EX-99.(A)(1) 2 v419146_ex99-a1.htm EXHIBIT (A)(1)

 

Exhibit (a)-(1)

 

PROXY STATEMENT OF THE COMPANY

 

 

[        ], 2015

 

Shareholders of Shanda Games Limited
Re: Notice of Extraordinary General Meeting of Shareholders

 

Dear Shareholder:

 

You are cordially invited to attend an extraordinary general meeting of shareholders of Shanda Games Limited, an exempted company with limited liability incorporated under the laws of the Cayman Islands (the “Company”), to be held on [        ], 2015 at [        ] a.m. (Hong Kong time). The meeting will be held at the offices of Davis Polk & Wardwell, The Hong Kong Club Building, 3A Chater Road, Central, Hong Kong. The accompanying notice of the extraordinary general meeting and proxy statement provide information regarding the matters to be acted on at the extraordinary general meeting, including at any adjournment thereof.

 

The Company entered into an agreement and plan of merger, dated as of April 3, 2015, with Capitalhold Limited, an exempted company with limited liability incorporated under the laws of the Cayman Islands (“Parent”), and Capitalcorp Limited, an exempted company with limited liability incorporated under the laws of the Cayman Islands and a wholly owned subsidiary of Parent (“Merger Sub”). Such agreement and plan of merger, as may be amended from time to time, is referred to herein as the “Merger Agreement.” Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation (the “Surviving Corporation”) and becoming a wholly owned subsidiary of Parent. The purpose of the extraordinary general meeting is for you and the other shareholders of the Company to consider and vote upon a proposal to authorize and approve the Merger Agreement and the plan of merger required to be filed with the Registrar of Companies of the Cayman Islands (the “Cayman Registrar”) in connection with the Merger (the “Plan of Merger”), and the transactions contemplated by the Merger Agreement and the Plan of Merger (collectively, the “Transactions”), including the Merger. Copies of the Merger Agreement and the Plan of Merger are attached as Annex A and Annex B, respectively, to the accompanying proxy statement.

 

Merger Sub and Parent were formed solely for the purpose of the Merger. At the effective time of the Merger (the “Effective Time”), Parent will be beneficially owned by (a) Ningxia Yilida Capital Investment Limited Partnership (“Ningxia Yilida”), a limited partnership formed under the laws of the People’s Republic of China and an affiliate of the Company’s acting chief executive officer, Mr. Yingfeng Zhang, (b) Ningxia Zhongyincashmere International Group Co., Ltd. (“Ningxia”), a company formed under the laws of the People’s Republic of China, (c) Orient Hongtai (Hong Kong) Limited (“Orient Hongtai”), a company incorporated and existing under the laws of Hong Kong and an affiliate of Mr. Miaotong Wang, Mr. Heng Shao and Mr. Ji Wang (Mr. Miaotong Wang, Mr. Heng Shao and Mr. Ji Wang collectively, the “ Li-Funds Persons ”), (d) Orient Hongzhi (Hong Kong) Limited (“Orient Hongzhi”), a company incorporated and existing under the laws of Hong Kong and an affiliate of the Li-Funds Persons, (e) Hao Ding International Limited (“Hao Ding”), a business company established under the laws of the British Virgin Islands and an affiliate of the Li-Funds Persons, (f) Ningxia Zhengjun Equity Investment Partnership Enterprise (Limited Partnership) (“Zhengjun Investment”), a limited partnership organized and existing under the laws of the People’s Republic of China and an affiliate of Mr. Yingfeng Zhang, (g) Ningxia Silkroad Equity Investment Partnership Enterprise (Limited Partnership) (“Ningxia Silkroad”), a limited partnership organized and existing under the laws of the People’s Republic of China and an affiliate of Ningxia, and (h) Ningxia Zhongrong Legend Equity Investment Partnership Enterprise (Limited Partnership) (“Zhongrong Legend”), a limited partnership organized and existing under the laws of the People’s Republic of China and an affiliate of Ningxia. Unless the context otherwise requires, Ningxia Yilida, Ningxia, Orient Hongtai, Orient Hongzhi, Hao Ding, Zhengjun Investment, Ningxia Silkroad and Zhongrong Legend are collectively referred to herein as the “Buyer Group.”

 

i
 

 

Under our amended and restated memorandum and articles of association, our ordinary shares, par value US$0.01 per share (each, a “Share”) are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, and holders of Class B ordinary shares are entitled to 10 votes per share. Holders of our Class A ordinary shares and Class B ordinary shares will vote as a single class on all matters described in the accompanying proxy statement. As of the date of the accompanying proxy statement, the Buyer Group collectively beneficially owns 311,568,626 Class A ordinary shares (including Class A ordinary shares represented by the Company’s American depositary shares (“ADSs”), each representing two Class A ordinary shares) and 97,518,374 Class B ordinary shares, representing approximately 75.6% of the Company’s issued and outstanding Shares and 1,286,752,366 votes, or approximately 90.7% of the total number of votes represented by the Company’s issued and outstanding Shares, which is more than the two-thirds majority necessary to approve a special resolution of the shareholders of the Company as required under Cayman Islands law to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. If the Merger is completed, the Company will continue its operations as a privately held company and will be beneficially owned by the Buyer Group and the Company’s ADSs will no longer be listed on the NASDAQ Global Select Market (“NASDAQ”), and the ADS program for the Company’s Class A ordinary shares will terminate.

 

If the Merger is completed, each Share issued and outstanding immediately prior to the Effective Time will be cancelled in exchange for the right to receive US$3.55 and each issued and outstanding ADS will be cancelled in exchange for the right to receive US$7.10 (less US$0.05 per ADS cancellation fees pursuant to the terms of the Deposit Agreement, dated as of September 24, 2009, among the Company, JPMorgan Chase Bank, N.A. (the “ADS Depositary”) and the holders of ADSs issued thereunder (the “Deposit Agreement”)), in each case, in cash, without interest and net of any applicable withholding taxes, other than (a) the Rollover Shares (as defined below) and (b) the Shares held by Parent, the Company or any of their subsidiaries immediately prior to the Effective Time (collectively, the “Excluded Shares”), which will be cancelled without payment of any consideration or distribution therefor.

 

In addition to the foregoing, at the Effective Time, (a) each option to purchase Shares, whether vested or unvested (“Company Options”) and whether or not granted under the Company’s amended and restated 2008 Equity Compensation Plan (the “Share Incentive Plan”), that is issued and outstanding immediately prior to the Effective Time, will be cancelled and converted into the right to receive, as soon as practicable after the Effective Time, an amount equal to the product of the total number of Shares issuable under such Company Option immediately prior to the Effective Time multiplied by the excess of US$3.55 over the exercise price payable per Share under such Company Option, in cash, without interest and net of any applicable withholding taxes, and (b) each restricted Share with respect to which the restrictions have not lapsed and each restricted stock unit, whether or not the restrictions with respect thereto have lapsed, in each case, whether or not awarded under the Share Incentive Plan, that is issued and outstanding immediately prior to the Effective Time, will be cancelled and converted into the right to receive, as soon as practicable after the Effective Time, an amount equal to US$3.55, in cash, without interest and net of any applicable withholding taxes.

 

A special committee (the “Special Committee”) of the board of directors of the Company (the “Board”), composed solely of directors who are unaffiliated with any member of the Buyer Group or any member of the management of the Company, reviewed and considered the terms and conditions of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. At a meeting on April 3, 2015, the Special Committee, after due consideration, unanimously (a) determined that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, were fair to, and in the best interests of, the Company and its shareholders and ADS holders, other than the members of the Buyer Group and their respective affiliates (such shareholders and ADS holders, the “Unaffiliated Holders”); (b) declared advisable the Merger Agreement, the Plan of Merger and the Transactions, including the Merger; and (c) recommended that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

At a meeting on April 3, 2015, the Board, acting upon the unanimous recommendation of the Special Committee, unanimously (a) determined that it was fair to, advisable and in the best interests of the Company and the Unaffiliated Holders to consummate the Transactions, including the Merger, (b) authorized and approved the execution, delivery and performance by the Company of the Merger Agreement, the Plan of Merger and the limited guarantees by Zhengjun Investment, Ningxia Silkroad and Zhongrong Legend in favor of the Company (the “Limited Guarantees”) pursuant to which such guarantors have collectively guaranteed in favor of the Company the entire portion of the payment obligations of Parent and Merger Sub under the Merger Agreement, and (c) resolved to recommend in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, to the shareholders of the Company and directed that the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, be submitted to a vote of the shareholders of the Company for authorization and approval.

 

Subsequent to the foregoing determination, declaration and recommendation, 230,990,798 Class A ordinary shares were indirectly purchased for RMB6,374,000,000 (approximately US$1,026,218,970 or US$4.44 per Class A ordinary share) in privately negotiated transactions that closed on June 30, 2015. See “Transactions in Shares and ADSs—Transactions within the Buyer Group” beginning on page [ ] for additional information regarding these transactions. At a meeting on August 25, 2015, the Special Committee, after due consideration, unanimously (a) determined that the Transactions, including the Merger, are fair to, and in the best interests of, the Company and the shareholders and ADS holders of the Company who are unaffiliated with the Company and whose securities are to be purchased pursuant to the terms of the Merger Agreement, (b) affirmed its April 3, 2015 resolutions (i) determining that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, would be fair to, and in the best interests of, the Company and the Unaffiliated Holders; (ii) declaring that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are advisable; and (iii) recommending that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, (c) authorized each member of the Special Committee to take, or cause to be taken, any actions to give effect to the resolutions described in (a) or (b) above and (d) ratified all previous actions taken by the Special Committee in connection with the matters described in the resolutions set forth in (a) or (b) above. Following the meeting of the Special Committee, the Board met via video conference on August 26, 2015, with representatives of Davis Polk, Sullivan & Cromwell and Conyers. Sullivan & Cromwell, on behalf of the Special Committee, briefed the Board on the work undertaken by the Special Committee and its advisors to date in connection with the Merger, including its consideration of the Li-Funds Purchase (as defined below), and reported to the Board the resolutions adopted by the Special Committee on August 25, 2015. Representatives of Davis Polk provided the Board with an update of the overall status of the Merger since the execution of the Merger Agreement on April 3, 2015. Representatives of Conyers advised the Board members of their fiduciary duties under Cayman Islands law. Members of the Board then discussed the fairness of the Merger in light of the Li-Funds Purchase. Following this discussion, the Board, acting upon the unanimous affirmation of the Special Committee, unanimously (a) determined that the Merger and other transactions contemplated by the Merger Agreement are fair to, and in the best interests of, the Company and the Unaffiliated Holders and (b) affirmed its April 3, 2015 resolutions (i) determining it was fair to, advisable and in the best interests of the Company and the Unaffiliated Holders to consummate the Merger; (ii) authorizing and approving the execution, delivery and performance by the Company of the Merger Agreement; and (iii) resolving to recommend in favor of the authorization and approval of the Merger Agreement, and the consummation of the Merger, to the shareholders of the Company for authorization and approval. 

 

ii
 

 

The Board unanimously recommends that you vote FOR the proposal to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, FOR the proposal to authorize the directors to do all things necessary to give effect to the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and FOR the proposal to adjourn the extraordinary general meeting in order to allow the Company to solicit additional proxies in the event that there are insufficient proxies received at the time of the extraordinary general meeting to pass the resolutions to be proposed at the extraordinary general meeting.

 

In considering the recommendation of the Special Committee made on April 3, 2015, which was subsequently affirmed by the Special Committee on August 25, 2015, and the recommendation of the Board made on April 3, 2015, which was subsequently affirmed by the Board on August 26, 2015, you should be aware that some of the Company’s directors and executive officers have interests in the Merger that are different from, or in addition to, the interests of the shareholders of the Company generally. As of the date of the accompanying proxy statement, Mr. Yingfeng Zhang, the chairman of the Board and acting chief executive officer of the Company, is the sole shareholder of Shanghai Yingfeng Investment Management Company Limited (“Shanghai Yingfeng”), a limited liability company organized under the laws of the People’s Republic of China and, the general partner of Ningxia Yilida and Zhengjun Investment. Both Ningxia Yilida and Zhengjun Investment are members of the Buyer Group and therefore, Mr. Yingfeng Zhang has interests that are different from, or in addition to, the interests of the shareholders of the Company generally. Mr. Shaolin Liang, a director of the Company, serves as a vice general manager of Ningxia, which is a member of the Buyer Group. Mr. Lijun Lin, a director of the Company, served as the chief executive officer of China Universal Asset Management Co., Ltd., which was an affiliate of Orient Hongtai and Orient Hongzhi prior to June 30, 2015, each of which is a member of the Buyer Group, from April 2004 to April 16, 2015. Therefore, both Mr. Shaolin Liang and Mr. Lijun Lin may have interests that are different from, or in addition to, the interests of the shareholders of the Company generally. Yili Shengda, Zhongrong Shengda, Orient Hongtai, Orient Hongzhi, Zhongrong Investment and Hao Ding (collectively, the “Rollover Shareholders”) have executed with Parent a support agreement, dated as of April 3, 2015 (as may be amended from time to time, the “Support Agreement”), providing that, among other things, (a) the Rollover Shareholders will vote all of the Shares (including Shares represented by ADSs) owned directly or indirectly by them in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and (b) the Rollover Shareholders agree that 48,759,187 Class B ordinary shares held by Yili Shengda, 48,759,187 Class B ordinary shares held by Zhongrong Shengda, 61,776,334 Class A ordinary shares held by Orient Hongtai, 61,776,335 Class A ordinary shares held by Orient Hongzhi, 80,577,828 Class A ordinary shares held by Zhongrong Investment and 107,438,129 Class A ordinary shares held by Hao Ding (collectively, the “Rollover Shares”) will, at the Effective Time, be cancelled for no consideration in the Merger. As of the date of the accompanying proxy statement, the Rollover Shareholders beneficially own an aggregate of 311,568,626 Class A ordinary shares (including Class A ordinary shares represented by ADSs) and 97,518,374 Class B ordinary shares, representing approximately 75.6% of the Company’s issued and outstanding Shares and 1,286,752,366 votes, or approximately 90.7% of the total number of votes represented by the Company’s issued and outstanding Shares, which is more than the two-thirds majority necessary to approve a special resolution of the shareholders of the Company as required under Cayman Islands law to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. You should also be aware that subsequent to the recommendation of the Special Committee and the Board made on April 3, 2015, but prior to the Special Committee’s affirmation of its April 3, 2015 recommendation on August 25, 2015 and the Board’s affirmation of its April 3, 2015 recommendation on August 26, 2015, 230,990,798 Class A ordinary shares were indirectly purchased for RMB6,374,000,000 (approximately US$1,026,218,970 or US$4.44 per Class A ordinary share) in privately negotiated transactions that closed on June 30, 2015. See “Transactions in Shares and ADSs—Transactions within the Buyer Group” beginning on page [ ] for additional information regarding these transactions.

 

The accompanying proxy statement provides detailed information about the Merger and the extraordinary general meeting. We encourage you to read the entire document and all of the attachments and other documents referred to or incorporated by reference herein carefully. You may also obtain more information about the Company from documents the Company has filed with the United States Securities and Exchange Commission (the “SEC”), which are available for free at the SEC’s website at www.sec.gov.

 

Regardless of the number of Shares that you own, your vote is very important. The Merger cannot be completed unless the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are authorized, approved and adopted by a special resolution representing an affirmative vote of shareholders holding two-thirds or more of the voting power represented by the Shares (including Shares represented by ADSs) present and voting in person or by proxy as a single class at the extraordinary general meeting.

 

Voting at the extraordinary general meeting will take place by poll voting, as the chairman of the Board has undertaken to demand poll voting at the meeting. Whether or not you plan to attend the extraordinary general meeting, please complete the accompanying proxy card, in accordance with the instructions set forth on the proxy card, as promptly as possible. The deadline to lodge your proxy card is [        ], 2015 at 10:00 a.m. (Hong Kong time).

 

iii
 

 

Completing the proxy card in accordance with the instructions set forth on the proxy card will not deprive you of your right to attend the extraordinary general meeting and vote your Shares in person. Please note, however, that if your Shares are held of record by a broker, bank or other nominee and you wish to vote at the extraordinary general meeting in person, you must obtain from the record holder a proxy issued in your name. If you submit a signed proxy card without indicating how you wish to vote, the Shares represented by your proxy card will be voted FOR the proposal to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, FOR the proposal to authorize the directors to do all things necessary to give effect to the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and FOR the proposal to adjourn the extraordinary general meeting in order to allow the Company to solicit additional proxies in the event that there are insufficient proxies received at the time of the extraordinary general meeting to pass the resolutions to be proposed at the extraordinary general meeting.

 

As the record holder of the Shares represented by ADSs, the ADS Depositary will endeavor to vote (or will endeavor to cause the vote of) the Shares it holds on deposit at the extraordinary general meeting in accordance with the voting instructions timely received from holders of ADSs at the close of business in New York City on [          ], 2015 (the “ADS Record Date”). The ADS Depositary must receive such instructions no later than 12:00 p.m. (New York City time) on [          ], 2015. If any holder of ADSs does not timely deliver specific voting instructions to the ADS Depositary, or if the ADS Depositary timely receives voting instructions from an ADS that fail to specify the manner in which the ADS Depositary is to vote the Shares represented by the holder’s ADSs, the ADS Depositary has advised the Company that it will not vote or attempt to exercise the right to vote any Shares underlying such holder’s ADSs. If you hold your ADSs in a brokerage, bank or other nominee account, you must follow the procedures of the broker, bank or other nominee through which you hold your ADSs if you wish to vote.

 

Holders of ADSs will not be able to attend the extraordinary general meeting unless they cancel their ADSs and become holders of Shares prior to the close of business in the Cayman Islands on [          ], 2015 (the “Share Record Date”). An ADS holder who wishes to cancel its ADSs needs to make arrangements to deliver the ADSs (or to the extent ADSs are certificated, the certificates evidencing such ADSs) to the ADS Depositary for cancellation before 12:00 p.m. (New York City time) on [          ], 2015 together with (a) delivery instructions for the corresponding Shares (including the name and address of the person who will be the registered holder of such Shares), (b) payment of the ADS cancellation fees (US$0.05 per ADS to be cancelled pursuant to the terms of the Deposit Agreement) and any applicable taxes and (c) a certification that the ADS holder either (i) held the ADSs as of the ADS Record Date and has not given, and will not give, voting instructions to the ADS Depositary as to the ADSs being cancelled, or has given voting instructions to the ADS Depositary as to the ADSs being cancelled but undertakes not to vote the corresponding Shares at the extraordinary general meeting or (ii) did not hold the ADSs as of the ADS Record Date and undertakes not to vote the corresponding Shares at the extraordinary general meeting. If you hold your ADSs in a brokerage, bank or other nominee account, please contact your broker, bank or other nominee to find out what actions you need to take to instruct the broker, bank or other nominee to cancel the ADSs on your behalf. Upon cancellation of the ADSs, the ADS Depositary will arrange for JPMorgan Chase Bank, N.A., Hong Kong branch, the custodian holding the Shares, to transfer registration of the Shares to the former ADS holder (or a person designated by the former ADS holder). If after the registration of Shares in your name you wish to receive a certificate evidencing the Shares registered in your name, you will need to make a request to the Company’s Registered Office at Codan Trust Company (Cayman), c/o Conyers Dill & Pearman, 2901 One Exchange Square, 8 Connaught Place, Central, Hong Kong, to issue and mail a certificate to your attention. If the Merger is not completed, the Company would continue to be a public company in the United States and the ADSs would continue to be listed on NASDAQ. Shares are not listed and cannot be traded on any stock exchange other than NASDAQ, and in such case only in the form of ADSs. As a result, if you have cancelled your ADSs to attend the extraordinary general meeting and the Merger is not completed and you wish to be able to sell your Shares on a stock exchange, you would need to deposit your Shares into the Company’s ADS program for the issuance of the corresponding number of ADSs, subject to the terms and conditions of applicable law and the Deposit Agreement, including, among other things, payment of relevant fees of the ADS Depositary for the issuance of ADSs and applicable share transfer taxes (if any) and related charges pursuant to the Deposit Agreement.

 

Shareholders who elect to dissent from the Merger will have the right to receive payment of the fair value of their Shares if the Merger is completed, but only if they deliver to the Company, before the vote for the Merger is taken at the extraordinary general meeting, a written objection to the Merger and subsequently comply with all procedures and requirements of Section 238 of the Cayman Islands Companies Law Cap. 22 (Law 3 of 1961, as consolidated and revised) (the “Cayman Islands Company Law”) for the exercise of dissenters’ rights, which is attached as Annex D to the accompanying proxy statement. The fair value of your Shares as determined under that statute could be more than, the same as or less than the merger consideration you would receive pursuant to the Merger Agreement if you do not exercise dissenters’ rights with respect to your Shares.

 

iv
 

 

ADS HOLDERS WILL NOT HAVE THE RIGHT TO EXERCISE DISSENTERS’ RIGHTS AND RECEIVE PAYMENT OF THE FAIR VALUE OF THE SHARES UNDERLYING THEIR ADSs. THE ADS DEPOSITARY WILL NOT ATTEMPT TO EXERCISE ANY DISSENTERS’ RIGHTS WITH RESPECT TO ANY OF THE SHARES THAT IT HOLDS, EVEN IF AN ADS HOLDER REQUESTS THE ADS DEPOSITARY TO DO SO. ADS HOLDERS WISHING TO EXERCISE DISSENTERS’ RIGHTS MUST SURRENDER THEIR ADSs TO THE ADS DEPOSITARY, PAY THE ADS DEPOSITARY’S FEES REQUIRED FOR THE CANCELLATION OF THEIR ADSs, PROVIDE INSTRUCTIONS FOR THE REGISTRATION OF THE CORRESPONDING SHARES IN THE COMPANY’S REGISTER OF MEMBERS, CERTIFY THAT THEY HAVE NOT GIVEN, AND WILL NOT GIVE, VOTING INSTRUCTIONS AS TO THEIR ADSs (OR, ALTERNATIVELY, THAT THEY WILL NOT VOTE THE CORRESPONDING SHARES) BEFORE 12:00 P.M. (NEW YORK CITY TIME) ON [          ], 2015 AND BECOME REGISTERED HOLDERS OF SHARES BY THE CLOSE OF BUSINESS IN THE CAYMAN ISLANDS ON THE SHARE RECORD DATE. THEREAFTER, SUCH FORMER ADS HOLDERS MUST COMPLY WITH THE PROCEDURES AND REQUIREMENTS FOR EXERCISING DISSENTERS’ RIGHTS WITH RESPECT TO THE SHARES UNDER SECTION 238 OF THE CAYMAN ISLANDS COMPANIES LAW. IF THE MERGER IS NOT COMPLETED, THE COMPANY WOULD CONTINUE TO BE A PUBLIC COMPANY IN THE UNITED STATES AND THE ADSs WOULD CONTINUE TO BE LISTED ON NASDAQ. SHARES ARE NOT LISTED AND CANNOT BE TRADED ON ANY STOCK EXCHANGE OTHER THAN NASDAQ, AND IN SUCH CASE ONLY IN THE FORM OF ADSs. AS A RESULT, IF A FORMER ADS HOLDER HAS CANCELLED HIS, HER OR ITS ADSs TO EXERCISE DISSENTERS’ RIGHTS AND THE MERGER IS NOT COMPLETED AND SUCH FORMER ADS HOLDER WISHES TO BE ABLE TO SELL HIS, HER OR ITS SHARES ON A STOCK EXCHANGE, SUCH FORMER ADS HOLDER WOULD NEED TO DEPOSIT HIS, HER OR ITS SHARES INTO THE COMPANY’S ADS PROGRAM FOR THE ISSUANCE OF THE CORRESPONDING NUMBER OF ADSs, SUBJECT TO THE TERMS AND CONDITIONS OF APPLICABLE LAW AND THE DEPOSIT AGREEMENT, INCLUDING, AMONG OTHER THINGS, PAYMENT OF RELEVANT FEES OF THE ADS DEPOSITARY FOR THE ISSUANCE OF ADSs AND APPLICABLE SHARE TRANSFER TAXES (IF ANY) AND RELATED CHARGES PURSUANT TO THE DEPOSIT AGREEMENT.

 

Neither the SEC nor any state securities regulatory agency has approved or disapproved the Merger, passed upon the merits or fairness of the Merger or passed upon the adequacy or accuracy of the disclosure in this letter or in the accompanying notice of the extraordinary general meeting or proxy statement. Any representation to the contrary is a criminal offense.

 

If you have any questions or need assistance voting your Shares, please call Georgeson Inc., the proxy solicitor, toll-free at +1 800 509 0983 (or +1 781 575 2137 outside of North America) or by email at ShandaGames@georgeson.com.

 

v
 

 

Thank you for your cooperation and continued support.

 

    Sincerely,
    Yingfeng Zhang
    Chairman of the Board

 

The accompanying proxy statement is dated [        ], 2015, and is first being mailed to the Company’s shareholders and ADS holders on or about [        ], 2015.

 

vi
 

 

SHANDA GAMES LIMITED

 

NOTICE OF EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS TO BE HELD ON [        ], 2015

 

Dear Shareholder:

 

Notice is hereby given that an extraordinary general meeting of the shareholders of Shanda Games Limited (referred to herein alternately as “the Company,” “us,” “we” or other terms correlative thereto), will be held on [          ], 2015 at [      ] a.m. (Hong Kong time) at the offices of Davis Polk & Wardwell, The Hong Kong Club Building, 3A Chater Road, Central, Hong Kong.

 

Only registered holders of ordinary shares of the Company, par value US$0.01 per share (each, a “Share”), at the close of business in the Cayman Islands on [          ], 2015 (the “Share Record Date”) or their proxy holders are entitled to vote at this extraordinary general meeting or any adjournment thereof. At the extraordinary general meeting, you will be asked to consider and vote upon the following resolutions:

 

·as a special resolution:

 

THAT the Agreement and Plan of Merger, dated as of April 3, 2015 (as may be amended from time to time, the “Merger Agreement”), among Capitalhold Limited, an exempted company with limited liability incorporated under the laws of the Cayman Islands (“Parent”), Capitalcorp Limited, an exempted company with limited liability incorporated under the laws of the Cayman Islands and a wholly owned subsidiary of Parent (“Merger Sub”), and the Company (the Merger Agreement being in the form attached as Annex A to the accompanying proxy statement and to be produced and made available for inspection at the extraordinary general meeting), the plan of merger (the “Plan of Merger”) required to be registered with the Registrar of Companies in the Cayman Islands (the Plan of Merger being in the form attached as Annex B to the accompanying proxy statement and to be produced and made available for inspection at the extraordinary general meeting) in order to give effect to the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation (the “Surviving Corporation”) and becoming a wholly owned subsidiary of Parent (the “Merger”), and any and all transactions contemplated by the Merger Agreement and the Plan of Merger (collectively, the “Transactions”), including without limitation (i) the Merger, (ii) the amendment of the authorized share capital of the Company from US$200,000,000 divided into 16,000,000,000 Class A ordinary shares of a par value of US$0.01 each and 4,000,000,000 Class B ordinary shares of a par value of US$0.01 each to US$1,000 divided into 100,000 ordinary shares of a par value of US$0.01 each, and (iii) the replacing of the existing memorandum and articles of association in their entirety with a new memorandum and articles of association, a copy of which is attached as Appendix II to the Plan of Merger, be authorized, approved and adopted; and

 

·as an ordinary resolution:

 

THAT the directors of the Company be authorized to do all things necessary to give effect to the Merger Agreement, the Plan of Merger and the Transactions, including the Merger; and

 

·if necessary, as an ordinary resolution:

 

THAT the chairman of the extraordinary general meeting be instructed to adjourn the extraordinary general meeting in order to allow the Company to solicit additional proxies in the event that there are insufficient proxies received at the time of the extraordinary general meeting to pass the resolutions to be proposed at the extraordinary general meeting.

 

Please refer to the accompanying proxy statement, which is attached to and made a part of this notice. A list of the Company’s shareholders will be available at its principal executive offices at No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, the People’s Republic of China (the “PRC”), during ordinary business hours for the two business days immediately prior to the extraordinary general meeting.

 

Certain existing shareholders of the Company, namely (a) Yili Shengda Investment Holdings (Hong Kong) Company Limited (“Yili Shengda”), a company incorporated and existing under the laws of Hong Kong and an affiliate of the Company’s acting chief executive officer, Mr. Yingfeng Zhang, (b) Zhongrong Shengda Investment Holdings (Hong Kong) Company Limited (“Zhongrong Shengda”), a company incorporated and existing under the laws of Hong Kong and an affiliate of Ningxia Zhongyincashmere International Group Co., Ltd. (“Ningxia”), a company formed under the laws of the PRC, (c) Orient Hongtai (Hong Kong) Limited (“Orient Hongtai”), a company incorporated and existing under the laws of Hong Kong and an affiliate of Mr. Miaotong Wang, Mr. Heng Shao and Mr. Ji Wang (Mr. Miaotong Wang, Mr. Heng Shao and Mr. Ji Wang, collectively, the “Li-Funds Persons”), (d) Orient Hongzhi (Hong Kong) Limited (“Orient Hongzhi”), a company incorporated and existing under the laws of Hong Kong and an affiliate of the Li-Funds Persons, (e) Zhongrong Investment Holdings (Hong Kong) Co., Ltd. (“Zhongrong Investment”), a company incorporated and existing under the laws of Hong Kong and an affiliate of Ningxia, and (f) Hao Ding International Limited (“Hao Ding”), a business company established under the laws of the British Virgin Islands and an affiliate of the Li-Funds Persons (collectively, the “Rollover Shareholders”), have entered into a support agreement, dated as of April 3, 2015 (as may be amended from time to time, the “Support Agreement”) with Parent, pursuant to which they have agreed, among other things, that (i) the Rollover Shareholders will vote all of the Shares (including Shares represented by the Company’s American depositary shares (“ADSs”), each representing two Class A ordinary shares) owned directly or indirectly by them in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and (ii) 48,759,187 Class B ordinary shares held by Yili Shengda, 48,759,187 Class B ordinary shares held by Zhongrong Shengda, 61,776,334 Class A ordinary shares held by Orient Hongtai, 61,776,335 Class A ordinary shares held by Orient Hongzhi, 80,577,828 Class A ordinary shares held by Zhongrong Investment and 107,438,129 Class A ordinary shares held by Hao Ding (collectively, the “Rollover Shares”) will, at the Effective Time, be cancelled for no consideration in the Merger. As of the date of the accompanying proxy statement, the Rollover Shareholders beneficially own an aggregate of 311,568,626 Class A ordinary shares (including Class A ordinary shares represented by ADSs) and 97,518,374 Class B ordinary shares, representing approximately 75.6% of the Company’s issued and outstanding Shares and 1,286,752,366 votes, or approximately 90.7% of the total number of votes represented by the Company’s issued and outstanding Shares, which is more than the two-thirds majority necessary to approve a special resolution of the shareholders of the Company as required under Cayman Islands law to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. Immediately following the consummation of the Merger, Parent and the Company will be beneficially owned by (a) Ningxia Yilida Capital Investment Limited Partnership (“Ningxia Yilida”), a limited partnership formed under the laws of the PRC and an affiliate of Mr. Yingfeng Zhang, (b) Ningxia, (c) Orient Hongtai, (d) Orient Hongzhi, (e) Hao Ding, (f) Ningxia Zhengjun Equity Investment Partnership Enterprise (Limited Partnership) (“Zhengjun Investment”), a limited partnership organized and existing under the laws of the PRC and an affiliate of Mr. Yingfeng Zhang, (g) Ningxia Silkroad Equity Investment Partnership Enterprise (Limited Partnership) (“Ningxia Silkroad”), a limited partnership organized and existing under the laws of the PRC and an affiliate of Ningxia, and (h) Ningxia Zhongrong Legend Equity Investment Partnership Enterprise (Limited Partnership) (“Zhongrong Legend”), a limited partnership organized and existing under the laws of the PRC and an affiliate of Ningxia. Unless the context otherwise requires, Ningxia Yilida, Ningxia, Orient Hongtai, Orient Hongzhi, Hao Ding, Zhengjun Investment, Ningxia Silkroad and Zhongrong Legend are collectively referred to herein as the “Buyer Group.”

  

i
 

 

After careful consideration and acting upon the unanimous recommendation made on April 3, 2015 of a special committee (the "Special Committee") of the board of directors of the Company (the "Board"), composed solely of directors who are unaffiliated with any member of the Buyer Group or any member of the management of the Company, the Board on April 3, 2015 unanimously (a) determined that it was fair to, advisable and in the best interests of the Company, its shareholders and ADS holders, other than the members of the Buyer Group and their respective affiliates (such shareholders and ADS holders the "Unaffiliated Holders"), to consummate the Transactions, including the Merger, (b) authorized and approved the execution, delivery and performance by the Company of the Merger Agreement, the Plan of Merger and the limited guarantees by Zhengjun Investment, Ningxia Silkroad and Zhongrong Legend in favor of the Company (the "Limited Guarantees") pursuant to which such guarantors have collectively guaranteed in favor of the Company the entire portion of the payment obligations of Parent and Merger Sub under the Merger Agreement, and (c) resolved to recommend in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, to the shareholders of the Company and directed that the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, be submitted to a vote of the shareholders of the Company for authorization and approval. After careful consideration and acting upon the Special Committee's unanimous affirmation made on August 25, 2015 of the Special Committee's April 3, 2015 recommendation, the Board on August 26, 2015 unanimously (a) determined that the Merger and other transactions contemplated by the Merger Agreement are fair to, and in the best interests of, the Company and the Unaffiliated Holders and (b) affirmed its April 3, 2015 resolutions (i) determining it was fair to, advisable and in the best interests of the Company and the Unaffiliated Holders to consummate the Merger; (ii) authorizing and approving the execution, delivery and performance by the Company of the Merger Agreement; and (iii) resolving to recommend in favor of the authorization and approval of the Merger Agreement, and the consummation of the Merger, to the shareholders of the Company for authorization and approval. The Board unanimously recommends that you vote FOR the proposal to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, FOR the proposal to authorize the directors to do all things necessary to give effect to the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and FOR the proposal to adjourn the extraordinary general meeting in order to allow the Company to solicit additional proxies in the event that there are insufficient proxies received at the time of the extraordinary general meeting to pass the resolutions to be proposed at the extraordinary general meeting. 

 

Regardless of the number of Shares that you own, your vote is very important. The Merger cannot be completed unless the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are authorized, approved and adopted by a special resolution representing an affirmative vote of shareholders holding two-thirds or more of the voting power represented by the Shares (including Shares represented by ADSs) present and voting in person or by proxy as a single class at the extraordinary general meeting.

 

ii
 

 

Even if you plan to attend the extraordinary general meeting in person, we request that you submit your proxy in accordance with the instructions set forth on the proxy card as promptly as possible. To be valid, your proxy card must be completed, signed and returned to the Company’s offices at No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, the PRC, Attention: Investor Relations Department, no later than [          ], 2015 at 10:00 a.m. (Hong Kong time). The proxy card is the “instrument of proxy” as referred to in the Company’s articles of association. Voting at the extraordinary general meeting will take place by poll voting as the chairman of the Board has undertaken to demand poll voting at the meeting. If you receive more than one proxy card because you own Shares that are registered in different names, please vote all of your Shares shown on each of your proxy cards in accordance with the instructions set forth on the proxy card.

 

Completing the proxy card in accordance with the instructions set forth on the proxy card will not deprive you of your right to attend the extraordinary general meeting and vote your Shares in person. Please note, however, that if your Shares are registered in the name of a broker, bank or other nominee and you wish to vote at the extraordinary general meeting in person, you must obtain from the record holder a proxy issued in your name.

 

If you abstain from voting, fail to cast your vote in person, fail to complete and return your proxy card in accordance with the instructions set forth on the proxy card, or fail to give voting instructions to your broker, bank or other nominee, your vote will not be counted.

 

When proxies are properly dated, executed and returned by holders of Shares, the Shares they represent will be voted at the extraordinary general meeting in accordance with the instructions of the shareholders. If no specific instructions are given by such shareholders, such Shares will be voted “FOR” the proposals as described above, unless you appoint a person other than the chairman of the meeting as proxy, in which case the Shares represented by your proxy card will be voted (or not submitted for voting) as your proxy determines.

 

If you own ADSs as of the close of business in New York City on [            ], 2015 (the “ADS Record Date”) (and do not cancel such ADSs and become a registered holder of the Shares underlying such ADSs as explained below), you cannot vote at the extraordinary general meeting directly, but you may instruct JPMorgan Chase Bank, N.A., in its capacity as the ADS depositary (the “ADS Depositary”) and the holder of the Shares underlying your ADSs how to vote the Shares underlying your ADSs. The ADS Depositary must receive your instructions no later than 10:00 a.m. (New York City time) on [          ], 2015 in order to ensure the Shares underlying your ADSs are properly voted at the extraordinary general meeting. If you hold your ADSs in a brokerage, bank or other nominee account, you must follow the procedures of the broker, bank or other nominee through which you hold your ADSs if you wish to vote. Alternatively, if you own ADSs as of the close of business in New York City on the ADS Record Date, you may vote at the extraordinary general meeting directly if you cancel your ADSs and become a registered holder of the Shares underlying your ADSs prior to the close of business in the Cayman Islands on [            ], 2015, the Share Record Date. If you wish to cancel your ADSs for the purpose of voting Shares directly, you need to make arrangements to deliver your ADSs to the ADS Depositary for cancellation before 12:00 p.m. (New York City time) on [            ], 2015 together with (a) delivery instructions for the corresponding Shares (including the name and address of the person who will be the registered holder of such Shares), (b) payment of the ADS cancellation fees (US$0.05 per ADS to be cancelled pursuant to the terms of the Deposit Agreement, dated as of September 24, 2009, among the Company, the ADS Depositary and the holders of ADSs issued thereunder (the “Deposit Agreement”)) and any applicable taxes and (c) a certification that you either (i) held the ADSs as of the ADS Record Date and have not given, and will not give, voting instructions to the ADS Depositary as to the ADSs being cancelled or have given voting instructions to the ADS Depositary as to the ADSs being cancelled but undertake not to vote the corresponding Shares at the extraordinary general meeting or (ii) did not hold the ADSs as of the ADS Record Date and undertake not to vote the corresponding Shares at the extraordinary general meeting. If you hold your ADSs in a brokerage, bank or other nominee account, please contact your broker, bank or other nominee to find out what actions you need to take to instruct the broker, bank or other nominee to cancel the ADSs on your behalf.

 

Shareholders who dissent from the Merger will have the right to seek payment of the fair value of their Shares if the Merger is completed, but only if they deliver to the Company, before the vote is taken, a written objection to the Merger and subsequently comply with all procedures and requirements of Section 238 of the Cayman Islands Companies Law for the exercise of dissenters’ rights, which is attached as Annex D to the accompanying proxy statement. The fair value of their Shares as determined under that statute could be more than, the same as or less than the merger consideration they would receive pursuant to the Merger Agreement if they do not exercise dissenters’ rights with respect to their Shares.

 

iii
 

 

ADS HOLDERS WILL NOT HAVE THE RIGHT TO EXERCISE DISSENTERS’ RIGHTS AND RECEIVE PAYMENT OF THE FAIR VALUE OF THE SHARES UNDERLYING THEIR ADSs. THE ADS DEPOSITARY WILL NOT ATTEMPT TO EXERCISE ANY DISSENTERS’ RIGHTS WITH RESPECT TO ANY OF THE SHARES THAT IT HOLDS, EVEN IF AN ADS HOLDER REQUESTS THE ADS DEPOSITARY TO DO SO. ADS HOLDERS WISHING TO EXERCISE DISSENTERS’ RIGHTS MUST SURRENDER THEIR ADSs TO THE ADS DEPOSITARY, PAY THE ADS DEPOSITARY’S FEES REQUIRED FOR THE CANCELLATION OF THEIR ADSs, PROVIDE INSTRUCTIONS FOR THE REGISTRATION OF THE CORRESPONDING SHARES IN THE COMPANY’S REGISTER OF MEMBERS, CERTIFY THAT THEY HAVE NOT GIVEN, AND WILL NOT GIVE, VOTING INSTRUCTIONS AS TO THEIR ADSs (OR, ALTERNATIVELY, THAT THEY WILL NOT VOTE THE CORRESPONDING SHARES) BEFORE 12:00 P.M. (NEW YORK CITY TIME) ON [          ], 2015 AND BECOME REGISTERED HOLDERS OF SHARES BY THE CLOSE OF BUSINESS IN THE CAYMAN ISLANDS ON THE SHARE RECORD DATE. THEREAFTER, SUCH FORMER ADS HOLDERS MUST COMPLY WITH THE PROCEDURES AND REQUIREMENTS FOR EXERCISING DISSENTERS’ RIGHTS WITH RESPECT TO THE SHARES UNDER SECTION 238 OF THE CAYMAN ISLANDS COMPANIES LAW. IF THE MERGER IS NOT COMPLETED, THE COMPANY WOULD CONTINUE TO BE A PUBLIC COMPANY IN THE UNITED STATES AND THE ADSs WOULD CONTINUE TO BE LISTED ON NASDAQ. SHARES ARE NOT LISTED AND CANNOT BE TRADED ON ANY STOCK EXCHANGE OTHER THAN NASDAQ, AND IN SUCH CASE ONLY IN THE FORM OF ADSs. AS A RESULT, IF A FORMER ADS HOLDER HAS CANCELLED HIS, HER OR ITS ADSs TO EXERCISE DISSENTERS’ RIGHTS AND THE MERGER IS NOT COMPLETED AND SUCH FORMER ADS HOLDER WISHES TO BE ABLE TO SELL HIS, HER OR ITS SHARES ON A STOCK EXCHANGE, SUCH FORMER ADS HOLDER WOULD NEED TO DEPOSIT HIS, HER OR ITS SHARES INTO THE COMPANY’S ADS PROGRAM FOR THE ISSUANCE OF THE CORRESPONDING NUMBER OF ADSs, SUBJECT TO THE TERMS AND CONDITIONS OF APPLICABLE LAW AND THE DEPOSIT AGREEMENT, INCLUDING, AMONG OTHER THINGS, PAYMENT OF RELEVANT FEES OF THE ADS DEPOSITARY FOR THE ISSUANCE OF ADSs AND APPLICABLE SHARE TRANSFER TAXES (IF ANY) AND RELATED CHARGES PURSUANT TO THE DEPOSIT AGREEMENT.

 

PLEASE DO NOT SEND YOUR SHARE CERTIFICATES OR CERTIFICATES EVIDENCING ADSs AT THIS TIME. IF THE MERGER IS COMPLETED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR SHARE CERTIFICATES OR ADRs.

 

If you have any questions or need assistance voting your Shares, please call Georgeson Inc., the proxy solicitor, toll-free at +1 800 509 0983 (or +1 781 575 2137 outside of North America) or by email at ShandaGames@georgeson.com.

 

The Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are described in the accompanying proxy statement. Copies of the Merger Agreement and the Plan of Merger are included as Annex A and Annex B, respectively, to the accompanying proxy statement. We urge you to read the entire accompanying proxy statement carefully.

 

Notes:

 

1.In the case of joint holders, the vote of the senior holder who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the votes of the joint holders. For this purpose, seniority will be determined by the order in which the names stand in the register of members of the Company.

 

2.The instrument appointing a proxy must be in writing under the hand of the appointer or of his or her attorney duly authorized in writing or, if the appointer is a corporation, either under seal or under the hand of an officer or attorney duly authorized.

 

3.A proxy need not be a member (registered shareholder) of the Company.

 

4.The chairman of the extraordinary general meeting may at his or her discretion direct that a proxy card will be deemed to have been duly deposited where sent by email or telefax upon receipt of email or telefax confirmation that the signed original thereof has been sent. A proxy card that is not deposited in the manner permitted will be invalid.

 

iv
 

 

5.Votes given in accordance with the terms of a proxy card will be valid notwithstanding the previous death or insanity of the principal or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the Share or Shares in respect of which the proxy is given, provided that no intimation in writing of such death, insanity, revocation or transfer was received by the Company at the principal executive offices of the Company at No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, the PRC at least two hours before the commencement of the extraordinary general meeting, or adjourned meeting at which such proxy is used.

 

  BY ORDER OF THE BOARD OF DIRECTORS,
 
  Chairman of the Board
   
  [        ], 2015

 

v
 

 

PROXY STATEMENT

 

Dated [        ], 2015

 

SUMMARY VOTING INSTRUCTIONS

 

Ensure that your shares of Shanda Games Limited can be voted at the extraordinary general meeting by submitting your proxy or contacting your broker, bank or other nominee.

 

If your shares are registered in the name of a broker, bank or other nominee: check the voting instruction card forwarded by your broker, bank or other nominee to see which voting options are available or contact your broker, bank or other nominee in order to obtain directions as to how to ensure that your shares are voted at the extraordinary general meeting.

 

If your shares are registered in your name: submit your proxy as soon as possible by signing, dating and returning the accompanying proxy card in the enclosed postage-paid envelope, so that your shares can be voted at the extraordinary general meeting unless you appoint a person other than the chairman of the meeting as proxy, in which case the shares represented by your proxy card will be voted (or not submitted for voting) as your proxy determines.

 

If you submit your proxy card without indicating how you wish to vote, the shares represented by your proxy will be voted in favor of the resolutions to be proposed at the extraordinary general meeting.

 

If your ADSs are registered in the name of a broker, bank or other nominee: check the ADS voting instructions card forwarded by your broker, bank or other nominee to see which voting options are available or contact your broker, bank or other nominee in order to obtain directions as to how to ensure that the shares represented by your ADSs are voted at the extraordinary general meeting.

 

If your ADSs are registered in your name: submit your ADS voting instructions card as soon as possible by signing, dating and returning the enclosed ADS voting instructions card in the enclosed postage-paid envelope, so that the shares represented by your ADSs can be voted at the extraordinary general meeting by the ADS Depositary, as the registered holder of the shares represented by your ADSs.

 

If you submit your ADS voting instructions card without indicating how you wish to vote, the shares represented by your ADSs will be voted in favor of the resolutions to be proposed at the extraordinary general meeting.

 

If you have any questions, require assistance with voting your proxy card, or need additional copies of proxy material, please contact Georgeson Inc., the proxy solicitor, at 480 Washington Boulevard, 26th Floor, Jersey City, NJ 07310 or toll-free at +1 800 509 0983 (or +1 781 575 2137 outside of North America) or by email at ShandaGames@georgeson.com.

 

i
 

 

TABLE OF CONTENTS

 

 

Page

 

Summary Term Sheet 3
Questions and Answers about the Extraordinary General Meeting and the Merger 15
Special Factors 22
Market Price of the Company’s ADSs, Dividends and Other Matters 77
The Extraordinary General Meeting 79
The Merger Agreement 85
Provisions for Unaffiliated Security Holders 104
Dissenters’ Rights 105
Financial Information 107
Transactions in Shares and ADSs 110
Security Ownership of Certain Beneficial Owners and Management of the Company 112
Future Shareholder Proposals 114
Cautionary Note Regarding Forward-Looking Statements 115
Where You Can Find More Information 116

 

ANNEX A: Agreement and Plan of Merger A-1
ANNEX B: Plan of Merger B-1
ANNEX C: Opinion of Merrill Lynch as Financial Advisor C-1
ANNEX D: Cayman Islands Companies Law Cap. 22 (Law 3 of 1961, as consolidated and revised) – Section 238 D-1
ANNEX E: Support Agreement E-1
ANNEX F: Directors and Executive Officers of Each Filing Person F-1

FORM OF PROXY CARD

FORM OF ADS VOTING INSTRUCTIONS CARD

 

ii
 

 

Summary Term Sheet

 

This “Summary Term Sheet” and the “Questions and Answers About the Extraordinary General Meeting and the Merger” highlight selected information contained in this proxy statement regarding the Merger (as defined below) and may not contain all of the information that may be important to your consideration of the Merger (as defined below) and other transactions contemplated by the Merger Agreement (as defined below). You should carefully read this entire proxy statement and the other documents to which this proxy statement refers for a more complete understanding of the matters being considered at the extraordinary general meeting. In addition, this proxy statement incorporates by reference important business and financial information about the Company. You are encouraged to read all of the documents incorporated by reference into this proxy statement and you may obtain such information without charge by following the instructions in “Where You Can Find More Information” beginning on page [  ]. In this proxy statement, the terms “the Company,” “us,” “we” or other terms correlative thereto refer to Shanda Games Limited. All references to “dollars” and “US$” in this proxy statement are to U.S. dollars, and all references to “RMB” in this proxy statement are to Renminbi, the lawful currency of the People’s Republic of China (the “PRC”).

 

The Parties Involved in the Merger

 

The Company

 

We are one of the PRC’s leading online game companies in terms of the size and diversity of our game portfolio, our game revenues and our game player base. Through our extensive experience in the online game industry in the PRC and in certain overseas markets, we have created a scalable approach to develop, source and operate online games as well as to license our games to third parties. We use multiple channels to assemble a large and diversified game portfolio of various genres. We operate a nationwide, secure network to host hundreds of thousands of users playing simultaneously, and monitor and adjust the environment of our games to optimize our game players’ experience. As of the date of this proxy statement, we operate 34 massively multi-player online games (“MMO games”), and 30 mobile games and our in-house development capabilities consist of approximately 1,240 game development personnel.

 

We are an exempted company with limited liability incorporated under the laws of the Cayman Islands. Our principal executive offices are located at No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, the PRC. Our telephone number at this address is +86 21 5050 4740 and our fax number is +86 21 5050 4740 ext. 897286.

 

For a description of our history, development, business and organizational structure, see our Annual Report on Form 20-F for the year ended December 31, 2014, filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 17, 2015, which is incorporated herein by reference. See “Where You Can Find More Information” beginning on page [  ] for a description of how to obtain a copy of our Annual Report.

 

Parent

 

Capitalhold Limited (“Parent”), a Cayman Islands exempted company with limited liability, is a holding company formed solely for the purpose of holding the equity interest in Merger Sub and completing the Transactions (as defined below), including the Merger (as defined below). Each of Yili Shengda and Zhongrong Shengda holds 50% of the outstanding shares of Parent. The business address of Parent is c/o Mr. Yingfeng Zhang, No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, the PRC, and its business telephone number is +86 21 5050 4740.

 

Merger Sub

 

Capitalcorp Limited (“Merger Sub”), a Cayman Islands exempted company with limited liability wholly owned by Parent, was formed by Parent solely for the purpose of effecting the Merger. The business address of Merger Sub is c/o Mr. Yingfeng Zhang, No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, the PRC, and its business telephone number is +86 21 5050 4740.

 

3 

 

 

Mr. Yingfeng Zhang

 

Mr. Yingfeng Zhang (“Mr. Zhang”) is the chairman of the board of directors of the Company (the “Board”) and acting chief executive officer of the Company. He has served as the acting chief executive officer and a director of the Company since October 28, 2014 and as the chairman of the Board since November 26, 2014. Mr. Zhang served as the general counsel of Shanda Interactive Entertainment Limited (“Shanda Interactive”) from April 4, 2008 to September 14, 2011 and as the co-general counsel from September 15, 2011 to December 16, 2014. Mr. Zhang also served as a vice president of Shanda Interactive from August 10, 2011 to December 16, 2014. Shanda Interactive is a company organized under the laws of the Cayman Islands with its principal business address at 8 Stevens Road 257819 Singapore. The principal business of Shanda Interactive is investment holding. Shanda Interactive was previously a member of the Buyer Group and our indirect controlling shareholder prior to November 25, 2014, when it ceased to own any equity securities of the Company. Mr. Zhang is a PRC citizen.

 

Ningxia Yilida

 

Ningxia Yilida Capital Investment Limited Partnership (“Ningxia Yilida”) is a limited partnership organized under the laws of the PRC and an affiliate of Mr. Zhang, with its principal business address at Ecological Textile Park, Lingwu, Ningxia 750400, the PRC and its business telephone number is +86 21 5050 4740. The general partner of Ningxia Yilida is Shanghai Yingfeng.

 

Yili Shengda

 

Yili Shengda Investment Holdings (Hong Kong) Company Limited (“Yili Shengda”) is a company organized under the laws of Hong Kong and an affiliate of Mr. Zhang, with its principal business address at Room 2803-05, AXA Tower, Landmark East, 100 How Ming Street, Kwun Tong, Kowloon, Hong Kong, and its business telephone number is +852 8208 5118. Yili Shengda is directly and wholly owned by Ningxia Yilida.

 

Zhengjun Investment

 

Ningxia Zhengjun Equity Investment Partnership Enterprise (Limited Partnership) (“Zhengjun Investment”) is a limited partnership organized under the laws of the PRC and an affiliate of Mr. Zhang, with its principal business address at Ecological Textile Park, Lingwu, Ningxia 750400, the PRC and its business telephone number is +86 21 5050 4740. The general partner of Zhengjun Investment is Shanghai Yingfeng.

 

Shanghai Yingfeng

 

Shanghai Yingfeng Investment Management Company Limited (“Shanghai Yingfeng”) is a company organized under the laws of the PRC with its principal business address at Room 2055, No. 5358 Huyi Road, Jiading District, Shanghai 201806, the PRC and its business telephone number is +86 21 5050 4740. Shanghai Yingfeng is wholly and directly owned by Mr. Zhang.

 

Ningxia

 

Ningxia Zhongyincashmere International Group Co., Ltd. (“Ningxia”) is a company organized under the laws of the PRC with its principal business address at Ecological Textile Park, Lingwu, Ningxia 750400, the PRC and its business telephone number is +86 951 4038 950, extension 8969. Mr. Shengguo Ma, Mr. Shengming Ma and Mr. Wei Ma collectively own 100% of the equity interests in Ningxia.

 

Zhongrong Investment

 

Zhongrong Investment Holdings (Hong Kong) Co., Ltd. (“Zhongrong Investment”) is a company organized under the laws of Hong Kong and an affiliate of Ningxia, with its principal business address at Room 2803-05, AXA Tower, Landmark East, 100 How Ming Street, Kwun Tong, Kowloon, Hong Kong and its business telephone number is +852 8208 5118. Zhongrong Investment is directly and wholly owned by Ningxia Zhongrong Culture Industry Equity Investment Enterprise (Limited Partnership) (“Zhongrong Culture”), the general partner of which is Ningxia.

 

Zhongrong Shengda

 

Zhongrong Shengda Investment Holdings (Hong Kong) Company Limited (“Zhongrong Shengda”) is a company organized under the laws of Hong Kong and an affiliate of Ningxia, with its principal business address at Room 2803-05, AXA Tower, Landmark East, 100 How Ming Street, Kwun Tong, Kowloon, Hong Kong and its business telephone number is +852 8208 5118. Zhongrong Shengda is directly and wholly owned by Ningxia Zhongrong Shengda Equity Investment Partnership Enterprise (Limited Partnership) (“Zhongrong Equity”), the general partner of which is Ningxia.

 

4 

 

 

Zhongrong Legend

 

Ningxia Zhongrong Legend Equity Investment Partnership Enterprise (Limited Partnership) (“Zhongrong Legend”) is a limited partnership organized under the laws of the PRC and an affiliate of Ningxia, with its principal business address at Ecological Textile Park, Lingwu, Ningxia 750400, the PRC and its business telephone number is +86 951 4038 950, extension 8969. Zhongrong Legend’s general partner is Ningxia.

 

Ningxia Silkroad

 

Ningxia Silkroad Equity Investment Partnership Enterprise (Limited Partnership) (“Ningxia Silkroad”) is a limited partnership organized under the laws of the PRC and an affiliate of Ningxia, with its principal business address at Ecological Textile Park, Lingwu, Ningxia 750400, the PRC and its business telephone number is +86 951 4038 950, extension 8969. Ningxia Silkroad’s general partner is Ningxia.

 

Mr. Shaolin Liang

 

Mr. Shaolin Liang (“Mr. Liang”) is a director of the Company. He has served as a director of the Company since February 2015. Mr. Liang has also served as a vice general manager of Ningxia since February 2015. From December 2007 to February 2015, Mr. Liang served at Ningxia Zhongyin Cashmere Co., Ltd. (“Zhongyin Cashmere,” formerly known as Ningxia Lingwu Zhongyin Cashmere Co., Ltd.), an affiliate of Ningxia and a company listed on the Shenzhen Stock Exchange, as a vice general manager and he served as a member of the board of directors of Zhongyin Cashmere from December 2007 to December 2014. From 1999 to December 2007, Mr. Liang served as a vice president of Zhongyin Cashmere. The business address of Mr. Liang is Sixth Floor, Heping Mansion, No. 6 Laiguangying East Road, Chaoyang District, Beijing 100102, the PRC and his business telephone number is +86 10 8517 1831, extension 849. Mr. Liang is a PRC citizen.

 

Orient Hongtai

 

Orient Hongtai (Hong Kong) Limited (“Orient Hongtai”) is a company organized under the laws of Hong Kong, with its principal business address at Flat 2, 19/F, Henan Building, 90-92 Jaffe Road, Wanchai, Hong Kong and its business telephone number is +86 575 8220 5036. Orient Hongtai was formed for the purpose of holding interests in the Company and in Parent and completing the Transactions, including the Merger. Orient Hongtai is directly and wholly owned by TonSung Holdings Limited, a British Virgin Islands business company.

 

Orient Hongzhi

 

Orient Hongzhi (Hong Kong) Limited (“Orient Hongzhi”) is a company organized under the laws of Hong Kong, with its principal business address at Flat 2, 19/F, Henan Building, 90-92 Jaffe Road, Wanchai, Hong Kong and its business telephone number is +86 575 8220 5036. Orient Hongzhi was formed for the purpose of holding interests in the Company and in Parent and completing the Transactions, including the Merger. Orient Hongzhi is directly and wholly owned by HuaSung Holdings Limited, a British Virgin Islands business company.

 

Hao Ding

 

Hao Ding International Limited (“Hao Ding”) is a British Virgin Islands business company, with its principal business address at 2810, No. 689 Guangdong Road, Huangpu District, Shanghai 200001, the PRC, and its business telephone number is +86 575 8220 5036. Hao Ding was formed for the purpose of holding interests in the Company and in Parent and completing the Transactions, including the Merger. Hao Ding is a direct wholly owned subsidiary of Shanghai Hai Sheng Tong Investment Co., Ltd., a company organized under the laws of the PRC.

 

HuaSung

 

HuaSung Holdings Limited, a British Virgin Islands business company (“HuaSung”), with its principal business address at Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands, and its business telephone number is +86 575 8220 5036. HuaSung is directly wholly owned by Litian Investment Center (Shanghai) L.P., a limited partnership organized under the laws of the PRC.

 

TonSung

 

TonSung Holdings Limited, a British Virgin Islands business company (“TonSung”), with its principal business address at Geneva Place, Waterfront Drive, P.O. Box 3469, Road Town, Tortola, British Virgin Islands, and its business telephone number is +86 575 8220 5036. TonSung’s principal business is making equity investments in private and public companies. TonSung is directly wholly owned by Lihua Investment Center (Shanghai) L.P. is a limited partnership organized under the laws of the PRC.

 

Hai Sheng Tong

 

Shanghai Hai Sheng Tong Investment Co., Ltd., a company organized under the laws of the PRC (“Hai Sheng Tong”) with its principal business address at 2810, No. 689 Guangdong Road, Huangpu District, Shanghai 200001, the PRC, and its business telephone number is +86 575 8220 5036. Hai Sheng Tong is directly wholly owned by Lihai Investment Center (Shanghai) L.P., a limited partnership organized under the laws of the PRC.

 

5 

 

  

Lihua

 

Lihua Investment Center (Shanghai) L.P. is a limited partnership organized under the laws of the PRC (“Lihua”), with its principal business address at 55 Xili Road, Room 1545A, 15th Floor, Shanghai Free Trade Zone, Shanghai, the PRC, and its business telephone number is +86 575 8220 5036. The general partners controlling Lihua are Liyou (as defined below) and Huatong (as defined below), both companies organized under the laws of the PRC.

 

Orient Securities Capital Company Limited (“Orient Capital”), a company organized under the laws of the PRC, serves as the administrative general partner of Lihua. Pursuant to the terms of the partnership agreement with respect to Lihua, Orient Capital has no authority or power to vote or dispose of, or to direct the voting or disposition of the securities acquired by Lihua. Accordingly, Orient Capital has no beneficial ownership interest in any securities owned by Lihua.

 

Litian

 

Litian Investment Center (Shanghai) L.P. is a limited partnership organized under the laws of the PRC (“Litian”), with its principal business address at 55 Xili Road, Room 1513B, 15th Floor, Shanghai Free Trade Zone, Shanghai, the PRC, and its business telephone number is +86 575 8220 5036. The general partners of Litian are Liyou (as defined below) and Huatong (as defined below), both companies organized under the laws of the PRC.

 

Orient Capital serves as the administrative general partner of Litian. Pursuant to the terms of the partnership agreement with respect to Litian, Orient Capital has no authority or power to vote or dispose of, or to direct the voting or disposition of the securities acquired by Litian. Accordingly, Orient Capital has no beneficial ownership interest in any securities owned by Litian.

 

Lihai

 

Lihai Investment Center (Shanghai) L.P. is a limited partnership organized under the laws of the PRC (“Lihai”), with its principal business address at 55 Xili Road, Room 1545A, 15th Floor, Shanghai Free Trade Zone, Shanghai, the PRC, and its business telephone number is +86 575 8220 5036. The ordinary general partners of Lihai are Liyou Investment Management (Shanghai) Company Limited and Zhejiang Huatong Holding Group Company Limited, both companies organized under the laws of the PRC.

 

Orient Capital serves as the administrative general partner of Lihai. Pursuant to the terms of the partnership agreement with respect to Lihai, Orient Capital has no authority or power to vote or dispose of, or to direct the voting or disposition of the securities acquired by Lihai. Accordingly, Orient Capital has no beneficial ownership interest in any securities owned by Lihai.

 

Liyou

 

Liyou Investment Management (Shanghai) Company Limited, a company organized under the laws of the PRC (“Liyou”), with its principal business address at 55 Xili Road, Room 1547B, 15th Floor, Shanghai Free Trade Zone, Shanghai, the PRC, and its business telephone number is +86 575 8220 5036. 50% of the equity interests of Liyou is directly owned by Mr. Ji Wang and the other 50% is directly owned by Mr. Heng Shao.

 

Huatong

 

Zhejiang Huatong Holding Group Company Limited, a company organized under the laws of the PRC (“Huatong”), with its principal business address at 439 Renmin Xi Road, Shangyu District, Shaoxing, Zhejiang, the PRC, and its business telephone number is +86 575 8214 8872. Mr. Miaotong Wang owns 90% of the equity interests in, and is the contolling person of, Huatong.

 

Mr. Heng Shao

 

Mr. Heng Shao is a director of Zhejiang Century Huatong Group Company Limited (“Century Huatong”), a public company organized under the laws of the PRC and listed on the Shenzhen Stock Exchange that engages in the development and operation of online games and mobile games as well as the manufacture of automotive accessories. Mr. Shao’s business address and telephone number are 391 Guiping Road, New International Commercial Center, Building A, 19th Floor, Xuhui District, Shanghai 200233, the PRC and +86 21 5427 8388. Mr. Shao is a PRC citizen.

 

Mr. Ji Wang

 

Mr. Ji Wang is a director of Century Huatong. His business address and telephone numbers are 391 Guiping Road, New International Commercial Center, Building A, 19th Floor, Xuhui District, Shanghai 200233, the PRC and +86 21 5427 8388. Mr. Ji Wang is a PRC citizen.

 

Mr. Miaotong Wang

 

Mr. Miaotong Wang is the chairman of the board of directors and the manager of Huatong. He also serves as the chairman of the board of directors of Century Huatong. His business address and telephone number are 439 Renmin Xi Road, Shangyu District, Shaoxing, Zhejiang, the PRC and +86 575 8214 8872. Mr. Miaotong Wang is a PRC citizen.

 

6 

 

  

Additional information regarding the parties to the Merger is set forth in Annex F, which is attached hereto and incorporated herein by reference.

 

Throughout this proxy statement, unless the context otherwise requires, (i) Ningxia Yilida, Ningxia, Orient Hongtai, Orient Hongzhi, Hao Ding, Zhengjun Investment, Ningxia Silkroad and Zhongrong Legend are collectively referred to herein as the “Buyer Group” and (ii) Mr. Miaotong Wang, Mr. Heng Shao and Mr. Ji Wang are collectively referred to herein as the “Li-Funds Persons.”

 

The Merger Agreement (Page [  ])

 

The Company, Parent and Merger Sub entered into an agreement and plan of merger on April 3, 2015 (as may be amended from time to time, the “Merger Agreement”). Pursuant to the Merger Agreement, once the Merger Agreement is approved by the requisite vote of the shareholders of the Company and the other conditions to the completion of the transactions contemplated by the Merger Agreement and the plan of merger (the “Plan of Merger”) required to be registered with the Registrar of Companies of the Cayman Islands (the “Cayman Registrar”) (the “Transactions”) are satisfied or waived in accordance with the terms thereof, Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation (the “Surviving Corporation”). You are being asked to vote upon a proposal to authorize and approve the Transactions, including the Merger.

 

Following completion, and as a result of, the Merger, the Company, as the Surviving Corporation, will continue to do business under the name “Shanda Games Limited” and will be a wholly owned subsidiary of Parent. If the Merger is completed, the Company will cease to be a publicly traded company.

 

Copies of the Merger Agreement and the Plan of Merger are attached as Annex A and Annex B, respectively, to this proxy statement. You should read the Merger Agreement and the Plan of Merger in their entirety because they, and not this proxy statement, are the legal documents that govern the Merger.

 

Merger Consideration (Page [  ])

 

Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding Class A ordinary share (other than (a) the Rollover Shares (as defined below) and (b) the ordinary shares of the Company, par value US$0.01 per share (each, a “Share”), held by Parent, the Company or any of their subsidiaries immediately prior to the Effective Time (collectively, the “Excluded Shares”), the Shares held by shareholders who have validly exercised and not effectively withdrawn or lost their rights to dissent from the Merger in accordance with Section 238 of the Cayman Islands Companies Law (the “Dissenting Shares”) and Class A ordinary shares represented by American depositary shares (“ADSs”)) will be cancelled in exchange for the right to receive consideration of US$3.55 in cash per Class A ordinary share, without interest (the “Per Share Merger Consideration”), net of any applicable withholding taxes; each outstanding ADS (other than any ADS that represents Excluded Shares), and the Class A ordinary shares represented by such ADS, will be cancelled in exchange for the right to receive consideration of US$7.10 in cash per ADS, without interest (the “Per ADS Merger Consideration”) (less US$0.05 per ADS for cancellation fees pursuant to the terms of the Deposit Agreement, dated as of September 24, 2009, among the Company, JPMorgan Chase Bank, N.A. (the “ADS Depositary”), and the holders of ADSs issued thereunder (the “Deposit Agreement”)), net of any applicable withholding taxes; and each Dissenting Share will be entitled to receive only the payment resulting from the procedures set forth in Section 238 of the Cayman Islands Companies Law Cap. 22 (Law 3 of 1961, as consolidated and revised) (the “Cayman Islands Company Law”). See “Dissenters’ Rights” beginning on page [  ] for additional information. At the Effective Time, each issued and outstanding Excluded Share will be cancelled without payment of any consideration or any distribution therefor.

 

At the Effective Time, each ordinary share, par value US$0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time will be converted into one validly issued, fully paid and non-assessable ordinary share, par value US$0.01 per share, of the Surviving Corporation, and such shares will constitute the only issued and outstanding share capital of the Surviving Corporation. As a result, current shareholders and ADS holders of the Company, other than the members of the Buyer Group, will no longer have any equity interest in, or be shareholders or ADS holders of, the Company upon completion of the Merger.

 

Treatment of Company Options (Page [  ])

 

At the Effective Time, each option to purchase Shares, whether vested or unvested (“Company Option”), that is outstanding and unexercised immediately prior to the Effective Time, whether or not vested or exercisable, will be cancelled. In exchange for a cancelled Company Option, the former holder (or his or her designee) of such Company Option will be paid in cash, without interest and net of any applicable withholding taxes, by the Surviving Corporation or one of its subsidiaries, as soon as practicable after the Effective Time, an amount equal to the product of (a) the total number of ordinary shares of the Company underlying such Company Option immediately prior to the Effective Time multiplied by (b) the excess of US$3.55 over the exercise price payable per Share under such Company Option. If the exercise price per Share of any such Company Option is equal to or greater than US$3.55, such Company Option will be cancelled without any payment therefor.

 

7 

 

 

Treatment of Company Restricted Shares and Company RSUs (Page [  ])

 

At the Effective Time, each restricted Share with respect to which the restrictions have not lapsed (“Company Restricted Share”) and each restricted stock unit, whether or not the restrictions with respect thereto have lapsed (“Company RSU”) that is outstanding immediately prior to the Effective Time will be cancelled. In exchange for a cancelled Company Restricted Share or Company RSU, each former holder (or his or her designee) of such Company Restricted Share or Company RSU will be paid in cash, without interest and net of any applicable withholding taxes, by the Surviving Corporation or one of its subsidiaries, as soon as practicable after the Effective Time, an amount equal to US$3.55 for each such cancelled Company Restricted Share or Company RSU. Each Company RSU granted by the Company represents the right to receive one Class A ordinary share of the Company. Upon vesting of any Company RSU, the Company’s practice is to promptly allocate the underlying Class A ordinary shares to the holder of such Company RSU after which such Company RSU is no longer outstanding.  As a result of this practice, unless otherwise specifically noted, numbers of Company RSUs in this proxy statement do not include any vested Company RSUs.

 

Support Agreement (Annex E)

 

Concurrently with the execution and delivery of the Merger Agreement on April 3, 2015, Yili Shengda, Zhongrong Shengda, Orient Hongtai, Orient Hongzhi, Zhongrong Investment and Hao Ding (collectively, the “Rollover Shareholders”) entered into a support agreement, dated as of April 3, 2015 (as may be amended from time to time, the “Support Agreement”) with Parent, pursuant to which they have agreed, among other things, that:

 

·they will vote the Shares held directly or indirectly by them in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and

 

  · the (a) 48,759,187 Class B ordinary shares held by Yili Shengda, (b) 48,759,187 Class B ordinary shares held by Zhongrong Shengda, (c) 61,776,334 Class A ordinary shares held by Orient Hongtai, (d) 61,776,335 Class A ordinary shares held by Orient Hongzhi, (e) 80,577,828 Class A ordinary shares held by Zhongrong Investment and (f) 107,438,129 Class A ordinary shares held by Hao Ding, including, in each case, such ordinary shares represented by ADSs (collectively, the “Rollover Shares”) will, at the Effective Time, be cancelled for no consideration in the Merger. A copy of the Support Agreement is attached as Annex E to this proxy statement and is incorporated herein by reference.

 

Purposes and Effects of the Merger (Page [  ])

 

The purpose of the Merger is to enable Parent to acquire 100% control of the Company in a transaction in which the holders of the Class A ordinary shares of the Company and ADSs (other than Excluded Shares, ADSs representing Excluded Shares and Dissenting Shares) will be cashed out in exchange for the Per Share Merger Consideration or the Per ADS Merger Consideration, as applicable. See “Special Factors—Purposes of and Reasons for the Merger” beginning on page [  ] for additional information.

 

ADSs representing Shares are currently listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “GAME.” It is expected that, following the consummation of the Merger, the Company will cease to be a publicly traded company and will instead become a private company beneficially owned by the Buyer Group. See “Special Factors—Effects of the Merger on the Company” beginning on page [  ] for additional information.

 

Plans for the Company after the Merger (Page [  ])

 

Following the completion of the Merger, Parent will indirectly own 100% of the equity interest in the Surviving Corporation. The Buyer Group anticipates that the Company will continue to conduct its operations substantially as they are currently being conducted, except that it will cease to be a publicly traded company and will instead be an indirect wholly owned subsidiary of Parent.

 

Following the completion of the Merger and the anticipated deregistration of the Class A ordinary shares of the Company and the ADSs, the Company will no longer be subject to the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”) and NASDAQ compliance and reporting requirements and the related direct and indirect costs and expenses.

 

Recommendations of the Special Committee and the Board (Page [  ])

 

The special committee of the Board (the “Special Committee”), composed solely of directors who are unaffiliated with any member of the Buyer Group or any member of the management of the Company, reviewed and considered the terms and conditions of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. On April 3, 2015, the Special Committee, after due consideration, unanimously:

 

8 

 

 

·determined that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, were fair to and in the best interests of the Company and its shareholders and ADS holders, other than the members of the Buyer Group and their respective affiliates (such shareholders and ADS holders, the “Unaffiliated Holders”),

 

·declared advisable the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and

 

·recommended that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

Such determination, declaration and recommendation were unanimously affirmed by the Special Committee on August 25, 2015.

 

ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO AUTHORIZE AND APPROVE THE MERGER AGREEMENT, THE PLAN OF MERGER AND THE TRANSACTIONS, INCLUDING THE MERGER, FOR THE PROPOSAL TO AUTHORIZE THE DIRECTORS TO DO ALL THINGS NECESSARY TO GIVE EFFECT TO THE MERGER AGREEMENT, THE PLAN OF MERGER AND THE TRANSACTIONS, INCLUDING THE MERGER, AND FOR THE PROPOSAL TO ADJOURN THE EXTRAORDINARY GENERAL MEETING IN ORDER TO ALLOW THE COMPANY TO SOLICIT ADDITIONAL PROXIES IN THE EVENT THAT THERE ARE INSUFFICIENT PROXIES RECEIVED AT THE TIME OF THE EXTRAORDINARY GENERAL MEETING TO PASS THE RESOLUTIONS TO BE PROPOSED AT THE EXTRAORDINARY GENERAL MEETING.

 

For a detailed discussion of the material factors considered by the Special Committee and the Board in determining to recommend the approval of the Merger Agreement and the Plan of Merger and the approval of the Transactions, including the Merger, and in determining that the Merger is fair to, advisable and in the best interests of the Company and the Unaffiliated Holders, see “Special Factors—Reasons for the Merger and Recommendation of the Special Committee and the Board” beginning on page [  ] and “Special Factors—Effects of the Merger on the Company—Primary Benefits and Detriments of the Merger” beginning on page [  ] for additional information. The foregoing summary is qualified in its entirety by reference to these sections.

 

Position of the Buyer Group as to Fairness (Page [  ])

 

Each member of the Buyer Group believes that the Merger is fair to the Company’s unaffiliated security holders, as defined in Rule 13e-3 of the Exchange Act. This belief is based upon the factors discussed under the section entitled “Special Factors—Position of the Buyer Group as to the Fairness of the Merger” beginning on page [ ].

 

Financing of the Merger (Page [  ])

 

The Company and the Buyer Group estimate that the total amount of funds necessary to complete the Transactions, including the Merger, will be approximately US$486 million, assuming no exercise of dissenters’ rights by shareholders of the Company.

 

The Buyer Group expects this amount will be provided through a combination of (a) the equity commitments contemplated by the equity commitment letters (the “Equity Commitment Letters”), dated as of April 3, 2015, by and between Parent and each of Zhengjun Investment, Ningxia Silkroad and Zhongrong Legend (the “Sponsors”) and (b) cash from the Company and its subsidiaries. See “Special Factors—Financing of the Merger” beginning on page [ ] for additional information.

 

Opinion of Merrill Lynch, the Special Committee’s Financial Advisor (Page [  ])

 

The Special Committee retained Merrill Lynch (Asia Pacific) Limited (“Merrill Lynch”) to act as its independent financial advisor in connection with the Merger. At the meeting of the Special Committee on April 3, 2015, Merrill Lynch rendered its oral opinion, which was subsequently confirmed in writing, that, as of such date, based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Merrill Lynch set forth in its opinion, the Per Share Merger Consideration or Per ADS Merger Consideration, as applicable, to be received in the Merger by holders of Class A ordinary shares of the Company or ADSs (other than holders of Excluded Shares) is fair, from a financial point of view, to such holders.

 

9 

 

 

See “Special Factors—Opinion of Merrill Lynch, the Special Committee’s Financial Advisor” beginning on page [ ] for additional information.

 

Interests of the Company’s Executive Officers and Directors in the Merger (Page [  ])

 

In considering the recommendations of the Board, the Company’s shareholders should be aware that certain of the Company’s directors, executive officers and employees have interests in the transaction that are different from, and/or in addition to, the interests of the Company’s shareholders and ADS holders generally. These interests include, among others:

 

·the beneficial ownership of Mr. Zhang, the chairman of the Board and acting chief executive officer of the Company, in Shanghai Yingfeng, a limited liability company organized under the laws of the PRC and the general partner of Ningxia Yilida and Zhengjun Investment, each of which is a member of the Buyer Group;

 

·the fact that Mr. Shaolin Liang, a director of the Company, is a vice general manager of Ningxia, which is a member of the Buyer Group;

 

·the fact that Mr. Zhang, the chairman of the Board and acting chief executive officer of the Company, is a director of Merger Sub, and if he remains in such position until immediately before the Effective Time, he will become a director of the Surviving Corporation after completion of the Merger.

 

  · the fact that Mr. Lijun Lin (“Mr. Lin”), a director of the Company, served as the chief executive officer of China Universal Asset Management Co., Ltd., which was an affiliate of Orient Hongtai and Orient Hongzhi prior to June 30, 2015, each of which is a member of the Buyer Group, from April 2004 to April 16, 2015;

 

·the potential enhancement or decline of share value for Parent, of which the members of the Buyer Group will be beneficial owners upon the completion of the Merger, as a result of the Merger, and the future performance of the Surviving Corporation;

 

·the cash-out of in-the-money Company Options and cash-out of Company Restricted Shares and Company RSUs held by the Company’s directors and executive officers, including members of the Special Committee;

 

·the continued indemnification rights, rights to advancement of fees and directors and officers liability insurance to be provided by the Surviving Corporation to current and former directors and officers of the Company;

 

·the compensation of the members of the Special Committee in exchange for their services in such capacity at a rate of US$10,000 per month for the chairman of the Special Committee and US$6,800 per month for each other member of the Special Committee (in each case, the payment of which is not contingent upon the completion of the Merger or the Special Committee’s or the Board’s recommendation of the Merger);

 

·the potential continuation of service of the executive officers of the Company with the Surviving Corporation in positions that are substantially similar to their current positions, allowing them to benefit from remuneration arrangements, including equity compensation, with the Surviving Corporation; and

 

·the contingent equity awards to be granted to certain game producers of the Company following the completion of the Merger pursuant to the commitment letters entered into between the Company and such game producers on September 18, 2014, which awards are subject to compliance with applicable laws, rules and regulations, the completion of the Merger and the other terms and conditions set forth in the commitment letters.

 

The Special Committee and the Board were aware of these potential conflicts of interest and considered them, among other matters, in reaching their decisions and recommendations with respect to the Merger Agreement and related matters. See “Special Factors—Interests of Certain Persons in the Merger” beginning on page [  ] for additional information.

 

No Solicitation of Competing Transactions (Page [  ])

 

The Merger Agreement restricts the ability of the Company and its subsidiaries until the Effective Time or, if earlier, the termination of the Merger Agreement, to solicit or engage in discussions or negotiations with third parties regarding Competing Transactions (as defined in the section entitled “The Merger Agreement—No Solicitation of Competing Transactions”). Subject to specified conditions and prior to obtaining the required shareholder authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, the Company may, however, provide information to a third party in response to an unsolicited proposal or offer regarding a Competing Transaction from a third party if the Board (acting only upon recommendation of the Special Committee) or the Special Committee determines in good faith (after consulting with its financial advisor and outside legal counsel) that the proposal or offer constitutes, or could reasonably be expected to result in, a Superior Proposal (as defined in the section entitled “The Merger Agreement—No Solicitation of Competing Transactions”), and, in light of such Superior Proposal, that failure to do so would be inconsistent with its fiduciary duties under applicable law. See and read carefully “The Merger Agreement—No Solicitation of Competing Transactions” and “The Merger Agreement—No Change of Recommendation” beginning on page [ ] and page [ ], respectively.

 

10 

 

 

Conditions to the Merger (Page [  ])

 

The obligations of the Company, Parent and Merger Sub to consummate the Merger are subject to the satisfaction or waiver of the following mutual conditions:

 

·the Merger Agreement, the Plan of Merger and the Transactions being authorized and approved by the holders of ordinary shares of the Company constituting the Requisite Company Vote (as defined in “The Merger—No Solicitation of Competing Transactions” beginning on page [  ]) at the extraordinary general meeting; and

 

·no governmental authority of competent jurisdiction having enacted, issued, promulgated, enforced or entered any law or award, writ, injunction, determination, rule, regulation, judgment, decree or executive order, whether temporary, preliminary or permanent, that is in effect and has or would have the effect of enjoining, restraining, prohibiting or otherwise making illegal the consummation of the Transactions, and the consummation of the Transactions not being subject to any requirement to obtain any regulatory approval under the Anti-monopoly Law of the PRC.

 

The obligations of Parent and Merger Sub to consummate the Merger are also subject to the satisfaction, or waiver, of the following conditions:

 

·(a) representations and warranties of the Company in the Merger Agreement regarding the Company’s power and authority to enter into the Merger Agreement and consummate the Transactions, the Board’s determination and recommendation with respect to the Merger, and the vote required in connection with the Merger being true and correct in all material respects, (b) representations and warranties of the Company in the Merger Agreement regarding the Company’s capitalization being true and correct in all but de minimis respects, and (c) each of the other representations and warranties of the Company set forth in the Merger Agreement being true and correct in all respects as of the date of the Merger Agreement and as of the closing date of the Merger, as if made on such date and time, in each case without giving effect to any qualification as to “materiality” or “Company Material Adverse Effect,” except in the case of (c) above, where the failure of such representations and warranties to be true and correct would not constitute a Company Material Adverse Effect;

 

·the Company having performed or complied in all material respects with all agreements and covenants required by the Merger Agreement to be performed or complied with by it on or prior to the closing date of the Merger;

 

·since the date of the Merger Agreement, there not having occurred a Company Material Adverse Effect (as defined below);

 

·the Company having delivered to Parent a certificate, dated the closing date of the Merger, signed by a senior executive officer of the Company, certifying as to the satisfaction of the above conditions; and

 

·the holders of no more than 10% of the ordinary shares of the Company having validly exercised dissenters’ rights under the Cayman Islands Companies Law.

 

The obligations of the Company to consummate the Merger are also subject to the satisfaction, or waiver by the Company, of the following conditions:

 

11 

 

 

·the representations and warranties of Parent and Merger Sub in the Merger Agreement (without giving effect to qualification by “materiality”) being true and correct in all respects as of the date of the Merger Agreement and as of the closing date of the Merger, as if made on and at date and time (other than representations and warranties that by their terms address matters only as of such a specified other time, which must be true and correct as of such time), except where the failure of such representations and warranties to be true and correct, individually or in the aggregate, have not, and would not reasonably be expected to, prevent, materially delay or materially impede or impair the ability of Parent and Merger Sub to consummate any of the Transactions;

 

·each of Parent and Merger Sub having performed or complied in all material respects with all covenants and agreements required to be performed or complied with by it under the Merger Agreement prior to or on the closing date of the Merger; and

 

·Parent having delivered to the Company a certificate, dated the closing date of the Merger, signed by an executive officer of Parent, certifying as to the fulfillment of the above conditions.

 

Termination of the Merger Agreement (Page [  ])

 

The Merger Agreement may be terminated at any time prior to the Effective Time:

 

·by mutual written consent of the Company and Parent with the approval of their respective boards of directors (or in the case of the Company, acting upon the recommendation of the Special Committee);

 

·by either the Company (acting only upon the recommendation of the Special Committee) or Parent (provided that this termination right is not available to the party whose failure to fulfill any of its obligations under the Merger Agreement has been a material cause of, or resulted in, the failure of any applicable condition to the Merger being satisfied), upon (each as defined in the section entitled “The Merger Agreement—Termination of the Merger Agreement”):

 

a Termination Date Termination Event;

 

a Permanent Order Termination Event; or

 

a No-Vote Termination Event;

 

·by the Company (acting only upon the recommendation of the Special Committee) at any time prior to the Effective Time, upon (each as defined in the section entitled “The Merger Agreement—Termination of the Merger Agreement”):

 

a Parent and Merger Sub Breach Termination Event;

 

a Parent and Merger Sub Failure to Close Termination Event; or

 

a Superior Proposal Termination Event; or

 

·by Parent, at any time prior to the Effective Time, upon (each as defined in the section entitled “The Merger Agreement—Termination of the Merger Agreement”):

 

a Company Breach Termination Event; or

 

a Change in the Company Recommendation Termination Event.

 

Termination Fees and Reimbursement of Expenses (Page [  ])

 

The Company is required to pay Parent a termination fee of US$57,250,000 in the event the Merger Agreement is terminated:

 

·by either the Company or Parent if:

 

12 

 

 

a bona fide proposal or offer with respect to a Competing Transaction has been publicly made, proposed or communicated and not publicly withdrawn after the date of the Merger Agreement and prior to the extraordinary general meeting (or prior to the termination of the Merger Agreement if there has been no extraordinary general meeting);

 

following the occurrence of an event described in the preceding clause, the Company or Parent terminates the Merger Agreement due to a Termination Date Termination Event or No-Vote Termination Event; and

 

within 12 months after the termination of the Merger Agreement, the Company consummates or enters into a definitive agreement in connection with any of the following transactions with a third party: (i) any merger, consolidation, share exchange, business combination, scheme of arrangement, amalgamation, recapitalization, liquidation, dissolution or other similar transaction involving the Company or any of its subsidiaries whose assets, individually or in the aggregate, constitute 50% or more of the consolidated assets of the Company or to which 50% or more of the total revenue or net income of the Company are attributable, (ii) any sale, lease, exchange, transfer or other disposition of assets or businesses that constitute or represent 50% or more of the total revenue, net income or assets of the Company and its subsidiaries, taken as a whole, (iii) any sale, exchange, transfer or other disposition of 50% or more of any class of equity securities of the Company, or securities convertible into or exchangeable for 50% or more of any class of equity securities of the Company, (iv) any tender offer or exchange offer that, if consummated, would result in any person beneficially owning 50% or more of any class of equity securities of the Company or (v) any combination of the foregoing;

 

·by Parent pursuant to a Company Breach Termination Event or Change in the Company Recommendation Termination Event; or

 

·by the Company pursuant to a Superior Proposal Termination Event.

 

Parent is required to pay the Company a termination fee of US$114,500,000 in the event the Merger Agreement is terminated:

 

·by the Company pursuant to a Parent and Merger Sub Breach Termination Event; or

 

·by the Company pursuant to a Parent and Merger Sub Failure to Close Termination Event.

 

Additionally, (a) in the event the Merger Agreement is terminated by the Company pursuant to a Parent and Merger Sub Breach Termination Event or a Parent and Merger Sub Failure to Close Termination Event, then Parent must pay to the Company, as promptly as possible (but in any event within three business days) following the delivery by the Company of an invoice therefor, all expenses incurred by the Company and its affiliates in connection with the Transactions, up to a maximum amount equal to US$3,000,000, and (b) in the event the Merger Agreement is terminated by Parent pursuant to a Company Breach Termination Event or Change in the Company Recommendation Termination Event, then the Company must pay to Parent, as promptly as possible (but in any event within three business days) following the delivery by Parent of an invoice therefor, all expenses incurred by Parent, Merger Sub and their respective affiliates in connection with the Transactions, including the equity financing, up to a maximum amount equal to US$3,000,000.

 

In the event that the Company or Parent fails to pay the applicable termination fee or any expenses when due and in accordance with the requirements of the Merger Agreement, the Company or Parent, as the case may be, is required to reimburse the other party for reasonable costs and expenses actually incurred or accrued by the other party (including fees and expenses of counsel) in connection with collection of such unpaid termination fee or any expenses, together with accrued interest on such unpaid termination fee or any expenses.

 

Except as described above or as otherwise provided in the Merger Agreement, whether or not the Merger or any other Transaction is consummated, all costs and expenses incurred in connection with the Merger Agreement and the Transactions will be paid by the party incurring such costs and expenses.

 

13 

 

 

 

Regulatory Matters (Page [  ])

 

The Company does not believe that any material federal or state regulatory approvals, filings or notices are required in connection with effecting the Merger other than the approvals, filings or notices required under the federal securities laws and the filing of the Plan of Merger (and supporting documentation as specified in the Cayman Islands Companies Law) with the Cayman Registrar and, in the event the Merger becomes effective, a copy of the Certificate of Merger being given to the shareholders and creditors of the Company and Merger Sub as at the time of the filing of the Plan of Merger and notice of Merger published in the Cayman Islands Gazette.

 

Litigation Related to the Merger (Page [  ])

 

On October 10, 2014, Kilometre Capital Management Cayman (“Kilometre”) issued a writ of summons endorsed with a statement of claim against the Company from the Court of First Instance of the High Court of the Hong Kong Special Administrative Region in connection with the proposed “going private” transaction. Kilometre seeks outstanding consulting fees in an aggregate sum of US$25.6 million (or alternatively, damages), certain declaratory relief, interest, costs and further and/or other relief as the court deems fit. On February 10, 2015, Kilometre amended its statement of claim to seek outstanding consulting fees in an aggregate sum of US$44.9 million (or alternatively, damages), certain declaratory relief, interest, costs and further and/or other relief as the court deems fit. On February 17, 2015, Kilometre applied for a summary judgment for consulting fees of US$39,229,944.32, interest and/or other relief as the court deems fit. In April 2015, Kilometre issued an invoice to the Company asserting an increased entitlement to US$45.8 million; however, this amount is yet to be reflected in any further amendment to the statement of claim. On July 8, 2015, a Hong Kong High Court Judge dismissed Kilometre’s summary judgment application and granted the Company unconditional leave to defend Kilometre’s claim. The effect of the dismissal of the summary judgment application, subject to any appeal, is that Kilometre's claim will now follow the usual litigation procedure. It can typically take 18-24 months to proceed to trial in Hong Kong. There is, at present, no scheduled hearing or further judgment expected from the Hong Kong Courts.

 

In addition, Kilometre served a statutory demand on the Company in the Cayman Islands on May 21, 2015 requesting the Company to pay a purported debt of US$39,229,944.32 within 21 days. On June 9, 2015, the Grand Court of the Cayman Islands (the “Grand Court”) granted an injunction restraining Kilometre from representing a winding-up petition against the Company based upon the statutory demand or any other statutory demand in relation to the same claim. On the same day, the Company issued an originating summons from the Grand Court seeking to set aside the statutory demand. On July 22, 2015, following the dismissal of the Hong Kong summary judgment application, Kilometre gave an undertaking to the Grand Court not to present a winding-up petition against the Company on the basis of the statutory demand pending the resolution of the Hong Kong proceedings. 

 

The Company intends to vigorously defend itself against all legal actions taken by Kilometre on the merits. If the Merger is completed prior to the resolutions of the disputes between the Company and Kilometre, then pursuant to the Merger Agreement and the effects of the Merger, the Surviving Corporation will become party to such unresolved disputes and succeed to and assume all of the Company’s rights and obligations with respect thereto.

 

Other than as set forth above, the Company is not aware of any lawsuit that challenges the Merger Agreement, the Plan of Merger or any of the Transactions, including the Merger.

 

Accounting Treatment of the Merger (Page [  ])

 

The Merger is expected to be accounted for, at carryover basis, as a Merger of entities under common control in accordance with Accounting Standards Codification 805-50, “Business Combinations—Related Issues.”

 

Market Price of the ADSs (Page [  ])

 

The closing price of the Company’s ADSs as quoted by NASDAQ on January 24, 2014, the last trading day immediately prior to the Company’s announcement on January 27, 2014 that it had received the Proposal (as defined in the section entitled “Special Factors—Background of the Merger” beginning on page [ ]), was US$5.65 per ADS. The consideration of US$7.10 per ADS to be paid in the Merger represents a premium of approximately 25.7% over that closing price.

 

Fees and Expenses (Page [  ])

 

Whether or not the Merger is completed, all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring such costs and expenses except as otherwise provided in the Merger Agreement and the consortium agreement among Ningxia Yilida, Ningxia, Orient Hongtai, Orient Hongzhi, Hao Ding, dated as of March 16, 2015 (the “Third Consortium Agreement,” to which each of Zhongrong Legend, Ningxia Silkroad and Zhengjun Investment became a party by entering into an adherence agreement on April 3, 2015).

 

Remedies (Page [  ])

 

The parties to the Merger Agreement may be entitled to the payment of a termination fee or the grant of specific performance of the terms of the Merger Agreement, including an injunction or injunctions to prevent breaches of the Merger Agreement, in addition to any other remedy at law or equity, subject to certain limitations as described under the section entitled “The Merger Agreement—Remedies” beginning on page [ ].

 

While the parties to the Merger Agreement may pursue both a grant of specific performance and monetary damages, upon payment of the applicable termination fee and certain expenses, the remedy of specific performance will not be available against the party paying such amount.

 

14 

 

 

Questions and Answers about the Extraordinary General
Meeting and the Merger

 

The following questions and answers address briefly some questions you may have regarding the extraordinary general meeting and the Merger. These questions and answers may not address all questions that may be important to you as a shareholder of the Company. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement.

 

Q:When and where will the extraordinary general meeting be held?

 

A:The extraordinary general meeting will take place on [          ], 2015, at [          ] a.m. (Hong Kong time) at the offices of Davis Polk & Wardwell, The Hong Kong Club Building, 3A Chater Road, Central, Hong Kong.

 

Q:What vote of the Company’s shareholders is required to authorize and approve the Merger Agreement and the Plan of Merger?

 

A:In order for the Merger to be completed, the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, must be authorized, approved and adopted by a special resolution of the Company’s shareholders, which requires an affirmative vote of shareholders holding two-thirds or more of the voting power represented by the Shares (including Shares represented by ADSs) present and voting in person or by proxy as a single class at the extraordinary general meeting. Under the Company’s amended and restated memorandum and articles of association, the Shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, and holders of Class B ordinary shares are entitled to 10 votes per share. Holders of the Company’s Class A ordinary shares and Class B ordinary shares will vote as a single class on all matters described in the accompanying proxy statement.

 

At the close of business in the Cayman Islands on [        ], 2015 (the “Share Record Date”), the record date for voting Shares at the extraordinary general meeting, 443,377,288 Class A ordinary shares and 97,518,374 Class B ordinary shares are expected to be issued and outstanding and entitled to vote at the extraordinary general meeting.

 

Pursuant to the Support Agreement, each of the Rollover Shareholders has agreed to vote all of the Shares (including Shares represented by ADSs) owned directly or indirectly by it in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. As of the date of this proxy statement, the Rollover Shareholders collectively own an aggregate of 311,568,626 Class A ordinary shares and 97,518,374 Class B ordinary shares, representing approximately 75.6% of the Company’s issued and outstanding Shares and 1,286,752,366 votes, or approximately 90.7% of the total number of votes represented by the Company’s issued and outstanding Shares, which is more than the two-thirds majority necessary to approve a special resolution of the shareholders of the Company as required under Cayman Islands law to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

Q:What vote of the Company’s shareholders is required to approve the proposal to adjourn the extraordinary general meeting, if necessary, to solicit additional proxies?

 

A: The proposal to adjourn the extraordinary general meeting, if necessary, to solicit additional proxies must be authorized and approved by an affirmative vote of shareholders holding at least 25% of the total voting power of all shareholders of the Company having the right to vote at the extraordinary general meeting. Under the Company’s amended and restated memorandum and articles of association, the Shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, and holders of Class B ordinary shares are entitled to 10 votes per share. Based on the number of Class A ordinary shares and Class B ordinary shares we expect to be issued and outstanding and entitled to vote on the Share Record Date and assuming all issued and outstanding Shares are present in person or by proxy and voting at the meeting, Shares representing 354,640,257 votes must be cast in favor of the proposal to adjourn the extraordinary general meeting to allow us, if necessary, to solicit additional proxies.

 

Q:How does the Board recommend that I vote on the proposals?

 

  A:

After careful consideration and acting upon the unanimous recommendation of the Special Committee, made on April 3, 2015 and

affirmed on August 25, 2015, the Board unanimously recommends that you vote:

 

15 

 

 

·FOR the proposal to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger;

 

·FOR the proposal to authorize the directors to do all things necessary to give effect to the Merger Agreement, the Plan of Merger and the Transactions, including the Merger; and

 

·FOR the proposal to adjourn the extraordinary general meeting in order to allow the Company to solicit additional proxies in the event that there are insufficient proxies received at the time of the extraordinary general meeting to pass the resolutions to be proposed at the extraordinary general meeting.

  

You should read “Special Factors—Reasons for the Merger and Recommendation of the Special Committee and the Board” beginning on page [  ] for a discussion of the factors that the Special Committee and the Board considered in deciding to recommend the approval of the Merger Agreement. In addition, in considering the recommendation of the Special Committee and the Board made on April 3, 2015 with respect to the Merger Agreement, you should be aware that some of the Company’s directors, executive officers and employees have interests in the Merger that are different from, or in addition to, the interests of the Company’s shareholders generally. See “Special Factors—Interests of Certain Persons in the Merger” beginning on page [  ] for additional information.

 

Q:Who is entitled to vote at the extraordinary general meeting?

 

A:The Share Record Date is [          ], 2015. Only shareholders entered in the register of members of the Company at the close of business in the Cayman Islands on the Share Record Date or their proxy holders are entitled to vote at the extraordinary general meeting or any adjournment thereof.

 

The record date with respect to ADSs is [          ], 2015 (the “ADS Record Date”). Only ADS holders of the Company at the close of business in New York City on the ADS Record Date are entitled to instruct the ADS Depositary to vote at the extraordinary general meeting. Alternatively, you may vote at the extraordinary general meeting if you cancel your ADSs by the close of business in New York City on [          ], 2015 and become a holder of Shares by the close of business in the Cayman Islands on the Share Record Date.

 

Q:What constitutes a quorum for the extraordinary general meeting?

 

A:The presence of one or more shareholders entitled to vote and present in person or by proxy representing not less than 50% of the voting rights represented by the issued and voting Shares will constitute a quorum for the extraordinary general meeting.

 

Q:When do you expect the Merger to be completed?

 

A:We are working toward completing the Merger as quickly as possible and currently expect the Merger to close during the second half of 2015, after all conditions to the Merger have been satisfied or waived. In order to complete the Merger, we must obtain shareholder approval of the Merger at the extraordinary general meeting and the other closing conditions under the Merger Agreement must be satisfied or waived in accordance with the Merger Agreement.

 

Q:What happens if the Merger is not completed?

 

A:If the Company’s shareholders do not authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, or if the Merger is not completed for any other reason, the Company’s shareholders will not receive any payment for their Shares or ADSs pursuant to the Merger Agreement, nor will the holders of any Company Options, Company Restricted Shares or Company RSUs receive payment pursuant to the Merger Agreement. In addition, the Company will remain a publicly traded company. The ADSs will continue to be listed and traded on NASDAQ, provided that the Company continues to meet NASDAQ’s listing requirements. In addition, the Company will remain subject to the reporting obligations of the SEC. Therefore, the Company’s shareholders will continue to be subject to similar risks and opportunities as they currently are with respect to their ownership of Shares and ADSs.

 

Under specified circumstances, the Company may be required to pay Parent or its designees a termination fee and/or reimburse Parent and its affiliates for their expenses in connection with the Transactions, or Parent may be required to pay the Company a termination fee and/or reimburse the Company and its affiliates for certain expenses in connection with the Transactions, in each case as described in “The Merger Agreement—Termination Fee and Reimbursement of Expenses” beginning on page [  ].

 

16 

 

 

Q:How will the Company’s directors and executive officers vote on the proposal to authorize and approve the Merger Agreement?

 

A:Pursuant to the Support Agreement, each of the Rollover Shareholders has agreed to vote all of the Shares and ADSs that they directly or indirectly hold in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

In addition, each of the Company’s directors who beneficially owns Shares (including Shares represented by ADSs) has informed the Company that, as of the date of this proxy statement, he or she intends to vote all of his or her Shares in favor of approval and authorization of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

You should be aware that some of the Company’s directors and executive officers have interests in the Merger that are different from, or in addition to, the interests of the shareholders of the Company generally. As of the date of this proxy statement, Mr. Zhang, the chairman of the Board and acting chief executive officer of the Company, is the sole shareholder of Shanghai Yingfeng, a limited liability company organized under the laws of the PRC and the general partner of Ningxia Yilida and Zhengjun Investment. Both Ningxia Yilida and Zhengjun Investment are members of the Buyer Group and therefore, Mr. Zhang has interests that are different from, or in addition to, the interests of the shareholders of the Company generally. Mr. Shaolin Liang, a director of the Company, serves as a vice general manager of Ningxia, which is a member of the Buyer Group. Mr. Lin, a director of the Company, served as the chief executive officer of China Universal Asset Management Co., Ltd., which was an affiliate of Orient Hongtai and Orient Hongzhi prior to June 30, 2015, each of which is a member of the Buyer Group, from April 2004 to April 16, 2015. Therefore, both Mr. Shaolin Liang and Mr. Lin may have interests that are different from, or in addition to, the interests of the shareholders of the Company generally. As of the date of this proxy statement, the Company’s directors and executive officers beneficially own, in the aggregate, 52,200,382 Shares, which consist of (a) 49,579,259 issued and outstanding ordinary shares, (b) issued and unexercised Company Options to purchase 2,418,623 Class A ordinary shares issued pursuant to the Company’s amended and restated 2008 Equity Compensation Plan (the “Share Incentive Plan”) and exercisable within 60 days following the date of this proxy statement, (c) zero (0) Company Restricted Shares the restrictions over which will lapse within 60 days following the date of this proxy statement, and (d) 202,500 Company RSUs the restrictions over which will lapse within 60 days following the date of this proxy statement, which in the aggregate represent approximately 9.7% of the total issued and outstanding Shares. See “Special Factors—Interests of Certain Persons in the Merger” beginning on page [  ] and “Security Ownership of Certain Beneficial Owners and Management of the Company” beginning on page [  ] for additional information.

 

Q:What do I need to do now?

 

A:We urge you to read this proxy statement carefully, including its annexes, exhibits, attachments and the other documents referred to or incorporated by reference herein and to consider how the Merger affects you as a shareholder. After you have done so, please vote as soon as possible.

 

Q:How do I vote if my Shares are registered in my name (that is, I do not hold ADSs)?

 

A:If Shares are registered in your name (that is, you do not hold ADSs) as of the Share Record Date for shareholder voting, you should simply indicate on your proxy card how you want to vote, and sign and mail your proxy card in the accompanying return envelope as soon as possible. The deadline to lodge your proxy card so that your Shares may be represented and voted at the extraordinary general meeting is [          ], 2015 at 10:00 a.m. (Hong Kong time).

 

Alternatively, you can attend the extraordinary general meeting and vote in person. If you decide to sign and send in your proxy card, and do not indicate how you want to vote, Shares represented by your proxy will be voted FOR the proposal to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, FOR the proposal to authorize the directors to do all things necessary to give effect to the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and FOR the proposal to adjourn the extraordinary general meeting in order to allow the Company to solicit additional proxies in the event that there are insufficient proxies received at the time of the extraordinary general meeting to pass the resolutions to be proposed at the extraordinary general meeting, unless you appoint a person other than the chairman of the meeting as proxy, in which case Shares represented by your proxy card will be voted (or not submitted for voting) as your proxy determines.

 

If your Shares are held by your broker, bank or other nominee, please see below for additional information.

 

17 

 

 

Q:How do I vote if I own ADSs?

 

A:If you own ADSs as of the close of business in New York City on the ADS Record Date (and do not cancel such ADSs and become a registered holder of the Shares underlying your ADSs as explained below), you cannot vote at the extraordinary general meeting directly, but you may instruct the ADS Depositary (as the holder of Shares underlying your ADSs) how to vote the Shares underlying your ADSs by completing and signing the ADS voting instruction card and returning it in accordance with the instructions printed on it as soon as possible. The ADS Depositary must receive such instructions no later than 12:00 p.m. (New York City time) on [          ], 2015 in order to ensure the Shares underlying your ADSs are properly voted at the extraordinary general meeting. The ADS Depositary will endeavor to vote (or will endeavor to cause the vote of) the Shares it holds on deposit at the extraordinary general meeting in accordance with the voting instructions timely received from holders of ADSs. If any holder of ADSs does not timely deliver specific voting instructions to the ADS Depositary, or if the ADS Depositary timely receives voting instructions from an ADS holder that fail to specify the manner in which the ADS Depositary is to vote the Shares represented by the holder’s ADS, the ADS Depositary has advised the Company that it will not vote or attempt to exercise the right to vote any Shares underlying such holder’s ADSs. If you hold your ADSs in a brokerage, bank or other nominee account, you must follow the procedures of the broker, bank or other nominee through which you hold your ADSs if you wish to vote.

 

Alternatively, if you own ADSs as of the close of business in New York City on the ADS Record Date, you may vote at the extraordinary general meeting directly if you cancel your ADSs and become a holder of the Shares underlying your ADSs prior to the close of business in the Cayman Islands on the Share Record Date. If you wish to cancel your ADSs for the purpose of voting Shares, you need to make arrangements to deliver your ADSs to the ADS Depositary for cancellation before 12:00 p.m. in New York City on [          ], 2015 together with (a) delivery instructions for the corresponding Shares (including the name and address of the person who will be the registered holder of such Shares), (b) payment of the ADS cancellation fees (US$0.05 per ADS to be cancelled pursuant to the terms of the Deposit Agreement) and any applicable taxes and (c) a certification that you either (i) held the ADSs as of the ADS Record Date and have not given, and will not give, voting instructions to the ADS Depositary as to the ADSs being cancelled, or have given voting instructions to the ADS Depositary as to the ADSs being cancelled but undertake not to vote the corresponding Shares at the extraordinary general meeting or (ii) did not hold the ADSs as of the ADS Record Date and undertake not to vote the corresponding Shares at the extraordinary general meeting. If you hold your ADSs in a brokerage, bank or other nominee account, please contact your broker, bank or other nominee to find out what actions you need to take to instruct the broker, bank or other nominee to cancel the ADSs on your behalf. Upon cancellation of the ADSs, the ADS Depositary will arrange for JPMorgan Chase Bank, N.A., Hong Kong branch, the custodian holding the Shares, to transfer registration of the Shares to the former ADS holder (or a person designated by the former ADS holder). If after the registration of Shares in your name you wish to receive a certificate evidencing the Shares registered in your name, you will need to make a request to the Company’s registered office at Codan Trust Company (Cayman), c/o Conyers Dill & Pearman, 2901 One Exchange Square, 8 Connaught Place, Central, Hong Kong, to issue and mail a certificate to your attention. If the Merger is not completed, the Company would continue to be a public company in the United States and the ADSs would continue to be listed on NASDAQ. Shares are not listed and cannot be traded on any stock exchange other than NASDAQ, and in such case only in the form of ADSs. As a result, if you have cancelled your ADSs to attend the extraordinary general meeting and the Merger is not completed and you wish to be able to sell your Shares on a stock exchange, you would need to deposit your Shares into the Company’s ADS program for the issuance of the corresponding number of ADSs, subject to the terms and conditions of applicable law and the Deposit Agreement, including, among other things, payment of relevant fees of the ADS Depositary for the issuance of ADSs and applicable share transfer taxes (if any) and related charges pursuant to the Deposit Agreement.

 

18 

 

 

Q:If my Shares or ADSs are held in a brokerage, bank or other nominee account, will my broker, bank or other nominee vote my Shares or ADSs on my behalf?

 

A:Your broker, bank or other nominee will only vote your Shares on your behalf or give voting instructions with respect to the Shares underlying your ADSs if you instruct it how to vote. Therefore, it is important that you promptly follow the directions provided by your broker, bank or other nominee regarding how to instruct it to vote your Shares or ADSs. If you do not instruct your broker, bank or other nominee how to vote your Shares that it holds, those Shares or ADSs may not be voted.

 

Q:What will happen if I abstain from voting or fail to vote on the proposal to authorize and approve the Merger Agreement?

 

A:If you abstain from voting, fail to cast your vote in person, fail to complete and return your proxy card in accordance with the instructions set forth on the proxy card, or fail to give voting instructions to the ADS Depositary, your broker, bank or other nominee, your vote will not be counted.

 

Q:May I change my vote?

 

A:Yes. If you are a holder of Shares, you may change your vote in one of the following three ways:

 

·First, you may revoke a proxy by written notice of revocation given to the chairman of the extraordinary general meeting at least two hours before the extraordinary general meeting commences. Any written notice revoking a proxy should be sent to Shanda Games Limited, No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, the PRC, Attention: Investor Relations Department;

 

·Second, you may complete, date and submit a new proxy card bearing a later date than the proxy card sought to be revoked to the Company no later than 10:00 a.m. (Hong Kong time) on [          ], 2015, which is the deadline to lodge your proxy card; or

 

·Third, you may attend the extraordinary general meeting and vote in person. Attendance, by itself, will not revoke a proxy. It will only be revoked if the shareholder actually votes at the extraordinary general meeting.

 

If you hold Shares through a broker, bank or other nominee and have instructed the broker, bank or other nominee to vote your Shares, you must follow directions received from the broker, bank or other nominee to change your instructions.

 

Holders of ADSs may revoke their voting instructions by notification to the ADS Depositary in writing at any time prior to 12:00 p.m. (New York City time) on [          ], 2015. A holder of ADSs can do this by completing, dating and submitting a new ADS voting instruction card to the ADS Depositary bearing a later date than the ADS voting instruction card that the ADS holder is seeking to revoke.

 

If you hold ADSs through a broker, bank or other nominee and you have instructed your broker, bank or other nominee to give ADS voting instructions to the ADS Depositary, you must follow the directions of your broker, bank or other nominee to change those instructions.

 

Q:What should I do if I receive more than one set of voting materials?

 

A:You may receive more than one set of voting materials, including multiple copies of this proxy statement or multiple proxy or voting instruction cards. For example, if you hold your Shares or ADSs in more than one brokerage, bank or other nominee account, you will receive a separate voting instruction card for each brokerage, bank or other nominee account in which you hold Shares or ADSs. If you are a holder of record and your Shares or ADSs are registered in more than one name, you will receive more than one proxy or voting instruction card. Please submit each proxy card that you receive.

 

19 

 

 

Q:Should I send in my Share certificates or my American Depositary Receipts representing ADSs (“ADRs”) now?

 

A:No. After the Merger is completed, you will be sent a form of letter of transmittal with detailed written instructions for exchanging your Share certificates for the merger consideration. Please do not send in your certificates now. Similarly, you should not send in the ADRs that represent your ADSs at this time. Promptly after the Merger is completed, the ADS Depositary will call for the surrender of all ADRs for delivery of the merger consideration. ADR holders will be receiving a similar form of letter of transmittal and written instructions from the ADS Depositary relating to the foregoing.

 

All holders of uncertificated Shares and uncertificated ADSs (i.e., holders whose Shares or ADSs are held in book entry) will automatically receive their merger consideration shortly after the Merger is completed without any further action required on the part of such holders.

 

If your Shares or your ADSs are held in “street name” by your broker, bank or other nominee you will receive instructions from your broker, bank or other nominee as to how to effect the surrender of your Share certificates or ADRs in exchange for the merger consideration.

 

Q:What happens if I sell my Shares or ADSs before the extraordinary general meeting?

 

A:The Share Record Date for voting at the extraordinary general meeting is earlier than the date of the extraordinary general meeting and the date that the Merger is expected to be completed. If you transfer your Shares after the Share Record Date for voting but before the extraordinary general meeting, you will retain your right to vote at the extraordinary general meeting unless you have given, and not revoked, a proxy to the person to whom you transfer your Shares, but will transfer the right to receive the Per Share Merger Consideration in cash without interest to such person, so long as such person is registered as the owner of such Shares when the Merger is completed. In such case, your vote is still very important and you are encouraged to vote.

 

The ADS Record Date is the close of business in New York City on [          ], 2015. If you transfer your ADSs after the ADS Record Date but before the extraordinary general meeting, you will retain your right to instruct the ADS Depositary to vote at the extraordinary general meeting, but will transfer the right to receive the Per ADS Merger Consideration in cash and net of any applicable withholding taxes to the person to whom you transfer your ADSs, so long as such person owns such ADSs when the Merger is completed. In such case, your vote is still very important and you are encouraged to vote.

 

Q:Am I entitled to dissenters’ rights?

 

A:Shareholders who dissent from the Merger will have the right to receive payment of the fair value of their Shares if the Merger is completed, but only if they deliver to the Company, before the vote to authorize and approve the Merger is taken, a written objection to the Merger and subsequently comply with all procedures and requirements of Section 238 of the Cayman Islands Companies Law for the exercise of dissenters’ rights, which is attached as Annex D to this proxy statement. The fair value of their Shares as determined under that statute could be more than, the same as, or less than the Per Share Merger Consideration they would receive pursuant to the Merger Agreement if they do not exercise dissenters’ rights with respect to their Shares.

 

ADS holders will not have the right to exercise dissenters’ rights and receive payment of the fair value of the Shares underlying their ADSs. The ADS Depositary will not attempt to exercise any dissenters’ rights with respect to any of the Shares that it holds, even if an ADS holder requests the ADS Depositary to do so. ADS holders wishing to exercise dissenters’ rights must surrender their ADSs to the ADS Depositary, pay the ADS Depositary’s fees required for the cancellation of their ADSs, provide instructions for the registration of the corresponding Shares in the Company’s register of members, and certify that they have not given, and will not give, voting instructions as to their ADSs (or, alternatively, that they will not vote the corresponding Shares) before 12:00 p.m. (New York City time) on [        ], 2015, and become registered holders of Shares by the close of business in the Cayman Islands on the Share Record Date. Thereafter, such former ADS holders must comply with the procedures and requirements for exercising dissenters’ rights with respect to the Shares under Section 238 of the Cayman Islands Companies Law. If the Merger is not completed, the Company would continue to be a public company in the United States and ADSs would continue to be listed on NASDAQ. Shares are not listed and cannot be traded on any stock exchange other than NASDAQ, and in such case only in the form of ADSs. As a result, if a former ADS holder has cancelled his, her or its ADSs to exercise dissenters’ rights and the Merger is not completed and such former ADS holder wishes to be able to sell his, her or its Shares on a stock exchange, such former ADS holder would need to deposit his, her or its Shares into the Company’s ADS program for the issuance of the corresponding number of ADSs, subject to the terms and conditions of applicable law and the Deposit Agreement, including, among other things, payment of relevant fees of the ADS Depositary for the issuance of ADSs and applicable Share transfer taxes (if any) and related charges pursuant to the Deposit Agreement.

 

20 

 

 

We encourage you to read the section of this proxy statement entitled “Dissenters’ Rights” beginning on page [  ] as well as “Annex D—Cayman Islands Companies Law Cap. 22 (Law 3 of 1961, as consolidated and revised)—Section 238” to this proxy statement carefully and to consult your own Cayman Islands legal counsel if you desire to exercise your dissenters’ rights.

 

Q:If I own ADSs and seek to exercise dissenters’ rights, how do I convert my ADSs to Shares, and when is the deadline for completing the conversion of ADSs to Shares?

 

A:If you own ADSs and wish to exercise dissenters’ rights, you must deliver the ADSs (or to the extent ADSs are certificated, the ADRs) to the ADS Depositary for cancellation before 12:00 p.m. (New York City time) on [          ], 2015 together with (a) delivery instructions for the corresponding Shares (including the name and address of the person who will be the registered holder of such Shares), (b) payment of the ADS cancellation fees (US$0.05 per ADS to be cancelled pursuant to the terms of the Deposit Agreement) and any applicable taxes and (c) a certification that you either (i) held the ADSs as of the ADS Record Date and have not given, and will not give, voting instructions to the ADS Depositary as to the ADSs being cancelled, or have given voting instructions to the ADS Depositary as to the ADSs being cancelled but undertake not to vote the corresponding Shares at the extraordinary general meeting or (ii) did not hold the ADSs as of the ADS Record Date and undertake not to vote the corresponding Shares at the extraordinary general meeting.

 

You must become a registered holder of the Shares underlying your ADSs and deliver to the Company, before the vote is taken at the extraordinary general meeting, a written objection to the Merger and subsequently comply with all procedures and requirements of Section 238 of the Cayman Islands Companies Law, which is attached as Annex D to this proxy statement, for the exercise of dissenters’ rights.

 

We encourage you to read the section of this proxy statement entitled “Dissenters’ Rights” beginning on page [  ], as well as “Annex D—Cayman Islands Companies Law Cap. 22 (Law 3 of 1961, as consolidated and revised)—Section 238” to this proxy statement carefully and to consult your own Cayman Islands legal counsel if you desire to exercise your dissenters’ rights.

 

Q:Will any proxy solicitors or information agents be used in connection with the extraordinary general meeting?

 

A:Yes. To assist in the solicitation of proxies, the Company has engaged Georgeson Inc. as its proxy solicitor.

 

Q:Who can help answer my questions?

 

A:If you have any questions about the Merger or if you need additional copies of this proxy statement or the accompanying proxy card, you should contact Georgeson Inc., the Company’s proxy solicitor, toll-free at +1 800 509 0983 (or +1 781 575 2137 outside of North America) or by email at ShandaGames@georgeson.com.

 

In order for you to receive timely delivery of any additional copy of this proxy statement or the accompanying proxy card in advance of the extraordinary general meeting, you must make your request no later than five business days prior to the date of the extraordinary general meeting.

 

21 

 

 

Special Factors

 

Background of the Merger

 

All dates and times referenced in this Background of the Merger refer to China Standard Time.

 

The Board and senior management of the Company periodically review the Company’s long-term strategic plans with the goal of enhancing shareholder value. As part of this ongoing process, the Board and senior management of the Company have, from time to time, considered strategic alternatives that may be available to the Company, including potential commercial and strategic business partnerships, acquisitions, dispositions and new business lines.

 

In particular, during the course of 2012 and 2013, the Company recognized that the revenues of certain of its games and businesses were growing faster than others at the time. With the aim of enabling the market to more accurately value the faster growing segments and facilitate the effective allocation of management resources, certain members of the Company’s management considered splitting the Company into two entities under three different scenarios, in accordance with which the Company would separate its businesses such that (a) one entity would own and operate the Company’s PRC business, and the other would own and operate its overseas businesses; (b) one entity would own and operate the Company’s two leading mature legacy games businesses, and the other would own and operate its other faster-growing games businesses; or (c) one entity would own and operate the Company’s overseas and mobile games businesses, and the other would own and operate the remainder of its games businesses. Although Mr. Tianqiao Chen (“Mr. Chen”), chairman of the Board at the time, Mr. Richard Wei (“Mr. Wei”), chief financial officer of the Company at the time, and other representatives of the Company discussed and evaluated these potential transactions, they ultimately decided not to pursue these transactions due to concerns regarding whether these transactions would ultimately increase the valuation of the Company as a whole. In mid-2012, Mr. Chen and Mr. Wei also engaged in preliminary discussions with a U.S. game developer with respect to a potential merger between the Company and the game developer; however, the Company ultimately declined to pursue this transaction due to concerns regarding the financial condition of the game developer and the value that would be assigned to the game developer relative to the Company in the transaction.

 

Despite these efforts, the Company had not been able to consummate any successful strategic alternatives. Therefore, to further pursue strategic alternatives for enhancing shareholder value, Mr. Wei met with representatives of Kilometre on December 4 and December 6, 2013 and Mr. Chen and Mr. Wei together met with representatives of Kilometre on December 9, 2013, in each case to discuss general industry conditions and recent trends in strategic transactions by publicly listed PRC-based companies, as well as Kilometre’s credentials with respect to potentially advising the Company on exploring strategic alternatives.

 

The Company subsequently retained Kilometre as strategic execution consultant to the Company with respect to advising on and executing possible strategic transactions, including potential minority, majority or change-of-control transactions that could enhance shareholder value.

 

Between December 18, 2013 and January 18, 2014, Kilometre contacted and introduced to the Company four private equity investors that might have been interested in a potential transaction with the Company, including Primavera Capital Limited (“Primavera”). In connection with these introductions, Kilometre also advised the Company with respect to the background and potential level of interest and financial resources of such private equity investors. Kilometre also coordinated the sequence and timing of meetings between the Company and such private equity investors. Between December 21, 2013 and January 26, 2014, the Company entered into confidentiality agreements with these private equity investors and made due diligence materials available to them, and members of the Company’s senior management held several meetings with representatives of each of these private equity investors to discuss the Company’s business and operations in order to facilitate their evaluation of a potential “going private” transaction involving the Company.

  

On January 27, 2014, Shanda Interactive, the then controlling shareholder of the Company and an affiliate of Mr. Chen, and an affiliate of Primavera entered into a consortium agreement (the “First Consortium Agreement”) pursuant to which they agreed, among other things, to form a consortium (such consortium, as it exists from time to time, the “Buyer Group”) to jointly make a proposal to the Company for a “going private” transaction, deal exclusively with each other in pursuing such transaction for a period of nine months or until the termination of the First Consortium Agreement by all parties thereto, if earlier, and cooperate with respect to such transaction.

 

 

22 

 

 

On the same date, Shanda SDG Investment Limited (“Shanda SDG”), a wholly owned subsidiary of Shanda Interactive, entered into a share purchase agreement with Primavera to sell 28,959,276 Class A ordinary shares to Primavera for US$2.7625 per share (the “Primavera SPA”), which sale was completed on February 17, 2014. Pursuant to the Primavera SPA, Primavera agreed that if a “going private” transaction occurred within one year of the completion of such sale, where Primavera was a member of the buyer group with respect to such “going private” transaction (or was not a member of the buyer group due to its own decision or election without Shanda SDG’s written consent), and the price per share in the “going private” transaction was higher than the price per share paid by Primavera, Primavera would pay to Shanda SDG, with respect to each share purchased by Primavera from Shanda SDG, a “make-whole” payment equal to the difference between the price per share paid by Primavera and the price per share paid in the “going private” transaction, the effect of which would be that Shanda SDG would receive the same price per share for the shares sold to Primavera as would be paid in the “going private” transaction.

 

Also on January 27, 2014, the Buyer Group submitted a preliminary non-binding letter (the “Proposal”) to the Board proposing to acquire all of the shares of the Company not already owned by members of the Buyer Group for a cash consideration of US$3.45 per Share and US$6.90 per ADS (the “Proposed Transaction”). In the Proposal, the Buyer Group noted that the per ADS price to be paid in the Proposed Transaction represented a premium of approximately 44.4% to the volume-weighted average price of the ADSs over the preceding 30 trading days. Moreover, the Buyer Group stated, among other things, that its members had entered into the First Consortium Agreement pursuant to which they had agreed to work with each other exclusively in pursuing the Proposed Transaction, and that it expected that the Proposed Transaction would be financed with a combination of debt and equity capital and that the equity portion would be provided by members of the Buyer Group. The Proposal also stated that the members of the Buyer Group did not intend to sell their Shares to any third party.

 

On January 28, 2014, the Board met via conference call to discuss, among other things, the Proposal. During the meeting, representatives of Davis Polk & Wardwell (“Davis Polk”), the Company’s U.S. legal advisor, provided the Board with an overview of the substantive requirements, processes and duties of directors under applicable law in connection with the Proposed Transaction, including various approaches taken by boards of directors when considering similar transactions, and the desirability of establishing a committee of independent directors to evaluate the Proposed Transaction given the conflicts of interest that may arise from the involvement of Shanda Interactive in the Proposed Transaction.

 

At the meeting, the Board determined it was in the best interests of the Company and the Unaffiliated Holders to form the Special Committee. After discussing the various qualifications of the members of the Board to serve on the Special Committee, including whether certain directors were sufficiently independent for purposes of serving on the Special Committee, the Board adopted resolutions to form the Special Committee, comprised of the following three directors, whom the Board determined were sufficiently independent for purposes of serving on the Special Committee: Mr. Lin (to serve as chairman of the Special Committee), Mr. Heng Wing Chan (“Mr. Chan”) and Mr. Yong Gui (“Mr. Gui”).

 

At the same meeting, the Board also adopted resolutions delegating to the Special Committee the appropriate power and authority of the Board to, among other things, consider and evaluate the Proposed Transaction and determine whether it was in the best interests of the shareholders of the Company, and make recommendations to the Board on the Proposed Transaction; negotiate on behalf of the Board the terms of the Proposed Transaction, including the terms of the Merger Agreement and any other document to be entered into with the Buyer Group in connection with the Proposed Transaction; consider competing proposals or offers and other strategic alternatives and make recommendations to the Board with respect thereto (including the recommendation that the Company not enter into any transaction and, instead, remain independent); request information and assistance from officers of the Company in connection with its consideration of the Proposed Transaction and any other alternative proposals; retain its own independent legal and financial advisors and other agents relating to the Proposed Transaction and enter into contracts providing for the retention and compensation of such advisors or other agents; submit its recommendation to the Board, together with the terms of any negotiated definitive agreement pursuant to which the “going private” transaction or any alternative transaction would be completed that would be required to be approved by the Board; and receive any information, assistance or documents from officers, advisors and employees of the Company that would be helpful in discharging the duties of the Special Committee. In addition, the Board resolved that each member of the Special Committee be indemnified by the Company to the fullest extent permitted by applicable law or the Company’s memorandum and articles of association for any loss and damage suffered because of his role on the Special Committee. On January 29, 2014, the Company issued a press release announcing the formation of the Special Committee to evaluate the Proposed Transaction.

 

23 

 

 

The Board subsequently adopted resolutions providing that each member of the Special Committee be compensated for his service. Such compensation was not and is not contingent upon the completion of the Merger or on the Special Committee’s or the Board’s recommendation of the Merger.

 

Between January 28, 2014 and February 16, 2014, the Special Committee interviewed a number of prospective legal advisors, including Sullivan & Cromwell, with respect to U.S. law; Walkers, with respect to Cayman Islands law; and Haiwen & Partners (“Haiwen”), with respect to PRC law. Following these interviews, the Special Committee evaluated the credentials and independence of the law firms interviewed.

 

On February 17, 2014, Messrs. Lin and Gui of the Special Committee met via conference call with representatives of Sullivan & Cromwell to confirm Sullivan & Cromwell’s engagement as the independent legal counsel to the Special Committee with respect to U.S. law and discussed the U.S. legal requirements applicable to the Proposed Transaction as well as the process that the Special Committee should follow in evaluating the Proposed Transaction. Later on that date, representatives of Sullivan & Cromwell called Mr. Chan to brief him on the discussion. On February 18, 2014, the Company issued a press release regarding the Special Committee’s appointment of Sullivan & Cromwell as its U.S. legal counsel.

 

Following the Company’s announcement of its receipt of the Proposal on January 27, 2014, the Special Committee received solicited and unsolicited proposals from, and evaluated the qualifications of, six financial advisory firms to act as independent financial advisor to the Special Committee. On February 18, 2014, after deliberation on the experience, qualification and reputation of each of the six financial advisory firms, the Special Committee selected Merrill Lynch as its independent financial advisor, subject to confirmation of its independence in connection with the Proposed Transaction. The Special Committee noted that Merrill Lynch was familiar with the Company and its industry, had substantial experience with “going private” transactions involving U.S.-listed PRC-based companies, and had the ability to interact in both English and Chinese. Merrill Lynch confirmed its independence on March 5, 2014, and the Special Committee executed an engagement letter with Merrill Lynch on March 6, 2014. On the same day, the Company issued a press release regarding the Special Committee’s appointment of Merrill Lynch as its independent financial advisor.

 

On February 21 and March 4, 2014, respectively, the Special Committee retained Walkers as its independent Cayman Islands legal advisor and Haiwen as its independent PRC legal advisor with respect to the Proposed Transaction, which engagements were confirmed in engagement letters on March 11, 2014.

 

On February 25, 2014, the Special Committee held a meeting in Shanghai to consider the Proposed Transaction. Each of Messrs. Lin and Gui attended in person, and Mr. Chan attended via telephone. Representatives of Sullivan & Cromwell and Merrill Lynch attended in person, and representatives of Walkers attended via telephone. At the meeting, representatives of Merrill Lynch and Sullivan & Cromwell discussed the Proposed Transaction with the Special Committee, including the composition of the Buyer Group; the structure of the Proposed Transaction; certain considerations for the Special Committee with respect to its analysis of the value, fairness and certainty of the transaction; the purchase price offered in the Proposed Transaction; safeguards for securing a fair deal for Unaffiliated Holders; whether a “market check” would be likely to find competing bidders; and alternative strategic options.

 

Representatives of Sullivan & Cromwell then discussed key legal considerations for the Special Committee, including the scope of authority under the Board’s resolutions; fiduciary duty considerations for members of the Special Committee; disclosure requirements under U.S. law; and deal execution considerations and other typical features of “going private” transactions. In particular, representatives of Sullivan & Cromwell summarized the importance of the independence and disinterestedness of the members of the Special Committee, the role of the Special Committee in representing the interests of Unaffiliated Holders, the importance of the Special Committee in assuring that a fair process is undertaken with respect to the Proposed Transaction and a fair price is reached, and the importance of considering strategic alternatives to the Proposed Transaction. Walkers also advised on the fiduciary duty considerations for members of the Special Committee under Cayman Islands law. Over the course of the three days following the meeting, Sullivan & Cromwell met via conference call with each member of the Special Committee to inquire as to the independence of such member, on which conference calls each member of the Special Committee confirmed his independence for purposes of serving on the Special Committee.

 

Pursuant to the Special Committee’s instructions, on March 4, 2014, Merrill Lynch presented a questionnaire to members of the Buyer Group as part of the Special Committee’s evaluation of the Proposed Transaction, which questionnaire covered, among other things, the financing of the Proposed Transaction, the proposed composition of the Buyer Group, the post-closing capital structure of the Company, and potential meetings between advisors of the Special Committee and those of potential financing sources. The Buyer Group responded to Merrill Lynch on March 7, 2014.

 

24 

 

 

Between March 4, 2014 and September 30, 2014, the Special Committee regularly met via conference call with representatives of Sullivan & Cromwell and Merrill Lynch to discuss, among other things, the status of the Proposed Transaction; Merrill Lynch’s due diligence on the financial resources and other aspects of members of the Buyer Group; the communications and discussions between Sullivan & Cromwell and Merrill Lynch, on the one hand, and members of the Buyer Group and their advisors, on the other; the expected timetable of the Proposed Transaction; the due diligence process by, and negotiations of the Merger Agreement, the Equity Commitment Letters and the Limited Guarantees (collectively, the “Transaction Documents”) with, the Buyer Group; the status of the Company’s disclosure schedules to the Merger Agreement; updates on the financial due diligence conducted with the management of the Company and, on September 23, 2014, a presentation on the valuation of the Company and the fairness of the consideration to be paid by the Buyer Group to the Unaffiliated Holders in the Proposed Transaction; and additional potential investors in the Proposed Transaction. Sullivan & Cromwell assisted the Special Committee in negotiating and concluding a confidentiality agreement with each of the potential investors that had indicated its intention to assess the possibility of joining the Buyer Group between February 28, 2014 and August 8, 2014.

  

On March 17, 2014, the Company made available to Merrill Lynch and the Buyer Group certain financial projections, which Merrill Lynch discussed with the Special Committee on March 25, 2014.

 

Also on March 17, 2014, Wilson Sonsini Goodrich & Rosati, P.C. (“WSGR”), the Buyer Group’s U.S. legal advisor, presented to Sullivan & Cromwell an initial draft of the Merger Agreement.

 

On March 25, 2014, the Special Committee and representatives of Sullivan & Cromwell and Merrill Lynch met via conference call. Representatives of Sullivan & Cromwell summarized the Merger Agreement received from WSGR, and discussed with the Special Committee key issues in the draft and terms to be negotiated with the Buyer Group and its counsel.

 

Between March 17, 2014 and April 22, 2014, Sullivan & Cromwell also held several conference calls with Latham & Watkins, counsel to Primavera, and WSGR with respect to the Proposed Transaction. During this period, the parties discussed the specific terms of the Merger Agreement and the Special Committee’s position with respect thereto, and exchanged drafts of the Merger Agreement.

 

During this period, negotiations with respect to the Merger Agreement included discussions of, and the drafts exchanged between the parties reflected changes to, the following terms, among others:

 

·the circumstances under which the Board could effect a change of recommendation to the Company’s shareholders in respect of the Proposed Transaction;

 

·the shareholder vote required to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger;

 

·the scope of debt and equity financing relating to the Proposed Transaction;

 

·the circumstances under which each party would be able to terminate the Merger Agreement;

 

·the circumstances under which each party would be obligated to pay the other a termination fee, and the amount and form of such termination fee;

 

·the level of efforts required to be undertaken by the parties to secure requisite regulatory approvals in connection with the Proposed Transaction;

 

·the representations and warranties made by the Company; and

 

·the restrictions on the Company’s conduct of its business prior to the closing of the Proposed Transaction.

 

During the course of these negotiations with WSGR and the Buyer Group, Sullivan & Cromwell, after consulting with the Special Committee, obtained certain terms of the Merger Agreement that were more favorable to the Unaffiliated Holders than those contained in the initial draft of the Merger Agreement, including, in particular, by (a) expanding the circumstances under which the Board would be able to effect a change of recommendation to the Company’s shareholders in respect of the Proposed Transaction, and under which the Company would be able to terminate the Merger Agreement in order to enter into an agreement with respect to an alternative transaction that could be more favorable to the Company and the Unaffiliated Holders; (b) limiting the circumstances under which Parent would be able to terminate the Merger Agreement, and requiring that members of the Buyer Group vote in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and therefore, in each case, increasing the likelihood of the Merger being completed; and (c) providing that the termination fee payable by Parent would be twice that of the termination fee payable by the Company.

 

25 

 

 

On April 1, 2014, the Special Committee and representatives of Merrill Lynch met via conference call to discuss, among other things, requesting an increase to the merger consideration from the Buyer Group. Shortly thereafter, representatives of Merrill Lynch proposed to representatives of the Buyer Group that the Buyer Group increase the then-current merger consideration. In the subsequent three-week period, representatives of Merrill Lynch and representatives of the Buyer Group engaged in various discussions concerning an increase to the merger consideration; however, representatives of the Buyer Group ultimately informed representatives of Merrill Lynch that the Buyer Group was not prepared to increase the merger consideration.

 

Between January and July 2014, Primavera led the Buyer Group’s discussions with potential additional equity investors that were considering joining the Buyer Group. Between February 2014 and August 2014, several of these potential equity investors signed confidentiality agreements with the Company and assessed the possibility of joining the Buyer Group.

 

In April and May 2014, (a) Perfect World Co., Ltd. (“Perfect World”), (b) an affiliate of FountainVest Partners (“FountainVest”), and (c) an affiliate of Carlyle Asia Partners IV, L.P. (“Carlyle”) each became a party to the First Consortium Agreement and joined the Buyer Group. On April 18, 2014, Perfect World and Shanda SDG entered into a share purchase agreement, pursuant to which Shanda SDG sold to Perfect World 30,326,005 Class A ordinary shares of the Company at US$3.2975 per share. Such 30,326,005 Shares were sold by Shanda SDG in the form of Class A ordinary shares converted from the same number of Class B ordinary shares because Shanda SDG wanted to retain control of the Company after the transaction. Perfect World also agreed to pay a “make-whole” payment to Shanda SDG on terms substantially the same as those in the Primavera SPA. The Company issued a press release in connection with each of Perfect World, FountainVest and Carlyle joining the Buyer Group. Although Mr. Xiangdong Zhang, chief executive officer of the Company at the time; Mr. Tunghai Chien, president of the Company; Mr. Wei; members of the Company’s investors relations team; and certain of the Company’s game producers met separately with two other private equity investors, one of which the Company had previously held discussions with in January 2014, on several occasions in March and April 2014 to discuss the Company’s business and operations in order to facilitate the evaluation by these investors of joining the Buyer Group, these investors ultimately did not join the Buyer Group.

 

Between May 9, 2014 and August 31, 2014, with the objective of assessing market interest for alternative transactions, representatives of Merrill Lynch also began conducting a “market check” by initiating discussions with other potential buyers and regularly updated the Special Committee on the status of those discussions. In all, Merrill Lynch contacted seven potential financial sponsors and nine potential strategic investors to assess their interest in an acquisition of the Company as an alternative to the Proposed Transaction, but each of these parties ultimately declined to make a proposal to acquire the Company.

 

On July 9, 2014 and July 11, 2014, representatives of Shanda Interactive and a Chinese bank that Shanda Interactive approached had meetings and discussions with Mr. Xiangdong Zhang, Mr. Tunghai Chien, members of the Company’s investors relations team, and certain of the Company’s game producers to discuss the Company’s business and operations in order to facilitate the evaluation by the Chinese bank of joining the Buyer Group; however, after these meetings and further evaluation, the Chinese bank ultimately did not join the Buyer Group.

 

In July 2014 and August 2014, representatives of Primavera, on behalf of itself, Perfect World, FountainVest and Carlyle, discussed with representatives of Shanda Interactive the progress of securing equity financing and the possibility of allowing members of the Buyer Group to separately solicit interest from various other potential equity investors to join the Buyer Group and facilitate the Proposed Transaction.

 

In August 2014, representatives of Primavera approached representatives of Shanghai Buyout Fund L.P., a limited partnership organized under the laws of the PRC (“Haitong”), an affiliate of Haitong Securities Co., Ltd., a PRC company listed on the Shanghai Stock Exchange (“Haitong Securities”), to solicit Haitong to join the Buyer Group. Between August 17 and September 1, 2014, representatives of Haitong discussed with representatives of Primavera, Perfect World and Shanda Interactive the terms, requirements and process for Haitong to purchase Class A ordinary shares from Shanda SDG, Primavera and Perfect World and join the Buyer Group. On September 1, 2014, Haitong agreed to purchase a total of 107,438,129 Class A ordinary shares from Shanda SDG, Primavera and Perfect World for US$3.45 per share, and Hao Ding, a then affiliate of Haitong Securities, completed such purchase on behalf of Haitong on September 23, 2014. Among the 107,438,129 Class A ordinary shares sold to Haitong, 48,152,848 shares were sold by Shanda Interactive in the form of Class A ordinary shares converted from the same number of Class B ordinary shares because Shanda Interactive wanted to retain control of the Company after the transaction. Haitong also agreed to pay a “make-whole” payment to each of Shanda SDG, Primavera and Perfect World on terms substantially the same as those in the Primavera SPA.

 

26 

 

 

Between August 19 and August 26, 2014, representatives of Ningxia approached and discussed with representatives of Shanda Interactive the terms, requirements and process for Ningxia to purchase Company shares from Shanda SDG and join the Buyer Group. On September 1, 2014, Shanda Interactive agreed to sell to Ningxia 80,577,828 Class A ordinary shares converted from the same number of Class B ordinary shares for US$3.45 per share and Ningxia agreed to purchase such shares at the same price. Such shares were sold by Shanda Interactive in the form of Class A ordinary shares converted from the same number of Class B ordinary shares because Shanda Interactive wanted to retain control of the Company after the transaction. Zhongrong Investment, an affiliate of Ningxia, completed such purchase on behalf of Ningxia on September 23, 2014. Ningxia and Zhongrong Investment also agreed to pay a “make-whole” payment to Shanda SDG on terms substantially the same as those in the Primavera SPA.

 

Between August 27 and August 31, 2014, representatives of Orient Finance Holdings (Hong Kong) Limited (“Orient Finance”), which is a direct and wholly owned subsidiary of Orient Securities Company Limited (“Orient Securities”), a company organized under the Laws of the PRC, and a then affiliate of Orient Hongtai and Orient Hongzhi, approached and discussed with representatives of Shanda Interactive the terms, requirements and process for Orient Finance to purchase Class A ordinary shares from Shanda SDG and join the Buyer Group. On August 31, 2014, Shanda Interactive agreed to sell to Orient Finance 123,552,669 Class A ordinary shares converted from the same number of Class B ordinary shares for US$3.45 per share and Orient Finance agreed to purchase such shares at the same price. Such shares were sold by Shanda Interactive in the form of Class A ordinary shares converted from the same number of Class B ordinary shares because Shanda Interactive wanted to retain control of the Company after the transaction. After the transaction was completed on September 23, 2014, such 123,552,669 Class A ordinary shares were subsequently transferred by Orient Finance to Orient Hongtai and Orient Hongzhi, each of which is a then affiliate of Orient Finance, on November 24, 2014. Orient Finance also agreed to pay a “make-whole” payment to Shanda SDG on terms substantially the same as those in the Primavera SPA.

  

On August 30, 2014 and August 31, 2014, representatives of Primavera, as the lead member of the Buyer Group at the time, and representatives of Shanda Interactive discussed the withdrawal of Primavera, Perfect World, FountainVest and Carlyle from the Buyer Group. On September 1, 2014, Perfect World, FountainVest, Carlyle and Primavera withdrew from the Buyer Group, and Haitong, Ningxia and Orient Finance joined the Buyer Group, after which the Buyer Group was comprised of Shanda Interactive, Haitong, Ningxia and Orient Finance. On September 2, 2014, the Company issued a press release announcing the changes to the Buyer Group.

 

In light of his role as the chief executive officer of China Universal Asset Management, an affiliate of Orient Finance, it was determined that Mr. Lin was no longer sufficiently independent for purposes of serving on the Special Committee, and he promptly resigned from the Special Committee. Mr. Chan was then elected by the Special Committee to serve as the chairman of the Special Committee. On September 4, 2014, the Special Committee reconfirmed Sullivan & Cromwell’s appointment as its U.S. legal counsel, Merrill Lynch’s appointment as its financial advisor (after Merrill Lynch reconfirmed its independence), Walkers’ appointment as its Cayman Islands legal counsel and Haiwen’s appointment as its PRC legal counsel, and issued a press release announcing that the Board had reconstituted the Special Committee formed by the Board to evaluate the Proposed Transaction.

 

On September 9, 2014, the Special Committee and representatives of Sullivan & Cromwell and Merrill Lynch met via conference call to review the status of the Proposed Transaction, particularly with respect to the change in the composition of the Buyer Group. At this meeting, the parties discussed the status of the negotiations with respect to the Merger Agreement and the other Transaction Documents, and the changes to the financing proposed by the Buyer Group (specifically that debt financing was no longer necessary).

 

On September 11, 2014, WSGR presented to Sullivan & Cromwell a revised draft of the Merger Agreement. During the period between September 11 and September 22, 2014, Sullivan & Cromwell held several conference calls and corresponded with WSGR with respect to the Proposed Transaction. On these calls and during this correspondence, Sullivan & Cromwell and WSGR discussed the outstanding terms of the Merger Agreement and the Special Committee’s position with respect to such terms and the other Transaction Documents, and exchanged various drafts of the Merger Agreement and the other Transaction Documents. The negotiations with respect to the Merger Agreement and the other Transaction Documents included discussions of, and the drafts exchanged between the parties reflected changes to, the following terms, among others: (a) the circumstances under which the Board could effect a change of recommendation to the Company’s shareholders in respect of the Proposed Transaction, (b) the scope and terms of the equity financing relating to the Proposed Transaction, (c) the amount of termination fees and (d) the representations and warranties to be made by the Company.

 

27 

 

 

On September 16, 2014, the Special Committee and representatives of Sullivan & Cromwell and Merrill Lynch held several conference calls to discuss the terms of the Merger Agreement in light of the changes to the Buyer Group and the Special Committee’s position with respect to the terms thereof and the other Transaction Documents. During the conference calls, the Special Committee consulted Merrill Lynch on its preliminary view on the then-proposed merger consideration and market practice. After discussions regarding negotiation tactics among the Special Committee, Sullivan & Cromwell and Merrill Lynch, the Special Committee directed Merrill Lynch to seek to negotiate an increase in the merger consideration.

 

On September 17, 2014, representatives of WSGR and Sullivan & Cromwell held a conference call to discuss certain issues with respect to the Anti-monopoly Law of the PRC and the proposed equity financing of the Proposed Transaction.

 

Between September 17 and September 22, 2014, representatives of Merrill Lynch held several conference calls with representatives of the Buyer Group, on which representatives of Merrill Lynch conveyed the Special Committee’s position with respect to an increase in the merger consideration. On September 22, 2014, representatives of the Buyer Group indicated to representatives of Merrill Lynch that the Buyer Group was prepared to increase the merger consideration to US$7.10 per ADS, and Merrill Lynch informed the Special Committee of the revised proposal.

 

On September 23, 2014, the Special Committee met in Shanghai with representatives of Sullivan & Cromwell, Merrill Lynch, Walkers and Haiwen attending either in person or via conference call. Representatives of Sullivan & Cromwell reviewed the history of the transaction, after which representatives of Walkers reviewed the fiduciary duty considerations for members of the Special Committee under Cayman Islands law. Sullivan & Cromwell then summarized for the Special Committee the key terms and proposed resolution of all open items in the Merger Agreement and the other Transaction Documents, as well as disclosure requirements under U.S. law, deal execution considerations and other typical features of “going private” transactions. Representatives of Haiwen then provided an update on certain considerations with respect to the Anti-monopoly Law of the PRC. Representatives of Merrill Lynch then gave a presentation on the valuation of the Company and the fairness of the consideration to be paid to the Unaffiliated Holders in the transaction. After the presentations by its advisors, the Special Committee asked questions about Merrill Lynch’s methodology and analysis with respect to the merger consideration, and discussed the other terms of the transaction with Sullivan & Cromwell, after which it deliberated on such terms and the negotiation strategy with respect thereto. The Special Committee then determined that it was prepared to proceed to negotiate the Proposed Transaction with the Buyer Group on the basis of a merger consideration of US$3.55 per Share and US$7.10 per ADS.

 

On September 24, 2014, the Special Committee held a conference call with representatives of Merrill Lynch, who discussed their financial analysis.

 

Between September 27 and October 19, 2014, WSGR and Sullivan & Cromwell exchanged revised drafts of the Merger Agreement and the other Transaction Documents in consideration of the Company and the Buyer Group’s desire to potentially sign the Merger Agreement on October 20, 2014, or shortly thereafter; however, on October 19, 2014, WSGR informed Sullivan & Cromwell that the Buyer Group would not be in a position to sign the Merger Agreement on October 20, 2014. Between October 19 and October 22, 2014, WSGR conveyed to Sullivan & Cromwell that members of the Buyer Group were continuing to discuss the Proposed Transaction among themselves, after which discussions between representatives of the Buyer Group and representatives of the Special Committee ceased for several weeks.

 

On October 27, 2014, the exclusivity period under the First Consortium Agreement expired and members of the Buyer Group were no longer obligated to deal exclusively with each other with respect to the Proposed Transaction. On October 28, 2014, Shanda Interactive and Ningxia entered into a letter agreement, pursuant to which Shanda Interactive and Ningxia agreed to continue to work with each other exclusively in pursuing the Proposed Transaction until November 25, 2014. Coincidentally on the same day, Mr. Xiangdong Zhang stepped down as chief executive officer of the Company and Mr. Yingfeng Zhang was appointed by the Board as acting chief executive officer of the Company. Such appointment was not related to the execution of the letter agreement by and between Shanda Interactive and Ningxia.

 

On October 29, 2014, Shanda Interactive indicated to Ningxia that it would also consider quitting the Proposed Transaction if all of the Class B ordinary shares that it indirectly held through Shanda SDG (the “SDG Shares”) could be sold at a premium for the super voting power carried by the SDG Shares. Ningxia then proposed to acquire all the SDG Shares.

 

On November 3, 2014, Shanda Interactive rejected Ningxia’s proposal, because if all the SDG Shares were sold to a single party, the transaction would result in a change of control of the Company, which could trigger an anti-monopoly review by the PRC government. Thereafter, Ningxia contacted Mr. Zhang to explore the possibility of Mr. Zhang joining the acquisition of the SDG Shares in a manner such that neither Ningxia nor Mr. Zhang would control the Company after the acquisition. As Mr. Zhang was interested in Ningxia’s proposal, he immediately established Yili Shengda and Ningxia Yilida in contemplation of the possibility of pursuing the purchase of half of the SDG Shares. Yili Shengda is directly and wholly owned by Ningxia Yilida, a PRC limited partnership, of which the general partner is Shanghai Yingfeng, a PRC company directly and wholly owned by Mr. Zhang.

 

28 

 

 

On November 7, 2014, Mr. Zhang confirmed with representatives of Ningxia his intention to purchase half of the SDG Shares and jointly undertake the Proposed Transaction with Ningxia. Subsequently, Mr. Zhang and representatives of Ningxia and Shanda Interactive discussed the potential sales of the SDG Shares to affiliates of Mr. Zhang and Ningxia, respectively.

 

On November 19, 2014, WSGR informed Sullivan & Cromwell that Shanda SDG intended to sell all of its Shares to affiliates of Mr. Zhang and Ningxia. On November 21, 2014, the Special Committee and representatives of Sullivan & Cromwell and Merrill Lynch met via conference call to discuss the status of the Proposed Transaction in light of Shanda SDG’s proposed sale and the new composition of the Buyer Group.

 

On November 22, 2014, representatives of Sullivan & Cromwell, Haiwen and WSGR held a conference call to discuss Shanda SDG’s proposed sale, and the potential implications under the Anti-monopoly Law of the PRC with respect to the Proposed Transaction in light of the composition of the Buyer Group that would result from Shanda SDG’s proposed sale.

 

On November 22, 2014, Shanda Interactive sent to Yili Shengda and Ningxia a draft share purchase agreement in respect of the sale of the SDG Shares. On November 25, 2014, Zhongrong Shengda, an affiliate of Ningxia, and Yili Shengda, an affiliate of Mr. Zhang, each agreed to purchase 48,759,187 Class B ordinary shares from Shanda SDG for US$5.13 per share, which purchase was completed on the same day (the “Shanda SDG Sale”). Unlike the prior occasions when Shanda SDG converted Class B ordinary shares held by it into Class A ordinary shares and sold such Class A ordinary shares to Primavera, Perfect World, Haitong, Ningxia and Orient Finance, or their respective affiliates, this time Zhongrong Shengda and Yili Shengda negotiated to purchase Class B ordinary shares, which entitled their holders to 10 votes per share and, in exchange, Shanda SDG demanded a higher price than for the Class A ordinary shares. By acquiring an aggregate of 97,518,374 Class B ordinary shares, Zhongrong Shengda and Yili Shengda together held approximately 69% of the total voting power of the outstanding ordinary shares, which is more than the two-thirds majority necessary to approve a special resolution of the shareholders of the Company as required under Cayman Islands law. On November 26, 2014, WSGR was engaged as U.S. legal counsel to Ningxia and Yili Shengda with respect to the Proposed Transaction.

 

Upon the completion of Shanda SDG Sale, each of Mr. Chen, Shanda Interactive and Shanda SDG ceased to own, directly or indirectly, any equity securities of the Company and was no longer an affiliate of the Company. None of Mr. Chen, Shanda Interactive and Shanda SDG had engaged, directly or indirectly, in any discussion on the Proposed Transaction since November 26, 2014. Also on November 26, 2014, Mr. Chen was replaced by Mr. Zhang as the chairman of the Board and the Company issued a press release announcing that it had been informed by Shanda Interactive that Shanda Interactive did not intend to remain a member of the Buyer Group following the completion of the Shanda SDG Sale, after which Shanda Interactive would no longer beneficially own any Shares, but that it had been informed by Mr. Zhang and Ningxia that they intended to continue pursuing the Proposed Transaction, after which discussions between representatives of the Buyer Group and representatives of the Special Committee ceased for several weeks. Although Mr. Zhang’s employment contract with Shanda Interactive was not officially terminated until December 16, 2014 (which was his monthly payroll cutoff date at Shanda Interactive), he had ceased to work for Shanda Interactive on November 25, 2014, the date on which the Shanda SDG Sale was agreed and completed. Since November 25, 2014, Mr. Zhang has worked exclusively and solely for the Company.

 

On November 26, 2014, representatives of Sullivan & Cromwell, WSGR and Davis Polk held a conference call to discuss the status of the Proposed Transaction in light of the Shanda SDG Sale.

 

On December 5, 2014, Ningxia Yilida, an affiliate of Mr. Zhang, and Ningxia entered into a consortium agreement (the “Second Consortium Agreement”), pursuant to which they agreed, among other things, to form a consortium to jointly make a proposal to the Company for a “going private” transaction, deal exclusively with each other in pursuing such transaction until February 6, 2015 or the termination of the Second Consortium Agreement, if earlier, and cooperate with respect to such transaction. All references to “Buyer Group” or “Buyer Group members” between December 8, 2014 and March 16, 2015 refer only to Ningxia Yilida and Ningxia.

 

On December 18 and December 22, 2014, representatives of WSGR and Sullivan & Cromwell held conference calls to discuss the timing and status of the Proposed Transaction, the scope of the equity financing relating to the Proposed Transaction and the status of the Buyer Group’s review of the Merger Agreement and the other Transaction Documents, and WSGR conveyed that the Buyer Group intended to continue pursuing the Proposed Transaction on the terms reflected in the Transaction Documents and previously negotiated with the Special Committee earlier in 2014. On December 23, 2014, the Special Committee and representatives of Sullivan & Cromwell and Merrill Lynch met via conference call to discuss the same.

 

Between December 24 and December 26, 2014, Sullivan & Cromwell assisted the Special Committee in negotiating a confidentiality agreement to be entered into with potential equity investors that had contacted the Buyer Group and expressed interest in assessing the possibility of joining the Buyer Group. Although two potential investors entered into such confidentiality agreements on January 2 and January 27, 2015, respectively, neither ultimately joined the Buyer Group.

 

On January 14, 2015, Ningxia retained Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) as its legal advisor in connection with the Proposed Transaction.

 

 

29 

 

 

On February 17, 2015, the Special Committee and representatives of Sullivan & Cromwell and Merrill Lynch met via conference call to discuss the status of the Proposed Transaction in light of the two new potential equity investors and a new potential debt financing source, as well as recent news coverage relating to the China Securities Regulatory Commission’s investigation of Zhongyin Cashmere (which investigation was not related to the Proposed Transaction), a public company listed on the Shenzhen Stock Exchange that is an affiliate of Ningxia, after which discussions between representatives of the Buyer Group and representatives of the Special Committee ceased for several weeks.

 

On March 12, 2015, representatives of Merrill Lynch held a conference call with Mr. Zhang to discuss the composition of the Buyer Group and the scope of the equity financing relating to the Proposed Transaction. On March 16, 2015, representatives of WSGR informed representatives of Merrill Lynch that a new consortium agreement would be signed within the next 24 hours.

 

Subsequently on March 16, 2015, Ningxia Yilida, Ningxia, Orient Hongtai, Orient Hongzhi and Hao Ding entered into the Third Consortium Agreement, pursuant to which they agreed to form a consortium to jointly make a proposal to the Company for a “going private” transaction, deal exclusively with each other in pursuing such transaction for a period of approximately six weeks or until the termination of the Third Consortium Agreement by all parties thereto, if earlier, and cooperate with respect to such transaction. On April 3, 2015, each of Zhongrong Legend, Ningxia Silkroad, and Zhengjun Investment entered into an adherence agreement, pursuant to which each of them became a party to the Third Consortium Agreement as a Sponsor. All references to “Buyer Group” or “Buyer Group members” after March 16, 2015 refer only to those entities that were a party to the Third Consortium Agreement as of the relevant time. The Third Consortium Agreement also obligated the parties thereto to vote for such transaction and against any competing proposal, and restricted transfers of shares, warrants and options of the Company and any other securities that were convertible into or exercisable for Shares or other equity securities of the Company, including Shares and ADSs.

 

On March 19, 2015, representatives of Sullivan & Cromwell and WSGR held a conference call to discuss the status and timing of the Proposed Transaction, on which call WSGR conveyed to Sullivan & Cromwell that the Buyer Group proposed a purchase price of US$3.45 per Share and US$6.90 per ADS, but otherwise wished to preserve the terms previously negotiated with the Special Committee during the course of 2014. Representatives of WSGR indicated that the members of the Buyer Group had carefully considered the purchase price that they would be prepared to pay in the Proposed Transaction. However, since such purchase price was lower than the US$3.55 per Class A ordinary share and US$7.10 per ADS that the Buyer Group had previously expressed a willingness to entertain in September 2014, the Special Committee determined that such lowered purchase price was not acceptable and considered requiring that the Merger Agreement and Plan of Merger be subject to approval by the Unaffiliated Holders (in addition to the approval by all shareholders at the extraordinary general meeting of the Company).

 

On March 23, 2015, the Special Committee and representatives of Sullivan & Cromwell, Merrill Lynch and Haiwen met via conference call to discuss the offer from the Buyer Group. The Special Committee determined that it would postpone its response to the Buyer Group until it had the opportunity to review the Company’s estimated balance sheet, income statement and statement of cash flows for the fiscal year ended December 31, 2014. On March 24, 2015, the Company made this financial information available to the Special Committee, which Merrill Lynch subsequently discussed with the Special Committee.

 

Between March 25 and April 2, 2015, Sullivan & Cromwell and WSGR continued to negotiate the Merger Agreement and the other Transaction Documents and to exchange drafts thereof. During this period, negotiations with respect to the Transaction Documents included discussions of, and the drafts exchanged between the parties reflected changes to, the merger consideration, the shareholder vote required to authorize and approve the Merger Agreement and Plan of Merger, the scope of equity financing relating to the Proposed Transaction, the amount of the termination fees, and certain considerations with respect to the Anti-monopoly Law of the PRC.

 

On March 27, 2015, the Company made available to the Special Committee certain financial projections, which Merrill Lynch subsequently discussed with the Special Committee.

 

On March 31, 2015, the Special Committee and representatives of Sullivan & Cromwell, Merrill Lynch and Haiwen met via conference call to discuss the Special Committee’s response to the current proposal from the Buyer Group and Merrill Lynch’s opinion regarding the fairness of the consideration to be paid to the Unaffiliated Holders in the transaction in light of the additional financial information received from the Company. Merrill Lynch noted that, compared to financial projections previously made available by the Company, the estimated revenue and net income of the Company for 2014 and the financial projections for subsequent years were lower, and therefore, it would be unlikely for the revised financial projections to materially affect Merrill Lynch’s analysis of the fairness of the proposed merger consideration presented on September 23, 2014 from a financial point of view. During the discussion, the Special Committee also noted that the price of US$5.13 per share paid by Yili Shengda and Zhongrong Shengda for the Class B ordinary shares in the Shanda SDG Sale exceeded the proposed merger consideration of US$7.10 per ADS and discussed with Merrill Lynch whether the price per share paid in the Shanda SDG Sale reflected a control premium and, if so, whether it would affect the valuation of the Company or the fairness of the consideration to be paid by the Buyer Group to the Unaffiliated Holders in the Proposed Transaction. After discussing with Merrill Lynch, the Special Committee acknowledged that the Class B ordinary shares underlying the Shanda SDG Sale represented the voting rights of the Company that would enable the two buyers to collectively control the Company and individually block any potential competing transaction to the Merger, and therefore the price of US$5.13 per share is not comparable to the merger consideration for Class A ordinary shares. After discussion among the Special Committee, Sullivan & Cromwell and Merrill Lynch of the history of the negotiations, the Special Committee instructed Sullivan & Cromwell and Merrill Lynch to propose that the merger consideration should be increased to US$3.55 per Class A ordinary share and US$7.10 per ADS. Subsequently on March 31, 2015, representatives of Sullivan & Cromwell and Merrill Lynch communicated to representatives of WSGR and Mr. Zhang the Special Committee’s position that the merger consideration should be increased to US$3.55 per Class A ordinary share and US$7.10 per ADS in view of the negotiations that had occurred in September 2014 and the purchase price paid to Shanda SDG in the Shanda SDG Sale for Class B ordinary shares, and that approval of the Merger Agreement and Plan of Merger would need to be subject to a separate approval by the Unaffiliated Holders if the merger consideration were any lower.

 

30 

 

 

On April 1, 2015, representatives of Sullivan & Cromwell, Merrill Lynch and WSGR held a conference call, on which WSGR conveyed that the Buyer Group, considering the protracted nature of negotiations to that point, desired to maintain the then-current momentum of discussions between the parties and reach a definitive agreement with respect to the Proposed Transaction, and therefore, had revised its proposal to reflect a merger consideration of US$3.50 per Share and US$7.00 per ADS, on the conditions that the Merger Agreement be signed by April 3, 2015 and that approval of the Merger Agreement and Plan of Merger not be subject to a separate approval by the Unaffiliated Holders. On the conference call, representatives of WSGR indicated that the members of the Buyer Group had deliberated extensively on the purchase price that they would be prepared to pay in the Proposed Transaction, and that the proposal of US$3.50 per Share and US$7.00 per ADS was the highest price that the Buyer Group would agree to pay.

 

On April 2, 2015, the Special Committee and representatives of Sullivan & Cromwell, Merrill Lynch and Haiwen met via conference call to discuss the proposal from the Buyer Group. The Special Committee considered the revised proposal, and concluded that it was not prepared to recommend the Proposed Transaction without a separate approval by the Unaffiliated Holders, unless the merger consideration was increased to US$3.55 per Class A ordinary share and US$7.10 per ADS. After the conference call, representatives of Sullivan & Cromwell and Merrill Lynch communicated the Special Committee’s position to representatives of WSGR.

 

On April 3, 2015, representatives of WSGR informed representatives of Sullivan & Cromwell and Merrill Lynch that the Buyer Group was prepared to agree to pay US$3.55 per Class A ordinary share and US$7.10 per ADS, provided that the Merger Agreement and Plan of Merger would not be subject to a separate approval by the Unaffiliated Holders.

 

On April 3, 2015, the Special Committee and representatives of Sullivan & Cromwell, Merrill Lynch and Haiwen met via conference call. Following an update from Sullivan & Cromwell on the status of negotiations with the Buyer Group, Sullivan & Cromwell summarized for the Special Committee the key terms and proposed resolution of all open items on the Merger Agreement and the other Transaction Documents and reviewed the fiduciary duty considerations for members of the Special Committee. Merrill Lynch then presented the Special Committee with its financial analyses of the transaction and, following such presentation, orally rendered its opinion, which was subsequently confirmed by it in writing and is attached hereto as Annex C, to the Special Committee to the effect that the consideration to be paid to holders of the Class A ordinary shares and ADSs (other than (a) the holders of the Rollover Shares and (b) Parent, the Company or any of their subsidiaries) in the Merger, as of April 3, 2015, based upon, and subject to, the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Merrill Lynch in preparing its opinion, was fair, from a financial point of view, to such holders. Haiwen then indicated that the consummation of the Transactions should not be subject to any requirement to obtain any regulatory approval under the Anti-monopoly Law of the PRC.

 

After considering the proposed terms of the Merger Agreement and the other Transaction Documents, which were amended as a result of the negotiations as described above, and the various presentations of Sullivan & Cromwell, Merrill Lynch, Walkers and Haiwen over the course of the transaction to date, including the receipt of Merrill Lynch’s opinion, and taking into account the other factors described below under the heading titled “—Reasons for the Merger and Recommendation of the Special Committee and the Board,” the Special Committee unanimously determined that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, were fair to, and in the best interests of, the Company and the Unaffiliated Holders, and recommended that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

Following the meeting of the Special Committee, the Board met via conference call on April 3, 2015, with representatives of Merrill Lynch, Davis Polk and Sullivan & Cromwell. The Board, acting upon the unanimous recommendation of the Special Committee, unanimously (a) determined that it was fair to, advisable and in the best interests of the Company and the Unaffiliated Holders to consummate the Transactions, including the Merger; (b) authorized and approved the execution, delivery and performance by the Company of the Merger Agreement, the Plan of Merger and the Limited Guarantees and the consummation of the Transactions, including the Merger; and (c) resolved to recommend in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, to the shareholders of the Company and directed that the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, be submitted to a vote of the shareholders of the Company for authorization and approval.

 

31 

 

 

Later in the evening on April 3, 2015, the Company, Parent and Merger Sub executed the Merger Agreement and the other Transaction Documents, and the Company issued a press release announcing the execution thereof.

 

In May 2015, representatives of Messrs. Miaotong Wang, Heng Shao and Ji Wang (collectively known herein as the “Li-Funds Persons”) approached representatives of Haitong Securities and Orient Securities to discuss the possibility for certain affiliates of the Li-Funds Persons, namely Litian, Lihua and Lihai, to purchase the 107,438,129 Class A ordinary shares beneficially owned by Haitong Securities and the 123,552,669 Class A ordinary shares beneficially owned by Orient Securities (such purchase from Haitong Securities and Orient Securities, the “Li-Funds Purchase”). 

 

The Li-Funds Persons control Century Huatong, a company organized under the laws of the PRC and listed on the Shenzhen Stock Exchange. Huatong (of which Mr. Miaotong Wang owns 90% of the equity interests) and Messrs. Heng Shao and Ji Wang are the three largest shareholders of Century Huatong, holding in aggregate approximately 54% of Century Huatong’s issued and outstanding shares.

 

Historically, Century Huatong had been primarily engaged in manufacturing automotive parts. In light of the potentially higher profit margins to be achieved in the technology, media and telecommunications (“TMT”) sectors, as well as higher price-to-earnings ratio of TMT companies trading in the PRC equity markets as compared to traditional industrial companies, Century Huatong began evaluating strategic options for diversifying its business in 2013. In 2014, Century Huatong entered the web and mobile games business by completing the acquisitions of two PRC games companies (the “Century Huatong Games Companies”).

 

Beginning in March 2014, the Century Huatong Games Companies entered into licensing and cooperation arrangements with the Company. Under these arrangements, the Company licensed certain intellectual property in its MMO games to the Century Huatong Games Companies, which developed web and mobile games jointly with the Company. The Century Huatong Games Companies then marketed and operated such newly developed web games and mobile games, and shared with the Company a percentage of the revenue generated from players of these games. These arrangements allowed the Century Huatong Games Companies to take advantage of the market-proven story lines, characters and gaming concepts as well as the firmly-established fan base in the Company’s PC-based MMO games, and to leverage them onto web and mobile platforms.

 

As a result of Century Huatong’s acquisition of Century Huatong Games Companies, the games segment became a significant driver of Century Huatong’s overall business, contributing approximately 57% of Century Huatong’s net earnings for 2014. This achievement encouraged the Li-Funds Persons to further explore opportunities to grow Century Huatong’s games business.

 

The Li-Funds Persons believed that cooperation with the Company presented an attractive and reliable foundation for further developing Century Huatong’s games business. Accordingly, they began considering ways to strengthen and safeguard that foundation within the context of Century Huatong’s strategic transformation from a traditional industrial company to a company engaged in not only its historical core of automotive parts manufacturing, but also in the higher-growth and higher-margin sector of web and mobile games. The Li-Funds Persons analyzed relevant market trends and possible steps to implement a strategy for building Century Huatong’s games business that involved further collaboration with the Company. In particular, in April 2015, the Li-Funds Persons reached a consensus around the points below:

 

· The web and mobile games market had the potential for rapid growth in the PRC and offered significant opportunities for Century Huatong as it further transitioned away from its traditional industrial roots, especially if Century Huatong could capitalize on the popularity of the intellectual property that the Company had developed in MMO games.

 

· The PRC games sector was entering a new phase, as technologies and user preferences shifted from PC platforms to web and mobile platforms. As a result, the dynamics in the sector were remarkably fluid, and commercial relationships among game developers, license holders and other participants in the sector faced a period of change and uncertainty.

 

 

· In light of Century Huatong’s own strategic transformation as well as the potentially disruptive shifts in the PRC games sector, a commitment to building Century Huatong’s relationship with the Company, as could be demonstrated through acquiring a significant equity stake in the Company, would be critical for realizing opportunities in the sector, for the following reasons:

 

 

o There was no guarantee that the Company would seek to continue and expand its cooperation and licensing arrangements with Century Huatong in the long term, particularly since not only Century Huatong’s competitors, but also the Company itself, were developing capabilities in web and mobile games in response to rapidly evolving user preferences away from PC-based MMO games to web- and mobile-based games in the PRC market; and

 

32 

 

 

o Holding a significant equity stake in the Company could provide a basis for influencing the direction of the Company in order to sustain and strengthen the collaboration between the Company and Century Huatong and to minimize the likelihood of developments at the Company that would be detrimental to Century Huatong and the Li-Funds Persons.

 

In considering acquiring a significant equity stake in the Company, the Li-Funds Persons sought a transaction that could be completed expeditiously and, importantly, without damaging Century Huatong’s relationship with the Company. Any transaction that could cause the Company’s management or controlling shareholders, namely Mr. Zhang and Ningxia, to view Century Huatong as anything other than a reliable, long-term business partner would have been highly counterproductive. Accordingly, the Li-Funds Persons avoided pursuing any transaction that could have been viewed as a Competing Transaction. From this perspective, the only sizable blocks of Shares that were potentially available for purchase were the Shares owned by Haitong Securities and Orient Securities. The Li-Funds Persons had prior dealings with Haitong Securities and Orient Securities, as Haitong Securities had advised Century Huatong on mergers and acquisitions and Orient Securities had served as the lead underwriter for Century Huatong’s initial public offering and the sponsor for Century Huatong’s listing on the Shenzhen Stock Exchange in July 2011. Haitong Securities and Orient Securities, as financial investors in the Company, were amenable to selling their Shares if a sufficiently attractive offer was made substantially earlier than any exit after the Merger, such as with the possibility of a relisting on a PRC stock exchange (whose timing would be uncertain, if it occurred at all).

 

In early May 2015, Mr. Ji Wang, on behalf of the Li-Funds Persons, held an initial in-person meeting with representatives of Haitong Securities and separately had an initial conference call with representatives of Orient Securities. Haitong Securities proposed a purchase price equivalent to approximately US$4.80 per Class A ordinary share for its block of 107,438,129 Class A ordinary shares, and Orient Securities proposed a purchase price equivalent to approximately US$5.00 per Class A ordinary share for its block of 123,552,669 Class A ordinary shares. The Li-Funds Persons rejected these proposals as being grossly over-priced.

 

From early May 2015 to mid-June 2015, the Li-Funds Persons engaged in extensive negotiations with Haitong Securities and Orient Securities with respect to the purchase price, culminating in an agreement in principle on a purchase price equivalent to approximately US$4.44 per Class A ordinary share. The Li-Funds Persons agreed to this purchase price while taking into account a variety of factors that they had considered during six weeks of negotiations, including the risk that any failure or delay in reaching an agreement with Haitong Securities and Orient Securities could result in a competitor of Century Huatong acquiring a substantial stake in the Company from either Haitong Securities or Orient Securities, or both. The significant volatility in the PRC equities markets in June 2015 further motivated the Li-Funds Persons to reach an agreement quickly.

 

In mid-June 2015, when agreement with Haitong Securities and Orient Securities appeared likely, representatives of the Li-Funds Persons contacted Mr. Zhang (in his capacity as the acting chief executive officer and major beneficial owner of the Company) and representatives of Ningxia (in its capacity as major beneficial owner of the Company) to inform them of the Li-Funds Persons’ proposed purchase of Shares and to express their hope that the cooperative and productive relationship between the Company and Century Huatong would be strengthened as a result.

  

On June 25, 2015, share purchase agreements were signed in connection with the transactions known collectively as the “Li-Funds Purchase”. The details of the transactions constituting the Li-Funds Purchase are summarized below.

 

· Litian agreed to acquire 100% of the equity interest of HuaSung from Orient Zhihui Investment Center (Shanghai) L.P. (“Orient Zhihui”), which directly owned 100% of the equity interest of HuaSung, which in turn directly owns 100% of the equity interest of Orient Hongzhi, which is the sole asset of HuaSung. Orient Hongzhi directly owns 61,776,335 Class A ordinary shares of the Company, which are the sole assets of Orient Hongzhi. The aggregate purchase price paid by Litian for the transaction was RMB1,705,000,000 (approximately US$274,506,329), or approximately US$4.44 per Class A ordinary share.

 

· Lihua agreed to acquire 100% of the equity interest of TonSung from Orient Zhisheng Investment Center (Shanghai) L.P. (“Orient Zhisheng”), which directly owned 100% of the equity interest of TonSung, which in turn directly owns 100% of the equity interest of Orient Hongtai, which is the sole asset of TonSung. Orient Hongtai directly owns 61,776,334 Class A ordinary shares of the Company, which are the sole assets of Orient Hongtai. The aggregate purchase price paid by Lihua for the transaction was RMB1,705,000,000 (approximately US$274,506,329), or approximately US$4.44 per Class A ordinary share.

 

· Lihai agreed to acquire 100% of the equity interest of Hai Sheng Tong from Haitong and Xizang Runda Resource Ltd., a PRC company (“Xizang Runda”), both of which collectively and directly owned 100% of the equity interest of Hai Sheng Tong, which in turn directly owns 100% of the equity interest of Hao Ding, which is the sole asset of Hai Sheng Tong. Hao Ding directly owns 107,438,129 Class A ordinary shares of the Company, which are the sole assets of Hao Ding. The aggregate purchase price paid by Lihai for the transaction was RMB2,964,000,000 (approximately US$477,206,312), or approximately US$4.44 per Class A ordinary share.

 

33 

 

 

The Li-Funds Purchase was completed on June 30, 2015, as a result of which the Li-Funds Persons became the controlling persons of Orient Hongzhi, Orient Hongtai and Hao Ding, which collectively hold 230,990,798 Class A ordinary shares of the Company. According to the Support Agreement, (i) each of Orient Hongzhi, Orient Hongtai and Hao Ding, as a Rollover Shareholder, must appear at any shareholders’ meeting of the Company or otherwise cause the Shares held by such Rollover Shareholder to be counted as present for the purposes of establishing a quorum and vote or cause to be voted such Shares (a) in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger and (b) against any Competing Transaction; and (ii) the Rollover Shares (including Rollover Shares represented by ADSs) will, at the Effective Time, be cancelled for no consideration in the Merger. None of the obligations of Orient Hongzhi, Orient Hongtai or Hao Ding under the Support Agreement are changed as a consequence of the Li-Funds Purchase. Accordingly, in considering the implications of the Li-Funds Purchase under the terms of the Merger Agreement, the Buyer Group has concluded as follows: (i) the Rollover Shareholders’ obligations under the Support Agreement have not changed, (ii) Parent’s obligations under the Merger Agreement to vote, and cause the Rollover Shareholders and their respective affiliates to vote, all Rollover Shares in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions have not changed, and (iii) the Buyer Group does not regard the Li-Funds Purchase to constitute an Intervening Event that requires a Change in the Company Recommendation. (See "The Merger Agreement—No Change of Recommendation").

 

The Buyer Group’s position that the US$3.55 Per Share Merger Consideration is fair to the Unaffiliated Holders is unchanged by the Li-Funds Purchase. Specifically, the Buyer Group considered, among others, the factors discussed below:

 

· The purchase price paid in connection with the Li-Funds Purchase is not a meaningful benchmark for evaluating whether the merger consideration is fair to the Unaffiliated Holders.

 

o

The purchase price paid in connection with the Li-Funds Purchase reflects the fundamentally unique strategic value placed by the Li-Funds Persons on acquiring a significant equity stake in the Company within the particular circumstances, as discussed above, including (i) Century Huatong’s ongoing business transformation from a traditional industrial company to a company with a significant games business, (ii) trends in the PRC games sector and the PRC equities market, as they impacted Century Huatong and the Li-Funds Persons, (iii) the importance, in Century Huatong’s perspective, of developing a strong, sustainable relationship with the Company as a way of mitigating risks in a highly dynamic market environment, (iv) the significance of equity ownership in the Company in laying a foundation for that relationship, and (v) the lack of availability of any sizable block of Shares other than those held by Haitong Securities and Orient Securities, which conferred upon Haitong Securities and Orient Securities substantial bargaining leverage – a set of circumstances that is unlikely to materialize in a comparable manner for any other person considering an investment in the Company.

 

o In fact, after the completion of the Li-Funds Purchase, Century Huatong and the Company entered into another cooperation and license agreement on July 5, 2015, which was deemed by the Li-Funds Persons to be, in part, a realization of that strategic value, signaling strengthened cooperation between the Company and Century Huatong.

 

· There have been no material changes to the circumstances underlying the fairness analysis of the Buyer Group discussed in the section entitled “Special Factors—Position of the Buyer Group as to the Fairness of the Merger” beginning on page [ ]. In particular:

 

o

the US$3.55 Per Share Merger Consideration was determined by the parties at that time based on both the actual results of operations and financial condition as well as on the Company’s business plan;

 

o the Buyer Group’s understanding from management is that the business, the financial conditions and the prospects of the Company have not improved in any material respect since April 3, 2015, when the Merger Agreement was signed; and

 

o the Buyer Group’s understanding from management is that the Li-Funds Purchase has not affected in any material respect the business, financial conditions or prospects of the Company.

 

On June 29, 2015, representatives of Sullivan & Cromwell and WSGR held a conference call during which WSGR informed Sullivan & Cromwell that Haitong Securities and Orient Securities had transferred or were in the process of transferring their respective interests in the Company to a third party. WSGR indicated that it would provide Sullivan & Cromwell with a further update on the following day. On June 30, 2015, representatives of Sullivan & Cromwell and WSGR held another conference call on which WSGR briefed Sullivan & Cromwell on the structure of the transfer and that the consideration for the transfer was approximately US$4.44 per Class A ordinary share. Sullivan & Cromwell indicated on the conference call that the Special Committee would need additional information on the transfer, including the parties involved, the timing of the transaction and the reason for the premium paid in connection with the transfer compared to the merger consideration. Sullivan & Cromwell then updated the members of the Special Committee and Merrill Lynch on this new development via e-mails.

  

34 

 

 

On June 30, 2015, Century Huatong, which is controlled by the Li-Funds Persons, announced that it may acquire all of the equity interests and assets of TonSung, HuaSung, Hai Sheng Tong from Litian, Lihua and Lihai at their overall cost within one year after the closing of the Merger; however, no agreement has been entered into with respect to this potential transaction. 

 

Between July 2, 2015 and July 3, 2015, each of Liyou, Orient Finance and Haitong made Schedule 13D filings with respect to the Company’s securities stating that the Li-Funds Purchase had occurred. On July 6, 2015, the Company issued a press release regarding the Li-Funds Purchase as reported in the Schedule 13D filings made on July 2, 2015 and July 3, 2015.

 

On July 2, 2015, the Special Committee met via conference call. Sullivan & Cromwell and Merrill Lynch discussed the Li-Funds Purchase and provided an update on the overall status of the Transactions. The members of the Special Committee noted the premium paid in the Li-Funds Purchase compared to the merger consideration. Representatives of Sullivan & Cromwell briefed the Special Committee on the terms of the Merger Agreement and other Transaction Documents that might be relevant to this development. Representatives of Merrill Lynch provided an update on general market conditions since the signing of the Merger Agreement. The Special Committee decided to request further information about the Li-Funds Purchase, including the reason for the premium paid in the Li-Funds Purchase compared to the merger consideration, in order to obtain sufficient information to evaluate the impact of the Li-Funds Purchase on the closing of the Merger, if any, and to urge WSGR to provide such information as soon as possible in order for the Special Committee to consider the fairness of the merger consideration.

 

On July 4, 2015, representatives of Sullivan & Cromwell and WSGR held a conference call. Sullivan & Cromwell requested that the Buyer Group provide further information with respect to why the Li-Funds Persons were willing to enter into the Li-Funds Purchase at a consideration of approximately US$4.44 per Class A ordinary share and also requested that the Buyer Group consider increasing the merger consideration.

 

On July 6, 2015, WSGR provided Sullivan & Cromwell with background information from the Buyer Group with respect to why the Li-Funds Persons were willing to enter into the Li-Funds Purchase at a consideration of approximately US$4.44 per Class A ordinary share. On the same day, representatives of Sullivan & Cromwell and Davis Polk held a conference call to further discuss the possible implications of the Li-Funds Purchase. Also on the same day, representatives of Sullivan & Cromwell, Davis Polk, WSGR and Skadden held a conference call to discuss the status of the Transactions. On that call, representatives of WSGR and Skadden expressed the Buyer Group’s view that the merger consideration continues to be fair, and that the premium paid in the Li-Funds Purchase compared to the merger consideration reflects, among other things, the strategic value which the Li-Funds Persons believe Century Huatong would achieve through the Transactions, which is a value that is specific to the Li-Funds Persons and not to the Unaffiliated Shareholders. Sullivan & Cromwell expressed the view that the information disclosed by related parties in their Schedule 13D filings and provided by the Buyer Group did not contain sufficiently specific information for the Special Committee’s evaluation and consideration, and requested that the Buyer Group consider increasing the merger consideration. Sullivan & Cromwell provided further comments on the information regarding the Li-Funds Purchase provided by the Buyer Group after the conference call on the same day.

 

On July 7, 2015, WSGR provided Sullivan & Cromwell with further information from the Buyer Group on the Li-Funds Purchase in response to Sullivan & Cromwell’s comments of July 6, 2015. Also on July 7, 2015, representatives of Sullivan & Cromwell and Merrill Lynch held a conference call to discuss Merrill Lynch’s views on the price paid in connection with the Li-Funds Purchase compared to the merger consideration. Merrill Lynch noted that it was still reviewing the facts and circumstances surrounding the Li-Funds Purchase and had not reached a view with respect to the Li-Funds Purchase. Merrill Lynch also noted that it would need further information from the Buyer Group in order to consider this question. On the same day, representatives of Sullivan & Cromwell, WSGR, Skadden and Davis Polk also held a conference call. WSGR noted that the Buyer Group would not agree to an increase in the merger consideration. Sullivan & Cromwell noted that the Special Committee would require time to conduct due diligence on the Li-Funds Purchase and to consider whether the premium paid in the Li-Funds Purchase compared to the merger consideration would affect the fairness of the Merger. Sullivan & Cromwell, WSGR, Skadden and Davis Polk also discussed the inclusion of disclosure reflecting the status of the Special Committee’s deliberations in an amendment to the Schedule 13E-3 regarding the Transactions and various considerations related to the obligations of the various parties under the Merger Agreement and other Transaction Documents.

 

On July 7, 2015 and July 8, 2015, the Special Committee met via conference call with representatives of Sullivan & Cromwell. The Special Committee and Sullivan & Cromwell discussed advice received from Walkers regarding the fiduciary duties of the members of the Special Committee under Cayman Islands law, the foregoing discussions among counsel for the parties to the Merger regarding merger consideration and matters related to the filing of an amendment to the Schedule 13E-3. The Special Committee determined to request that the Buyer Group further clarify the information regarding, and the reasons for, the premium paid in the Li-Funds Purchase compared to the merger consideration, and to instruct Merrill Lynch to assist in the due diligence of such information and reasons.

 

On July 9, 2015, Sullivan & Cromwell provided WSGR with a detailed set of due diligence questions with respect to the Li-Funds Purchase. These questions inquired about: (a) the background and timing of the negotiations that led to the Li-Funds Purchase; (b) the views of the Li-Funds Persons with respect to the web games and mobile games industry in China and how such views relate to their valuation of the Company; and (c) the reasons for which the Li-Funds Persons pursued an investment in the equity interests of the Company, including (i) why the Li-Funds Persons pursued the acquisition at the time they did, (ii) why the Li-Funds Persons pursued an investment in the Company specifically, (iii) why the Li-Funds Persons carried out their investment in the Company through purchases from Orient Securities and Haitong Securities and (iv) the factors considered by the Li-Funds Persons in reaching a decision to pay a significant premium, as reflected in the consideration of approximately US$4.44 per Class A ordinary share.

 

35 

 

 

On July 10, 2015, representatives of Sullivan & Cromwell, Davis Polk and WSGR held a conference call to discuss the status of the due diligence with respect to the Li-Funds Purchase and the filing of an amendment to the Schedule 13E-3. Also on July 10, 2015, representatives of Sullivan & Cromwell, Merrill Lynch and WSGR and Mr. Ji Wang, who is one of the Li-Funds Persons and is also the general manager of Shanghai T2 Entertainment Company Limited, one of the Century Huatong Games Companies, held a conference call, during which Mr. Ji Wang provided background information with respect to the Li-Funds Purchase as well as the business cooperation between Century Huatong and the Company.

 

On July 13, 2015, representatives of Sullivan & Cromwell, Merrill Lynch, Davis Polk, WSGR and DaCheng Law Offices (“DaCheng”), counsel to Orient Hongzhi, Orient Hongtai and Hao Ding, and Mr. Ji Wang held a conference call, during which Mr. Ji Wang provided additional information with respect to the Li-Funds Purchase, including the reasons for which the Li-Funds Persons were willing to pay a consideration of approximately US$4.44 per Class A ordinary share, as well as the history and status of the business relationship between Century Huatong and the Company. In particular, Mr. Ji Wang noted that, in light of the existing business relationship between Century Huatong and the Company and the importance of this relationship to Century Huatong, the Li-Funds Persons were willing to acquire beneficial ownership of the Company’s equity interests at a consideration of approximately US$4.44 per Class A ordinary share in order to sustain and strengthen the cooperative relationship between Century Huatong and the Company and with the hope of exercising greater influence over the management of the Company in the future as a significant shareholder. Mr. Ji Wang also noted that, while the Li-Funds Persons were considering the acquisition of a significant equity stake in the Company, they sought a transaction with a high degree of certainty that could be completed quickly, and therefore were not interested in making a proposal for a Competing Transaction, which would have involved a high degree of uncertainty and required a lengthy process to completion.

 

On July 21, 2015, the Special Committee and representatives of Sullivan & Cromwell, Merrill Lynch and Walkers met via conference call. During the meeting, Sullivan & Cromwell summarized the information that it had received from the Buyer Group and its counsel, including information with respect to the Li-Funds Purchase and the discussions that Sullivan & Cromwell had conducted with the Buyer Group with respect to a potential increase in the merger consideration. Walkers summarized the Special Committee’s fiduciary duties and the requirements and procedure for exercising dissenters’ rights under Cayman Islands law. Merrill Lynch summarized the results of due diligence with respect to the Li-Funds Purchase, including a description of the primary business operations of Century Huatong, as well as the market reaction to the Li-Funds Purchase, including changes in the stock price of the Company since the Li-Funds Purchase and the feedback that Merrill Lynch had received from certain of the Unaffiliated Holders with respect to the Li-Funds Purchase. Following discussions of these topics among the Special Committee, Sullivan & Cromwell, Merrill Lynch and Walkers, the Special Committee instructed Merrill Lynch to confirm with the Buyer Group whether the Buyer Group was prepared to consider an increase of the merger consideration from US$7.10 per ADS and instructed Sullivan & Cromwell to continue the diligence effort, including following up on any outstanding questions. Later on the same day, following a call with Mr. Yingfeng Zhang, Merrill Lynch informed the Special Committee, Sullivan & Cromwell and Walkers that the Buyer Group, as conveyed by Mr. Yingfeng Zhang, was not prepared to increase the merger consideration.

 

On August 6, 2015, the Special Committee met via conference call with representatives of Merrill Lynch, Sullivan & Cromwell and Walkers. During this meeting, the Special Committee considered the information that it had received regarding the Li-Funds Purchase and whether such information was sufficient to evaluate the fairness of the merger consideration. The Special Committee instructed Sullivan & Cromwell and Merrill Lynch to continue to engage in diligence on the Li-Funds Purchase.

 

On August 7, 2015, representatives of Sullivan & Cromwell, Davis Polk, WSGR, Skadden and DaCheng held a conference call. During the call, Sullivan & Cromwell requested that the Buyer Group provide further information related to the Li-Funds Purchase. Later that day, Sullivan & Cromwell forwarded to DaCheng a number of due diligence questions regarding the Li-Funds Purchase, including with respect to how the Li-Funds Persons initiated discussions with Haitong Securities and Orient Securities regarding the Li-Funds Purchase, and how the Li-Funds Purchase (including the price paid) was negotiated.

 

On August 12, 2015, the Special Committee met via conference call with representatives of Sullivan & Cromwell. During this conference call, the Special Committee decided to meet with Mr. Zhang, in his capacity as acting chief executive officer of the Company and chairman of the Board, to brief him on the status of the Transactions and diligence related to the Li-Funds Purchase.

  

On August 15, 2015, Messrs. Chan and Gui met with Mr. Zhang in Shanghai and briefed him on the status of the Transactions and the Special Committee’s diligence related to the Li-Funds Purchase.

 

On August 17, 2015, a conference call was held among Messrs. Chan, Gui and Zhang, the other members of the Board and representatives of the Buyer Group, WSGR, Skadden, DaCheng, Davis Polk, Merrill Lynch and Sullivan & Cromwell to address outstanding questions regarding the Li-Funds Purchase. During this call, Mr. Ji Wang explained the commercial rationale for the Li-Funds Purchase, which was to strengthen and protect Century Huatong’s games business in light of Century Huatong’s strategic transformation from a traditional industrial company to a company engaged in both automotive parts manufacturing and web and mobile games development. 

 

36 

 

 

On August 25, 2015, the Special Committee met via conference call with representatives of Haiwen, Merrill Lynch, Sullivan & Cromwell and Walkers. Sullivan & Cromwell provided the Special Committee with an update on the overall status of the Merger and other transactions contemplated by the Merger Agreement. Following this briefing, Walkers advised the Special Committee on the fiduciary duty considerations for members of the Special Committee under Cayman Islands law. 

 

Following these discussions and taking into consideration the factors described below under the heading titled “—Reasons for the Merger and Recommendation of the Special Committee and the Board”, the Special Committee (a) determined that the Transactions, including the Merger, are fair to, and in the best interests of, the Company and the shareholders and ADS holders of the Company who are unaffiliated with the Company and whose securities are to be purchased pursuant to the terms of the Merger Agreement, (b) affirmed its April 3, 2015 resolutions (i) determining that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are fair to, and in the best interests of, the Company and the Unaffiliated Holders; (ii) determining that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are advisable; and (iii) recommending that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, (c) authorized each member of the Special Committee to take, or cause to be taken, any actions to give effect to the resolutions described in (a) or (b) above and (d) ratified all previous actions taken by the Special Committee in connection with the matters described in the resolutions set forth in (a) or (b) above.

 

Following the meeting of the Special Committee, the Board met via video conference on August 26, 2015, with representatives of Davis Polk, Sullivan & Cromwell and Conyers. Sullivan & Cromwell, on behalf of the Special Committee, briefed the Board on the work undertaken by the Special Committee and its advisors to date in connection with the Merger, including its consideration of the Li-Funds Purchase, and reported to the Board the resolutions adopted by the Special Committee on August 25, 2015. Representatives of Davis Polk provided the Board with an update of the overall status of the Merger since the execution of the Merger Agreement on April 3, 2015. Representatives of Conyers advised the Board members of their fiduciary duties under Cayman Islands law. Members of the Board then discussed the fairness of the Merger in light of the Li-Funds purchase. Following this discussion, the Board, acting upon the unanimous affirmation of the Special Committee, unanimously (a) determined that the Merger and other transactions contemplated by the Merger Agreement are fair to, and in the best interests of, the Company and the Unaffiliated Holders and (b) affirmed its April 3, 2015 resolutions (i) determining it was fair to, advisable and in the best interests of the Company and the Unaffiliated Holders to consummate the Merger; (ii) authorizing and approving the execution, delivery and performance by the Company of the Merger Agreement; and (iii) resolving to recommend in favor of the authorization and approval of the Merger Agreement, and the consummation of the Merger, to the shareholders of the Company for authorization and approval. 

 

Reasons for the Merger and Recommendation of the Special Committee and the Board

 

The Board, acting upon the unanimous recommendation of the Special Committee made on April 3, 2015 and affirmed on August 25, 2015, which Special Committee acted with the advice and assistance of the Company’s management and its independent financial and outside legal advisors, evaluated the Merger Agreement, the Plan of Merger and the Transactions.

 

In general, the Board believes that, as a privately held entity, the Company’s management may have greater flexibility to focus on improving the Company’s long-term financial performance without the pressures created by the public equity market’s emphasis on short-term period-to-period financial performance.

 

37 

 

 

In addition, as an SEC-reporting company, the Company’s management and accounting staff, which comprises a relatively small number of individuals, must devote significant time to SEC reporting and compliance. The Company is also required to disclose a considerable amount of business information to the public, some of which is commercially sensitive and would not be disclosed by a non-reporting company. As a result, the Company’s actual or potential competitors, customers, lenders, intellectual property licensors and other vendors all have ready access to this information, which may help them compete against the Company or make it more difficult for the Company to negotiate favorable terms with them, as the case may be.

 

The Special Committee met regularly with its advisors between January 2014 and April 2015 to consider and review, among other things, any possible strategic alternatives to the Proposed Transaction and the terms of the Proposed Transaction, and to review, consider, discuss with its advisors regarding and give its advisors instructions on the status and tactics of negotiations with the Buyer Group on the proposed merger consideration and other terms of the Proposed Transaction. These efforts are described in greater detail under the section entitled “—Background of the Merger.” At a meeting on April 3, 2015, the Special Committee reviewed and considered the terms and conditions of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. The Special Committee, after due consideration, unanimously (a) determined that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, were fair to, and in the best interests of, the Company and the Unaffiliated Holders; (b) declared advisable the Merger Agreement, the Plan of Merger and the Transactions, including the Merger; and (c) recommended that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

At a meeting on April 3, 2015, the Board, acting upon the unanimous recommendation of the Special Committee, unanimously (a) determined that it was fair to, advisable and in the best interests of the Company and the Unaffiliated Holders to consummate the Transactions, including the Merger; (b) authorized and approved the execution, delivery and performance by the Company of the Merger Agreement, the Plan of Merger and the Limited Guarantees and the consummation of the Transactions, including the Merger; and (c) resolved to recommend in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, to the shareholders of the Company and directed that the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, be submitted to a vote of the shareholders of the Company for authorization and approval.

 

In the course of reaching their determinations on April 3, 2015, each of the Special Committee and the Board considered the following substantive factors and potential benefits of the Merger, which are not listed in any relative order of importance, each of which the Special Committee and the Board believed supported their decisions:

 

  · the Special Committee and the Board had knowledge of the Company’s business, financial condition, results of operations, prospects and competitive position and believed that the Merger would be financially more favorable to the Unaffiliated Holders than any alternative reasonably available to the Company and the Unaffiliated Holders;

 

38 

 

 

 

·the consideration of US$7.10 per ADS offered to the Unaffiliated Holders in the Merger represents a premium of approximately 25.7% over the Company’s closing price as quoted by NASDAQ on January 24, 2014, the last trading day immediately prior to the Company’s announcement on January 27, 2014 that it had received the Proposal, and a premium of approximately 46.5% and 53.8%, respectively, over the Company’s 30- and 60-trading day volume-weighted average price as quoted by NASDAQ prior to, and including, January 24, 2014;

 

·it could take a considerable period of time, if ever, before the trading price of the ADSs would reach and sustain a level equal to or greater than the merger consideration of US$7.10 per ADS, as adjusted for present value;

 

·the Special Committee determined that, following extensive negotiations with the Buyer Group, US$3.55 per Share and US$7.10 per ADS were the highest price per Share and per ADS that the Buyer Group would agree to pay, with the Special Committee basing its belief on a number of factors, including the duration and tenor of negotiations and the experience of the Special Committee and its advisors;

 

·the all-cash merger consideration allows the Unaffiliated Holders to immediately realize liquidity for their investment and provides them with a specific amount of cash consideration for, and corresponding certainty of the value of, their Shares and/or ADSs;

 

·following its formation, the Special Committee had independent control of the sale process with the advice and assistance of Merrill Lynch as its independent financial advisor and Sullivan & Cromwell, Walkers and Haiwen as its independent legal advisors, which, in each case, reported solely to the Special Committee;

 

·the Special Committee reviewed and discussed with Merrill Lynch its financial analysis, and Merrill Lynch rendered an opinion to the Special Committee on April 3, 2015 that the consideration to be paid to holders of the Class A ordinary shares and ADSs (other than (a) the Excluded Shares and (b) ADSs representing Excluded Shares) in the Merger, as of April 3, 2015, based upon, and subject to, the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Merrill Lynch in preparing its opinion, was fair, from a financial point of view (see “—Opinion of Merrill Lynch, the Special Committee’s Financial Advisor” beginning on page [ ] for additional information);

 

·the forecasts of the Company’s future financial performance prepared by the Company’s management, together with the Company’s management’s view of the Company’s financial condition, results of operations, business, prospects and competitive position, were made available to the Special Committee;

 

·the Company’s revenues are highly concentrated in a small number of mobile games and MMO games (which include massively multi-player online role-playing games (“MMORPGs”) and advanced casual games), and there can be no certainty that MMO games and/or MMORPGs will remain popular or that the Company will be able to introduce new games that are comparably successful due to the risks faced by the Company, including, in particular, that:

 

the Company is currently dependent on three MMORPGs for approximately 53.3% of its net revenues, the popularity of which is unpredictable and may not remain for the duration anticipated by the Company;

 

39 

 

 

the Company may not be able to develop commercially successful games or expansion packs for existing games according to its timetable or at all;

 

the Company may not be able to continue to create successful mobile games, which have a lower operating margin than MMO games; and

 

the Company’s item-based revenue model, which allows players to play the basic features of each game for free and relies on players purchasing virtual items to generate revenues, may not be successful;

 

· members of the Buyer Group together hold approximately 90.7% of the total voting power of the outstanding ordinary shares, more than the two-thirds majority necessary to approve a special resolution of the shareholders of the Company, and have agreed not to sell their respective Shares and/or ADSs to any third party;

 

·the Special Committee considered factors of the transaction that could impact deal certainty, including:

 

the fact that Parent and Merger Sub have obtained committed equity financing necessary to complete the Merger, and Merrill Lynch has performed due diligence on the financial resources of the equity investors; and

 

the Merger Agreement contains a limited scope of conditions to closing;

 

·the Merger Agreement provides that, in the event of the failure of the Merger to be completed under certain circumstances, Parent will pay the Company a termination fee of US$114,500,000 (see “The Merger Agreement—Termination Fee and Reimbursement of Expenses” beginning on page [ ] for additional information);

 

·Merrill Lynch, under the direction of the Special Committee, conducted a “market check” of parties deemed to be potentially interested in and capable of acquiring the Company, and all such parties ultimately declined to engage in discussions with the Special Committee regarding such acquisition or any alternative transaction;

 

·since the announcement of the Proposal on January 27, 2014, no party other than the Buyer Group, as it existed from time to time, had made any proposal to the Company or the Special Committee with respect to any alternative transaction with the Company; and

 

· the Special Committee believed that it was unlikely that any transaction with a third party could be completed given that the Third Consortium Agreement (as further discussed under the section entitled “—Background of the Merger”) provides that, subject to the terms and conditions set forth therein, the Buyer Group members that are a party thereto, which beneficially own an aggregate of 311,568,626 Class A ordinary shares (including Class A ordinary shares represented by ADSs) and 97,518,374 Class B ordinary shares, representing approximately 75.6% of the Company’s issued and outstanding Shares and approximately 90.7% of the total number of votes represented by the Company’s issued and outstanding Shares, will only vote in favor of the Merger and will vote against any transaction involving a third party, in each case in their capacities as shareholders of the Company.

 

In addition, the Special Committee and the Board believed that sufficient procedural safeguards were and are present to ensure that the Merger is procedurally fair to the Unaffiliated Holders and to permit each of the Special Committee and the Board to represent effectively the interests of such Unaffiliated Holders. The procedural safeguards, which are not listed in any relative order of importance, include the following:

 

·in considering the transaction with the Buyer Group, the Special Committee acted solely to represent the interests of the Unaffiliated Holders, and the Special Committee had independent control of its legal and financial advisors;

 

·the consideration and negotiation of the Merger Agreement were conducted under the control and supervision of the Special Committee, and all of the members of the Special Committee that recommended authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, during the entire process were and are independent directors and free from any affiliation with the Buyer Group; none of the members of the Special Committee that recommended approval of the Merger Agreement, the Plan of Merger and the consummation of the Transactions is or ever was an employee of the Company or any of its subsidiaries or affiliates and none of such members has any financial interest in the Merger that is different from that of the Unaffiliated Holders other than the cash-out of Company Restricted Shares and Company RSUs held by such members, such members’ receipt of Board and Special Committee compensation (which was not and is not contingent upon the completion of the Merger, or the Special Committee’s or the Board’s recommendation of the Merger) and their indemnification and liability insurance rights under the Merger Agreement and the Company’s memorandum and articles of association; during all dealings as a member of the Special Committee prior to his resignation on September 4, 2014, Mr. Lin was also an independent director and free from any affiliation with the Buyer Group as it was composed prior to the addition of Orient Finance to the Buyer Group on September 1, 2014; and, finally, Mr. Lin resigned as a member of the Special Committee following the addition of Orient Finance to the Buyer Group on September 1, 2014 (see “—Background of the Merger” beginning on page [ ] for additional information);

 

40 

 

 

 

·the Special Committee was assisted in negotiations with the Buyer Group and in its evaluation of the Merger by Merrill Lynch as its independent financial advisor and Sullivan & Cromwell, Walkers and Haiwen as its independent legal advisors;

 

·the Special Committee was broadly empowered to consider, attend to and take any and all actions in connection with the Proposal from the Buyer Group in relation to the Merger Agreement, the Plan of Merger and the Transactions from the date the Special Committee was established, and no evaluation, negotiation or response regarding the Merger Agreement, the Plan of Merger and the Transactions in connection therewith from that date forward was considered by the Board for approval until the Special Committee had recommended such action to the Board;

 

·the terms and conditions of the Merger Agreement were the product of extensive negotiations between the Special Committee and its advisors, on the one hand, and the Buyer Group and its advisors, on the other hand;

 

·the Special Committee was broadly empowered to exercise the full power and authority of the Board in relation to the negotiation of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and related process;

 

·the Special Committee met regularly to consider and review the terms of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger;

 

·the Special Committee and the Board recognized that the Special Committee had no obligation to recommend the Merger or any other transaction;

 

·the Special Committee and the Board recognized that, under the terms of the Merger Agreement, prior to the approval and adoption of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, by the shareholders of the Company, the Special Committee has the ability to consider any acquisition proposal reasonably likely to lead to a Superior Proposal;

 

·the Company has the ability, subject to compliance with the terms and conditions of the Merger Agreement and prior to the approval and adoption of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, by the shareholders of the Company, to terminate the Merger Agreement in order to enter into an agreement with respect to a Superior Proposal;

 

·the Board and the Special Committee have the ability, under certain circumstances, to change, withhold, withdraw, qualify or modify the Company Recommendation (as defined in the section entitled “Merger Agreement—No Solicitation of Competing Transactions” beginning on page [ ]) that the Company’s shareholders vote to approve and adopt the Merger Agreement, Plan of Merger and the Transactions, including the Merger; and

 

·dissenters’ rights are available to the shareholders who comply with all of the required procedures under the Cayman Islands Companies Law for exercising dissenters’ rights, which allow such shareholders to receive payment of the fair value of their Shares.

 

41 

 

 

Each of the Special Committee and the Board also considered a variety of potentially negative factors concerning the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, including the following, which are not listed in any relative order of importance:

 

·the Unaffiliated Holders will have no on-going equity participation in the Company following the Merger, and they will cease to participate in the Company’s future earnings or growth, if any, and to benefit from increases, if any, in the value of the Company’s equity, and will not participate in any potential future sale of the Company to a third party or any potential recapitalization of the Company, which could include a dividend to shareholders;

 

·approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, is not subject to a separate approval by the Unaffiliated Holders and, given that the Buyer Group has, in the aggregate, approximately 90.7% of the voting power of the outstanding Shares, the Buyer Group has the ability to determine the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, at the extraordinary general meeting;

 

·the restrictions on the conduct of the Company’s business prior to the completion of the Merger may delay or prevent the Company from undertaking business opportunities that may arise or any other action it would otherwise take with respect to the operations of the Company pending completion of the Merger;

 

·since the Company became publicly listed on NASDAQ on September 25, 2009, the highest historical closing price of ADSs (US$13.00 per ADS in September 2009) exceeds the consideration of US$7.10 per ADS to be paid in the Merger, although the ADSs have not had a closing price above US$7.10 per ADS since June 2, 2011;

 

·there are risks and costs to the Company if the Merger does not close, including the diversion of management and employee attention, potential employee attrition and the potential disruptive effect on the Company’s business and customer relationships;

 

·the Company may be required, under certain circumstances, to pay Parent a termination fee of US$57,250,000 in connection with the termination of the Merger Agreement;

 

·the Company’s remedy in the event of breach of the Merger Agreement by Parent or Merger Sub is limited, under certain circumstances, to the receipt of a reverse termination fee of US$114,500,000, and under certain circumstances the Company may not be entitled to a reverse termination fee or expenses at all;

 

·the Buyer Group has interests in the Merger that are different from, or in addition to, those of the Unaffiliated Holders (see “—Interests of Certain Persons in the Merger” beginning on page [ ] for additional information), particularly in light of the terms of the Buyer Group’s participation in the Merger;

 

·it is possible that the Merger might not be completed and the negative impact of such a public announcement on the Company’s sales and operating results, and the Company’s ability to attract and retain key management, marketing and technical personnel; and

 

·an all-cash transaction is taxable to the Unaffiliated Holders who are U.S. Holders (as defined under “—Material U.S. Federal Income Tax Consequences”) for U.S. federal income tax purposes, and is likely taxable to the Unaffiliated Holders in other jurisdictions.

 

Following the Li-Funds Purchase in June 2015, the Special Committee and its advisors engaged with the Buyer Group and its advisors to evaluate the circumstances surrounding the Li-Funds Purchase in order to evaluate the fairness of the Merger in light of developments subsequent to the execution of the Merger Agreement. These efforts are described in greater detail under the section entitled “—Background of the Merger.” At a meeting on August 25, 2015, the Special Committee, after due consideration, unanimously (a) determined that the Transactions, including the Merger, are fair to, and in the best interests of, the Company and the shareholders and ADS holders of the Company who are unaffiliated with the Company and whose securities are to be purchased pursuant to the terms of the Merger Agreement, (b) affirmed its April 3, 2015 resolutions (i) determining that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, would be fair to, and in the best interests of, the Company and the Unaffiliated Holders; (ii) declaring that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are advisable; and (iii) recommending that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, (c) authorized each member of the Special Committee to take, or cause to be taken, any actions to give effect to the resolutions described in (a) or (b) above and (d) ratified all previous actions taken by the Special Committee in connection with the matters described in the resolutions set forth in (a) or (b) above. 

 

At a meeting on August 26, 2015, the Board, acting upon the unanimous affirmation of the Special Committee, unanimously (a) determined that the Merger and other transactions contemplated by the Merger Agreement are fair to, and in the best interests of, the Company and the Unaffiliated Holders, (b) affirmed its April 3, 2015 resolutions (i) determining it was fair to, advisable and in the best interests of the Company and the Company’s Unaffiliated Holders to consummate the Merger; (ii) authorizing and approving the execution, delivery and performance by the Company of the Merger Agreement; and (iii) resolving to recommend in favor of the authorization and approval of the Merger Agreement, and the consummation of the Merger, to the shareholders of the Company for authorization and approval.

 

42 

 


 

In the course of reaching their respective determinations on August 25, 2015, and August 26, 2015, the Special Committee and the Board considered the following factors, which are not listed in any relative order of importance:

 

·

The Li-Funds Persons were strategic investors who, in pursuing a long-term plan of corporate transformation of Century Huatong through diversification into the PRC games sector, sought to secure and strengthen Century Huatong’s existing relationship with the Company as a foundation of that transformation by purchasing the only significant blocks of Shares that were available in the immediate term, while taking into account possible actions by competitors of Century Huatong – in particular:

 

o Century Huatong (through its subsidiaries) had already licensed certain intellectual property from the Company as the basis for developing a new generation of web- and mobile-based games that could leverage off the story lines and characters that the Company had made popular as well as the customer base that the Company had cultivated. Thus, Century Huatong and the Li-Fund Persons, as the controlling shareholders of Century Huatong, had a distinct reason to be strategically focused on not just the PRC games sector, but specifically the Company.

 

o The Li-Funds Persons viewed a large equity investment in the Company as an important strategic step, but were only willing to make such an investment if they could do so expeditiously and without disrupting Century Huatong’s relationship with the Company and its existing major shareholders and management. The Shares held by Haitong Securities and Orient Securities were the only blocks of Shares available for purchase that met such requirements.

 

o From the perspective of the Li-Funds Persons, failure to acquire such Shares would have put Century Huatong in a precarious competitive position, potentially setting back the Li-Funds Persons’ transformation plan for Century Huatong for years.

 

o The Li-Funds Purchase reflected a unique set of circumstances particular to the Li-Funds Persons. Absent such unique set of circumstances, other persons are unlikely to be willing to pay the premium paid by the Li-Funds Persons. Accordingly, the purchase price paid in connection with the Li-Funds Purchase is not a meaningful benchmark for evaluating whether the merger consideration is fair to the Unaffiliated Holders.

 

· The Special Committee and the Board were advised of and considered the Company’s latest business performance, financial condition, results of operations and competitive position, which have not improved in any material respect since the Company entered into the Merger Agreement on April 3, 2014, and continued to believe that the Merger would be financially more favorable to the Unaffiliated Holders than any alternative reasonably available to the Company and the Unaffiliated Holders.

 

· Since the Company first received a “going private” proposal on January 27, 2014, the composition of the Buyer Group has changed completely, and no Superior Proposal has emerged.

 

· The outlook for U.S.-listed PRC-based companies (including technology companies) is highly competitive in light of recent volatility and declines in the U.S. and PRC equity markets (the Dow Jones BRIC 50 China Subindex has fallen from 737.55 on April 3, 2015, to 588.69 as of August 24, 2015, and the Dow Jones Global Technology Index has fallen from 677.50 on April 3, 2015 to 591.96 as of August 24, 2015).

 

· The Special Committee and the Board have considered the possible implications of the Li-Funds Purchase under the terms of the Merger Agreement, and do not regard it to constitute an Intervening Event that requires, for reasons of fiduciary duty, a Change in the Company Recommendation (See "The Merger Agreement—No Change of Recommendation").

 

· The Merger Agreement provides that either party may terminate the Merger if it is not consummated by October 3, 2015, and any further delay will present significant risks that the Merger may not be consummated at all.

 

· Given the Buyer Group controls approximately 90.7% of the total number of votes represented by the Company's issued and outstanding Shares, any alternative transaction would require the support of the Buyer Group, and if the Merger is not consummated, in light of current market conditions, it is possible that the Unaffiliated Shareholders would not have another opportunity to be cashed out through a strategic transaction in the near future or ever.

 

The foregoing discussion of information and factors considered by the Special Committee and the Board is not intended to be exhaustive, but includes a number of the factors considered by the Special Committee and the Board. In view of the wide variety of factors considered by the Special Committee and the Board, neither the Special Committee nor the Board found it practicable to quantify or otherwise assign relative weights to the foregoing factors in reaching its conclusions. In addition, individual members of the Special Committee and the Board may have given different weights to different factors and may have viewed some factors more positively or negatively than others. The Special Committee recommended that the Board authorize and approve, and the Board authorized and approved, the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, based upon the totality of the information presented to and considered by it.

 

43 

 

 

In reaching its conclusion regarding the fairness of the Merger to the Unaffiliated Holders and its decision to recommend the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, the Special Committee considered financial analyses presented by Merrill Lynch as an indication of the going-concern value of the Company. These analyses included, among others, a historical trading range analysis, broker target price analysis, selected comparable public companies analysis, discounted cash flow analysis and premiums paid analysis. All of the material analyses as presented to the Special Committee on April 3, 2015 are summarized below under the section entitled “—Opinion of Merrill Lynch, the Special Committee’s Financial Advisor” beginning on page [ ]. The Special Committee expressly adopted these analyses and the opinion of Merrill Lynch, among other factors considered, in reaching its determination as to the fairness of the Transactions, including the Merger.

 

Neither the Special Committee nor the Board considered the liquidation value of the Company’s assets because each considers the Company to be a viable going-concern business where value is derived from cash flows generated from its continuing operations. In addition, each of the Special Committee and the Board believes that the value of the Company’s assets that might be realized in a liquidation would be significantly less than its going-concern value. Each of the Special Committee and the Board believes the analyses and additional factors it reviewed provided an indication of the Company’s going-concern value. Each of the Special Committee and the Board also considered the historical market prices of the ADSs as described under the section entitled “Market Price of the Company’s ADSs, Dividends and Other Matters—Market Price of the ADSs” beginning on page [ ]. Each of the Special Committee and the Board considered the purchase prices paid in previous purchases as described under “Transactions in Shares and ADSs.” Neither the Special Committee nor the Board, however, considered the Company’s net book value, which is defined as total assets minus total liabilities, attributable to the Company’s shareholders, as a factor. Each of the Special Committee and the Board believes that net book value is not a material indicator of the value of the Company as a going concern as it does not take into account the future prospects of the Company, market conditions, trends in the industry related to the development and marketing of MMO games and mobile games or the business risks inherent in competing with other companies in that industry. The Board and the Special Committee note, however, that the merger consideration of US$3.55 per Share and US$7.10 per ADS is in each case substantially higher than the Company’s net book value per Share of US$0.57 as of December 31, 2014 (based on the weighted average number of issued and outstanding Shares during 2014).

 

In reaching its determination on April 3, 2015, which it affirmed on August 26, 2015, that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are fair to, and in the best interests of, the Company and the Unaffiliated Holders, and its decision to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and its recommendation to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, by the Company’s shareholders, the Board, on behalf of the Company, considered the analysis and recommendation of the Special Committee and the factors examined by the Special Committee as described above under this section and under “—Background of the Merger,” and adopted such recommendations and analysis. 

 

In addition, the Special Committee and the Board considered that it is appropriate for the Company to undertake the Transactions at this time and not to remain independent after considering (a) the incremental uncertainties in the Company’s future financial performance and the risks that such uncertainties pose to the Unaffiliated Holders, based on the Company’s past financial performance and projections and, in particular, (i) that the estimated revenue and net income of the Company for 2014 and the financial projections for subsequent years were lower than previously estimated and, based on the Company’s projections, the Company’s revenue and net income will not be higher than those for 2012 until 2018; (ii) the prospect that it could take a considerable period of time, if ever, before the trading price of the ADSs would reach and sustain a level equal to or greater than the merger consideration of US$7.10 per ADS, as adjusted for present value; and (iii) the Company’s ongoing dependence on mobile games and MMO games and the risks associated with such dependence and, in particular, the Company’s dependence on three MMORPGs for 53.3% of its net revenue in 2014, two of which were released over ten years ago, together with the fact that all games have finite commercial lifespans notwithstanding the Company’s efforts to extend these commercial lifespans; (b) the consideration and evaluation of alternative strategic options by the Company’s senior management in 2012 and 2013, and the failure of such efforts to produce any successful strategic alternatives due to concerns relating to valuation; and (c) the fact that the merger consideration proposal of the Buyer Group on April 3, 2015 was the highest proposal by the Buyer Group (as it existed with various members from time to time) since the Buyer Group was first formed on January 27, 2014 and not to be subsequently aborted by the Buyer Group (the earlier proposal by the Buyer Group on September 22, 2014, though it had the same merger consideration, was aborted by the Buyer Group on October 19, 2014).

 

During its consideration of the Merger Agreement and the Transactions, including the Merger, the Board was also aware that some of the Company’s directors and shareholders, including Mr. Zhang, the chairman of the Board and acting chief executive officer of the Company, Mr. Chen, the former chairman of the Board, and other employees of the Company, have, or had at times during the negotiation of the Merger Agreement, interests with respect to the Merger that are or may be, or were or may have been, different from or in addition to those of the Unaffiliated Holders generally, as described under the section entitled “—Interests of Certain Persons in the Merger” beginning on page [ ].

 

For the foregoing reasons, the Company believes that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, are fair to, and in the best interests of, the Company and its unaffiliated security holders.

 

Position of the Buyer Group as to the Fairness of the Merger

 

Under SEC rules governing “going private” transactions, each member of the Buyer Group is deemed to be an affiliate of the Company and is required to express its beliefs as to the fairness of the Merger to the Company’s unaffiliated security holders, as defined in Rule 13e-3 of the Exchange Act. Each member of the Buyer Group is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. The Buyer Group does not rely on or adopt the analysis of the Special Committee or Merrill Lynch in considering the fairness of the Merger to the Unaffiliated Holders. The views of the Buyer Group as to the fairness of the Merger are not intended to be and should not be construed as a recommendation to any shareholder of the Company or holder of ADSs as to how to vote on the proposal to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. The Buyer Group has interests in the Merger that are different from, and/or in addition to, those of the Unaffiliated Holders of the Company by virtue of its continuing interests in the Surviving Corporation after the consummation of the Merger. These interests are described under the caption “—Interests of Certain Persons in the Merger—Interests of the Buyer Group” beginning on page [  ].

 

44 

 

 

The Buyer Group believes the interests of the Unaffiliated Holders were represented by the Special Committee, which negotiated the terms and conditions of the Merger Agreement with the assistance of its independent legal counsel and independent financial advisor. The Buyer Group attempted to negotiate a transaction that would be most favorable to it, and not to the Unaffiliated Holders and, accordingly, did not negotiate the Merger Agreement with a goal of obtaining terms that were substantively or procedurally fair to such Unaffiliated Holders. The Buyer Group did not participate in the deliberations of the Special Committee regarding, and did not receive any advice from the Special Committee’s independent legal counsel or financial advisors as to, the fairness of the Merger to the Unaffiliated Holders. Furthermore, the members of the Buyer Group did not themselves undertake a formal evaluation of the fairness of the Merger and did not receive any independent reports, opinions or appraisals from any third party related to the Merger, and thus did not consider any such reports, opinions or appraisals in determining the substantive and procedural fairness of the Merger to the Unaffiliated Holders. 

 

Based on its knowledge and analysis of available information regarding the Company, as well as discussions with the Company’s senior management regarding the Company and its business and the factors considered by, and findings of, the Special Committee and the Board discussed under the caption “—Reasons for the Merger and Recommendation of the Special Committee and the Board” beginning on page [  ] (which considerations and findings are adopted by the Buyer Group solely for the purposes of making the statements in this section), the Buyer Group believes that the Merger is both substantively and procedurally fair to the Unaffiliated Holders based on the following factors, which are not listed in any relative order of importance:

 

·none of the members of the Special Committee that recommended the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, is or ever was an employee of the Company or any of its subsidiaries or affiliates and none of such members has any financial interest in the Merger that is different from that of the Unaffiliated Holders other than the cash-out of Company Restricted Shares and Company RSUs held by such members, such members’ receipt of Board and Special Committee compensation (which was not and is not contingent upon the completion of the Merger, or the Special Committee’s or the Board’s recommendation of the Merger) and their indemnification and liability insurance rights under the Merger Agreement and the Company’s memorandum and articles of association;

 

·the Special Committee and the Board had no obligation to recommend the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger;

 

·the Special Committee retained Merrill Lynch as its independent financial advisor and Sullivan & Cromwell, Walkers and Haiwen as its independent legal advisors, each of whom is experienced in advising committees such as the Special Committee in similar transactions; with the advice and assistance of such advisors, the Special Committee had independent control of the sale process;

 

·the Buyer Group did not participate in or have any influence over the deliberative process of, or the conclusions reached by, the Special Committee or the negotiating positions of the Special Committee;

 

·the consideration of US$7.10 per ADS offered to the Unaffiliated Holders in the Merger represents a 25.7% premium over the Company’s closing price as quoted by NASDAQ on January 24, 2014, the last trading day immediately prior to the Company’s announcement on January 27, 2014 that it had received the Proposal, and a premium of approximately 46.5% and 53.8%, respectively, over the Company’s 30- and 60-trading day volume-weighted average price as quoted by NASDAQ prior to, and including, January 24, 2014;

 

45 

 

 

·the lowest closing price of the Company’s ADSs was US$2.74 per ADS during the 52-week period prior to the announcement of the Company’s receipt of the Proposal;

 

·notwithstanding that the Buyer Group may not rely upon the opinion provided by Merrill Lynch to the Special Committee on April 3, 2015, the Special Committee received an opinion from Merrill Lynch stating that, as of the date of the Merger Agreement, and based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Merrill Lynch in preparing its opinion, the Per Share Merger Consideration and Per ADS Merger Consideration to be received by holders of the Class A ordinary shares and ADSs (other than the Excluded Shares and ADSs representing Excluded Shares) in the Merger were fair, from a financial point of view, to such holders;

 

· the Special Committee on April 3, 2015 unanimously (a) determined that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, were fair to, and in the best interests of, the Company and the Unaffiliated Holders; (b) declared advisable the Merger Agreement, the Plan of Merger and the Transactions, including the Merger; and (c) recommended that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger; and such determination, declaration and recommendation were unanimously affirmed by the Special Committee on August 25, 2015;

 

·

the Board, acting upon the unanimous recommendation of the Special Committee, on April 3, 2015 unanimously (a) determined that it was fair to, advisable and in the best interests of the Company and the Unaffiliated Holders to consummate the Transactions, including the Merger; (b) authorized and approved the execution, delivery and performance by the Company of the Merger Agreement, the Plan of Merger and the Limited Guarantees and the consummation of the Transactions, including the Merger; and (c) resolved to recommend in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the consummation of the Transactions, including the Merger, to the shareholders of the Company; and such determination, authorization, approval and resolution were unanimously affirmed by the Board on August 26, 2015;

 

·the Company has the ability, under certain circumstances, to specifically enforce the terms of the Merger Agreement;

 

·under the terms of the Merger Agreement, in certain circumstances prior to obtaining shareholder approval of the Merger, the Company is permitted to furnish information to and participate in discussions or negotiations with persons making acquisition proposals and the Board and the Special Committee have the ability to change, withhold, withdraw, qualify or modify their recommendations to approve the Merger Agreement;

 

·the Company may terminate the Merger Agreement under the terms of the Merger Agreement upon acceptance of a Superior Proposal, subject to compliance with the terms and conditions of the Merger Agreement;

 

·the Merger is not conditioned on any financing being obtained by Parent or Merger Sub, thus increasing the likelihood that the Merger will be consummated and the Per Share Merger Consideration and Per ADS Merger Consideration will be paid to the Unaffiliated Holders;

 

·the consideration to be paid to the Unaffiliated Holders in the Merger is all cash, allowing the Unaffiliated Holders to immediately realize a certain and fair value for all of their Shares and ADSs, without incurring brokerage and other costs typically associated with market sales; and

 

·dissenters’ rights are available to the shareholders who comply with all of the required procedures under the Cayman Islands Companies Law for exercising dissenters’ rights, which allow such shareholders to receive payment of the fair value of their Shares.

 

The Buyer Group did not consider the Company’s liquidation value to be a relevant valuation method because it considers the Company to be a viable going concern and because the Company will continue to operate its business following the Merger. The Buyer Group views the trading history of the ADSs as an indication of the Company’s going concern value, and, accordingly, did not believe liquidation value to be relevant to a determination as to the fairness of the Merger.

 

46 

 

 

The Buyer Group did not consider the Company’s net book value, which is defined as total assets minus total liabilities, attributable to the Company’s shareholders, as a factor. The Buyer Group believes that net book value, as an accounting concept based on historical costs, is not a material indicator of the value of the Company as a going concern because it does not take into account quality of earnings, cash generation capability, the future prospects of the Company, market conditions, trends in the industry in which the Company conducts its business or the business risks inherent in competing with other companies in the same industry but rather is indicative of historical costs. Therefore, the Buyer Group does not believe that net book value is a relevant measure in the determination as to the fairness of the Merger. The Buyer Group notes, however, that the merger consideration of US$3.55 per Class A ordinary share and US$7.10 per ADS are substantially higher than the Company’s net book value per Share of US$0.57 as of December 31, 2014 (based on the weighted average number of issued and outstanding Shares during 2014).

 

The Buyer Group did not establish, and did not consider, a going concern value for the Company as a public company to determine the fairness of the merger consideration to the Unaffiliated Holders because, following the Merger, the Company will have a significantly different capital structure. However, to the extent the pre-Merger going concern value was reflected in the pre-announcement price of the Company’s ADSs, the merger consideration of US$7.10 per ADS represents a premium to the going concern value of the Company.

 

Other than the transactions among the current and former members of the Buyer Group as described under the caption “Transactions in Shares and ADSs—Transactions within the Buyer Group” beginning on page [  ], no member of the Buyer Group purchased any Share or ADS during the past two years. Because each Class A ordinary share is entitled to one vote and is not convertible into a Class B ordinary share while each Class B ordinary share is entitled to 10 votes and is convertible at any time into one Class A ordinary share at the election of its holder, the Buyer Group did not consider these intra-group transfers (except for the Li-Funds Purchase) in considering the fairness of the Merger primarily because of the following reason. The Buyer Group considers that the higher price of US$5.13 per share paid by Yili Shengda and Zhongrong Shengda for the Class B ordinary shares in the Shanda SDG Sale reflected a control premium as such Class B ordinary shares, unlike Class A ordinary shares and ADSs held by the Unaffiliated Holders, collectively represented approximately 69% of the total voting power represented by the Company’s outstanding ordinary shares, more than the two-thirds majority necessary to approve a special resolution of the shareholders of the Company as required under Cayman Islands law. As such, the price paid in the Shanda SDG Sale was not directly comparable to the US$3.55 Per Share Merger Consideration. The Buyer Group notes that the price per share for the Class A ordinary shares in the transfers among the current and former members of the Buyer Group (except for the price per share in the Li-Funds Purchase) will equal the Per Share Merger Consideration after “make-whole” payments pursuant to the terms of the relevant share purchase agreements. The price of $5.127 per Class B ordinary share in the Shanda SDG Sale was the result of arm’s length negotiation between Shanda Interactive, on the one hand, and Ningxia and Mr. Zhang, on the other hand. The price of $3.55 Per Share Merger Consideration was the result of arm’s length negotiation between the Special Committee, on the one hand, and the Buyer Group, on the other hand.

 

The Buyer Group’s position that the Merger is fair to the Unaffiliated Holders is unchanged by the Li-Funds Purchase for an aggregate price of RMB6,374,000,000 (approximately US$1,026,218,970 or US$4.44 per Class A ordinary share). The Buyer Group bases its position upon the fact that there have been no material changes to the circumstances underlying the fairness analysis of the Buyer Group discussed above beginning on page [ ] that would suggest that the Merger was unfair to the Unaffiliated Holders. In particular:

 

  ·

the US$3.55 Per Share Merger Consideration was determined by the parties at that time based on both the actual results of operations and financial condition as well as on the Company’s business plan;

     
  · the Buyer Group’s understanding from management is that the business, the financial conditions and the prospects of the Company have not improved in any material respect since April 3, 2015, when the Merger Agreement was signed; and
     
  · the Buyer Group’s understanding from management is that the Li-Funds Purchase has not affected in any material respect the business, financial conditions or prospects of the Company.

 

The purchase price paid in connection with the Li-Funds Purchase is not viewed by the Buyer Group as a meaningful benchmark for evaluating whether the merger consideration is fair to the Unaffiliated Holders. Such price reflects the fundamentally unique strategic value placed by the Li-Funds Persons on acquiring a significant equity stake in the Company within the particular circumstances, as described under the caption “—Background of the Merger” beginning on page [  ], including (i) Century Huatong’s ongoing business transformation from a traditional industrial company to a company with a significant games business and an attendant higher valuation in the PRC equities market, (ii) trends in the PRC games sector, as they impacted Century Huatong and the Li-Funds Persons, (iii) the importance, in Century Huatong’s perspective, of developing a strong, sustainable relationship with the Company as a way of mitigating risks in a highly dynamic market environment, (iv) the significance of equity ownership in the Company in laying a lasting foundation for that relationship, and (v) the lack of availability of any sizable block of Shares other than those held by Haitong Securities and Orient Securities, which conferred upon Haitong Securities and Orient Securities substantial bargaining leverage – a set of circumstances that is unlikely to materialize in a comparable manner for any other person considering an investment in the Company.

   

47 

 

 

Although Cayman Islands law does not require, and the Merger Agreement is not subject to, approval by a majority of the unaffiliated shareholders of the Company, as a result of the procedural safeguards described above, the Buyer Group concluded that the Merger is procedurally fair to the Unaffiliated Holders.

 

The foregoing is a summary of the information and factors considered and given weight by the Buyer Group in connection with its evaluation of the fairness of the Merger to the Unaffiliated Holders, which is not intended to be exhaustive, but is believed by the Buyer Group to include all material factors considered by it. The Buyer Group did not find it practicable to assign, and did not assign, relative weights to the individual factors considered in reaching their conclusion as to the fairness of the Merger to the Unaffiliated Holders. Rather, its fairness determination was made after consideration of all of the foregoing factors as a whole.

 

The Buyer Group believes these factors provide a reasonable basis for its belief that the Merger is both substantively and procedurally fair to the unaffiliated security holders. This belief, however, is not intended to be and should not be construed as a recommendation by the Buyer Group to any shareholder of the Company as to how such shareholder should vote with respect to the approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

Certain Financial Projections

 

Other than guidance on the coming quarter provided in earnings releases and on earnings conference calls for quarterly periods prior to the third quarter of 2013, the Company’s management does not, as a matter of course, make available to the public future financial projections. However, in connection with the Buyer Group’s due diligence review of the Company, the Company’s management provided financial projections for the fiscal year ended December 31, 2013 through the fiscal year ending December 31, 2018 and for the fiscal year ended December 31, 2014 through the fiscal year ending December 31, 2019 to the Buyer Group in March 2014 and March 2015, respectively, and in connection with Merrill Lynch’s financial analysis of the consideration to be paid in the Merger, the Company’s management provided financial projections for the fiscal year ended December 31, 2013 through the fiscal year ending December 31, 2018 and for the fiscal year ended December 31, 2014 through the fiscal year ending December 31, 2019 to Merrill Lynch, as the financial advisor to the Special Committee, on March 17, 2014 and March 27, 2015, respectively. See “—Background of the Merger” beginning on page [  ] for additional information. These financial projections, which were based on management’s projection of the Company’s future financial performance as of the date provided, were prepared by the Company’s management for internal use and for use by Merrill Lynch in its financial analyses, and were not prepared with a view toward public disclosure or compliance with published guidelines of the SEC regarding forward-looking information or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts or U.S. generally accepted accounting principles (“U.S. GAAP”).

 

48 

 

 

The financial projections are not a guarantee of performance. In compiling the projections, the Company’s management took into account historical performance of legacy games, projected launch dates of new games in the Company’s pipeline, and projected revenues for each new game, combined with estimates regarding gross margin, operating expenses, tax rates, capital expenditure, EBITDA and net income. Although the projections are presented with numerical specificity, they were based on numerous assumptions and estimates as to future events made by management that management believed were reasonable at the time the projections were prepared. This information is not, however, fact and should not be relied upon as being necessarily indicative of actual future results. In addition, factors such as industry performance, the market for the Company’s existing and new games, gamers’ behavior and preferences, the competitive environment, expectations regarding future acquisitions or any other transaction and general business, economic, regulatory, market and financial conditions, all of which are difficult to predict and beyond the control of management, may cause actual future results to differ materially from the results forecasted in these financial projections. In addition, the projections do not take into account any circumstances or events occurring after the date that they were prepared. For instance, the projections do not give effect to the Merger or any changes to the Company’s operations or strategy that may be implemented after the time the projections were prepared. We cannot assure you that the projections will be realized or that actual results will not be significantly different from those contained in the projections.

 

Neither the Company’s independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian LLP (“PwC”), nor any other independent accountants have examined, compiled or performed any procedures with respect to the financial projections or any amounts derived therefrom or built thereupon and, accordingly, they have not expressed any opinion or given any form of assurance on the financial projections or their achievability. The PwC report accompanying the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2014 incorporated by reference in this proxy statement refers exclusively to the Company’s historical information and does not cover any other information in this proxy statement and should not be read to do so. The financial projections included in this proxy statement are included solely to give shareholders access to certain information that was made available to the financial advisor and are not included for the purpose of influencing any shareholder to make any investment decision with respect to the Merger, including whether or not to seek appraisal for his, her or its Shares.

 

The following table summarizes the financial projections provided by management to the Buyer Group and Merrill Lynch in March 2014:

 

   Management Projections 
   Fiscal Year Ending December 31, 
  

2013E(1)

   2014E   2015E   2016E   2017E   2018E 
   (RMB in millions)(2) 
Total Net Revenues    4,346    4,210    5,222    6,228    6,976    7,589 
Growth   -7.9%   -3.1%   24.0%   19.3%   12.0%   8.8%
Gross Profit    3,210    3,146    3,852    4,555    5,098    5,461 
Gross Margin   73.9%   74.7%   73.8%   73.1%   73.1%   72.0%
Total Operating Expenses    1,481    1,561    1,895    2,213    2,427    2,615 
Income from Operations    1,729    1,585    1,957    2,342    2,671    2,847 
Operating Margin    39.8%   37.6%   37.5%   37.6%   38.3%   37.5%
Net Income attributable to Shanda Games Limited    1,589    1,326    1,648    1,972    2,206    2,385 

 

 

(1)These projections were prepared by the Company’s management during the first quarter of 2014. At the time these projections were prepared, the audit for the fiscal year ended December 31, 2013 had not been completed. Accordingly, management estimates for fiscal year 2013 may vary materially from the Company’s audited financial statements.

 

(2)Financial projections were prepared and provided in RMB.

 

The following table summarizes the financial projections provided by management to the Buyer Group and the Merrill Lynch in March 2015:

 

   Management Projections 
   Fiscal Year Ending December 31, 
  

2014E(1)

   2015E   2016E   2017E   2018E   2019E 
   (RMB in millions)(2) 
Total Net Revenues    3,717    3,591    4,700    5,662    6,465    7,661 
Growth   -14.5%   -3.4%   30.9%   20.5%   14.2%   18.5%
Gross Profit    2,777    2,723    3,463    4,066    4,548    5,491 
Gross Margin   74.7%   75.8%   73.7%   71.8%   70.3%   71.7%
Total Operating Expenses    1,594    1,386    1,799    2,105    2,323    2,826 
Income from Operations    1,183    1,337    1,663    1,961    2,225    2,665 
Operating Margin    31.8%   37.2%   35.4%   34.6%   34.4%   34.8%
Net Income attributable to Shanda Games Limited    1,040    1,234    1,462    1,602    1,848    1,902 

 

 

(1)These projections were prepared by the Company’s management during the first quarter of 2015. At the time these projections were prepared, the audit for the fiscal year ended December 31, 2014 had not been completed. Accordingly, management estimates for fiscal year 2014 may vary materially from the Company’s audited financial statements.

 

(2)Financial projections were prepared and provided in RMB.

 

In preparing these projections, the Company’s management necessarily made certain assumptions about future financial factors affecting the Company’s business, including, primarily, that (a) material costs and expenses would increase in line with the Company’s revenue increase, (b) the growth of personal computer and smartphone markets in the PRC and elsewhere would continue in line with management’s expectation, (c) the Company would be able to successfully develop or license new MMORPGs that attract and retain new and existing players and result in online game revenues consistent with management’s expectations, (d) the popularity of MMORPGs would remain stable in the geographic markets in which the Company operates, and (e) the Company would be able to further expand its small but growing mobile game business by developing and licensing more successful mobile games. The Company’s management also assumed that the overall economy in the PRC will remain stable, and that there will be no material change in competition affecting the Company.

 

For the reasons discussed in this proxy statement, including the bases and assumptions on which the financial projections and forecasts were compiled, the inclusion of specific portions of the financial projections and forecasts in this proxy statement should not be regarded as an indication that the Company, the Special Committee or the Board considers such financial projections or forecasts to be an accurate prediction of future events, and the projections and forecasts should not be relied on as such an indication. No one has made any representation to any shareholders of the Company or anyone else regarding the information included in the financial projections and forecasts discussed above.

 

The financial projections and forecasts included in this proxy statement should not be considered in isolation or in lieu of the Company’s operating and other financial information prepared in accordance with U.S. GAAP (see “Financial Information—Selected Historical Financial Information” beginning on page [  ] for additional information). 

 

49 

 

 

The financial projections are forward-looking statements. For information on factors that may cause the Company’s future financial results to materially vary, see “Cautionary Note Regarding Forward-Looking Statements” beginning on page [  ] and “Item 3. Key Information—D. Risk Factors” included in the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2014, incorporated by reference into this proxy statement.

 

Merrill Lynch reviewed certain financial analyses that were based, in part, on the financial projections above. For additional information regarding the Merrill Lynch’s analysis, see “Presentation/discussion materials prepared by Merrill Lynch for discussion with the Special Committee and the Board, dated April 3, 2015” and “Presentation/discussion materials prepared by Merrill Lynch for discussion with the Special Committee, dated September 23, 2014,” filed as Exhibit (c)-(2) and Exhibit (c)-(3), respectively, to the Company’s transaction statement on Schedule 13E-3 and “—Opinions of Merrill Lynch, the Special Committee’s Financial Advisor” beginning on page [  ].

 

NONE OF THE COMPANY OR ITS AFFILIATES, ADVISORS, OFFICERS, DIRECTORS OR REPRESENTATIVES HAS MADE OR MAKES ANY REPRESENTATION TO ANY SHAREHOLDER OR OTHER PERSON REGARDING THE ULTIMATE PERFORMANCE OF THE COMPANY COMPARED TO THE INFORMATION CONTAINED IN THE PROJECTIONS OR THAT PROJECTED RESULTS WILL BE ACHIEVED.

 

BY INCLUDING IN THIS PROXY STATEMENT A SUMMARY OF ITS INTERNAL FINANCIAL PROJECTIONS, THE COMPANY UNDERTAKES NO OBLIGATIONS TO UPDATE, OR PUBLICLY DISCLOSE ANY UPDATE TO, THESE FINANCIAL PROJECTIONS TO REFLECT CIRCUMSTANCES OR EVENTS, INCLUDING UNANTICIPATED EVENTS, THAT MAY HAVE OCCURRED OR THAT MAY OCCUR AFTER THE PREPARATION OF THESE PROJECTIONS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING THE FINANCIAL PROJECTIONS ARE SHOWN TO BE IN ERROR OR CHANGE, EXCEPT TO THE EXTENT REQUIRED BY APPLICABLE FEDERAL SECURITIES LAW.

 

Opinion of Merrill Lynch, the Special Committee’s Financial Advisor

 

Merrill Lynch was retained by the Special Committee to act as its financial advisor in connection with the Proposed Transaction. At the meeting of the Special Committee on April 3, 2015, Merrill Lynch orally rendered its opinion, which was subsequently confirmed by it in writing, that, as of such date, based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Merrill Lynch set forth in the opinion, the Per Share Merger Consideration or Per ADS Merger Consideration, as applicable, to be received in the Merger by holders of the Class A ordinary shares of the Company or ADSs (other than holders of Excluded Shares) is fair, from a financial point of view, to such holders.

 

The full text of Merrill Lynch’s written opinion, dated April 3, 2015, is attached to this proxy statement as Annex C. You should read the opinion in its entirety for a discussion of the assumptions made, procedures followed, matters considered and qualifications to and limitations on the review undertaken by Merrill Lynch in rendering the opinion. The following summary is qualified in its entirety by reference to the full text of such opinion.

 

In arriving at its opinion, Merrill Lynch, among other things:

 

·reviewed certain publicly available business and financial information relating to the Company that Merrill Lynch deemed to be relevant, including certain public research analyst estimates with respect to the future financial performance of the Company;

 

·reviewed certain internal financial and operating information with respect to the business, operations and prospects of the Company furnished to or discussed with Merrill Lynch by the management of the Company, including certain financial forecasts relating to the Company prepared by the management of the Company (such forecasts, the “Management Forecasts”);

 

50 

 

 

·discussed the past and current business, operations, financial condition and prospects of the Company with members of senior management of the Company;

 

·reviewed the trading history for the ADSs and compared that trading history with the trading histories of certain other publicly traded companies Merrill Lynch deemed relevant;

 

·compared certain financial and stock market information of the Company with similar information of certain other publicly traded companies Merrill Lynch deemed relevant;

 

·compared certain financial terms of the Merger to financial terms, to the extent publicly available, of other transactions Merrill Lynch deemed relevant;

 

·reviewed drafts dated April 3, 2015 of the Merger Agreement, Equity Commitment Letters, Limited Guarantees and Support Agreement; and

 

·performed such other analyses and studies and considered such other information and factors as Merrill Lynch deemed appropriate, including its assessment of general economic, market and monetary conditions.

 

In arriving at its opinion, Merrill Lynch assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with Merrill Lynch and relied upon the assurances of the management of the Company that they are not aware of any facts or circumstances that would make such information or data inaccurate or misleading in any material respect. With respect to the Management Forecasts, Merrill Lynch was advised by the Company, and assumed, that such forecasts were reasonably prepared on bases reflecting the best available estimates and good faith judgments of the management of the Company as to the future financial performance of the Company. Merrill Lynch did not make and was not provided with any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the Company, nor did it make any physical inspection of the properties or assets of the Company. Merrill Lynch did not evaluate the solvency or fair value of the Company under any U.S. state, U.S. federal or other laws relating to bankruptcy, insolvency or other similar matters. Merrill Lynch assumed, at the direction of the Company, that the Merger Agreement did not differ in any material respect from the draft dated April 3, 2015 reviewed by Merrill Lynch. Merrill Lynch also assumed, at the direction of the Company, that the Merger will be consummated in accordance with its terms, without waiver, modification or amendment of any material term or condition and that, in the course of obtaining the necessary governmental, regulatory and other approvals, consents, releases and waivers for the Merger, no delay, limitation, restriction or condition, including any divestiture requirements or amendments or modifications, will be imposed that would have an adverse effect on the Company or the contemplated benefits of the Merger.

 

Merrill Lynch did not express any view or opinion as to any terms or other aspects of the Merger other than the Per Share Merger Consideration and the Per ADS Merger Consideration, including, without limitation, the form or structure of the Merger. Merrill Lynch’s opinion was limited to the fairness, from a financial point of view, of the Per Share Merger Consideration and the Per ADS Merger Consideration, as applicable, to the holders of the Shares or ADSs (other than holders of Excluded Shares). No opinion or view was expressed with respect to any consideration received in connection with the Merger by the holders of any other class of securities, creditors or other constituencies of any party. In addition, no opinion or view was expressed with respect to the fairness (financial or otherwise) of the amount, nature or any other aspect of any compensation to any of the officers, directors or employees of any party to the Merger, or class of such persons, relative to the Per Share Merger Consideration or the Per ADS Merger Consideration. Furthermore, no opinion or view was expressed as to the relative merits of the Merger in comparison to other strategies or transactions that might be available to the Company or in which the Company might engage or as to the underlying business decision of the Company to proceed with or effect the Merger. In addition, Merrill Lynch expressed no opinion or recommendation as to how any security holder should vote or act in connection with the Merger or any related matter.

 

Merrill Lynch’s opinion is necessarily based on financial, economic, monetary, market and other conditions and circumstances as in effect on, and the information made available to Merrill Lynch as of April 3, 2015, the date of its opinion. Merrill Lynch does not have any obligation to update, revise, or reaffirm its opinion.

 

The following is a summary of the material analyses performed by Merrill Lynch in connection with its opinion rendered to the Special Committee. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses used by Merrill Lynch, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses and the order of the analyses does not represent relative importance or weight given to those analyses by Merrill Lynch. The analyses listed in the tables and described below must be considered as a whole; considering any portion of such analyses and of the factors discussed, without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of the process underlying Merrill Lynch’s analyses.

 

51 

 

 

Historical Trading Range Analysis

 

Merrill Lynch reviewed the trading performance of the ADSs on NASDAQ in the 52-week period prior to January 24, 2014, the last trading day before the Company announced it received the Proposal. Merrill Lynch observed that the low and high closing prices quoted by NASDAQ for the ADSs in the 52-week period prior to January 24, 2014 were US$2.74 per ADS and US$6.25 per ADS, respectively. Merrill Lynch further observed that the merger consideration of US$7.10 per ADS was above the range of such 52-week low and high closing prices.

 

Broker Target Price Analysis

 

Merrill Lynch reviewed the price targets for the ADSs prepared and published by brokers before the Company announced on January 27, 2014 that it had received the Proposal. These targets reflected each broker’s estimate of the future public market trading price of the ADSs and were not discounted to reflect present value. The range of undiscounted price targets for the ADSs as of January 24, 2014, the last trading day prior to the announcement of the Proposal, was US$3.50 to US$6.50 per ADS.

 

The public market trading price targets published by brokers do not necessarily reflect current market trading prices for the ADSs and these estimates are subject to uncertainties, including the future financial performance of the Company and future financial market conditions.

 

Selected Comparable Public Companies Analysis

 

Using publicly available financial and stock market information, Merrill Lynch compared selected financial data of the Company with financial and trading data of selected publicly traded comparable companies, producing valuation multiples of selected financial metrics that Merrill Lynch utilized to estimate the implied value for the Company. The companies included in the selected comparable public company analysis were chosen based upon the experience and judgment of Merrill Lynch and did not include all publicly traded online gaming companies. Merrill Lynch selected companies that are currently (or were at the time they were taken private) U.S.-listed publicly traded PRC-based gaming companies that focused on client- or web-based games similar to the business focus of the Company. Merrill Lynch excluded gaming companies that focus on mobile games, rather than client-based or PC games, and that had a short track record as publicly traded companies. For the purposes of its analysis, Merrill Lynch reviewed and compared certain financial information, ratios and available public market multiples relating to the Company, some of which were publicly available and others of which were based on internal information, including the Management Forecasts, to corresponding financial data for selected publicly traded companies. The companies selected for the analysis were:

 

·NetEase, Inc.;

 

·Changyou.com Limited;

 

·Perfect World Co. Limited; and

 

·Giant Interactive Group Inc.

 

Merrill Lynch analyzed the following statistics for comparative purposes:

 

·the ratio of price to estimated earnings per ADS for calendar year 2015, referred to as P/E;

 

52 

 

 

·the ratio of price to estimated earnings per ADS for calendar year 2016 (“2016 price-to-earnings multiple”), referred to as P/E;

 

·the ratio of adjusted price, defined as price per ADS plus total debt per ADS and minority interests per ADS less cash and cash equivalents per ADS (“Adjusted Price”), to estimated earnings per ADS for calendar year 2015, referred to as Adjusted P/E; and

 

·the ratio of Adjusted Price to estimated earnings per ADS for calendar year 2016, referred to as Adjusted P/E.

 

Merrill Lynch used the following metrics for each comparable company for the purpose of its analyses:

 

  

P/E

  

Adjusted P/E

  

EV/EBITDA(1)

  

PEG(1)

 

Company

 

2014E(1)

  

2015E

  

2016E

  

2014E(1)

  

2015E

  

2016E

  

2014E

  

2015E

  

2016E

  

2014E

  

2015E

  

2016E

 
Giant Interactive Going-Private Proposal
Broker Consensus                                                            
Giant Interactive (Pre-Offer)   9.7x   9.0x   9.8x   7.7x   7.2x   7.8x   7.0x   6.0x   7.1x   0.8x   0.7x   0.9x
Giant Interactive (First Offer)   11.3    10.5    11.4    8.5    7.9    8.6    7.7    6.6    8.7x   0.9    0.8    1.0 
Giant Interactive (Final Offer)   11.5    10.7    11.6    8.7    8.1    8.8    7.9    6.8    8.9x   0.9    0.9    1.0 
                                                             
Management Projections                                                            
Giant Interactive (Pre-Offer)   9.8x   8.3x   7.6x   7.8x   6.6x   6.1x   7.1x   5.5x   4.7x   0.8x   0.7x   0.6x
Giant Interactive (First Offer)   11.4    9.6    8.8    8.6    7.3    6.7    7.8    6.0    5.1    0.9    0.8    0.7 
Giant Interactive (Final Offer)   11.6    9.8    9.0    8.8    7.5    6.9    8.0    6.2    5.3    0.9    0.8    0.7 
                                                             
Perfect World Going-Private Proposal                                                               
Broker Consensus                                                            
Perfect World (Pre-Offer)(2)   8.1x   7.1x   6.0x   3.5x   3.1x   2.5x   3.1x   2.5x   2.1x   0.5x   0.5x   0.4x
Perfect World (At Offer)(2)   10.3    9.0    7.6    6.1    5.4    4.4    5.4    4.4    3.6    0.7    0.6    0.5 
                                                             
Public Comparables                                                               
Broker Consensus                                                            
Netease(3)   17.9x   15.5x   13.1x   13.0x   11.4x   9.7x   12.6x   10.5x   8.8x   1.2x   1.0x   0.9x
Changyou(4)   nm    9.9    9.4    nm    8.2    7.9    nm    7.3    6.7    nm    nm    1.6 

 

 

(1)The following statistics, which are provided in the table above, are provided for informational purposes only and were not used for comparative purposes: (a) the ratio of price to estimated earnings per ADS for calendar year 2014 (“2014 price-to-earnings multiple”); (b) the ratio of Adjusted Price to estimated earnings per ADS for calendar year 2014; (c) the ratios of enterprise value, defined as fully diluted market value plus total debt and minority interests less cash and cash equivalents (“EV”), as of March 27, 2015, to estimated calendar years 2014, 2015 and 2016 EBITDA; and (d) the ratios of 2014, 2015 and 2016 price-to-earnings multiple to estimated long-term earnings per ADS growth rate (“PEG”).

 

53 

 

 

(2)Perfect World’s cash balance adjusted for US$3.6 million paid to acquire Digital Extremes.

 

(3)Netease’s cash balance adjusted for dividend declared and unpaid of US$0.39/ADS for the fourth quarter of 2014, to be paid on March 6, 2015, assuming that dividends accrue to unvested restricted share units. Netease’s net debt excludes (US$5.7 million) deficit minority interest, which is a result of retrospective presentation and disclosure requirements on the noncontrolling interest which became effective for fiscal years beginning on or after December 31, 2008. The noncontrolling interest will continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance.

 

(4)nm = not meaningful

 

Based on the analysis of the relevant metrics for each of the comparable public companies, Merrill Lynch selected a representative range of financial multiples of the comparable public companies and applied this range of multiples to the relevant Company financial statistic.

 

The value of the range of multiples selected by Merrill Lynch was in some cases lower than the value of the P/E multiples and Adjusted P/E multiples of individual comparable public companies set forth above. Mathematical analysis (such as determining the mean or median) is not in itself a meaningful method of using comparable public company data. No company utilized in the comparable-company analysis is identical to the Company. In evaluating comparable public companies and determining the implied multiple range, Merrill Lynch made complex considerations, judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, which could affect the public trading or other values of the companies to which the Company was compared.

 

The following table reflects the results of the analysis and the corresponding representative multiples for the comparable companies:

 

Calendar Year Financial

   

Representative Range

    

Implied Per ADS Value

 
Price to Estimated 2015 Earnings per ADS   8.5x – 9.5x    US$6.29 – US$7.03 
Price to Estimated 2016 Earnings per ADS   8.0x – 9.0x    US$7.04 – US$7.92 
Adjusted Price to Estimated 2015 Earnings per ADS   7.5x – 8.5x    US$5.83 – US$6.57 
Adjusted Price to Estimated 2016 Earnings per ADS   7.0x – 8.0x    US$6.42 – US$7.30 

 

Discounted Cash Flow Analysis

 

Merrill Lynch conducted a discounted cash flow analysis for the purpose of determining an illustrative range of implied equity value per ADS. A discounted cash flow analysis is a method of evaluating an asset using estimates of the unlevered, after-tax free cash flows generated by the asset and taking into consideration the time value of money with respect to those future cash flows by calculating their “present value.” “Present value” refers to the current value of one or more future cash payments from the asset, which is referred to as that asset’s cash flows, and is obtained by discounting those cash flows back to the present using a discount rate that takes into account macroeconomic assumptions and estimates of risk, the opportunity cost of capital, capitalized returns and other appropriate factors. “Terminal value” refers to the capitalized value of all cash flows from an asset for periods beyond the final forecast period. For purposes of its discounted cash flow analysis, Merrill Lynch utilized the Management Forecasts, which can be found under the caption “—Certain Financial Projections” beginning on page [  ].

 

Merrill Lynch calculated ranges of the estimated net present values of the Company’s unlevered, after-tax free cash flows that the Company was forecasted to generate from 2015 to 2019 based on Management’s Forecasts. Merrill Lynch calculated the estimated net present value of unlevered, after-tax cash flows that the Company was forecasted to generate after fiscal year 2019 (the “Terminal Value”) using a perpetual growth rate range of 1.0% to 2.0%. Merrill Lynch selected this perpetual growth rate range based on its experience and judgment.

 

54 

 

 

The projected unlevered, after-tax free cash flows the Company forecasted to generate from 2015 to 2019 and the Terminal Value were discounted at a rate ranging from 16.0% to 18.0%. In selecting this discount range, Merrill Lynch took into account, among other things: (a) a weighted average cost of capital calculation based on factors commonly considered for purposes of calculating an estimated weighted average cost of capital, including a market risk premium based on Bloomberg; (b) the risk-free rate (based on the spot rate for 10-year PRC treasury as of March 27, 2015); (c) an estimated beta for the ADSs (based on peer companies’ average trading volatility of ADSs relative to the overall market, adjusted for the Company’s capital structure); and (d) a size premium based on market capitalization of the Company.

 

Merrill Lynch then, based upon certain assumptions described by and discussions held with the management of the Company, adjusted the ranges of the estimated net present values of the Company’s unlevered free cash flows and the Terminal Value by:

 

·subtracting (i) the Company’s cash and cash equivalents as at December 31, 2014 of US$130.8 million and (ii) the Company’s available short-term investments at December 31, 2014 of US$47.5 million;

 

·adding (i) the Company’s short-term borrowings and long-term borrowings (excluding the amounts which were secured by the Company’s short-term investments) as at December 31, 2014, each of which was nil and (ii) the Company’s dividends payable of US$0.3 million as at December 31, 2014; and

 

·adding the Company’s non-controlling interests of US$46.7 million as at December 31, 2014. These analyses resulted in a range of implied enterprise values for the Company of US$1,638 million to US$1,963 million and a range of implied prices of US$6.50 to US$7.69 per ADS of the Company, in each case as of March 27, 2015.

 

Premiums Paid Analysis

 

Merrill Lynch compared the premiums paid in the going-private transactions of 12 U.S.-listed PRC-based companies and 17 U.S.-listed non-PRC-based companies that were announced since 2009, where the acquiror owned over 50% of the target prior to the transaction with a transaction value inclusive of the acquiror’s stake that was between US$100 million and US$3 billion based on final offer price. Merrill Lynch selected transactions that, based on its experience and judgment, were similar to the Merger. Merrill Lynch excluded transactions involving minority strategic investments, as well as announced transactions that were terminated. For each of these transactions, Merrill Lynch reviewed the premium paid to the target company’s closing stock price for the one day, one week and one month prior to the announcement date of each transaction. The relevant metrics for each of the selected going-private transactions are set out below.

 

   Final Offer
Over Trading Price Premium Prior to Announcement
 
Target Company  1 Day (%)   1 Week (%)   1 Month (%) 
U.S.-Listed PRC-based Companies               
Perfect World   26.9%   26.3%   22.9%
Noah Education Holdings   24.4%   22.3%   16.2%
Charm Communications   17.2%   7.3%   17.2%
ShangPharma Corp   30.8%   32.2%   48.5%
China Nuokang Bio-Pharmaceutical   56.8%   57.6%   59.8%
Winner Medical Group   32.3%   42.9%   21.6%
China Real Estate Information Corp   25.3%   35.9%   37.0%
Shanda Interactive Entertainment   23.5%   27.7%   16.7%
Tiens Biotech Group (USA)   67.0%   63.8%   30.2%
Funtalk China Holdings   17.1%   25.7%   43.1%
Chemspec International   28.2%   22.2%   30.6%
Tongjitang Chinese Medicines   19.0%   20.3%   17.8%

 

55 

 

 

U.S.-Listed Non-PRC-based Companies               
Brookfield Residential Properties   27.5%   33.5%   23.6%
PAA Natural Gas Storage   9.1%   10.8%   3.9%
Pioneer Southwest Energy Partners   19.4%   18.5%   24.5%
Cornerstone Therapeutics   72.7%   76.6%   70.3%
BBX Capital Corp   (8.8%)   (3.4%)   40.6%
Bluegreen Corp   73.6%   71.8%   58.7%
Stream Global Services   1.6%   (0.9%)   (1.8%)
Venoco   39.2%   45.5%   (1.7%)
C&D Technologies   18.3%   17.5%   22.3%
Duncan Energy Partners   (32.2%)   (32.2%)   (31.3%)
XO Holdings   84.2%   93.1%   102.9%
Caraco Pharmaceutical Laboratories   16.4%   18.2%   19.3%
CNA Surety Corp   37.9%   37.7%   46.9%
Cascal NV   (11.3%)   (7.0%)   0.2%
Landry’s Restaurants   127.7%   116.0%   138.3%
OSG America   41.4%   56.5%   54.1%
Cox Radio   45.5%   47.7%   (6.3%)

 

The precedent going-private transactions premiums analysis indicated the following minimums, maximums, means and medians:

 

   Final Offer
Over Trading Price Premium Prior to Announcement
 
   1 Day (%)   1 Week (%)   1 Month (%) 
U.S.-Listed PRC-based Companies               
Minimum   17.1%   7.3%   16.2%
Maximum   67.0%   63.8%   59.8%
Mean   30.7%   32.0%   30.1%
Median   26.1%   27.0%   26.6%
                
U.S.-Listed Non-PRC-based Companies               
Minimum   (32.2%)   (32.2%)   (31.3%)
Maximum   127.7%   116.0%   138.3%
Mean   33.1%   35.3%   33.2%
Median   27.5%   33.5%   23.6%
                
All Companies               
Minimum   (32.2%)   (32.2%)   (31.3%)
Maximum   127.7%   116.0%   138.3%
Mean   32.1%   33.9%   31.9%
Median   26.9%   27.7%   23.6%

 

56 

 

 

Merrill Lynch observed that the merger consideration of US$7.10 per ADS represented a one-day, one-week and one-month premium of approximately 25.7%, 48.8% and 57.6%, respectively, over the applicable closing prices of the ADSs as quoted by NASDAQ measured from January 24, 2014, the last trading day before the Company announced it had received the Proposal.

 

The precedent going-private transactions premiums analysis indicated the following implied price per ADS for the Company, in each case, using a premium range of 20% to 40%:

 

      Price per ADS  
      Closing Price       Implied Price  
1-Day     US$5.65       US$6.78 – US$7.91  
1-Week     US$4.77       US$5.72 – US$6.68  
1-Month     US$4.48       US$5.38 – US$6.27  

 

None of the selected precedent transactions analyzed by Merrill Lynch is identical to the Merger. Accordingly, a complete analysis of the results of the foregoing calculations cannot be limited to a quantitative review of the results and involves complex qualitative considerations and judgments.

 

General

 

In preparing its opinion to the Special Committee, Merrill Lynch performed a variety of analyses, including those described above. The summary of Merrill Lynch’s analyses above does not purport to be a complete description of the analyses performed by Merrill Lynch. The preparation of a fairness opinion is a complex analytic process involving various quantitative and qualitative judgments and determinations as to the most appropriate and relevant financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither the opinion nor its underlying analyses is readily susceptible to partial analysis or summary description. Merrill Lynch arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. The analyses performed by Merrill Lynch include analyses based upon forecasts of future results, which results may be significantly more or less favorable than the actual results or any results suggested by Merrill Lynch’s analyses.

 

In performing its analyses, Merrill Lynch considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of the opinion. The analyses were prepared solely for the purposes of Merrill Lynch rendering its opinion to the Special Committee. Merrill Lynch’s analyses involved judgments and assumptions with regard to industry performance, general business, economic, regulatory, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the business of the Company and on the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of the Company or the industry or in the markets generally. No company, transaction or business used in Merrill Lynch’s analyses for comparative purposes is identical to the Company or the Merger, as applicable, and an evaluation of the results of those analyses is not entirely mathematical. Merrill Lynch believes that mathematical derivations (such as determining average and median) of financial data are not by themselves meaningful and should be considered together with qualitative factors, judgments and informed assumptions. The estimates contained in the Company’s analyses and the implied reference range values indicated by Merrill Lynch’s analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, companies, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of the Company. Much of the information used in, and accordingly the results of, Merrill Lynch’s analyses are inherently subject to substantial uncertainty.

 

57 

 

 

Merrill Lynch’s opinion was provided to the Special Committee in connection with its consideration of the Proposed Transaction and was only one of many factors considered by the Special Committee in evaluating the Merger and the fairness of the merger consideration. Neither Merrill Lynch’s opinion nor its analyses were determinative of the merger consideration or of the views of the Special Committee or management with respect to the Merger Agreement, the Plan of Merger and the Transactions, including the merger consideration. The type and amount of consideration payable in the Merger were determined through negotiation between the Special Committee and the Buyer Group, and the recommendation that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, was solely that of the Special Committee and was made on April 3, 2015.

 

Merrill Lynch has acted as financial advisor to the Special Committee in connection with the Proposed Transaction and provided financial advisory services, including an opinion to the Special Committee regarding the fairness, from the financial point of view, of the Per Share Merger Consideration and the Per ADS Merger Consideration, as applicable, to the holders of the Shares or ADSs (other than holders of Excluded Shares), based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Merrill Lynch in preparing its opinion. Under the terms of its engagement, the Company has agreed to pay Merrill Lynch a fee of US$1,400,000 due upon delivery of Merrill Lynch’s opinion, regardless of the conclusions reached therein. In addition, the Company may, at its sole discretion, pay an additional US$600,000 to Merrill Lynch immediately prior to or upon consummation of the Merger. In addition, the Company has agreed to reimburse Merrill Lynch’s expenses and indemnify Merrill Lynch, its affiliates and certain related parties against certain liabilities arising out of the engagement.

 

Merrill Lynch and its affiliates comprise a full-service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and financial advisory services and other commercial services and products to a wide range of companies, governments and individuals. In the ordinary course of its businesses, Merrill Lynch and its affiliates may invest on a principal basis or on behalf of customers or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions in equity, debt or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Company and certain of its affiliates.

 

Merrill Lynch and its affiliates in the past have provided, and in the future may provide, investment banking, commercial banking and other financial services to the Company and certain of its current, former or future affiliates, including acting as financial advisor to the special committee of the board of directors of Shanda Interactive in a “going-private” proposal until the completion of that role on February 14, 2012 and acting as Joint Bookrunner in connection with the proposed Initial Public Offering of Cloudary Corporation until the termination of that role prior to July 12, 2011. Merrill Lynch has, and in the future may, receive compensation for rendering investment banking, commercial banking or other financial services to the Company and its affiliates.

 

For additional information on Merrill Lynch’s analysis, please see “Presentation/discussion materials prepared by Merrill Lynch for discussion with the Special Committee and the Board, dated April 3, 2015” and “Presentation/discussion materials prepared by Merrill Lynch for discussion with the Special Committee, dated September 23, 2014,” filed as Exhibit (c)-(2) and Exhibit (c)-(3), respectively, to the Company’s transaction statement on Schedule 13E-3.

 

Copies of Merrill Lynch’s opinion dated April 3, 2015 and written presentations to the Special Committee on September 23, 2014 and April 3, 2015, are available for inspection and copying at the principal executive offices of the Company during regular business hours by any interested stockholder of the Company or representative who has been so designated in writing.

 

Purposes of and Reasons for the Merger

 

The Buyer Group

 

Under a possible interpretation of the SEC rules governing “going private” transactions, each member of the Buyer Group may be deemed to be engaged in a “going private” transaction and, therefore, required to express its reasons for the Merger to the Company’s unaffiliated security holders, as defined in Rule 13e-3 of the Exchange Act. Each member of the Buyer Group is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. For the Buyer Group, the purpose of the Merger is to enable Parent to acquire 100% control of the Company, in a transaction in which the holders of the Class A ordinary shares of the Company and the ADSs (other than the Excluded Shares, the Dissenting Shares and ADSs representing the Excluded Shares) will be cashed out in exchange for US$3.55 per Class A ordinary share or US$7.10 per ADS (less US$0.05 per ADS cancellation fees pursuant to the terms of the Deposit Agreement), respectively, without interest and net of any applicable withholding taxes, so Parent will bear the rewards and risks of the sole ownership of the Company after the ADSs and Shares are cancelled, including any increases in value of the Company as a result of improvements to the Company’s operations or acquisitions of other businesses.

 

58 

 

 

The Buyer Group believes the operating environment has changed in a significant manner since the Company’s initial public offering. There is greater domestic competition in many of the segments in which the Company operates. These changes have increased the uncertainty and volatility inherent in the business models of companies similar to the Company. As a result, the Buyer Group is of the view that there is potential for considerably greater short- and medium-term volatility in the Company’s earnings. Responding to current market challenges will require tolerance for volatility in the performance of the Company’s business and a willingness to make business decisions focused on improving the Company’s long-term profitability. The Buyer Group believes that these strategies would be most effectively implemented in the context of a private company structure. As a privately held entity, the Company’s management will have greater flexibility to focus on improving long-term profitability without the pressures exerted by the public market’s valuation of the Company and its emphasis on short-term period-to-period performance.

 

Further, as a privately held company, the Company will be relieved of many of the expenses, burdens and constraints imposed on companies that are subject to the public reporting requirements under the U.S. federal securities laws, including the Exchange Act and the Sarbanes-Oxley Act of 2002.

 

The Buyer Group decided to undertake the “going private” transaction at this time because it wants to take advantage of the benefits of the Company being a privately held company as described above and because Merger Sub was able to obtain equity financing in connection with the Merger. In the course of considering the “going private” transaction, the Buyer Group did not consider alternative transaction structures because the Buyer Group believed the Merger was the most direct and effective way to enable the Buyer Group to acquire ownership and control of the Company.

 

The Company

 

The Company’s purpose for engaging in the Merger is to enable its shareholders and ADS holders to receive US$3.55 per Share and US$7.10 per ADS in cash, without interest and net of any applicable withholding taxes, which represents (a) approximately a 25.7% premium over the closing price of the ADSs as quoted by NASDAQ on January 24, 2014, the last trading day immediately prior to the Company’s announcement on January 27, 2014 that it had received the Proposal and (b) approximately a 46.5% premium over the volume-weighted average trading price of the ADSs during the 30 trading days prior to, and including, January 24, 2014. The Company believes its long-term objectives can best be pursued as a private company.

 

The Company has determined to undertake the Merger at this time based on the analyses, determinations and conclusions of the Special Committee and the Board described in detail above under “—Reasons for the Merger and Recommendation of the Special Committee and the Board.”

 

Effects of the Merger on the Company

 

Private Ownership

 

The Company’s ADSs are currently listed on NASDAQ under the symbol “GAME.” It is expected that, immediately following the completion of the Merger, the Company will cease to be a publicly traded company and will instead become a privately held company owned directly by Parent and indirectly by the Buyer Group. Following the completion of the Merger, the ADSs will cease to be listed on NASDAQ, and price quotations with respect to sales of the ADSs in the public market will no longer be available. In addition, registration of the Company’s ADSs and the underlying Class A ordinary shares under the Exchange Act may be terminated upon the Company’s application to the SEC if such shares are not listed on a national securities exchange and there are fewer than 300 record holders of such shares. Ninety days after the filing of Form 15 in connection with the completion of the Merger or such shorter period as may be determined by the SEC, registration of the ADSs and the underlying Class A ordinary shares under the Exchange Act will be terminated. At such time, the Company will no longer be required to file periodic reports with the SEC or otherwise be subject to the U.S. federal securities laws, including the Sarbanes-Oxley Act of 2002, applicable to public companies. After the completion of the Merger, the Company’s shareholders will no longer enjoy the rights or protections that the U.S. federal securities laws provide. Furthermore, the ADS program for Class A ordinary shares of the Company will terminate.

 

59 

 

 

Upon completion of the Merger, each issued and outstanding Class A ordinary share and ADS, other than the Excluded Shares, ADSs representing the Excluded Shares and the Dissenting Shares (please see “Dissenters’ Rights” below), will be cancelled in exchange for the right to receive US$3.55 per Class A ordinary share and US$7.10 per ADS (less US$0.05 per ADS cancellation fees pursuant to the terms of the Deposit Agreement), respectively, in cash, without interest and net of any applicable withholding taxes. At the Effective Time, the Excluded Shares will be cancelled for no consideration. At the Effective Time, each ordinary share of Merger Sub issued and outstanding immediately prior to the Effective Time will be converted into one fully paid and non-assessable ordinary share of the Surviving Corporation. As a result, current shareholders and ADS holders of the Company, other than the members of the Buyer Group, will no longer have any equity interest in, or be shareholders or ADS holders of, the Company upon completion of the Merger. Consequently, the Company’s shareholders and ADS holders, other than the members of the Buyer Group, will not have the opportunity to participate in the earnings and growth of the Company and they will not have the right to vote on corporate matters. Similarly, the Company’s current shareholders and ADS holders, other than the members of the Buyer Group, will not be exposed to the risk of loss in relation to their investment in the Company.

 

At the Effective Time, each Company Option that is then outstanding and unexercised, whether or not vested or exercisable, will be cancelled and converted into the right to receive a cash amount equal to (a) the total number of Shares issuable under such Company Option immediately prior to the Effective Time multiplied by (b) the excess of US$3.55 over the exercise price payable per Share under such Company Option, without interest and net of any applicable withholding taxes. If the exercise price per Share of a Company Option is equal to or greater than US$3.55, such Company Option will be cancelled without any payment.

 

At the Effective Time, each Company Restricted Share that is then outstanding will be cancelled and converted into the right to receive a cash amount equal to US$3.55, without interest and net of any applicable withholding taxes.

 

At the Effective Time, each Company RSU that is then outstanding will be cancelled and converted into the right to receive a cash amount equal to US$3.55, without interest and net of any applicable withholding taxes.

 

We have attached the Merger Agreement to this proxy statement as Annex A. We encourage you to read the entire Merger Agreement carefully, because it is the legal document that governs the Merger.

 

Directors and Management of the Surviving Corporation

 

If the Merger is completed, the current memorandum of association and articles of association of the Company will be replaced in their entirety by the memorandum of association and articles of association of Merger Sub, as in effect immediately prior to the Effective Time (except that, at the Effective Time, Article I of the articles of association of the Surviving Corporation will be amended to read as follows: “The name of the corporation is “Shanda Games Limited”.”). In addition, the directors of Merger Sub immediately prior to the Effective Time (identified below in “Annex F—Directors and Executive Officers of Each Filing Person”) will become the directors of the Surviving Corporation and the officers of the Company will remain the officers of the Surviving Corporation, in each case unless otherwise determined by Parent prior to the Effective Time.

 

Primary Benefits and Detriments of the Merger

 

The primary benefits of the Merger to the Unaffiliated Holders include the following:

 

·the receipt by Unaffiliated Holders of a merger consideration of US$3.55 per Class A ordinary share or US$7.10 per ADS represents a premium of approximately 46.5% and 53.8%, respectively, over the volume-weighted average trading prices of the Company’s ADSs as quoted by NASDAQ during the 30 and 60 trading days prior to January 24, 2014, the last trading day prior to the Company’s announcement on January 27, 2014 that it had received the Proposal and an approximately 9.2% premium over the Company’s closing price as quoted by NASDAQ on January 27, 2014; and

 

60 

 

 

·risks to Unaffiliated Holders in connection with any possible decrease in the Company’s future revenues, free cash flow, growth or value following the Merger will be avoided.

 

The primary detriments of the Merger to the Unaffiliated Holders include the following:

 

·Unaffiliated Holders will no longer benefit from possible increases in the future revenues and free cash flow, growth or value of the Company or payment of dividends, if any; and

 

·in general, the receipt of cash pursuant to the Merger or through the exercise of dissenters’ rights will be a taxable transaction for U.S. federal income tax purposes and may also be a taxable transaction under other applicable tax laws. See “—Material U.S. Federal Income Tax Consequences” and “—Material PRC Income Tax Consequences” beginning on page [ ] for additional information.

 

The primary benefits of the Merger to the Buyer Group include the following:

 

·if the Company is managed and executes its business strategies successfully, the value of the Buyer Group’s equity interests in the Company could increase due to possible increases in future revenues, free cash flow and the underlying value of the Company or the payment of dividends, if any, that will accrue to Parent;

 

·the Company will be relieved from pressure exerted by the public market’s valuation and the emphasis on short-term period-to-period performance, which may not maximize the long-term equity value of the Company, and as a result the Company’s management will have greater flexibility to focus on long-term strategic planning in a highly competitive business and on improving long-term profitability;

 

·the Company’s management will have more freedom to change the capital spending strategies without public market scrutiny or analysts’ quarterly expectations;

 

·the Company will be able to develop and introduce new products and services or change its pricing strategies to attract customers without public market scrutiny or the pressure to meet short-term forecasts; and

 

·the costs and administrative burden resulting from operating the Company as a publicly traded company will be reduced, including the costs in connection with regulatory filings and compliance requirements.

 

The primary detriments of the Merger to the Buyer Group include the following:

 

·all of the risks associated with any possible decrease in the Company’s revenues, free cash flow or value following the Merger will be borne by Parent;

 

·the business risks facing the Company such as increased competition will be borne by Parent; and

 

·following the Merger, there will be no trading market for the Surviving Corporation’s equity securities and Parent’s equity investment in the Surviving Corporation following the Merger will bear material risks resulting from such limited liquidity.

 

In connection with the Merger, some of the Company’s directors and executive officers have interests in the Merger that are different from, or in addition to, the interests of the shareholders of the Company generally, as described in more detail under “—Interests of Certain Persons in the Merger” beginning on page [  ].

 

The Company’s Net Book Value and Net Earnings

 

After the closing of the Merger, each member of the Buyer Group will have an indirect interest in the Company’s net book value and net earnings in proportion to such member’s ownership interest in Parent, which will wholly own the Surviving Corporation. The Company’s net income attributable to its shareholders for the fiscal year ended December 31, 2014 was approximately US$167.7 million and its net book value as of December 31, 2014 was approximately US$306.0 million.

 

61 

 

 

The table below sets forth the indirect beneficial interest in the Company’s net book value and net earnings for each member of the Buyer Group before and after the Merger, based on the historical net book value and net earnings of the Company as of and for the year ended December 31, 2014.

 

   Ownership Prior to the Merger(1)   Ownership After the Merger(2) 
                      Net Book Value                     Earnings                      Net Book Value                     Earnings 
Name  US$’000   %   US$’000   %   US$’000   %   US$’000   % 
Ningxia Yilida   27,595    9.0    15,122    9.0    27,595    9.0    15,122    9.0 
Ningxia   73,198    23.9    40,113    23.9    73,198    23.9    40,113    23.9 
Hao Ding   60,804    19.9    33,321    19.9    60,804    19.9    33,321    19.9 
Orient Hongtai   34,962    11.4    19,160    11.4    34,962    11.4    19,160    11.4 
Orient Hongzhi   34,962    11.4    19,160    11.4    34,962    11.4    19,160    11.4 
Ningxia Silkroad                   37,925    12.2    20,783    12.2 
Zhengjun Investment                   18,963    6.1    10,392    6.1 
Zhongrong Legend                   17,597    6.0    9,643    6.0 

 

 

(1)Ownership percentages are based on Shares outstanding as of April 3, 2015, the date of the Merger Agreement.

 

(2)Ownership percentages after the Merger are based on all Excluded Shares being cancelled without payment of any consideration and all other ordinary shares (including Class A ordinary shares represented by ADSs) and Company Options, Company Restricted Shares and Company RSUs being cancelled in exchange for the Per Share Merger Consideration and Per ADS Merger Consideration and other amounts due pursuant to the terms of the Merger Agreement, as applicable. Further, such percentages are subject to adjustment pursuant to the terms and conditions of the Merger Agreement, the Equity Commitment Letters and the Support Agreement.

 

Plans for the Company after the Merger

 

Following the completion of the Merger, Parent will own 100% of the equity interest in the Surviving Corporation. The Buyer Group anticipates that the Company will continue to conduct its operations substantially as they are currently being conducted, except that the Company will cease to be a publicly traded company and will instead be a wholly owned subsidiary of Parent.

 

Except as set forth in this proxy statement and transactions already under consideration by the Company, the Buyer Group does not have any current plans, proposals or negotiations that relate to or would result in any of the following:

 

·an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries;

 

·the sale or transfer of a material amount of the assets of the Company or any of its subsidiaries; or

 

·any other material changes in the Company, including with respect to the Company’s corporate structure or business.

 

However, Parent has been evaluating and will continue to evaluate, from time to time, the Company’s entire business and operations in order to determine what action is in the best interests of the Surviving Corporation and its shareholders, which may include a disposition or acquisition of material assets or other such extraordinary transactions. Subject to market conditions and the ability of the Buyer Group and the Surviving Corporation to obtain requisite regulatory approvals, the Buyer Group may also consider potentially relisting the Surviving Corporation or a substantial part of its business on an internationally recognized stock exchange in mainland China. However, given the volatility of the A-share market in the PRC and, more importantly, the complexity and uncertainty of the A-share listing approval process as set forth in the paragraph below, the Buyer Group has not formulated any definitive plan with respect to any relisting and its evaluation of such relisting may take significant time and may not, in the end, lead to any concrete transaction involving the Surviving Corporation.

  

In the event the Buyer Group definitively elects to relist the Surviving Corporation on an internationally recognized stock exchange in the PRC, the Buyer Group and the Surviving Corporation will face a number of uncertainties and potential hurdles. For example:

 

·to effect an A-share listing in China, prior approval of the China Securities Regulatory Commission (“CSRC”) is required; such approval is subject to a high degree of uncertainty, particularly given the indication by the CSRC in a press release on July 3, 2015, that, the total number of listings through initial public offering to be approved by the CSRC will be reduced in response to the recent tumble of the A-share market (the period for the reduction was not specified in the press release);

 

·the CSRC and the relevant stock exchanges would likely require the Surviving Corporation to engage in extensive restructuring prior to any relisting, and the cost imposed by such restructuring could be substantial, rendering it economically unviable for the Surviving Corporation to continue to seek a public listing on such an exchange; and

 

·the negotiations involved in a public listing and related restructuring are highly time consuming and complicated, involving multiple parties, such as other investors and shareholders, whose interests are not always aligned.

 

The above factors, together with the volatility of the A-share market in the PRC, make it premature for the Buyer Group to state with any degree of certainty whether the Surviving Corporation will in fact pursue relisting after the closing of the Transaction.

 

Subsequent to the completion of the Merger and the anticipated deregistration of the Company’s Class A ordinary shares and ADSs, the Company will no longer be subject to the Exchange Act and NASDAQ compliance and reporting requirements and the related direct and indirect costs and expenses, and may experience positive effects on profitability as a result of the elimination of such costs and expenses.

 

Alternatives to the Merger

 

The Special Committee was formed following a Board meeting on January 28, 2014 in response to the receipt of the Proposal from the Buyer Group (which at the time was comprised of Primavera and Shanda Interactive) on January 27, 2014. The Special Committee was reconstituted on September 4, 2014 as further discussed in “—Background of the Merger” beginning on page [ ].

 

62 

 

 

In light of the following factors, the Special Committee determined that there was no viable alternative to the proposed sale of the Company to the Buyer Group:

 

(i)the express intention of the members of the Buyer Group (which as of the date of this proxy statement is comprised of Ningxia Yilida, Ningxia, Orient Hongtai, Orient Hongzhi, Hao Ding, Zhengjun Investment, Ningxia Silkroad and Zhongrong Legend) not to sell their Shares and/or ADSs to any third party, and the Buyer Group’s aggregate beneficial ownership of approximately 75.6% of the Company’s issued and outstanding Shares and control of approximately 90.7% of the total number of votes represented by the Company’s issued and outstanding Shares (as of the date of this proxy statement);

 

(ii)the fact that, in the “market check” Merrill Lynch conducted under the direction of the Special Committee, all the parties deemed to be potentially interested in and capable of acquiring the Company and contacted by Merrill Lynch declined to engage in discussions with the Special Committee regarding any such acquisition; and

 

(iii)the fact that, since the announcement of the Proposal on January 27, 2014, no party other than the members of the Buyer Group has made any proposal to the Company or the Special Committee with respect to any alternative transaction with the Company.

 

In addition, the Special Committee and the Board considered, as an alternative to the Merger, that the Company remain as a public company. However, based on the considerations set forth in the section entitled “—Reasons for the Merger and Recommendation of the Special Committee and the Board” beginning on page [  ], the Special Committee and the Board have concluded that it is more beneficial to the Unaffiliated Holders for the Company to enter into the Merger Agreement and pursue the consummation of the Transactions, including the Merger, rather than to remain a public company. The Special Committee also took into account that, prior to the receipt of shareholder approval, the Company, subject to compliance with the terms and conditions of the Merger Agreement, can terminate the Merger Agreement in order to accept an alternative transaction proposed by a third party that is a Superior Proposal, subject to the payment of a termination fee of US$57,250,000, as provided in the Merger Agreement. In this regard, the Special Committee recognized that it has flexibility under the Merger Agreement to respond to an alternative transaction proposed by a third party that is or is reasonably likely to result in a Superior Proposal, including the ability to provide information to, and engage in discussions and negotiations with, such party (and, if such proposal is a Superior Proposal, recommend such proposal to the Company’s shareholders).

 

Effects on the Company if the Merger Is Not Completed

 

If the Merger Agreement is not authorized, approved and adopted by the shareholders or if the Merger is not completed for any other reason, the shareholders will not receive any payment for their Shares and/or ADSs in connection with the Merger nor will the holders of any options, Company Restricted Shares or Company RSUs receive payment pursuant to the Merger Agreement. Instead, the Company will remain a publicly traded company, the ADSs will continue to be listed and traded on NASDAQ, provided that the Company continues to meet NASDAQ’s listing requirements, and the Company will remain subject to SEC reporting obligations. Therefore, the Company’s shareholders will continue to be subject to similar risks and opportunities as they currently are with respect to their ownership of the Shares and/or ADSs. Accordingly, if the Merger is not completed, we cannot assure you as to the effect of these risks and opportunities on the future value of the Shares or ADSs, including the risk that the market price of the ADSs may decline to the extent that the current market price reflects a market assumption that the Merger will be completed.

 

Under specified circumstances, the Company may be required to pay Parent or its designees a termination fee of US$57,250,000 and reimburse Parent for its expenses in connection with the Merger up to US$3,000,000, or Parent may be required to pay the Company a termination fee of US$114,500,000 and reimburse the Company for certain expenses in connection with the Merger up to US$3,000,000, in each case as described in the section entitled “The Merger Agreement—Termination Fee and Reimbursement of Expenses” beginning on page [ ]. If the Merger is not completed, the Board will, from time to time, evaluate and review, among other things, the business, operations, dividend policy and capitalization of the Company and make such changes as are deemed appropriate, and continue to seek to identify strategic alternatives to enhance shareholder value. If the Merger Agreement is not approved by the shareholders or if the Merger is not completed for any other reason, we cannot assure you that any other transaction acceptable to the Company will be offered, or that the business, prospects or results of operations of the Company will not be adversely impacted.

 

63 

 

 

Financing of the Merger

 

The Buyer Group estimates that the total amount of funds necessary to complete the Transactions, including the Merger, will be approximately US$486 million, assuming no exercise of dissenters’ rights by shareholders of the Company. This amount includes the cash to be paid to the Unaffiliated Holders and holders of Company Options, Company Restricted Shares and Company RSUs, as well as the related costs and expenses, in connection with the Merger and the other Transactions. It does not consider the value of the Excluded Shares, which will be cancelled for no consideration in the Merger. For additional information regarding such cancellation, please see “The Merger Agreement—Merger Consideration” beginning on page [ ].

 

The total amount of funds necessary to complete the Merger and the other Transactions is expected to be provided through a combination of (a) aggregate equity commitments of US$467,217,590.95, which are discussed below, and (b) cash from the Company and its subsidiaries. As of the date of this proxy statement, there are no alternative financing arrangements or plans in place to acquire the funds necessary for the Merger and the other Transactions.

 

The Merger and the other Transactions are expected to be funded primarily through cash contributions contemplated by the Equity Commitment Letters, by and between Parent and each of Ningxia Silkroad, Zhengjun Investment and Zhongrong Legend. Under the terms and subject to the conditions of the Equity Commitment Letters, Ningxia Silkroad, Zhengjun Investment and Zhongrong Legend will provide equity financing in an aggregate amount of US$467,217,590.95 to Parent to complete the Merger. The remaining funds necessary to complete the Merger and the other Transactions are expected to be provided by cash from the Company and its subsidiaries.

 

Pursuant to these Equity Commitment Letters, each of Ningxia Silkroad, Zhengjun Investment and Zhongrong Legend has committed to purchase, or cause the purchase of, for cash, subject to the terms and conditions therein, equity securities of Parent, immediately prior to the Effective Time, in an amount of US$234,542,965.55 by Ningxia Silkroad, in an amount of US$117,271,481.00 by Zhengjun Investment and in an amount of US$115,403,144.40 by Zhongrong Legend. Such funds are to be used solely for the purpose of completing the Merger and the other Transactions in accordance with the Merger Agreement. Parent may, upon subsequent agreement with the applicable Sponsor, amend or modify the Equity Commitment Letters so long as (a) the aggregate proceeds of the Equity Commitment Letters (as amended or modified) will be sufficient for Parent and the Surviving Corporation to pay (i) the Merger Consideration and (ii) any other amounts required to be paid in connection with the consummation of the Transactions upon the terms and conditions contemplated in the Merger Agreement; and (b) such amendment or modification would not prevent, materially delay or materially impede or impair (i) the ability of Parent and Merger Sub to consummate the Transactions or (ii) the rights and benefits of the Company under the Equity Commitment Letters.

 

Each Sponsor’s commitment under its Equity Commitment Letter is conditioned upon (a) the satisfaction or waiver of the conditions to Parent and Merger Sub’s obligations to complete the Merger under the Merger Agreement; and (b) the substantially contemporaneous consummation of the closing of the Merger.

 

The obligation of each of the Sponsors to fund the equity commitment under its Equity Commitment Letter will terminate automatically and immediately upon the earliest to occur of (a) the valid termination of the Merger Agreement in accordance with its terms; (b) the closing of the Merger, at which time such obligation will be discharged, but subject to the performance of such obligation; and (c) the Company or any of its affiliates asserting a claim that would make the relevant Limited Guarantee terminable in accordance with the terms thereof.

 

The Company is an express third-party beneficiary of each of the Equity Commitment Letters to the extent of its right to seek specific performance of each of the equity commitments under the circumstances in which the Company would be permitted by the Merger Agreement to obtain specific performance requiring Parent and Merger Sub to enforce the equity commitments. Each of the Sponsors may assign or delegate all or a portion of its obligations to fund its equity commitment to any of its affiliates or any other investment fund advised or managed by such affiliate so long as such Sponsor remains liable for the obligations under its Equity Commitment Letter.

 

64 

 

 

Pursuant to the Merger Agreement, each of Parent and Merger Sub is required to use its reasonable best efforts to (a) obtain financing on the terms and conditions described in the Equity Commitment Letters; (b) maintain in effect the Equity Commitment Letters until the Merger is consummated; (c) satisfy, or cause to be satisfied, on a timely basis all conditions to the closing of and funding under the Equity Commitment Letters applicable to Parent and/or Merger Sub that are within its control; (d) consummate the financing at or prior to the Effective Time; and (e) enforce the relevant parties’ funding obligations and the rights of Parent and Merger Sub under the Equity Commitment Letters to the extent necessary to fund the Merger Consideration.

 

Consortium Agreement

 

On March 16, 2015, Ningxia Yilida, Ningxia, Orient Hongtai, Orient Hongzhi and Hao Ding entered into the Third Consortium Agreement. Under the Third Consortium Agreement, the consortium members agreed, among other things, (a) to form a consortium to jointly make a proposal to acquire the Company in a “going private” transaction; (b) to deal exclusively with each other with respect to such “going private” transaction until the earlier of (i) April 30, 2015 and (ii) termination of the Third Consortium Agreement; and (c) to cooperate and proceed in good faith to negotiate and consummate the “going private” transaction. On April 3, 2015, each of Zhongrong Legend, Ningxia Silkroad and Zhengjun Investment entered into an adherence agreement, pursuant to which each of Zhongrong Legend, Ningxia Silkroad and Zhengjun Investment became a party to the Third Consortium Agreement as a sponsor.

 

The Third Consortium Agreement provides that, concurrently with the execution of the Merger Agreement, Ningxia Yilida, Ningxia, Orient Hongtai, Orient Hongzhi and Hao Ding would enter into or cause its affiliates to enter into, as applicable, a support agreement with Parent, pursuant to which they or their affiliates, as applicable, would contribute all of their Shares of the Company (including Shares represented by ADSs), in exchange for the same number and class of shares of the Parent, at the closing of the “going private” transaction. In addition, the Third Consortium Agreement obligates the parties thereto to vote against any competing proposal and restrict transfers of Shares of the Company.

 

Certain consortium members and/or their affiliated entities had previously entered into the First Consortium Agreement and the Second Consortium Agreement. These previous consortium agreements had terms and conditions, including obligations to deal with each other exclusively, similar to those of the Third Consortium Agreement; however, the exclusivity periods under these two previous consortium agreements had both expired at the time that the Third Consortium Agreement was entered into. See “—Background of the Merger” beginning on page [ ] for additional information.

 

Limited Guarantees

 

Concurrently with the execution and delivery of the Merger Agreement on April 3, 2015, each of the Guarantors, namely Zhongrong Legend, Ningxia Silkroad and Zhengjun Investment executed and delivered the Limited Guarantees. Under the Limited Guarantees, the Guarantors have collectively guaranteed in favor of the Company the entire portion of the payment obligations of Parent and Merger Sub under the Merger Agreement.

 

Support Agreement

 

Concurrently with the execution and delivery of the Merger Agreement on April 3, 2015, the Rollover Shareholders entered into the Support Agreement with Parent, pursuant to which they agreed, among other things, that, from the date of the Support Agreement until the termination of the Support Agreement in accordance with its terms (a) each Rollover Shareholder would appear at any shareholders’ meeting of the Company or otherwise cause the Shares held by such Rollover Shareholder to be counted as present for the purposes of establishing a quorum and vote or cause to be voted such Shares (i) in favor of the authorization and approval of the Merger Agreement, the Plan of Merger and the Transactions, including the Merger and (ii) against any Competing Transaction; and (b) the Rollover Shares (including Rollover Shares represented by ADSs) will, at the Effective Time, be cancelled for no consideration in the Merger. A copy of the Support Agreement is attached as Annex E to this proxy statement and is incorporated herein by reference.

 

Remedies

 

The parties to the Merger Agreement may be entitled to the payment of a termination fee or the grant of specific performance of the terms of the Merger Agreement, including an injunction or injunctions to prevent breaches of the Merger Agreement, in addition to any other remedy at law or equity, subject to certain limitations as described under the section entitled “The Merger Agreement—Remedies” beginning on page [ ].

 

65 

 

 

Interests of Certain Persons in the Merger

 

In considering the recommendation of the Special Committee and the Board with respect to the Merger, you should be aware that each member of the Buyer Group has interests in the transaction that are different from, and/or in addition to, the interests of the Company’s shareholders generally. The Board and Special Committee were aware of such interests and considered them, among other matters, in reaching their decisions to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, and recommend that the Company’s shareholders vote in favor of authorizing and approving the Merger Agreement, the Plan of Merger and the Transactions, including the Merger. Except as set forth under “—Background of the Merger,” no director who is not an employee of the Company has retained an unaffiliated representative to act solely on behalf of unaffiliated security holders for purposes of negotiating the terms of the Transactions and/or preparing a report concerning the fairness of the Transactions.

 

Interests of the Buyer Group

 

In considering the recommendation of the Special Committee and the Board with respect to the Merger, you should be aware that each member of the Buyer Group has interests in the transaction that are different from, and/or in addition to, the interests of the Company’s shareholders generally. The Special Committee and the Board were aware of such interests and considered them, among other matters, in reaching their decisions to approve the Merger Agreement.

 

As a result of the Merger, Parent will own 100% of the equity interest in the Surviving Corporation immediately following the completion of the Merger. Ningxia, Hao Ding, Ningxia Silkroad, Orient Hongtai, Orient Hongzhi, Ningxia Yilida, Zhengjun Investment and Zhongrong Legend will beneficially hold 23.9%, 19.9%, 12.2%, 11.4%, 11.4%, 9.0%, 6.1% and 6.0%, respectively, of the entire equity interests in Parent immediately following the completion of the Merger. Because of Parent’s equity interest in the Surviving Corporation, each member of the Buyer Group will directly or indirectly enjoy the benefits from any future earnings and growth of the Company after the Merger which, if the Company is successfully managed, could exceed the value of their original investments in the Company. Parent will also directly bear, and each member of the Buyer Group will indirectly bear, the corresponding risks of any possible decreases in the future earnings, growth or value of the Company. Parent’s investment in the Surviving Corporation will be illiquid, with no public trading market for the Surviving Corporation’s shares and no certainty that an opportunity will develop to sell its shares in the Surviving Corporation at an attractive price, or that dividends paid by the Surviving Corporation will be sufficient to recover its investment.

 

The Merger may also provide additional means to enhance shareholder value for the Buyer Group, including improved profitability due to the elimination of the expenses associated with public company reporting and compliance requirements; increased flexibility and responsiveness in management of the business to achieve growth and respond to competition without the restrictions of short-term earnings comparisons; and additional means for making liquidity available to the Buyer Group, such as through dividends or other distributions.

 

Relationship Between the Buyer Group and Certain Directors

 

As of the date of this proxy statement, Mr. Zhang, the chairman of the Board and acting chief executive officer of the Company, is the sole shareholder of Shanghai Yingfeng, which is the general partner of Ningxia Yilida and Zhengjun Investment. Both Ningxia Yilida and Zhengjun Investment are members of the Buyer Group. In addition, Mr. Zhang is a director of Merger Sub, and the Buyer Group expects that he will become a director of the Surviving Corporation. Therefore, Mr. Zhang has interests that are different from, or in addition to, the interests of the shareholders of the Company generally. Mr. Shaolin Liang, a director of the Company, serves as a vice general manager of Ningxia, which is a member of the Buyer Group. Mr. Lin, a director of the Company, served as the chief executive officer of China Universal Asset Management Co., Ltd., an affiliate of Orient Hongtai and Orient Hongzhi, each of which is a member of the Buyer Group, from April 2004 to April 16, 2015. Therefore, both Mr. Shaolin Liang and Mr. Lin may have interests that are different from, or in addition to, the interests of the shareholders of the Company generally.

 

66 

 

 

Treatment of Shares, Options, Company Restricted Shares and Company RSUs Held by Directors and Executive Officers

 

If the Merger is completed, at the Effective Time, each Company Option issued and outstanding immediately prior to the Effective Time, will be cancelled and converted into the right to receive, as soon as practicable after the Effective Time, an amount equal to the product of (a) the total number of Shares issuable under such Company Option immediately prior to the Effective Time multiplied by (b) the excess of US$3.55 over the exercise price payable per Share under such Company Option, in cash, without interest and net of any applicable withholding taxes, and each Company Restricted Share and Company RSU that is outstanding immediately prior to the Effective Time will be cancelled and converted into the right to receive, as soon as practicable after the Effective Time, an amount equal to US$3.55, in cash, without interest and net of any applicable withholding taxes.

 

As of the date of this proxy statement, the Company’s directors and executive officers (as set forth in “Security Ownership of Certain Beneficial Owners and Management of the Company” beginning on page [  ]), as a group, beneficially own an aggregate of 52,200,382 Shares. These consist of (a) 49,579,259 issued and outstanding ordinary shares, (b) issued and unexercised Company Options to purchase 2,418,623 Class A ordinary shares issued pursuant to the Share Incentive Plan and exercisable within 60 days from the date of this proxy statement, (c) zero (0) Company Restricted Shares the restrictions over which will lapse within 60 days from the date of this proxy statement, and (d) 202,500 Company RSUs the restrictions over which will lapse within 60 days from the date of this proxy statement. The Company Options issued pursuant to the Share Incentive Plan and held by the Company’s directors and executive officers have a weighted average exercise price of US$1.8703 per Share.

 

The following table shows, as of the date of this proxy statement, for each director and executive officer of the Company, (a) the number and classes of Shares owned, (b) the cash payment that will be made in respect of the Shares at the Effective Time, (c) the number of Shares underlying Company Options to purchase Shares granted under the Share Incentive Plan, (d) the average exercise price payable per Share for the outstanding and unexercised Company Options held by such person, (e) the cash payment that will be made in respect of the Company Options to purchase Shares at the Effective Time, (f) the number of Company Restricted Shares held, (g) the cash payment that will be made in respect of the Company Restricted Shares at the Effective Time, (h) the number of Company RSUs held, (i) the cash payment that will be made in respect of the Company RSUs at the Effective Time and (j) the total cash payment such person may receive in respect of all payments described in this table if the Merger is consummated (in all cases before applicable withholding taxes).

 

   

Shares

   

Options to Purchase Shares

   

Company Restricted Shares

   

Company RSUs

      Total Cash Payments (including Company Restricted  
Name of Directors and Executive Officers  

Shares Beneficially Owned

   

Cash Payment Thereof (US$)

   

Shares Underlying

   

Average Exercise Price

   

Cash Payment Therefor (US$)

   

Shares Underlying

   

Cash Payment Therefor (US$)

   

Shares Underlying

   

Cash Payment Therefor (US$)

   

Share Payments that may be subject to Deferred Payment Arrangements) (US$)

 
Yingfeng Zhang     48,803,359       156,810.60                                     37,500       133,125.00       289,935.60  
Shaolin Liang                                                            
Danian Chen     500,000       1,775,000.00                                                 1,775,000.00  
Li Yao     72,300       256,665.00                                     97,500       346,125.00       602,790.00  
Lijun Lin     25,000       88,750.00                                                 88,750.00  
Heng Wing Chan     25,000       88,750.00                                                 88,750.00  
Yong Gui     6,250       22,187.50                                     18,750       66,562.50       88,750.00  
Tunghai Chien     230       816.50       2,354,987       1.676       4,412,135.50                               4,412,952.00  
Jisheng Zhu     73,768       261,876.40       1,359,469       2.206       1,827,126.34                   75,000       266,250.00       2,355,252.74  
Jin Zhang     73,352       260,399.60                                     112,500       399,375.00       659,774.60  
Total for All Directors and Executive Officers     49,579,259       2,911,255.60       3,714,456       1.86       6,239,261.84                   341,250       1,211,437.50       10,361,954.94  

 

67 

 

 

After the completion of the Merger, the maximum amount of cash payments the Company’s directors and executive officers may receive in respect of their Shares, Company Options, Company Restricted Shares and Company RSUs is approximately US$10,361,954.94, which includes (a) US$2,911,256.00 in respect of 820,072 issued and outstanding Shares held by them as of the date of this proxy statement, (b) US$6,239,261.84 in respect of Company Options to purchase 3,714,456 Shares granted under the Share Incentive Plan which are issued but unexercised as of the date of this proxy statement, (c) US$0 in respect of zero (0) Company Restricted Shares held by them as of the date of this proxy statement, and (d) US$1,211,437.50 in respect of 341,250 Company RSUs held by them as of the date of this proxy statement.

 

Indemnification; Directors’ and Officers’ Insurance

 

Pursuant to the terms of the Merger Agreement, the Company’s directors and officers will be entitled to certain ongoing indemnification and coverage under directors’ and officers’ liability insurance policies from the Company. See the section entitled “The Merger Agreement—Indemnification; Directors’ and Officers’ Insurance” beginning on page [ ] for a description of such ongoing indemnification and coverage obligations.

 

The Special Committee

 

On January 28, 2014, the Board established the Special Committee to, among other things, consider and evaluate the Proposed Transaction, determine whether the Proposed Transaction was in the best interests of the Unaffiliated Holders, make recommendations to the Board on the Proposed Transaction and negotiate the terms of the “going private” transaction on behalf of the Board, including the terms of the Merger Agreement and any other document to be entered into with the Buyer Group in connection with the Proposed Transaction. The Special Committee was originally composed of the following independent directors: Mr. Chan, Mr. Gui and Mr. Lin.

 

On August 31, 2014, Orient Finance, which is a direct and wholly owned subsidiary of Orient Securities and an affiliate of Orient Hongtai and Orient Hongzhi, entered into an agreement with Shanda SDG to purchase 123,552,669 Class A ordinary shares from Shanda SDG and acceded to the Buyer Group on September 1, 2014. In light of his role as the chief executive officer of China Universal Asset Management, an affiliate of Orient Finance, Mr. Lin resigned from the Special Committee. See “—Background of the Merger” beginning on page [ ] for additional information.

  

On September 4, 2014, following Mr. Lin’s resignation, the Board announced the reconstitution of the Special Committee consisting of Messrs. Chan and Gui. Accordingly, the Special Committee consisted solely of Messrs. Chan and Gui at the time that it unanimously (a) determined that the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, were fair to, and in the best interests of, the Company and the Unaffiliated Holders; (b) declared advisable the Merger Agreement, the Plan of Merger and the Transactions, including the Merger; and (c) recommended that the Board authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger.

 

Other than the cash-out of Company Restricted Shares and Company RSUs held by them, their receipt of Board and Special Committee compensation (which was not and is not contingent upon the completion of the Merger, or the Special Committee’s or the Board’s recommendation of the Merger) and their indemnification and liability insurance rights under the Merger Agreement and the Company’s memorandum and articles of association, neither of the members of the Special Committee as reconstituted on September 4, 2014 has a financial interest in connection with the Merger or any of the Transactions that is different from, or in addition to, those of the Unaffiliated Holders nor is either of them related to any member of the Buyer Group. See “—Interests of Certain Persons in the Merger” beginning on page [  ] for additional information. The Board did not place any limitations on the authority of the Special Committee regarding its investigation and evaluation of the Merger.

 

The Company has compensated, and intends to continue to compensate, each member of the Special Committee in exchange for his service in such capacity at a rate of US$10,000 per month for the chairman of the Special Committee and US$6,800 per month for each other member of the Special Committee (in each case, the payment of which is not contingent upon the consummation of the Merger or the Special Committee’s or the Board’s recommendation of the Merger).

 

68 

 

 

Contingent Equity Awards to Certain Key Personnel

 

On September 18, 2014, the Company entered into commitment letters with eight game producers of the Company, pursuant to which the Company committed to grant to each such game producer, subject to compliance with applicable laws, rules and regulations, the completion of the Merger and the other terms and conditions set forth therein, equity awards in an amount of no less than RMB80 million (US$13 million) per individual producer (based on a valuation of the Company of 15 times its 2013 consolidated net profits) within 30 business days following the completion of the Merger. Based on a valuation of the Company of 15 times its 2013 consolidated net profits, the value of these equity awards range from RMB80 million (US$12.9 million) to RMB100 million (US$16.1 million) per individual producer. None of such game producers was involved in the review, evaluation and negotiation of the Buyer Group’s “going private” proposal, the Merger Agreement or the Company’s other strategic alternatives.

 

Position with the Surviving Corporation

 

The directors of Merger Sub immediately prior to the Effective Time will become the directors of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time will become the officers of the Surviving Corporation, in each case, unless otherwise determined by Parent prior to the Effective Time. Mr. Zhang is a director of Merger Sub, and the Buyer Group expects that he will become a director of the Surviving Corporation.

 

Related-Party Transactions

 

We have adopted an audit committee charter, which requires the audit committee to review and approve all related-party transactions as defined in Item 404 of Regulation S-K on an ongoing basis. In addition to the arrangements in connection with the Merger discussed elsewhere in this proxy statement, for a description of significant related-party transactions for the years ended December 31, 2013 and 2014, see “Item 7. Major Shareholders and Related-Party Transactions” included in the Company’s Annual Reports on Form 20-F for the fiscal years ended December 31, 2013 and December 31, 2014, respectively, which are incorporated by reference into this proxy statement. See “Where You Can Find More Information” beginning on page [  ] for a description of how to obtain copies of the Company’s Annual Reports.

 

Related-Party Transactions in 2014 and First Half 2015

 

Acquisition of Platform and Prepaid Card Distribution Businesses

 

Before August 2013, we relied on Shanghai Shengzhan Networking Technology Co., Ltd. (“Shengzhan”), and Tianjin Shengjing Trade Co., Ltd. (“Shengjing”), for platform services and prepaid card distribution services, and paid them service fees for services including online billing, user authentication, customer service, anti-fatigue compliance, data support services, and prepaid card marketing and distribution. In July 2013, we entered into a transaction framework agreement and a series of ancillary agreements to acquire Shengzhan and Shengjing from Shanda Interactive, and completed the acquisition in August 2013. Both Shengzhan and Shengjing were entities under the common control of Shanda Interactive at the time of the acquisition. The aggregate consideration for the transaction was US$812.7 million, subject to closing adjustments and payable in a combination of cash, deferred payments and settlement of an outstanding loan receivable from Shanda Interactive. As of December 31, 2014, the consideration has been fully paid. In addition, as a part of the Pre-IPO Reorganization, Shengqu Information Technology (Shanghai) Co., Ltd. (“Shengqu”) entered into various variable interest entity agreements with Shengzhan and Shengjing. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Our VIEs and Their Shareholders” included in the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2014, incorporated by reference into this proxy statement. See “Where You Can Find More Information” beginning on page [  ] for a description of how to obtain a copy of the Company’s Annual Report.

 

Transactions and Agreements with Shanda Interactive

 

Shanda Interactive ceased to be a shareholder of the Company on November 25, 2014. Transactions and agreements with Shanda Interactive after November 25, 2014 will no longer be considered related-party transactions.

 

Pursuant to Shanda Interactive’s reorganization effective July 1, 2008 (the “Pre-IPO Reorganization”), Shanda Interactive transferred substantially all of its assets and liabilities related to its online game business to us. Prior to the Pre-IPO Reorganization, the Company’s online game business was operated by Shanda Interactive through its various subsidiaries and variable interest entities (“VIEs”). Effective July 1, 2008, pursuant to the Pre-IPO Reorganization, we assumed substantially all of the assets and liabilities related to the online game business. As a result of the Pre-IPO Reorganization, we conduct the online game business through the Company’s VIEs.

 

69 

 

 

In connection with the Pre-IPO Reorganization, we entered into agreements with Shanda Interactive with respect to various ongoing relationships between Shanda Interactive and us, including but not limited to the following in 2014 and the first half of 2015. For more information, see “Related Party Transactions—Transactions and Agreements with Shanda Interactive” included in the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2014, incorporated by reference into this proxy statement. See “Where You Can Find More Information” beginning on page [  ] for a description of how to obtain a copy of the Company’s Annual Report.

 

Amended and Restated Non-Compete Agreement

 

Under the amended and restated non-compete agreement between Shanda Interactive and us, Shanda Interactive has agreed, for a period of five years commencing July 1, 2013, not to engage in the online game and mobile game business, which refers to the sourcing, development, operation and licensing of online games and mobile games and related intellectual property rights and activities incidental to such business, anywhere in the world, except that (a) certain of Shanda Interactive’s subsidiaries may continue to engage in third-party billing, payment and related services; (b) Shanda Interactive may hold or acquire equity interests in a company that does not have more than 25.0% of its gross revenues (based on the latest annual audited financial statements of the investee company) attributable to the online game and mobile game business; (c) Shanda Interactive may make minority, passive or venture capital investments by its private equity and venture capital funds; and (d) Shanda Interactive may operate virtual communities with certain online game features provided that such features do not constitute the core business model of such community. In addition, the agreement permits Shanda Interactive to acquire or invest in any third party engaging in the online game and mobile game business if, after using its reasonable best efforts to make such investment opportunity available to the Company as required under the agreement, we do not pursue such opportunity; provided that Shanda Interactive’s equity interest in such third party will not exceed 50%.

 

Furthermore, Shanda Interactive has agreed, for a period of five years commencing July 1, 2013, not to solicit any customer, supplier or any other third party having any business relationship with the Company or any of its employees.

 

Domain Names and Trademarks License Agreement

 

As part of the Pre-IPO Reorganization, Shengqu, one of the Company’s PRC subsidiaries, entered into a domain names and trademarks license agreement with Shanda Computer (Shanghai) Co. Ltd (“Shanda Computer”), a company then under the common control of Shanda Interactive on July 1, 2008, pursuant to which Shanda Computer licensed to Shengqu nine trademarks on a nonexclusive, nontransferable and royalty-free basis. On October 14, 2014, Shanda Computer reached a supplementary agreement with Shengqu, pursuant to which such licenses were terminated on December 31, 2014.

 

On January 1, 2011, Shengqu entered into a trademarks license agreement (the “2011 Trademarks License Agreement”) with Shanghai Shanda Networking Co., Ltd. (“Shanda Networking”), a company then under the common control of Shanda Interactive and Shanda Computer, pursuant to which Shanda Networking and Shanda Computer licensed to Shengqu 13 trademarks on a nonexclusive, nontransferable and royalty-free basis, including “Shanda Games.” On October 14, 2014, Shanda Networking and Shanda Computer reached a supplementary agreement with the Company, pursuant to which the term of the 2011 Trademarks License Agreement was extended to the later of (a) December 31, 2016 or (b) the 90th day after the earlier of (i) the Company no longer being a listed company, or (ii) Shanda Interactive no longer holding 50% or more of the voting rights in the Company. As Shanda Interactive ceased to be a shareholder of the Company in November 2014, the 2011 Trademarks License Agreement will terminate on December 31, 2016.

 

In August 2013, the Company acquired Shengzhan and Shengjing from Shanda Interactive. As a part of the acquisition, on July 28, 2013, Shengzhan entered into two trademarks license agreements (the “2013 Trademarks License Agreements”), with Shanda Networking and Shanda Computer, respectively, pursuant to which Shanda Networking and Shanda Computer licensed certain trademarks to Shengzhan on an exclusive, unconditional, irrevocable and royalty-free basis. Certain trademarks under the 2013 Trademarks License Agreements are related to the platform services and prepaid card distribution services. On October 14, 2014, Shanda Networking and Shanda Computer each reached a supplementary agreement with Shengzhan, pursuant to which the terms of the 2013 Trademarks License Agreements were extended to the later of (a) December 31, 2016 or (b) the 90th day after the earlier of (i) the Company no longer being a listed company, or (ii) Shanda Interactive no longer holding 50% or more of the voting rights in the Company. As Shanda Interactive ceased to be a shareholder of the Company in November 2014, the 2011 Trademarks License Agreement will terminate on December 31, 2016.

 

70 

 

 

On October 14, 2014, Shanda Computer, Shanda Networking, Shengqu and Shengzhan signed a trademark license agreement. Pursuant to the trademark license agreement, during and after the process of certain trademarks being transferred from Shanda Computer to Shanda Networking, Shanda Networking, as the transferee, will continue licensing those trademarks to the Company in accordance with the 2011 Trademarks License Agreement, as amended, and the 2013 Trademarks License Agreements, as amended.

 

Lease of Office Facilities

 

The Company leases its office space of approximately 19,500 square meters at No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203 and No. 1, Lane 666 Zhangheng Road, Pudong New Area, Shanghai 201204, from a company controlled by Shanda Interactive. The Company incurred rental expense of RMB18.5 million in 2013 and RMB29.2 million in 2014.

 

Lendings and Borrowings

 

Prior to the closing of the acquisition of platform and prepaid card distribution businesses, Shengzhan and Shengjing had various intra-group loans with other entities then under the common control of Shanda Interactive. As of December 31, 2012, Shengzhan and Shengjing extended an aggregate net amount of RMB821.7 million to such entities. Substantially all of these intra-group loans were settled as part of the acquisition, and the amount outstanding as of December 31, 2014 was RMB25.0 million, which represents an interest-free loan from Shengjing to one of our billing providers, Shanghai Shengfutong Electronic Business Co., Ltd.

 

In July 2014, the Company extended a loan to a company then under the common control of Shanda Interactive, the aggregate principal amount of which was RMB311.0 million with an interest rate of 3% per year. This loan was repaid in full in September 2014.

 

For more details regarding interest-bearing loans to and from Shanda Interactive or companies under its control in 2013, see Item 7.B. “Related-Party Transactions—Transactions and Agreements with Shanda Interactive—Loans Outstanding” in the Company’s Annual Report on Form 20-F for the year ended December 31, 2013.

 

Fees and Expenses

 

Fees and expenses incurred or to be incurred by the Company and the Buyer Group in connection with the Merger are estimated at the date of this proxy statement to be as follows:

 

Description

 

Amount

 
    (US$ in ‘000)  
Professional fees and expenses     5,137  
Legal fees and expenses     12,850  
Special Committee fees     385  
Miscellaneous (including accounting, filing fees, printer, proxy solicitation and mailing costs)     126  
ADS cancellation and surrender fees(1)     3,200  
Total     21,698  

 

 

(1)Includes ADS cancellation fees for ADSs held by members of the Rollover Shareholders.

 

These expenses (other than the ADS cancellation fees and surrender fees) will not reduce the merger consideration to be received by the Company’s shareholders and ADS holders. If the Merger is consummated, the party incurring any costs and expenses in connection with the Merger and the Merger Agreement will pay such costs and expenses except as otherwise provided in the Merger Agreement and the Third Consortium Agreement.

 

71 

 

 

Voting by the Rollover Shareholders at the Extraordinary General Meeting

 

Pursuant to the Support Agreement, the Rollover Shareholders have agreed to vote the Shares held by such Rollover Shareholders, which as of the date of this proxy represent approximately 75.6% of the Company’s issued and outstanding Shares and 1,286,752,366 votes, or approximately 90.7% of the total number of votes represented by the Company’s issued and outstanding Shares (excluding, for purposes of this calculation, Shares issuable upon the exercise of Company Options, Company Restricted Shares and Company RSUs), in favor of the proposal to authorize and approve the Merger Agreement, the Plan of Merger and the Transactions, including the Merger, at the extraordinary general meeting.

 

Voting of Unvested Company Restricted Shares

 

Under each restricted share award document, the person receiving the award has granted to the Company or its representative an irrevocable proxy to vote, or to execute and deliver written consents or otherwise act in the capacity of a shareholder with respect to, all of the Company Restricted Shares owned by such person until the earlier of (i) the date of termination of such person’s employment with the Company and (ii) the end of the applicable vesting period under such award document.

 

Litigation Related to the Merger

 

On October 10, 2014, Kilometre issued a writ of summons endorsed with a statement of claim against the Company from the Court of First Instance of the High Court of the Hong Kong Special Administrative Region in connection with the proposed “going private” transaction. Kilometre seeks outstanding consulting fees in an aggregate sum of US$25.6 million (or alternatively, damages), certain declaratory relief, interest, costs and further and/or other relief as the court deems fit. On February 10, 2015, Kilometre amended its statement of claim to seek outstanding consulting fees in an aggregate sum of US$44.9 million (or alternatively, damages), certain declaratory relief, interest, costs and further and/or other relief as the court deems fit. On February 17, 2015, Kilometre applied for a summary judgment for consulting fees of US$39,229,944.32, interest and/or other relief as the court deems fit. In April 2015, Kilometre issued an invoice to the Company asserting an increased entitlement to US$45.8 million; however, this amount is yet to be reflected in any further amendment to the statement of claim. On July 8, 2015, a Hong Kong High Court Judge dismissed Kilometre’s summary judgment application and granted the Company unconditional leave to defend Kilometre’s claim. The effect of the dismissal of the summary judgment application, subject to any appeal, is that Kilometre's claim will now follow the usual litigation procedure. It can typically take 18-24 months to proceed to trial in Hong Kong. There is, at present, no scheduled hearing or further judgment expected from the Hong Kong Courts.

 

In addition, Kilometre served a statutory demand on the Company in the Cayman Islands on May 21, 2015 requesting the Company to pay a purported debt of US$39,229,944.32 within 21 days. On June 9, 2015, the Grand Court granted an injunction restraining Kilometre from representing a winding-up petition against the Company based upon the statutory demand or any other statutory demand in relation to the same claim. On the same day, the Company issued an originating summons from the Grand Court seeking to set aside the statutory demand. On July 22, 2015, following the dismissal of the Hong Kong summary judgment application, Kilometre gave an undertaking to the Grand Court not to present a winding-up petition against the Company on the basis of the statutory demand pending the resolution of the Hong Kong proceedings.

 

The Company intends to vigorously defend itself against all legal actions taken by Kilometre on the merits. If the Merger is completed prior to the resolutions of the disputes between the Company and Kilometre, then pursuant to the Merger Agreement and the effects of the Merger, the Surviving Corporation will become party to such unresolved disputes and succeed to and assume all of the Company’s rights and obligations with respect thereto.

 

Other than as set forth above, the Company is not aware of any lawsuit that challenges the Merger Agreement, the Plan of Merger or any of the Transactions, including the Merger.

 

Accounting Treatment of the Merger

 

The Merger is expected to be accounted for, on a carryover basis, as a merger of entities under common control in accordance with Accounting Standards Codification 805-50, “Business Combinations—Related Issues.”

 

Regulatory Matters

 

The Company does not believe that any material federal or state regulatory approvals, filings or notices are required in connection with effecting the Merger other than the approvals, filings or notices required under the federal securities laws and the filing of the Plan of Merger (and supporting documentation as specified in the Cayman Islands Companies Law) with the Cayman Registrar and, in the event the Merger becomes effective, a copy of the Certificate of Merger being given to the shareholders and creditors of the Company and Merger Sub as at the time of the filing of the Plan of Merger and notice of Merger published in the Cayman Islands Gazette. See “The Merger Agreement—Conditions to the Merger” beginning on page [  ] for additional information.

 

Dissenters’ Rights

 

Shareholders who exercise dissenters’ rights will have the right to receive payment of the fair value of their Shares if the Merger is completed, but only if they deliver to the Company, before the vote is taken, a written objection to the Merger and subsequently comply with all procedures and requirements of Section 238 of the Cayman Islands Companies Law for the exercise of dissenters’ rights, which is attached as Annex D to this proxy statement. The fair value of their Shares as determined under that statute could be more than, the same as, or less than the merger consideration they would receive pursuant to the Merger Agreement if they do not exercise dissenters’ rights with respect to their Shares. These procedures are complex and you should consult your Cayman Islands legal counsel. If you do not fully and precisely satisfy the procedural requirements of the Cayman Islands Companies Law, you may lose your dissenters’ rights (as described under the section entitled “Dissenters’ Rights” on page [  ]).

 

72 

 

 

Material U.S. Federal Income Tax Consequences

 

The following are certain material U.S. federal income tax consequences to a U.S. Holder described below of the exchange of the Class A ordinary shares of the Company or ADSs for cash pursuant to the Transactions. This discussion applies only to a U.S. Holder that holds Class A ordinary shares or ADSs as capital assets for U.S. federal income tax purposes and it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including alternative minimum tax or Medicare contribution tax consequences, and tax consequences applicable to U.S. Holders subject to special rules, such as:

 

· certain financial institutions;

 

·dealers or certain traders in securities;

 

·persons holding Class A ordinary shares or ADSs as part of a straddle, wash sale, conversion transaction or integrated transaction, or persons entering into a constructive sale with respect to Class A ordinary shares or ADSs;

 

·persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

 

·partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

 

·tax-exempt entities, including “individual retirement accounts” and “Roth IRAs”;

 

·persons that own or are deemed to own Class A ordinary shares or ADSs representing ten percent or more of the voting stock of the Company; or

 

·persons holding Class A ordinary shares or ADSs in connection with a trade or business conducted outside of the United States.

 

If an entity that is classified as a partnership for U.S. federal income tax purposes owns Class A ordinary shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning Class A ordinary shares or ADSs and partners therein should consult their tax advisers as to the particular U.S. federal income tax consequences of disposing of Class A ordinary shares or ADSs.

 

This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed U.S. Treasury regulations, all as of the date hereof and all of which are subject to change, possibly with retroactive effect. U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of disposing of Class A ordinary shares or ADSs pursuant to the Transactions in their particular circumstances.

 

For purposes of this discussion, a “U.S. Holder” is a beneficial owner of Class A ordinary shares or ADSs that is, for U.S. federal income tax purposes: 

 

  · a citizen or individual resident of the United States;

 

  · a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or

 

  · an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

 

Exchange of Class A ordinary shares or ADSs for Cash. The exchange of Class A ordinary shares of the Company or ADSs for cash will be a taxable transaction for U.S. federal income tax purposes. An exchanging or dissenting U.S. Holder will recognize gain or loss on the disposition of Class A ordinary shares or ADSs, equal to the difference between the amount of cash received and the U.S. Holder’s tax basis in the Class A ordinary shares or ADSs disposed of. Subject to the discussion in “—Passive Foreign Investment Company” below, any gain or loss recognized will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder has held the Class A ordinary shares or ADSs for more than one year. The deductibility of capital losses is subject to limitations.

 

73 

 

 

As described in “—Material PRC Income Tax Consequences,” if we were deemed to be a tax resident enterprise under PRC tax law, gains from a sale of Class A ordinary shares of the Company or ADSs may be subject to PRC tax. U.S. Holders are entitled to use foreign tax credits to offset only the portion of their U.S. federal income tax liability that is attributable to foreign-source income. Because under the Code capital gains of U.S. persons generally are treated as U.S.-source income, this limitation may preclude a U.S. Holder from claiming a credit for all or a portion of any PRC taxes imposed on any gain from the sale of Class A ordinary shares of the Company or ADSs. However, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may be able to elect to treat any such gain as foreign-source gain for foreign tax credit purposes. U.S. Holders should consult their tax advisers regarding their eligibility for benefits under the income tax treaty between the United States and the PRC and the creditability of any PRC tax on disposition gains in their particular circumstances.

 

Passive Foreign Investment Company. Although it is not clear how the contractual arrangements between the Company and its PRC operating companies should be treated for purposes of the passive foreign investment company (“PFIC”) rules, based on the composition of the Company’s income and assets and the value of the Company’s assets, including goodwill, which is based, in part, on the market price of the Company’s ADSs, the Company does not expect to be a PFIC for the current taxable year. However, because the determination of whether a company is a PFIC is made annually after the end of each taxable year and the Company’s expectation as to its PFIC status is based on facts that may change, the Company cannot assure you that it will not be a PFIC for the current taxable year. In addition, as described in certain of the Company’s annual reports on Form 20-F, it is unclear whether the Company was a PFIC for certain of its previous taxable years. If the Company was a PFIC for any previous taxable year during which a U.S. Holder owned Class A ordinary shares of the Company or ADSs, the Company would generally continue to be treated as a PFIC with respect to that U.S. Holder for all succeeding years during which the U.S. Holder owned the Class A ordinary shares or ADSs, even if the Company ceased to meet the threshold requirements for PFIC status.

 

In general, a foreign corporation is a PFIC for U.S. federal income tax purposes for any taxable year if (a) 75% or more of its gross income consists of passive income (such as dividends, interest and certain rents and royalties) or (b) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income (including cash). If a corporation owns at least 25% (by value) of the stock of another corporation, the corporation will be treated, for purposes of the PFIC tests, as owning its proportionate share of the 25%-owned subsidiary’s assets and receiving its proportionate share of the 25%-owned subsidiary’s income.

 

Generally, if the Company was a PFIC for any taxable year during which a U.S. Holder owned Class A ordinary shares of the Company or ADSs, the amount of gain recognized upon the disposition of Class A ordinary shares or ADSs by the U.S. Holder would be allocated ratably over the U.S. Holder’s holding period for such shares or ADSs. The amounts allocated to the taxable year of disposition and to years before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest tax rate in effect for that taxable year for individuals or corporations, as appropriate, and an interest charge would be imposed on the tax attributable to the allocated amounts. Furthermore, a U.S. Holder would be required to file IRS Form 8621 with respect to the Company, generally with the U.S. Holder’s federal income tax return for the year of the Merger. If the Company was a PFIC for any previous taxable year in which a U.S. Holder owned Class A ordinary shares or ADSs, the amount of gain and the manner in which it is allocated between taxable years within the U.S. Holder’s holding period may be affected by any valid election that the U.S. Holder may have made to either mark-to-market ADSs, or be taxed on a deemed sale of the Class A ordinary shares of the Company or ADSs. U.S. Holders should consult their tax advisers regarding the consequences of disposing of their Class A ordinary shares or ADSs in the case that the Company was a PFIC for any taxable year, and the effect of any previous mark-to-market or deemed sale election that they may have made.

 

Information Reporting and Backup Withholding. Payments of the cash consideration for the Class A ordinary shares or ADSs that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (a) the U.S. Holder is a corporation or other exempt recipient or (b) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability, if any, and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

 

74 

 

 

Material PRC Income Tax Consequences

 

Under the PRC Enterprise Income Tax Law (the “EIT Law”), which took effect on January 1, 2008, enterprises established outside of the PRC whose “de facto management bodies” are located in the PRC are considered “resident enterprises,” and thus will generally be subject to the enterprise income tax at the rate of 25% on their global income. On December 6, 2007, the State Council of the PRC adopted the Regulation on the Implementation of PRC Enterprise Income Tax Law, effective as of January 1, 2008, which defines the “de facto management body” as an establishment that has substantial management and control over the business, personnel, accounts and properties of an enterprise. The State Administration of Taxation of the PRC (the “SAT”) issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies (“Circular 82”) on April 22, 2009, with retroactive effect from January 1, 2008. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled offshore incorporated enterprise is located in the PRC. There is no assurance that the Company will not be treated as a PRC tax resident enterprise. Under the EIT Law and its implementation regulations, PRC income tax at a rate of 10% is applicable to any gain recognized on receipt of consideration by a “non-resident enterprise” from transfer of its equity in a PRC resident enterprise, to the extent such gain is derived from sources within the PRC, provided that the “non-resident enterprise” does not have a de facto management body in the PRC and also (a) does not have an establishment or place of business in the PRC or (b) has an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business. Under the Individual Income Tax Law of the PRC, an individual who disposes of a capital asset in the PRC is subject to PRC individual income tax at the rate of 20% if the gain is from sources within the PRC. Relief from these taxes may be sought under applicable income tax treaties with the PRC. If the Company is treated as a PRC tax resident enterprise, gain from the disposition of Class A ordinary shares of the Company or ADSs may be treated as derived from PRC-sources and taxed as described above.

 

On December 10, 2009, the SAT issued the Circular on Strengthening the Administration of Enterprises Income Tax on Non-resident Enterprises’ Equity Transfer Income (“Circular 698”), with retroactive effect from January 1, 2008, and the Circular Concerning Various Questions on the Administration of Enterprises Income Tax on Non-resident Enterprises (“Bulletin 24”) was issued by the SAT and became effective as of April 1, 2011. According to Circular 698 and Bulletin 24, if any non-resident enterprise indirectly transfers the equity of a resident enterprise, the non–resident enterprise may be subject to a 10% PRC income tax on the gain from such equity transfer, unless such equity is to be transferred and the transfer price thereunder is determined pursuant to standard trading rules of a public security market and not by the purchaser and the seller by mutual agreement prior to such transactions. On February 3, 2015, the SAT further promulgated the Public Notice of State Administration of Taxation on Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-resident Enterprises (“Circular 7”), effective from February 3, 2015, to replace certain provisions under Circular 698 and Bulletin 24 and to further strengthen the regulation over enterprise income tax applicable to indirect transfer of properties by non-resident enterprises. According to Circular 7, where a non-resident enterprise indirectly transfers equity interests in a PRC resident enterprise, properties of an establishment or place in the PRC or immovable properties in the PRC (collectively, the “PRC Taxable Properties”), through the implementation of a scheme, including transfer of equity interests and other similar rights of an overseas enterprise (an “Overseas Enterprise”), without a reasonable commercial purpose and resulting in the avoidance of the enterprise income tax liability, upon review and examination of the documents submitted, such indirect transfer may be re-characterized as a direct transfer of the PRC Taxable Properties by the in-charge tax authorities in accordance with the EIT Law. Both parties to the indirect transfer of PRC Taxable Properties (i.e., the transferor and the transferee) and the Chinese tax resident enterprise being indirectly transferred may report this indirect transfer to the in-charge tax authority.

 

According to Circular 7, when assessing the “reasonable commercial purpose,” a holistic approach should be used to consider all the arrangements relevant to the indirect transfer of PRC Taxable Properties based on the actual facts and circumstances, and the following relevant factors must be analyzed comprehensively: (a) whether the main value of the equity of the Overseas Enterprise directly or indirectly derives from PRC Taxable Properties; (b) whether a majority of the assets of the Overseas Enterprise is directly or indirectly comprised of investment in the PRC, or whether a majority of its income is directly or indirectly sourced from the PRC; (c) whether the actual functions performed and risks undertaken by the Overseas Enterprise and its subsidiaries which directly or indirectly hold the PRC Taxable Properties can substantiate the economic substance of their corporate structure; (d) the existence duration of the shareholders, business model of the Overseas Enterprise and the relevant organizational structure; (e) overseas income taxes applicable to the indirect transfer of PRC Taxable Properties; (f) whether the indirect investment or the indirect transfer of the PRC Taxable Properties by the equity transferor can be substituted by a direct transfer of the PRC Taxable Properties; (g) whether tax treaties or tax arrangements can apply to the income from indirect transfer of PRC Taxable Properties; and (h) other related factors. A transaction will be deemed to lack a reasonable commercial purpose and thus be subject to PRC enterprise income tax under Circular 7 if all of the following conditions are satisfied, unless the safe harbor for qualifying intra-group reorganization applies: (a) 75% or more of the value of the equity interests of the Overseas Enterprise is directly or indirectly derived from the PRC Taxable Properties; (b) at any time within one (1) year before the indirect transfer of PRC Taxable Properties, 90% or more of the total assets of the Overseas Enterprise (not including cash) is directly or indirectly comprised of investment in the PRC, or 90% or more of the Overseas Enterprise’s income in the year before the indirect transfer of PRC Taxable Properties is directly or indirectly sourced from the PRC; (c) the Overseas Enterprise and its subsidiaries which directly or indirectly hold the PRC Taxable Properties are incorporated in that country (region) to satisfy the legal requirement of the organizational format, but actually only perform limited functions and undertake limited risks which are insufficient to substantiate their economic substance; and (d) the overseas income tax payable for the indirect transfer of PRC Taxable Properties is less than the possible tax burden in the PRC on the direct transfer of such PRC Taxable Properties.

 

75 

 

 

Circular 7 also provides certain safe harbor for indirect transfers of the PRC Taxable Properties. Circular 7 will not apply where the overall arrangement related to the indirect transfer of the PRC Taxable Properties meets any one of the following conditions: (a) the non-resident enterprises deriving income from indirect transfer of PRC Taxable Properties from the buying and selling of shares of the same listed Overseas Enterprise through public stock exchanges; or (b) if the non-resident enterprises directly held and transferred the PRC Taxable Properties, the income from the transfer of such property would otherwise be exempted from enterprise income tax according to the applicable tax treaty or tax arrangement; or (c) if the indirect transfer of PRC Taxable Properties is deemed as qualified intra-group reorganization, such indirect transfer will be exempt from PRC enterprise income tax, provided that the current indirect transfer would not result in the reduction of the enterprise income tax burden on the gain arising on the subsequent potential indirect transfer of PRC Taxable Properties compared to the tax that would have been imposed on the subsequent transfer had the current indirect transfer not taken place, and provided that the consideration is paid by the transferee solely in the form of its own equity of a related enterprise with which the transferee has a controlling relationship.

 

Circular 7 specifies that the date that enterprise income tax liability arises as stipulated therein refers to the date when the relevant equity transfer agreement takes effect and the relevant procedures for the change in equity ownership of the Overseas Enterprise are completed. With respect to the legal consequences for failing to withhold and pay the enterprise income tax, Circular 7 specifies that the payor (which in most, but not all cases, will be the transferee), regardless of whether it is a resident enterprise, is required to withhold tax on gains realized from an indirect transfer of PRC Taxable Properties. According to Circular 7, in the event that the withholding agent does not withhold enterprise income tax, and the transferor does not timely report and file the enterprise income tax due for the indirect transfer of PRC Taxable Properties or does not fully settle its enterprise income tax liability, the in-charge tax authority, besides seeking the collection of the enterprise income tax payable, may impose a penalty ranging from 50% to three times the amount of the unpaid taxes on the withholding agent for its failure to withhold the capital gains tax, which may be reduced or waived if the withholding agent has reported to the in-charge tax authorities by submitting the required documents within 30 days after the equity transfer agreement for the indirect transfer is executed. If the withholding agent does not withhold the tax or does not withhold enough amount, the transferor will report the transaction to the in-charge tax authority and settle the tax payments within seven days from when the tax obligation arises. If the transferor fails to pay taxes due within the prescribed time limit, the transferor is subject to a daily interest rate equal to the RMB lending benchmark rate published by the People’s Bank of China in that tax year plus 5% for the period of such overdue tax payment. The additional 5% punitive interest charge will be waived if the transferor voluntarily reports to the in-charge tax authorities within 30 days after the equity transfer agreement is signed. It is worth noting that Circular 7 also applies to transactions that took place before its effective date (i.e., February 3, 2015) but for which the relevant PRC tax treatment has not been decided upon by the Chinese in-charge tax authorities.

 

There is uncertainty as to the application of Circular 7. While it appears that Circular 7 was not intended to apply to individual transferors, there is very little guidance and practical experience regarding its application to individual transferors. Circular 7 may be determined by the tax authorities to be applicable to the Merger where non-PRC resident corporate shareholders or ADS holders were involved, if the Company is determined by the PRC tax authorities to lack reasonable commercial purpose. As a result, if the PRC tax authorities were to invoke Circular 7 and impose tax on the receipt of consideration for Shares or ADSs, then any gain recognized on the receipt of consideration for such Shares or ADSs pursuant to the Merger by the Company’s shareholders who are not PRC residents could be treated as PRC-source income that would be subject to PRC enterprise income tax at a rate of 10% (subject to applicable treaty or relief).

 

You should consult your own tax advisor for a full understanding of the tax consequences of the Merger to you, including any PRC tax consequences.

 

Material Cayman Islands Tax Consequences

 

The Cayman Islands currently have no form of income, corporate or capital gains tax and no estate duty, inheritance tax or gift tax. No taxes, fees or charges will be payable (either by direct assessment or withholding) to the government or other taxing authority in the Cayman Islands under the laws of the Cayman Islands in respect of the Merger or the receipt of cash for the Shares or ADSs under the terms of the Merger. This is subject to the qualification that (a) Cayman Islands stamp duty may be payable if any transaction documents are brought to or executed or produced before a court in the Cayman Islands; and (b) registration fees will be payable to the Cayman Registrar to register the Plan of Merger.

 

76 

 

  

Market Price of the Company’s ADSs, Dividends and Other Matters

 

Market Price of the ADSs

 

The following table provides the intra-period high and low prices for ADSs, each representing one Share, quoted on NASDAQ under the symbol “GAME” for (a) each quarter of 2012, 2013 and 2014 and (b) each quarter during the current year:

 

    Sales Price Per ADS (in US$)  
    High     Low  
Quarterly:                
2012                
First quarter     5.39       3.46  
Second quarter     5.92       3.77  
Third quarter     4.05       3.16  
Fourth quarter     3.84       2.71  
2013                
First quarter     3.32       2.88  
Second quarter     4.20       2.68  
Third quarter     6.42       3.79  
Fourth quarter     4.98       3.87  
2014                
First quarter     7.00       4.16  
Second quarter     6.78       6.48  
Third quarter     6.75       5.90  
Fourth quarter     6.70       5.67  
2015                
First quarter     6.53       4.91  
Second quarter     6.97       6.37  
Third quarter (through [          ], 2015)     [  ]       [  ]  

 

On January 24, 2014, the last trading day immediately prior to the Company’s announcement on January 27, 2014 that it had received the Proposal, the reported closing price of the Company’s ADSs as quoted by NASDAQ was US$5.65 per ADS. The merger consideration of US$7.10 per ADS represents a premium of approximately 25.7% over the closing price of the Company’s ADSs as quoted by NASDAQ on January 24, 2014, and a premium of approximately 46.5%, 53.8% and 56.2%, respectively, to the volume-weighted average trading price as quoted by NASDAQ during the 30, 60 and 90 trading days prior to, and including, January 24, 2014, the last trading day prior to the Company’s announcement on January 27, 2014 that it had received the Proposal. On [          ], 2015, the most recent practicable date before the printing of this proxy statement, the high and low reported sales prices of ADSs were US$[      ] and US$[      ], respectively. You are urged to obtain a current market price quotation for your Shares in connection with voting your Shares.

 

Dividend Policy

 

In November 2011, the Board declared a cash dividend in the aggregate amount of approximately US$289.4 million payable to holders of Shares. As of the date of this proxy statement, US$288.3 million was paid to shareholders of the Company, with the remaining amount payable to holders of unvested restricted shares upon vesting.

 

Under the terms of the Merger Agreement, the Company is not permitted to pay any dividends or repurchase any Shares pending consummation of the Merger.

 

In the event the Merger Agreement is terminated for any reason and the Merger is not consummated, the payment of future dividends will be subject to the discretion of the Board. Even if the Board decides to pay dividends, the form, frequency and amount will depend upon the Company’s future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board may deem relevant. If the Company pays any dividends, the ADS Depositary will distribute such payments to the Company’s ADS holders to the same extent as holders of Shares, subject to the terms of the Deposit Agreement, including the fees and expenses payable thereunder. Cash dividends on Shares, if any, will be paid in U.S. dollars. In addition, the Company is a holding company incorporated in the Cayman Islands. The Company’s current and future ability to pay dividends depends substantially on the payment of dividends to the Company by its PRC subsidiaries.

 

77 

 

 

The Company generates substantially all of its revenues through contractual arrangements with its PRC operating companies. PRC governmental authorities may, however, require the Company to amend these contractual arrangements in a manner that would materially and adversely affect the Company’s PRC subsidiaries’ ability to pay dividends to the Company. If the Company’s PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may also restrict the ability of the Company’s PRC subsidiaries to pay dividends to the Company. Furthermore, PRC legal restrictions permit payments of dividends by the Company’s PRC subsidiaries only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations. There is no significant difference between retained earnings as determined in accordance with PRC accounting standards and in accordance with U.S. GAAP. Under PRC law, the Company’s PRC subsidiaries are also required to set aside at least 10% of their net income each year to fund their general reserves until the cumulative amount reaches 50% of their paid-in capital. The Company’s PRC subsidiaries may also allocate a portion of their net income to their staff welfare and bonus funds. These reserves and welfare and bonus funds are not distributable as cash dividends to the Company. Moreover, cash transfers from the Company’s PRC subsidiaries to the Company are subject to the PRC government’s currency conversion policy, and the Company’s PRC subsidiaries may not be able to obtain the relevant approvals or complete the requisite registrations for distributing dividends to the Company. Any failure by any of the Company’s shareholders or any beneficial owner of Shares who is a PRC resident to comply with the approval or registration requirements imposed by the State Administration of Foreign Exchange with respect to their investment in the Company could also subject the Company to legal sanctions, including a restriction on the Company’s PRC subsidiaries’ ability to distribute dividends to the Company. As a result of the foregoing restrictions on the Company’s PRC subsidiaries and PRC operating companies, the Company’s ability to pay dividends on Shares, or indirectly on ADSs, could be significantly limited.

 

The Company may be treated as a PRC resident enterprise for PRC tax purposes and be obligated to withhold PRC income tax on payments of dividends on Shares and ADSs to investors that are non-resident enterprises of the PRC. The withholding tax rate would generally be 10% on dividends paid to non-resident enterprises and 20% on dividends paid to non-resident individuals, subject to applicable tax treaty reliefs. Pursuant to a tax treaty between the PRC and the United States, a 10% rate will apply to dividends paid to non-resident individuals provided certain conditions are met. In addition, pursuant to a tax treaty between the PRC and Hong Kong, the withholding tax rate may be lowered to 5% if the PRC resident enterprise is at least 25% held by a Hong Kong company and other conditions set forth by the relevant tax authorities have been met. See “Item 3. Key Information—D. Risk Factors—Risks Related to the Regulation of Our Business—The discontinuation, reduction, delay or retroactive revocation of any of the preferential tax treatments or the government financial incentives currently available to us in China could materially and adversely affect our business, financial condition and results of operations,” “Item 3. Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate—There are significant uncertainties under the EIT Law relating to our PRC enterprise income tax liabilities” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Our ADSs—We may be required to withhold PRC income tax on the dividends we pay you (if any), and any gain you realize on the transfer of our ordinary shares and/or ADSs may also be subject to PRC withholding tax” in the Company’s Annual Report on Form 20-F for the year ended December 31, 2014, which is incorporated into this proxy statement by reference. See “Where You Can Find More Information” beginning on page [  ] for a description of how to obtain a copy of the Company’s Annual Report.

 

78 

 

 

The Extraordinary General Meeting

 

We are furnishing this proxy statement to you, as a holder of the Shares, as part of the solicitation of proxies by the Board for use at the extraordinary general meeting described below.

 

Date, Time and Place of the Extraordinary General Meeting

 

The extraordinary general meeting will be held on [        ], 2015 at [        ] a.m. (Hong Kong time). The meeting will be held at the offices of Davis Polk & Wardwell, The Hong Kong Club Building, 3A Chater Road, Central, Hong Kong.

 

Proposals to be Considered at the Extraordinary General Meeting

 

At the meeting, you will be asked to consider and vote upon:

 

·as a special resolution:

 

THAT the Merger Agreement, the Plan of Merger required to be registered with the Registrar of Companies in the Cayman Islands in order to give effect to the Merger, and the Transactions, including the Merger, be authorized, approved and adopted; and

 

·as an ordinary resolution:

 

THAT the directors of the Company be authorized to do all things necessary to give effect to the Merger Agreement, the Plan of Merger and the Transactions, including the Merger; and

 

·if necessary, as an ordinary resolution:

 

THAT the chairman of the extraordinary general meeting be instructed to adjourn the extraordinary general meeting in order to allow the Company to solicit additional proxies in the event that