China Capital Market Annual Conference and was awarded by Shenzhen Stock Exchange the title as 2008 SME board outstanding sponsor institution.

Founded in 1870 in Germany, Deutsche Bank is one of the world’s leading international financial services providers. Today it serves more than 14 million clients in 72 countries and regions and has a presence in many of the world’s major cities including Frankfurt, New York, London, Tokyo, Hong Kong, Singapore and Sydney.

The Project

As the PRC legal consultant of Shanxi Securities on the establishment of its investment bank joint venture with Deutsche Bank (this Transaction), Kejie lawyers (i) assisted Deutsche Bank in the due diligence investigation of Shanxi Securities for this Transaction; (ii) drafted the legal documents for this Transaction including the joint venture contract and article of association; (iii) participated in the negotiations of this Transaction; (iv) issued its legal opinion regarding this Transaction; and (v) drafted, modified and prepared documents to be submitted to competent authorities of China, and assisted Shanxi Securities in obtaining China’s governmental approval for this Transaction.

The Challenge

Cultural Conflict

Cultural conflict has always been an inevitable issue in every Sino-foreign joint venture project. In this Transaction, different cultural backgrounds led to great difference in the ways and practices of negotiation between Shanxi Securities and Deutsche Bank. As “conflicts” and “deadlocks” happened a lot from time to time during the negotiation, Kejie lawyers, using their rich experience in negotiations and proficient communication skills, successfully assisted both parties in reaching an agreement on this Transaction.

Multilateral Coordination

During the negotiation of this Transaction, how to coordinate and further reflect the interests of all parties, namely Shanxi Securities, Deutsche Bank and the joint venture company to be established, in the transaction documents is the most critical but also the most difficult task for Kejie lawyers. At the meantime of solving the multilateral conflict of interests in a proper manner, Kejie lawyers had to make every detail of this transaction meet all the requirements from CSRC. Kejie lawyers deliberately designed transactional provisions and proposed many innovative transaction arrangements, which satisfied all the parties’ interests and ensured Shanxi Securities obtaining CSRC’s approval successfully.

Complicated Legal Environment

From the preliminary contact between Shanxi Security and Deutsche Bank for this Transaction to the final approval of CSRC, in less than 18 months, the Chinese Government has issued a series of laws and regulations including Regulation on the Supervision and Administration of Securities Companies, Provisions for the Establishment of Subsidiaries of Securities Companies, and Rules on the Establishment of Foreign-shared Securities Companies, which put many new requirements on the establishment and operation of the under-discussed joint venture securities company. Those new measures made precedent cases much more irrelevant and imposed urgent demands on Kejie lawyers in the timely and precise modification of transaction documents, with full consideration to satisfy requirements from all parties involved in the transaction as well as those from CSRC.

The Result

Shanxi Securities got the CSRC’s approval on 28 December 2008. Zhong De Securities is the second joint venture security company to win CSRC’s approval since the promulgation of CSRC’s new rules. The first one is Credit Suisse Founder Securities Ltd.

The Team

Kejie team was led by Partner He Jie, and included Cao Lei and Yu Jiazhi.

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