PREM14A 1 v324501_prem14a.htm FORM PREM14A

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant To Section 14(A) Of The
Securities Exchange Act Of 1934
(Amendment No. )

 

 

 

Filed by the registrant x

 

Filed by a party other than the registrant ¨

 

Check the appropriate box:

 

x Preliminary proxy statement

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

¨ Definitive proxy statement

¨ Definitive additional materials

¨ Soliciting material pursuant to §240.14a-12

 

China Growth Equity Investment Ltd.

(Name of Registrant as Specified in Its Charter)

 

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of filing fee (Check the appropriate box):

 

¨ No fee required.

 

x Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

 

(1) Title of each class of securities to which transaction applies:

 

Ordinary shares, par value $0.001 per share, of China Growth Equity Investment Ltd.

 

(2) Aggregate number of securities to which transaction applies:

 

77,000,000 ordinary shares of China Growth Equity Investment Ltd.

 

(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

 

$9.91 per ordinary share, representing the average of the high and low prices of an ordinary share on October 22, 2012.

 

(4) Proposed maximum aggregate value of transaction:

 

$763,070,000

  

(5) Total fee paid:

 

$104,083

  

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 

(1) Amount previously paid:

 

(2) Form, schedule or registration statement no.:

 

(3) Filing party:

 

(4) Date filed:

 

 
 

 

CHINA GROWTH EQUITY INVESTMENT LTD.

 

To the Shareholders of China Growth Equity Investment Ltd.:

 

The board of directors of China Growth Equity Investment Ltd. (“CGEI”) has unanimously approved an agreement and plan of merger by and among CGEI, China Dredging Group Co., Ltd. (“CDGC”), Xinrong Zhuo (“Founder”) and China Growth Dredging Sub Ltd. (“Merger Sub”) (the “Merger Agreement”) providing for the combination of CGEI and CDGC. Current holders of CDGC ordinary shares, no par value per share (“CDGC Ordinary Shares”) and CDGC Class A preferred shares, no par value per share (“CDGC Preferred Shares”) will receive CGEI ordinary shares, par value $0.001 per share (“CGEI Ordinary Shares”) to replace their existing CDGC shares. Immediately following the consummation of the transactions contemplated by the Merger Agreement, CGEI will acquire the business of Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd (“Pingtan Fishing”), pursuant to the terms of a share purchase agreement by and among CGEI, Founder, Merchant Supreme Co., Ltd (“Merchant Supreme”), Prime Cheer Corporation Limited (“Prime Cheer”), Pingtan Fishing, Heroic Treasure Limited (“Heroic Treasure”) and Fuzhou Honglong Ocean Fishery Co., Ltd. (“Hong Long”) (the “Pingtan Fishing share purchase agreement”).

 

In connection with the foregoing transactions:

 

All of the issued and outstanding CDGC Ordinary Shares and CDGC Preferred Shares will be exchanged for a total of up to 52,000,000 CGEI Ordinary Shares, subject to adjustment as described in the Merger Agreement;

 

All of the issued and outstanding shares of Merchant Supreme (which will control Pingtan Fishing) will be purchased by CGEI for a total of 25,000,000 CGEI Ordinary Shares subject to adjustment as described in the Pingtan Fishing purchase agreement;

 

CGEI will change its name to Pingtan Marine Enterprise Ltd.; and

 

Xinrong Zhuo, the founder and currently the Chairman of the Board of Directors and Chief Executive Officer of CDGC, Bin Lin, currently the Senior Vice President of CDGC, Lin Bao, currently an officer of an affiliate of Pingtan Fishing, Yeliang Zhou, currently an independent director of CDGC, Zengbiao Zhu, currently an independent director of CDGC, Xuesong Song, currently the Chairman of the Board of Directors and Chief Financial Officer of CGEI, and Jin Shi, currently the Chief Executive Officer and director of CGEI, will be members of the CGEI board of directors after the consummation of the transactions contemplated by the Merger Agreement.

 

CGEI is providing its shareholders with the opportunity to redeem their CGEI Ordinary Shares for cash equal to their pro rata share of the aggregate amount then on deposit in a trust account holding the proceeds of CGEI’s initial public offering less franchise and income taxes payable, upon the consummation of the transactions contemplated by the Merger Agreement, subject to certain limitations. CGEI’s initial shareholders have agreed not to exercise their redemption rights with respect to their founder shares and any Ordinary Shares they may hold in connection with the consummation of a business combination, and the founder shares will be excluded from the pro rata calculation used to determine the per-share redemption price.

 

CGEI will consummate the transactions contemplated by the Merger Agreement only if holders of a majority of the CGEI issued and outstanding Ordinary Shares are voted in favor of the approval and adoption of the Merger Agreement. Each shareholder holding CGEI Ordinary Shares may elect to redeem his, her or its Ordinary Shares irrespective of whether he, she or it votes for or against the approval and adoption of the Merger Agreement. CGEI has no specified maximum redemption threshold. However, CGEI will not close the combination unless it has more than $5.0 million of cash held either in or outside the trust account. Shareholders holding CGEI Ordinary Shares following the merger with CDGC or the acquisition of Pingtan Fishing will be able to redeem their shares up to the business day immediately prior to the vote on the proposal to approve and adopt the Merger Agreement.

 

A shareholder of CGEI Ordinary Shares, together with any of his, her or its affiliates or any other person with whom it is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended), will be restricted from redeeming his, her or its shares with respect to more than an aggregate of 10% of the shares sold in CGEI’s initial public offering.

 

 
 

 

CGEI’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT, “FOR” THE PROPOSAL TO INCREASE THE AUTHORIZED SHARE CAPITAL, “FOR” THE PROPOSAL TO CHANGE CGEI’S NAME AND “FOR” THE PROPOSAL TO ADJOURN THE EXTRAORDINARY GENERAL MEETING, IF NECESSARY, FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING AND APPROVING THE MERGER AGREEMENT AND THE SHARE CAPITAL INCREASE. YOUR VOTE IS IMPORTANT.

 

Information about the extraordinary general meeting, the transactions contemplated by the Merger Agreement, the Pingtan Fishing acquisition and the other business to be considered by the CGEI shareholders is contained in this document and the documents incorporated by reference herein, which we urge you to read carefully. In particular, see “Risk Factors” beginning on page 20.

 

Your vote is very important. Whether or not you plan to attend the extraordinary general meeting of CGEI shareholders, please submit a proxy to vote your shares as soon as possible to make sure your shares are represented at the applicable extraordinary general meeting.

 

Sincerely,

[SIGNATURE]

Jin Shi

Chief Executive Officer and Director

China Growth Equity Investment Ltd.

 

The accompanying proxy statement is dated [• ], 2012 and is first being mailed or otherwise delivered to CGEI shareholders on or about [• ], 2012.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORY AGENCY HAS APPROVED OR DISAPPROVED THE MERGER OR THE MERGER AGREEMENT, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

 

 
 

 

CHINA GROWTH EQUITY INVESTMENT LTD.
CN11 Legend Town, No. 1 Balizhuangdongli
Chaoyang District, Beijing, 100025, PRC

 

 

 

NOTICE OF EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS
To be held on [• ], 2013

 

To Our Shareholders:

 

An extraordinary general meeting of shareholders of China Growth Equity Investment Ltd. (“CGEI”) will be held at [• ] on [• ], 2013, at [• ] a.m., [• ] time (the “extraordinary general meeting”) for the following purposes:

 

1.          To approve and adopt the Agreement and Plan of Merger, dated as of October 24, 2012, among CGEI, China Dredging Group Co., Ltd. (“CDGC”), Xinrong Zhuo (“Founder”) and China Growth Dredging Sub Ltd. (“Merger Sub”) as it may be amended (the “Merger Agreement”), a copy of which is attached to the accompanying proxy statement as Annex A;

 

2.          To consider and act upon a proposal to adopt amendments to the memorandum and articles of association of CGEI to increase the authorized share capital from $65,000 divided into 60,000,000 ordinary shares and 5,000,000 preferred shares to $105,000 divided into 100,000,000 ordinary shares and 5,000,000 preferred shares;

 

3.          To consider and act upon a proposal to adopt amendments to the memorandum and articles of association of CGEI to change the name CGEI to Pingtan Marine Enterprise Ltd.; and

 

4.          To approve one or more adjournments of the extraordinary general meeting (including, if necessary, to solicit additional proxies because there are not sufficient votes to approve and adopt the Merger Agreement and the share capital increase authorization).

  

The CGEI board has fixed [• ], 2012 as the record date for the determination of shareholders entitled to notice of, and to vote at, the extraordinary general meeting or one or more adjournments or postponements thereof. Only holders of record CGEI Ordinary Shares at the close of business on [• ], 2012 are entitled to notice of, and to vote at, the extraordinary general meeting or one or more adjournments or postponements thereof.

 

CGEI IS PROVIDING ITS SHAREHOLDERS WITH THE OPPORTUNITY TO REDEEM THEIR ORDINARY SHARES IN THE SHARE CAPITAL OF CGEI FOR CASH EQUAL TO THEIR PRO RATA SHARE OF THE AGGREGATE AMOUNT THEN ON DEPOSIT IN A TRUST ACCOUNT HOLDING THE PROCEEDS OF CGEI’S INITIAL PUBLIC OFFERING LESS FRANCHISE AND INCOME TAXES PAYABLE, UPON THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, SUBJECT TO CERTAIN LIMITATIONS. CGEI’S INITIAL SHAREHOLDERS HAVE AGREED NOT TO EXERCISE THEIR REDEMPTION RIGHTS WITH RESPECT TO THEIR FOUNDER SHARES AND ANY OTHER CGEI SHARES THEY MAY HOLD IN CONNECTION WITH THE CONSUMMATION OF THE PROPOSED BUSINESS COMBINATION, AND THE FOUNDER SHARES WILL BE EXCLUDED FROM THE PRO RATA CALCULATION USED TO DETERMINE THE PER-SHARE REDEMPTION PRICE.

 

CGEI and CDGC will consummate the transactions contemplated by the Merger Agreement only if holders of a majority of the issued and outstanding CGEI Ordinary Shares vote in favor of the approval and adoption of the Merger Agreement and the share capital increase authorization. CGEI’s sponsor, Chum Capital Group Limited, who we refer to collectively as CGEI’s initial shareholders, have agreed to vote all their founder shares in accordance with the majority of votes cast by the public holders of CGEI Ordinary Shares and any CGEI Ordinary Shares acquired by them in or after CGEI’s initial public offering in favor of the proposals to approve and adopt the Merger Agreement and the share capital increase authorization. Each holder of CGEI Ordinary Shares may elect to redeem his, her or its ordinary shares irrespective of whether he, she or it votes for or against the approval and adoption of the Merger Agreement and the share capital increase authorization. CGEI has no specified maximum redemption threshold. However, CGEI will not close the business combination unless it has at least $5.0 million of cash held either in or outside the trust account. Holders of CGEI Ordinary Shares will be able to redeem their shares up to the business day immediately prior to the vote on the proposal to approve and adopt the Merger Agreement and the share capital increase authorization.

 

 
 

 

Subject to CGEI’s amended and restated memorandum and articles of association and rules of the designated stock exchange and/or any competent regulatory authority, a holder of CGEI Ordinary Shares, together with any of his, her or its affiliates or any other person with whom it is acting in concert or as a “group” (as used in Section 13 of the Securities Exchange Act of 1934, as amended), will be restricted from redeeming his, her or its shares with respect to more than an aggregate of 10% of the shares sold in CGEI’s initial public offering.

 

For more information about the proposals and the extraordinary general meeting, please review carefully the accompanying proxy statement.

 

Our Board of Directors reviewed and considered the terms and conditions of the merger and unanimously determined that the merger is fair to, and in the best interests of, CGEI and its shareholders, unanimously approved and declared advisable the Merger Agreement, the merger, the share capital increase, the name change and the other transactions contemplated by the Merger Agreement in accordance with Cayman Islands law, and unanimously resolved to recommend the adoption and approval of the Merger Agreement and the transactions contemplated thereby, including the merger, to our shareholders.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION AND APPROVAL OF THE MERGER AGREEMENT, “FOR” THE APPROVAL OF THE INCREASE IN AUTHORIZED SHARE CAPITAL, “FOR” THE PROPOSAL TO CHANGE CGEI’S NAME AND “FOR” THE PROPOSAL TO ADJOURN THE EXTRAORDINARY GENERAL MEETING, IF NECESSARY, FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING AND APPROVING THE MERGER AGREEMENT AND THE SHARE CAPITAL INCREASE AUTHORIZATION YOUR VOTE IS IMPORTANT.

 

Your vote is important. Whether or not you expect to attend the extraordinary general meeting in person, please submit a proxy by telephone or over the internet as instructed in these materials, or complete, date, sign and return the enclosed proxy card, as promptly as possible in order to ensure that we receive your proxy with respect to your CGEI Ordinary Shares. Instructions are shown on the enclosed proxy card and a return envelope (postage pre-paid if mailed in the United States) is enclosed for your convenience. If your CGEI Ordinary Shares are held in a stock brokerage account or by a bank or other nominee, please follow the instructions that you receive from your broker, bank or other nominee to vote your shares.

 

If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be voted in favor of the adoption of the Merger Agreement, in favor of the proposals to amend the memorandum and articles of association of CGEI to increase its authorized shares and change the company name, and in favor of the proposal to adjourn the meeting if necessary to solicit additional proxies. If you fail to return your proxy card or fail to submit your proxy by telephone or over the internet, or fail to instruct your broker how to vote, and do not attend the extraordinary general meeting in person, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the extraordinary general meeting. If you are a shareholder of record and you attend the extraordinary general meeting and wish to vote in person, you may withdraw your proxy and vote in person.

 

Please do not send documents or certificates representing your ownership of CGEI Ordinary Shares. If the transactions contemplated by the Merger Agreement are consummated, we will notify you of the procedures for redeeming your CGEI Ordinary Shares.

 

No person has been authorized to give any information or to make any representations other than those set forth in the proxy statement in connection with the solicitation of proxies made hereby, and, if given or made, such information must not be relied upon as having been authorized by CGEI or any other person.

 

  By Order of the Board of Directors,
   
  Secretary

 

Beijing, PRC
[• ], 2012

 

IN ADDITION TO DELIVERING THE PROXY MATERIALS FOR THE EXTRAORDINARY GENERAL MEETING TO BE HELD ON [• ], 2013 TO SHAREHOLDERS BY MAIL, THE PROXY STATEMENT FOR SUCH MEETING IS ALSO IS AVAILABLE AT [• ].

 

 
 

 

REFERENCES TO ADDITIONAL INFORMATION

  

The accompanying proxy statement incorporates important business and financial information about CGEI from other documents that are not included in or delivered with this proxy statement. This information is available for you to review at the Securities and Exchange Commission’s, or SEC’s, public reference room located at 100 F Street, N.E., Room 1580, Washington, DC 20549, and through the SEC’s website, www.sec.gov. You can also obtain those documents incorporated by reference in this proxy statement by requesting them in writing, by telephone or by email from the appropriate company at the following addresses, telephone numbers and email addresses:

 

China Growth Equity Investment Ltd.

CN11 Legend Town,

No.1 Balizhuangdongli, Chaoyang District,

Beijing, 100025, P.R.C.

Attention: Chantelle Bai

Email: cbai@chum.com.cn

 

In addition, if you have questions about the transactions described herein or the extraordinary general meetings, or if you need to obtain copies of the accompanying proxy statement, proxy cards, election forms or other documents incorporated by reference in the proxy statement, you may contact the appropriate contact listed below. You will not be charged for any of the documents you request.

 

[Proxy Solicitation Firm]

 

If you would like to request documents, please do so by [• ], 2012,
in order to receive them before the extraordinary general meeting.

 

For a more detailed description of the information incorporated by reference in the accompanying proxy statement and how you may obtain it, see “Where You Can Find More Information” beginning on page 208 of the accompanying proxy statement.

 

EXPLANATORY NOTE

 

Unless the context otherwise requires, all references in this proxy statement to:

 

·“CGEI”, “we”, “us” and “our” refer to China Growth Equity Investment Ltd., a Cayman Islands exempted company;
   
·“CDGC” refers to China Dredging Group Co., Ltd., a British Virgin Islands business company;
   
 ·“Merger Sub” refers to China Growth Dredging Sub Ltd., a British Virgin Islands business company and a direct wholly-owned subsidiary of CGEI;

 

·“Pingtan Fishing” refers to the PRC operating company, Fujian Provincial Pingtan Country Ocean Fishing Group Co., Ltd, which is undertaking a corporate reorganization with Merchant Supreme Co. Ltd, as described herein;

 

·“Merchant Supreme” refers to Merchant Supreme Co. Ltd., a British Virgin Island business company, which is undertaking a corporate reorganization with Pingtan Fishing, as described herein;

 

·“Prime Cheer” refers to Prime Cheer Limited, a company incorporated under the laws of the Hong Kong Special Administrative Region and a wholly-owned subsidiary of Merchant Supreme;

 

·“Heroic Treasure” refers to Heroic Treasure Limited a company incorporated under the laws of the Hong Kong Special Administrative Region and the sole shareholder of Merchant Supreme;

 

·“Founder” refers to Zhuo Xinrong, a resident of the Hong Kong Special Administrative Region;
   
·“Hong Long” refers to Fuzhou Honglong Ocean Fishery Co., Ltd., a company incorporated under the laws of the Hong Kong Special Administrative Region;
   
·“Merger Agreement” refers to the Agreement and Plan of Merger, dated as of October 24, 2012, as it may be amended from time to time, among CGEI, CDGC, Founder and Merger Sub, a copy of which is attached as Annex A to this proxy statement;

 

·the “Pingtan Fishing share purchase agreement” refers to the share purchase agreement, dated as of October 24, 2012, as it may be amended from time to time, by and among CGEI, Pingtan Fishing, Founder, Merchant Supreme, Prime Cheer, Heroic Treasure and Hong Long, a copy of which is attached as Annex B to this proxy statement;

 

·to the “merger” refers to the proposed combination with CDGC; and

 

·the “business combination” refers to the merger and the acquisition of Pingtan Fishing.

  

For further clarification, although CGEI will technically be acquiring an equity interest in Merchant Supreme, the substance of the Pingtan Fishing share purchase agreement provides for CGEI to acquire the business of Pingtan Fishing. Merchant Supreme currently does not have any operating activities and following the reorganization with Pingtan Fishing (which will occur prior to CGEI’s acquisition of Merchant Supreme), will have no activities other than holding an indirect controlling interest in Pingtan Fishing. Accordingly, Merchant Supreme’s business will be that of Pingtan Fishing and its financial statements will effectively be those of Pingtan Fishing (with Pingtan Fishing treated as the accounting acquiror). For these reasons, management believes it is meaningful to present information regarding Pingtan Fishing in this proxy statement rather than information regarding Merchant Supreme.

 

 
 

 

 FORWARD-LOOKING STATEMENTS

 

This proxy statement and the documents that are incorporated into this proxy statement by reference may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” under U.S. Securities laws. You can typically identify forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other similar words. These include, but are not limited to, statements relating to the synergies and the benefits that we expect to achieve in the transactions discussed herein, including future financial and operating results, the combined company’s plans, objectives, expectations and intentions and other statements that are not historical facts. Those statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside the control of CGEI, CDGC and Pingtan Fishing, and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In addition to the risk factors described under “Risk Factors” beginning on page 20, those factors include:

 

possible delays in closing the business combination whether due to the inability to obtain shareholder or regulatory approval, CGEI not having at least $5.0 million of cash immediately prior to the consummation of the business combination held either in or outside the trust account, or otherwise;

 

our ability to integrate CDGC’s or Pingtan Fishing’s business and operations;

 

anticipated growth and growth strategies;

 

the need for additional capital and the availability of financing;

 

the combined company’s ability to successfully manage relationships with customers, distributors and other important relationships;

 

the loss of key personnel or expenditure of a greater amount of resources attracting, retaining and motivating key personnel than in the past;

 

the compatibility of business cultures;

 

pricing and availability of products and services;

 

demand for the combined company’s products and services;

 

competition;

 

the deterioration of general economic conditions, either nationally or in the local markets in which CGEI, CDGC and Pingtan Fishing operate, particularly China;

 

legislative or regulatory changes that may adversely affect the businesses of CGEI, CDGC and Pingtan Fishing;

 

costs related to the business combination that may reduce CGEI’s working capital; and

 

CGEI’s dissolution and liquidation as a result of a failure to close the business combination.

 

The forward-looking statements are based on current expectations about future events. Although CGEI believes that the expectations reflected in the forward-looking statements are reasonable, these expectations may not be achieved. CGEI is under no duty to update any of the forward-looking statements after the date of this proxy statement to conform those statements to actual results. In evaluating these statements, you should consider various factors, including the risks outlined in the section entitled “Risk Factors.”

 

-i-
 

 

  TABLE OF CONTENTS  
     
    Page
     
  FORWARD-LOOKING STATEMENTS
     
  QUESTIONS AND ANSWERS 1
     
  SUMMARY 9
     
    Parties to the Business Combination 10
       
    The Proposed Business Combination 10
       
    Consideration Received by CDGC Shareholders in the Merger 10
       
    Consideration to be Paid for Pingtan Fishing 10
       
    Total CGEI Shares to be Issued 11
       
    CGEI Extraordinary General Meeting 11
       
    Recommendation of the CGEI Board 12
       
    Interests of Officers and Directors in the Business Combination 12
       
    Material U.S. Federal Income Tax Consequences 12
       
    Officers and Directors of CGEI 13
       
  SELECTED HISTORICAL FINANCIAL DATA OF CGEI 14
     
  SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF CDGC 15
     
  SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF Pingtan Fishing 16
     
  SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA 17
     
  COMPARATIVE PER SHARE DATA 18
     
  MARKET PRICE AND DIVIDEND INFORMATION 19
     
  RISK FACTORS 20
     
    Risk Factors Relating to the Business Combination 20
       
    Risks Factors Relating to CGEI’s Business 26
       
    Risks Factors Relating to CDGC’s Business 33
       
    Risks Related to Pingtan Fishing’s Business 49
       
  INFORMATION ABOUT CGEI 62
     
    Overview 62

 

-ii-
 

 

    Shareholder Redemption Rights 63
       
    Management 64
       
    Offering Proceeds Held in Trust 65
       
    Fair Market Value of Target Business 65
       
    Opportunity for Shareholder Approval of Business Combination 65
       
    Liquidation If No Business Combination 66
       
    Competition 66
       
    Facilities 66
       
    Employees 66
       
    Legal Proceedings 67
       
    Available Information 67
       
    Management’s Discussion and Analysis of Financial Condition and Results of Operations 67
       
    Quantitative and Qualitative Disclosures about Market Risk 69
       
    Directors and Executive Officers 69
       
    Number and Terms of Office of Directors and Officers 72
       
    Board of Directors Leadership Structure 73
       
    Committees of the CGEI Board 73
       
    Code of Ethics and Committee Charters 74
       
    Limitation on Liability and Indemnification of Directors and Officers 74
       
    Conflicts of Interest 75
       
    Section 16(a) Beneficial Ownership Reporting Compliance 78
       
    Executive Compensation 78
       
    Compensation Discussion and Analysis 78
       
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 78
       
    Certain Relationships, Related Transactions and Director Independence 79
       
    Director Independence 80

 

- iii -
 

 

  INFORMATION ABOUT CHINA DREDGING GROUP CO., LTD. 81
     
    History and Development of CDGC 81
       
    Business Overview 84
       
    Competition 92
       
    Intellectual Property 93
       
    Research and Development 93
       
    Organizational Structure 93
       
    Property, Plants and Equipment 93
       
    Employees 94
       
    Legal Proceedings 95
       
    Management’s Discussion and Analysis of Financial Condition and Results of Operations 95
       
    Quantitative and Qualitative Disclosures About Market Risk 114
       
    Directors, Executive Officers And Corporate Governance 115
       
    Code of Ethics 117
       
    Committees of the CDGC Board 117
       
    Duties of Directors 119
       
    Compensation of Directors and Executive Officers 119
       
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 120
       
    Related Party Transactions 121
       
  INFORMATION ABOUT PINGTAN FISHING 123
     
    Overview 123
       
    Business Strategy 129
       
    Employees 129
       
    Competition 129
       
    Management’s Discussion and Analysis of Financial Condition and Results of Operations 130

 

- iv -
 

 

    Quantitative and Qualitative Disclosures About Market Risk 152
       
  THE EXTRAORDINARY GENERAL MEETING OF CGEI SHAREHOLDERS 153
     
    Date, Time and Place of the CGEI Extraordinary General Meeting 153
       
    Purpose of the CGEI Extraordinary General Meeting 153
       
    Record Date Issued and Outstanding Shares Entitled to Vote 153
       
    Ownership of CGEI Shares 153
       
    Quorum 153
       
    Vote Required 154
       
    Recommendation of the CGEI Board 154
       
    Voting by CGEI’s Directors, Executive Officers and Initial Shareholders 155
       
    How to Vote 155
       
    Attending the CGEI Extraordinary General Meeting 155
       
    Voting of Proxies 155
       
    Voting of CGEI Shares Held in Street Name 156
       
    Revoking your Proxy 156
       
    Proxy Solicitations 156
       
    Other Business 156
       
    Adjournments and Postponements 156
       
  PROPOSAL NO. 1 — APPROVAL AND ADOPTION OF THE MERGER AGREEMENT 158
     
    Vote Required for Approval 158
       
    Recommendation of the CGEI Board 158
       
  PROPOSAL NO. 2 – SHARE INCREASE AUTHORIZATION 159
     
    Vote Required for Approval 159
       
    Recommendation of the CGEI Board 159
       
  PROPOSAL NO. 3 — NAME CHANGE 160
     
    Vote Required for Approval 160
       
    Recommendation of the CGEI Board 160
     
  PROPOSAL NO. 4 — ADJOURNMENT OF EXTRAORDINARY GENERAL MEETING 161
     
    Vote Required for Approval 161
       
    Recommendation of the CGEI Board 161
       
  THE BUSINESS COMBINATION 162
     
    General Description of the Business Combination 162
       
    Background of the Business Combination 162

 

- v -
 

 

    Recommendation of the CGEI Board; CGEI’s Reasons for the Business Combination 164
       
    Consequences to CGEI if the Merger Agreement Is Not Approved and Adopted 165
       
    Redemption Rights of CGEI Shareholders 165
       
    Interests of Officers and Directors in the Business Combination 166
       
    Accounting Treatment of the Business Combination 166
       
  MATERIAL U.S. FEDERAL TAX CONSEQUENCES 167
     
    Tax Consequences to CGEI Shareholders 168
       
    Redemption of Ordinary Shares 168
       
    Information Reporting and Backup Withholding 169
       
    Reporting Requirements 169
       
  THE AGREEMENTS 170
     
    Description of the Merger Agreement 170
       
    Description of the Pingtan Fishing Share Purchase Agreement 177

 

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  POST-TRANSACTION PRO FORMA SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CGEI 186
     
  CGEI EXECUTIVE OFFICERS AND DIRECTORS UPON COMPLETION OF BUSINESS COMBINATION 188
       
    Biographical Information 188
       
    Committees of the CGEI Board 190
       
    Compensation Arrangements for Directors 192
       
    Compensation Committee Information 192
       
    Compensation of the CGEI Board and Executive Officers 192
     
  COMPENSATION OF CGEI EXECUTIVE OFFICERS 192
       
    Summary of Compensation of Executive Officers 192
     
  UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA 193
     
  DESCRIPTION OF CGEI SECURITIES 203
       
    General 203

 

- vii -
 

 

    Ordinary Shares 203
       
    Preferred Shares 204
       
    Units 204
       
    Warrants 205
       
    Dividends 207
       
    Transfer Agent and Warrant Agent 207
       
    Registration Rights 207
       
  WHERE YOU CAN FIND MORE INFORMATION 208
     
  ANNEXES 208
     
  INDEX TO FINANCIAL STATEMENTS F-1

 

- viii -
 

 

QUESTIONS AND ANSWERS

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the business combination and the extraordinary general meeting of CGEI. These questions and answers may not address all questions that may be important to you as a shareholder. To better understand these matters, and for a description of the legal terms governing the business combination, you should carefully read this entire proxy statement, including the annexes, as well as the documents that have been incorporated by reference in this proxy statement. See “Where You Can Find More Information” beginning on page 208.

 

Q:         Why am I receiving this proxy statement?

 

A:          You are receiving this proxy statement because CGEI is required to obtain shareholder approval in order to consummate the business combination. In this proxy statement, when we refer to the business combination, we mean: the acquisition of CDGC through the merger of Merger Sub with and into CDGC, with CDGC as the surviving company and a wholly-owned subsidiary of CGEI, with CDGC shareholders receiving CGEI Ordinary Shares; and the acquisition of Pingtan Fishing pursuant to the Pingtan Fishing share purchase agreement, pursuant to which Pingtan Fishing will become fully controlled by Merchant Supreme through a VIE agreement structure and Merchant Supreme will become a wholly-owned subsidiary of CGEI, with Merchant Supreme shareholders receiving CGEI Ordinary Shares.

 

We will not be able to complete the business combination unless approval of Proposal 1 (to approve and adopt the Merger Agreement) and Proposal 2 (the increase in our authorized share capital) are obtained at the extraordinary general meeting.

 

This proxy statement includes important information about the business combination, and includes a copy of the Merger Agreement in Annex A, the Pingtan Fishing share purchase agreement in Annex B and the proposed amendment to our Memorandum and Articles of Association in Annex C. You should read this information carefully and in its entirety. The enclosed voting materials allow you to vote your shares without attending the applicable extraordinary general meeting.

 

Your vote is important. You are encouraged to vote as soon as possible after carefully reviewing this proxy statement.

 

Q:         Will CGEI remain listed on the NASDAQ following completion of the business combination?

 

A:          Yes. CGEI will continue to be listed on The Nasdaq Capital Market immediately following completion of the business combination.

 

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Q:           Why is CGEI proposing the business combination?

 

A:           CGEI is proposing to acquire CDGC pursuant to the Merger Agreement and Pingtan Fishing pursuant to the Pingtan Fishing share purchase agreement.

 

CGEI is a Cayman Islands blank check company incorporated on January 18, 2010 for the purpose of directly or indirectly acquiring, through a merger, share exchange, asset acquisition, plan of arrangement, recapitalization, reorganization or similar business combination, an operating business, or control of such operating business through contractual arrangements, that has its principal business and/or material operations located in the PRC. CGEI’s prospective target business does not have to be limited to a particular industry. In accordance with CGEI’s amended and restated memorandum and articles of association, if CGEI is unable to complete a business combination by February 26, 2013, its purpose and powers will be limited to winding up its affairs and liquidating.

 

CDGC is one of the leading private subcontractors of dredging services in the PRC and Pingtan Fishing is a fast-growing pelagic fishing company in the PRC and internationally. Upon the consummation of the business combination, CDGC and Pingtan Fishing will be directly wholly-owned subsidiaries of CGEI and CGEI, assuming the name change proposal is approved, will change its corporate name to Pingtan Marine Enterprise Ltd.

 

CGEI has not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses. In evaluating a prospective target business, the management considered a variety of factors, including one or more of the following:

 

• financial condition and results of operation;

 

• growth potential;

 

• experience and skill of management and availability of additional personnel;

 

• capital requirements;

 

• competitive position;

 

• barriers to entry; and

 

• costs associated with effecting the business combination.

 

Based on its due diligence investigations of CDGC, Pingtan Fishing and the industries in which they operate, including the financial and other information provided by CDGC and Pingtan Fishing in the course of their negotiations, CGEI believes that CDGC and Pingtan Fishing meet many of the criteria and guidelines listed above and provide it with an opportunity to participate in a company with significant growth potential. See “The Business Combination — Recommendation of the CGEI Board; CGEI’s Reasons for the Business Combination.”

 

Q:           Why is CGEI proposing the share increase authorization proposal?

 

A:           Under the Merger Agreement and the Pingtan Fishing share purchase agreement, CGEI will issue an aggregate of 77,000,000 CGEI Ordinary Shares in the closing of the business combination. At present, CGEI does not have enough ordinary shares (after taking into account shares reserved for issuance upon the exercise of its outstanding warrants and unit purchase options) available for issuance in order to satisfy CGEI’s obligations under the Merger Agreement and the Pingtan Fishing share purchase agreement. CGEI cannot complete the business combination without an increase in the number of authorized ordinary shares.

 

Q:         Immediately following completion of the business combination, who will own and control CGEI?

 

A:         Assuming that no holders of CGEI Ordinary Shares exercise their redemption rights, we anticipate that immediately following completion of the business combination, the issued and outstanding shares of CGEI will be held as follows:

 

• approximately 7.75% by continuing holders of CGEI Ordinary Shares;

• approximately 62.30% by former holders of CDGC shares; and

• approximately 29.95% by former holders of Merchant Supreme shares.

 

Q:           What conditions must be satisfied to complete the business combination?

 

A:           CGEI and CDGC are not required to complete the merger unless a number of conditions are satisfied or waived. These conditions include, among others: (i) receipt of the CGEI merger approval (ii) approval by CDGC’s shareholders of the merger; (iii) absence of any injunctions, orders or laws that would prohibit, restrain or make illegal the merger and (iv) CGEI having at least $5.0 million of cash held either in or outside the trust account.

 

For a more complete summary of the conditions that must be satisfied or waived prior to completion of the merger, see “The Agreements — Description of the Merger Agreement — Conditions to the closing of the Merger” beginning on page 175.

 

CGEI and Pingtan Fishing are not required to complete the Pingtan Fishing acquisition unless a number of conditions are satisfied or waived. These conditions include, among others, absence of any injunctions, orders or laws that would prohibit, restrain or make illegal the mergers.

 

For a more complete summary of the conditions that must be satisfied or waived prior to completion of the Pingtan Fishing acquisition, see “The Agreements — Description of the Pingtan Fishing Share Purchase Agreement” beginning on page 177.

 

Q:           When do you expect the business combination to be completed?

 

A:           CGEI, CDGC and Pingtan Fishing are working to complete the business combination as quickly as possible, and we anticipate that it will be completed in the first quarter of 2013. However, the business combination is subject to various regulatory approvals and other conditions that are described in more detail in this proxy statement, and it is possible that factors outside the control of CGEI, CDGC and Pingtan Fishing could result in the business combination being completed at a later time, or not at all.

 

Q:           What are my U.S. Federal income tax consequences as a result of the business combination?

 

A:            CGEI shareholders will not recognize any gain or loss as a result of the merger unless they redeem their shares. See “What are the federal income tax consequences of exercising my redemption rights?” on page 7.

 

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Q:           What happens if I sell my CGEI Ordinary Shares before the extraordinary general meeting?

 

A:           The record date for the extraordinary general meeting is earlier than the date of the extraordinary general meetings and the date that the business combination is expected to be completed. If you transfer your shares after the applicable record date, but before the extraordinary general meeting, unless the transferee requests a proxy, you will retain your right to vote at such extraordinary general meeting (subject to the transferee’s instructions)

 

Q:           My shares are held in “street name” by my broker. Will my broker automatically vote my shares for me?

 

A:           No. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial holder” of the shares held for you in what is known as “street name.” If this is the case, this proxy statement has been forwarded to you by your brokerage firm, bank or other nominee, or its agent. As the beneficial holder, you have the right to direct your broker, bank or other nominee as to how to vote your shares. If you do not provide voting instructions to your broker, bank or other nominee on a particular proposal on which your broker, bank or other nominee does not have discretionary authority to vote, your shares will not be voted on that proposal. This is called a “broker non-vote.”

 

CGEI believes that under the Companies Law (as revised) and CGEI’s memorandum and articles of association, broker non-votes should be counted for purposes of determining the presence or absence of a quorum. Furthermore, under the rules of the New York Stock Exchange, or NYSE, brokers, banks and other nominees that are members of the NYSE do not have discretionary authority to vote on the proposals contained in this proxy statement.

 

Q:           What do I need to do now?

 

A:           Read and consider the information contained in this proxy statement carefully, and then please vote your shares as soon as possible so that your shares may be represented at the extraordinary general meeting.

 

Q:           How do I vote?

 

A:           You can vote in person by completing a ballot at the extraordinary general meeting, or you can vote by proxy before the extraordinary general meeting. Even if you plan to attend the extraordinary general meeting, we encourage you to vote your shares by proxy as soon as possible. After carefully reading and considering the information contained in this proxy statement, please submit your proxy by telephone or over the Internet in accordance with the instructions set forth on the enclosed proxy card, or mark, sign and date the proxy card, and return it in the enclosed postage-paid envelope as soon as possible so that your shares may be voted at your company’s extraordinary general meeting. For detailed information, see “The Extraordinary General Meeting of CGEI Shareholders — How to Vote” beginning on page 155. YOUR VOTE IS VERY IMPORTANT.

 

-3-
 

 

Q:           Can I change my vote after I have submitted a proxy by telephone or over the Internet or submitted my completed proxy card?

 

A:           Yes. If you are a shareholder of record, you can change your vote by revoking your proxy at any time before it is voted at the CGEI extraordinary general meeting. You can do this in one of four ways: (1) submit a proxy again by telephone or over the Internet prior to midnight on the night before the extraordinary general meeting; (2) sign another proxy card with a later date and return it by mail prior to midnight on the night before the extraordinary general meeting; (3) attend the applicable extraordinary general meeting and complete a ballot; or (4) send a written notice of revocation to the secretary of CGEI, so that it is received prior to midnight on the night before the CGEI extraordinary general meeting.

 

If you have instructed a broker, bank or other nominee to vote your shares, you must follow directions received from your broker, bank or other nominee to change your vote.

 

Q:           What should shareholders do if they receive more than one set of voting materials for a extraordinary general meeting?

 

A:           You may receive more than one set of voting materials for an extraordinary general meeting, including multiple copies of this proxy statement and multiple proxy cards or voting instruction cards. Please complete, sign, date and return each proxy card and voting instruction card that you receive. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card.

 

Q:           Who should I call if I have questions about the proxy materials or voting procedures?

 

A:           If you have questions about the merger, or if you need assistance in submitting your proxy or voting your shares or need additional copies of this proxy statement or the enclosed proxy card, you should contact [• ].

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you should contact your broker, bank or other nominee for additional information.

 

-4-
 

 

Q:           Why is CGEI proposing the name change proposal?

 

A:           CGEI believes that the new name, Pingtan Marine Enterprise Ltd., more accurately reflects the business CGEI will conduct after the business combination and will enable industry and financial market participants to move closely associate CGEI with its operating business.

 

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

 

A:           The extraordinary general meeting will be held at [• ] on [• ], 2013, at [• ], Eastern time, unless the extraordinary general meeting is adjourned or postponed.

 

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

 

A:           CGEI has fixed [• ], 2012 as the record date. If you were a CGEI shareholder at the close of business on the record date, you are entitled to vote on matters that come before the CGEI extraordinary general meeting. However, a CGEI shareholder may only vote his or her shares if he or she is present in person or is represented by proxy at the CGEI extraordinary general meeting.

 

Q:           How many votes do I have?

 

A:           CGEI shareholders are entitled to one vote at the extraordinary general meeting for each CGEI Ordinary Shares held of record as of the record date. As of the close of business on the record date, there were [• ] issued and outstanding CGEI Ordinary Shares.

 

Q:           What constitutes a quorum?

 

A:           Two members being individuals present in person or by proxy or if a corporation or other non-natural person by its duly authorized representative shall constitute a quorum. Accordingly, the presence at the extraordinary general meeting, either in person or by proxy, of at least two holders of CGEI Ordinary Shares will be required to establish a quorum. In the absence of a quorum the directors will have power to adjourn the extraordinary general meeting.

 

-5-
 

 

Q:           What vote is required to approve each proposal?

 

A:           Proposal 1 to Approve and Adopt the Merger Agreement: The proposal to approve and adopt the Merger Agreement and the merger contemplated thereby, which we refer to as the merger proposal, requires the affirmative vote of holders of a majority of CGEI Ordinary Shares issued and outstanding, entitled to vote and voting at the extraordinary general meeting.

 

Proposal 2 to Increase the Share Capital: The proposal to adopt amendments to the memorandum and articles of association of CGEI to increase share capital of CGEI and thereby the number of ordinary shares CGEI is authorized to issue from 60,000,000 to 100,000,000 Ordinary Shares, requires the affirmative vote of holders of a majority of CGEI Ordinary Shares issued and outstanding, entitled to vote and voting at the extraordinary general meeting

 

Proposal 3 to Change the Corporate Name: The proposal to adopt amendments to the memorandum and articles of association of CGEI to change CGEI’s name to Pingtan Marine Enterprise Ltd. requires the affirmative vote of two thirds of members present in person or by proxy and voting at the extraordinary general meeting.

 

 Proposal 4 to Adjourn the Extraordinary General Meeting: Approving the adjournment of the extraordinary general meeting (if it is necessary or appropriate to solicit additional proxies because there are not sufficient votes to approve and adopt Proposals 1 and 2) require the affirmative vote of two thirds of the members present in person or by proxy and voting at the extraordinary general meeting.

 

Q:           How do CGEI’s initial shareholders intend to vote their shares?

 

A:           Each of CGEI’s initial shareholders has agreed to vote all their founder shares which constitute 20% of CGEI’s issued and outstanding Ordinary Shares, in accordance with the majority of votes cast by the public holders of Ordinary Shares. To the extent any CGEI insider or officer or director of CGEI has acquired CGEI Ordinary Shares, or subsequent to, CGEI’s initial public offering, he, she or it has agreed to vote these acquired shares in favor of the proposal to approve and adopt the Merger Agreement.

 

Q:           What are the recommendations of CGEI’s board of directors?

 

A:           CGEI’s board of directors, or the CGEI board, has unanimously (i) approved the Merger Agreement and the consummation of the transactions contemplated thereby upon the terms and subject to the conditions set forth in the Merger Agreement, (ii) determined that the terms of the business combination are fair to, and in the best interests of, CGEI and its shareholders, (iii) determined that the share capital increase and name change are in the best interest of CGEI and its shareholders, (iv) directed that the Merger Agreement be submitted to CGEI shareholders for adoption, (v) recommended that CGEI shareholders approve and adopt the Merger Agreement and the amendments to the memorandum and articles of association of CGEI, (vi) declared the advisability of the Merger Agreement, and (vii) determined that all the proposals are in the best interest of the CGEI shareholders.

 

The CGEI board unanimously recommends that CGEI shareholders vote:

 

•           “FOR” the proposal to approve and adopt the Merger Agreement;

 

•           “FOR” the proposal to amend the memorandum and articles of association to increase the authorized share capital;

 

•           “FOR“ the proposal to amend the memorandum and articles of association to change CGEI’s name; and

 

•           “FOR” the proposal to approve the adjournment of the extraordinary general meeting (if it is necessary or appropriate to solicit additional proxies because there are not sufficient votes to approve and adopt Proposals 1 and 2).

 

See “The Business Combination — Recommendation of the CGEI Board; CGEI’s Reasons for the Business Combination” beginning on page 162.

 

Q:           Do CGEI shareholders have redemption rights?

 

A:           Yes. CGEI is providing its shareholders with the opportunity to redeem their CGEI Ordinary Shares for cash equal to their pro rata share of the aggregate amount then on deposit in the trust account, less franchise and income taxes payable, upon the consummation of the business combination, subject to certain limitations. There will be no redemption rights upon the consummation of the business combination with respect to CGEI warrants. CGEI’s initial shareholders have agreed not to exercise their redemption rights with respect to their founder and any other ordinary shares they may hold in connection with the consummation of the business combination, and the founder shares will be excluded from the pro rata calculation used to determine the per-share redemption price.

 

-6-
 

 

Each holder of CGEI Ordinary Shares may elect to redeem his, her or its shares irrespective of whether he, she or it votes for or against the approval of the CGEI merger proposal and the amendments to the memorandum and articles of association of CGEI. CGEI has no specified maximum redemption threshold. However, CGEI will not consummate the business combination unless it has at least $5.0 million of cash held either in or outside the trust account. CGEI’s Ordinary Shareholders will be able to redeem their shares up to the business day immediately prior to the vote on the merger proposal and the amendments to the memorandum and articles of association of CGEI.

 

Holders of CGEI Ordinary Shares together with any of their affiliates or any other person with whom they are acting in concert or as a “group” (as used in Section 13 of the Exchange Act) will be restricted from redeeming their shares with respect to more than an aggregate of 10% of the shares sold in CGEI’s initial public offering.

 

Q:           Will how I vote affect my ability to exercise redemption rights?

 

A:           No. You may exercise your redemption rights whether you vote your CGEI Ordinary Shares for or against the merger proposal and for the amendments to the memorandum and articles of association of CGEI.

 

Q:           How do I exercise my redemption rights?

 

A:           If you wish to exercise your redemption rights, you must:

 

•          send a letter to CGEI’s transfer agent, American Stock Transfer & Trust Company, at 6201 15th Avenue Brooklyn, NY, 11219, stating that you are exercising your redemption rights and demanding your CGEI Ordinary Shares be converted into cash; and

 

•           either:

 

ºphysically tender, or if you hold your CGEI Ordinary Shares in “street name,” cause your broker to physically tender, your share certificates representing CGEI Ordinary Shares to CGEI’s transfer agent by [• ], 2013; or

 

ºdeliver your shares electronically using the Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, to CGEI’s transfer agent by [• ], 2013.

 

You may elect to redeem your shares irrespective of whether you vote for or against the approval of the CGEI merger proposal.

 

Q:           What are the federal income tax consequences of exercising my redemption rights?

 

A:           CGEI shareholders who exercise their redemption rights to receive cash from the trust account in exchange for their CGEI Ordinary Shares generally will be required to treat the transaction as a sale of such shares and recognize gain or loss upon the conversion in an amount equal to the difference, if any, between the amount of cash received and the tax basis of the CGEI Ordinary Shares converted. Such gain or loss should be treated as capital gain or loss if such shares were held as a capital asset on the date of the conversion. A shareholder’s tax basis in his, her or its CGEI Ordinary Shares generally will equal the cost of such shares. A shareholder who purchased CGEI units will have to allocate the cost between the ordinary shares and the warrants comprising the units based on their relative fair market values at the time of the purchase. See “Material U.S. Federal Income Tax Consequences.”

 

Q:           If I am a CGEI warrant holder, can I exercise redemption rights with respect to my warrants?

 

A:           No. There are no redemption rights with respect to CGEI’s warrants.

 

-7-
 

 

Q:           What happens to the funds deposited in the trust account after completion of the business combination?

 

A:           Upon consummation of the business combination, the funds deposited in the trust account will be released (i) to pay CGEI Ordinary Shareholders who properly exercise their redemption rights, (ii) to pay transaction fees and expenses associated with the business combination, and (iii) for working capital and general corporate purposes of CGEI following the business combination.

 

Q:           What happens if the business combination is not consummated or is terminated?

 

A:           If CGEI does not effect the business combination or any other business combination before February 26, 2013, it will liquidate the trust account and distribute the amount held in the trust account, including interest but net of franchise and income taxes payable and less up to $100,000 of such net interest that may be released to CGEI from the trust account to pay liquidation expenses, to CGEI’s Ordinary Shareholders, subject in each case to CGEI’s obligations under Cayman Islands law to provide for claims of creditors and the requirements of other applicable law. After distributing the proceeds of the trust account, CGEI will promptly distribute the balance of its net assets to its remaining shareholders according to CGEI’s plan of dissolution.

 

-8-
 

 

SUMMARY

 

The following summary highlights only selected information contained elsewhere in this proxy statement and may not contain all the information that may be important to you. Accordingly, you are encouraged to read this proxy statement carefully and in its entirety, including its annexes and the documents incorporated by reference in this proxy statement.. See the section entitled “Where You Can Find More Information” on page 208.

 

Parties to the Business Combination

 

China Growth Equity Investment Ltd.

 

CGEI, a Cayman Islands exempted limited liability company, was incorporated as a blank check company on January 18, 2010 with the purpose of directly or indirectly acquiring, through a merger, share exchange, asset acquisition, plan of arrangement, recapitalization, reorganization or similar business combination, an operating business, or control of such operating business through contractual arrangements, that has its principal business and/or material operations located in the PRC.

 

On June 2, 2011, CGEI completed an initial public offering of 5,000,000 units, which units consists of one Ordinary Share and one reedemable purchase warrant. CGEI has neither engaged in any operations, nor generated any revenues, nor incurred any debt or expenses other than in connection with its initial public offering and, thereafter, expenses related to identifying and pursuing acquisitions of targets and expenses related to liquidating its trust fund for the benefit of its holders of Ordinary Shares and reconstituting CGEI as an ongoing business company. It has incurred expenses only in connection with (i) the preparation and filing of its quarterly reports on Form 10-Q, annual reports on Form 10-K and prospectuses and (ii) travel expenses related to finding and developing acquisition candidates. CGEI’s believes its travel expense policies are consistent with good business practice.

 

Following the initial public offering in June 2011, units, Ordinary Shares and warrants in CGEI were listed on the Nasdaq Capital Market under the symbols CGEIU, CGEI and CGEIW, respectively. On [·], the latest practicable date before the printing of this proxy statement, the last reported sale price of the units, ordinary shares and warrants in CGEI on The Nasdaq Capital Market was $[·], $[·] and $[·], per unit, share and warrant, respectively.

 

CGEI’s principal executive offices are located at CN11 Legend Town, No. 1 Balizhuangdongli, Chaoyang District, Beijing, 100025, PRC, and its telephone number is +86-10-6569-3988.

  

China Dredging Group Co., Ltd.

 

CDGC was incorporated in the British Virgin Islands on April 14, 2010. Through its PRC subsidiary, Fujian Service, CDGC provides specialized dredging services exclusively to the PRC marine infrastructure market and is, based on the number and capacity of the dredging vessels it operates, one of the leading independent (not state-owned) providers of such services in the PRC. Since its inception, CDGC has functioned exclusively as a specialist subcontractor, performing dredging services for other companies licensed to function as general contractors. CDGC engages in capital dredging, maintenance dredging and reclamation dredging projects and primarily sources its projects by subcontracting projects from general contractors.

 

CDGC’s ordinary shares are registered with the SEC, but are not listed on the Nasdaq, the NYSE, or the NYSE Amex, or another major international securities exchange.

 

CDGC’s principal executive offices are located at Floor 18, Tower A, Zhongshan Building No. 154, Hudong Road, Gulou District, Fuzhou City, Fujian Province 350001, PRC, and its telephone number is +86-591-8727-1266.

 

Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd.

 

Pingtan Fishing was incorporated in Pingtan County, Fujian Province, PRC on February 27, 1998. Pingtan Fishing primarily engages in ocean fishery with many of its self-owned vessels within Indian EEZ and Arafura Sea of Indonesia, which is ranked highly as one of the leading private (i.e. not state-owned) supplier and trader of oceanic aquatic products in PRC.

 

-9-
 

 

Pingtan Fishing’s ordinary shares are currently not listed on the Nasdaq, the NYSE, the NYSE Amex, or any other major international securities exchange.

 

Pingtan Fishing’s principal executive office is located at Room 201, 3 Wandefu Garden, Cui Yuan North Road, Tancheng Township, Pingtan County, Fuzhou City, Fujian Province, PRC, and its telephone number is +86-591-87276590.

  

China Growth Dredging Sub Ltd.

 

China Growth Dredging Sub Ltd., or Merger Sub, will be a British Virgin Islands business company and a wholly-owned subsidiary of CGEI. Merger Sub will be organized solely for the purpose of effecting the merger. Merger Sub will be merged with and into CDGC, and, as a result, CDGC will become a wholly-owned subsidiary of CGEI. Merger Sub will not carry on any activities other than in connection with the business combination. Merger Sub’s principal executive offices will be located at CN11 Legend Town, No. 1 Balizhuangdongli, Chaoyang District, Beijing, 100025, PRC.

 

Merchant Supreme Ltd.

 

Merchant Supreme is a British Virgin Island business company, which after the reorganization contemplated by the Pingtan Fishing share purchase agreement will hold an indirect controlling interest in Pingtan Fishing Merchant Supreme will have no other activities other than holding such interest. Merchant Supreme’s principal executive offices are located at Floor 19, Tower A, Zhongshan Building No. 154, Hudong Road, Gulou District, Fuzhou City, Fujian Province 350001, PRC.

 

The Proposed Business Combination

 

CGEI is proposing to acquire CDGC pursuant to the Merger Agreement. CGEI, CDGC, Founder and Merger Sub have entered into the Merger Agreement pursuant to which Merger Sub will merge with and into CDGC, with CDGC as the surviving entity. As a result of the transaction, former holders of CDGC Ordinary Shares and CDGC Preferred Shares will own CGEI Ordinary Shares converted at the ratio set forth in the Merger Agreement. In addition, CGEI will acquire Pingtan Fishing through the acquisition of Merchant Supreme which will control Pingtan Fishing pursuant to the Pingtan Fishing share purchase agreement.

 

For additional information on the merger, see “The Business Combination” beginning on page 162, and for additional information on the Merger Agreement and share purchase agreement, see “The Agreements” beginning on page 170.

 

Merger Consideration Received by CDGC Shareholders

 

Pursuant to the terms of the Merger Agreement, upon completion of the merger, each share of then-issued and outstanding CDGC Ordinary Shares and CDGC Preferred Shares will be redeemed and cancelled thereby transferring the entire economic interest in CDGC to CGEI as consideration for the issuance of the number of CGEI Ordinary Shares equal to CDGC Ordinary Shares and CDGC Preferred Shares multiplied by the Exchange Ratio. The Exchange Ratio is 0.82947 CGEI Ordinary Shares per each CDGC Ordinary Share or CDGC Preferred Share. The Exchange Ratio is subject to adjustment to reflect appropriately the effect of any division, combination, share dividend, extraordinary cash dividends, reorganization, recapitalization, reclassification, combination, exchange of shares or other like change, although no such events are currently contemplated. However, the Exchange Ratio will not be adjusted to reflect any changes in the market prices of CGEI Ordinary Shares.

 

CDGC shareholders will not receive any fractional CGEI Ordinary Shares in the merger. Instead, CGEI will issue one CGEI Ordinary Share to each holder of CDGC shares that would otherwise be entitled to a fraction of a CGEI Ordinary Share.

 

A description of the CGEI Ordinary Shares to be issued as merger consideration is set forth under the section entitled “Description of CGEI Securities” beginning on page 203.

 

Consideration to be Paid for Pingtan Fishing

 

Pursuant to the terms of the Pingtan Fishing share purchase agreement, all of the issued and outstanding shares of Merchant Supreme capital shares will be purchased by CGEI for an aggregate of 25,000,000 CGEI Ordinary Shares.

 

-10-
 

 

Total CGEI Shares to be Issued

 

Based on [• ] CGEI Ordinary Shares issued and outstanding as of [• ], 2012, the latest practicable date before the printing of this proxy statement, and assuming no CGEI Ordinary Shares are redeemed between [• ], 2012 and consummation of the business combination, the total number of CGEI Ordinary Shares issued and outstanding immediately following the consummation of the business combination will be approximately [• ]. Upon consummation of the business combination and assuming no redemptions by CGEI shareholders, current CGEI shareholders (including CGEI’s founders) will own approximately 7.75% of CGEI, former CDGC shareholders will own approximately 62.30% of CGEI and former Merchant Supreme shareholders will own approximately 29.95% of CGEI.

 

CGEI Extraordinary General Meeting

 

Date, Time and Place

 

An extraordinary general meeting of the shareholders of CGEI will be held at [• ] on [• ], 2013, at [• ], [• ] time, unless the extraordinary general meeting is adjourned or postponed.

 

Purposes of the Extraordinary General Meeting

 

At the extraordinary general meeting, CGEI shareholders will be asked to consider and vote upon the following matters and to transact such other business that may properly come before the meeting:

 

a proposal to approve and adopt the Merger Agreement;

 

a proposal to adopt an amendment to CGEI’s memorandum and articles of association to increase the authorized share capital;

 

a proposal to adopt an amendment to CGEI’s memorandum and articles of association to change CGEI’s name; and

 

a proposal to approve the adjournment of the extraordinary general meeting (if it is necessary or appropriate to solicit additional proxies because there are not sufficient votes to approve and adopt the Merger Agreement and the share capital increase authorization).

 

Record Date; Shares Entitled to Vote

 

Holders of CGEI Ordinary Shares as of the close of business on [• ], 2012, or the CGEI record date, are entitled to notice of, and to vote at, the extraordinary general meeting or one or more adjournments thereof. Each CGEI Ordinary Share is entitled to one vote.

 

As of the CGEI record date, [• ] CGEI Ordinary Shares were issued and outstanding and entitled to vote at the CGEI extraordinary general meeting.

 

Vote Required

 

Proposal to Approve and Adopt the Merger Agreement by CGEI shareholders:

 

The merger proposal requires the affirmative vote of holders of a majority of the CGEI Ordinary Shares issued and outstanding, entitled to vote and voting at the extraordinary general meeting.

 

Proposal to Adopt Share Increase Authorization by CGEI shareholders:

 

The share increase authorization proposal requires the affirmative vote of holders of a majority of the CGEI Ordinary Shares issued and outstanding, entitled to vote and voting at the extraordinary general meeting.

 

Proposal to Adopt Name Change:

 

The name change proposal requires the affirmative vote of two thirds of the the members present, in person or by proxy, and voting at the extraordinary general meeting.

 

-11-
 

 

Proposal to Approve the Adjournment of the Extraordinary General Meeting by CGEI shareholders:

 

Approving the adjournment of the extraordinary general meeting (if it is necessary or appropriate to solicit additional proxies because there are not sufficient votes to approve and adopt the Merger Agreement and the share capital increase authorization) requires the affirmative vote two thirds of the members present, in person or by proxy, and voting at the extraordinary general meeting. If a quorum is not present the directors may adjourn the meeting to a time and place they think fit.

 

Recommendation of the CGEI Board

 

The CGEI board has unanimously (i) approved the Merger Agreement and the consummation of the transactions contemplated thereby upon the terms and subject to the conditions set forth in the Merger Agreement, (ii) determined that the terms of the business combination are fair to, and in the best interests of, CGEI and its shareholders, (iii) directed that the Merger Agreement be submitted to CGEI shareholders for approval and adoption, (iv) recommended that CGEI shareholders approve and adopt the Merger Agreement and the amendments to the CGEI memorandum and articles of association and (v) declared the advisability of the Merger Agreement.

 

THE CGEI BOARD UNANIMOUSLY RECOMMENDS THAT CGEI SHAREHOLDERS VOTE:

 

“FOR” THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT;

 

“FOR” THE PROPOSAL TO AMEND THE MEMORANDUM AND ARTICLES OF ASSOCIATION TO INCREASE THE AUTHORIZED SHARE CAPITAL;

 

“FOR” THE PROPOSAL TO AMEND THE MEMORANDUM AND ARTICLES OF ASSOCIATION TO CHANGE CGEI’S NAME; AND

 

“FOR” THE PROPOSAL TO APPROVE THE ADJOURNMENT OF THE EXTRAORDINARY GENERAL MEETING (IF IT IS NECESSARY OR APPROPRIATE TO SOLICIT ADDITIONAL PROXIES BECAUSE THERE ARE NOT SUFFICIENT VOTES TO APPROVE AND ADOPT THE MERGER AGREEMENT and SHARE CAPITAL INCREASE AUTHORIZATION).

 

See “The Business Combination — Recommendation of the CGEI Board; CGEI’s Reasons for the Business Combination” beginning on page 164.

 

Interests of Officers and Directors in the Business Combination

 

Certain of CGEI’s executive officers and directors have financial interests in the business combination that are different from, or in addition to, the interests of CGEI’s shareholders, other than the insider shareholders. The members of the CGEI board were aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and the transactions contemplated thereby and in recommending to CGEI’s shareholders, that the Merger Agreement be approved and adopted. These interests are described in more detail in the sections of this document entitled “The Business Combination — Interests of CGEI’s Directors and Officers in the Business Combination”.

 

Material U.S. Federal Income Tax Consequences

 

There will be no tax consequences from the merger for CGEI shareholders except as to shareholders who choose to redeem their shares.

 

-12-
 

 

Tax matters are very complicated, and the tax consequences of the merger to a particular shareholder will depend on such shareholder’s circumstances. Accordingly, CGEI urges you to consult your tax advisor for a full understanding of the tax consequences of the merger to you, including the applicability and effect of U.S. federal, state, local and foreign income and other tax laws. For a more complete discussion of the material U.S. federal income tax consequences of the merger, see “Material U.S. Federal Income Tax Consequences” on page 167.

 

Officers and Directors of CGEI

 

Upon completion of the business combination, the following individuals will serve as directors and executive officers of CGEI:

 

Name   Position
     
Xinrong Zhuo   Chairman of the Board and Chief Executive Officer
     
Bin Lin   Senior Vice President and Director
     
Alfred Ho   Chief Financial Officer
     
Lin Bao   Director
     
Yeliang Zhou   Director
     
Zengbiao Zhu   Director
     
Xuesong Song   Director
     
Jin Shi   Director

 

For more information on the new directors and management of CGEI, see “CGEI Executive Officers and Directors upon Completion of Business Combination” beginning on page 188.

 

-13-
 

 

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF CGEI

 

The following table sets forth selected historical financial information derived from CGEI’s unaudited financial statements included elsewhere in this proxy statement for the six months ended June 30, 2012 and 2011 and from CGEI’s audited financial statements included elsewhere in this proxy statement for the year ended December 31, 2011 and for the period from January 18, 2010 (inception) through December 31, 2010.

 

The historical results of CGEI included below and elsewhere in this proxy statement are not necessarily indicative of the future performance of CGEI. You should read the following selected financial data in conjunction with “Unaudited Pro Forma Condensed Combined Financial Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section “Information About CGEI” and the financial statements and the related notes appearing elsewhere in this proxy statement.

 

        For the period 
          from January 18, 
    Six months ended June 30,   Year ended   2010 (Inception) 
   2012   2011   December 31,   to December 31, 
Statement of Operations Data:  (Unaudited)   (Unaudited)   2011   2010 
Formation and operating costs  $(317,351)  $(84,946)  $(310,075)  $(11,248)
Interest income   8,248    -    5,577    - 
Interest expense   -    (7,738)   (7,739)   (12,161)
Other (expense) income   (725)   -    678    - 
Net loss  $(309,828)  $(92,684)  $(311,559)  $(23,409)
                     
Weighted average shares issued and outstanding   6,250,000    2,548,444    4,426,677    1,955,000 
Basic and diluted net loss per share  $(0.05)  $(0.04)  $(0.07)  $(0.01)
                     
Balance Sheet Data:                    
Cash  $12,476   $971,055   $134,028   $167,374 
Advances to Affiliate   230,498    -    382,830    - 
Investments held in trust at amortized cost   50,263,824    50,250,000    50,255,577    - 
Total Assets   50,580,548    51,221,055    50,873,279    278,864 
Maximum ordinary shares, subject to possible redemption 4,308,631, 4,360,086, 4,339,460 and 0 shares stated at conversion value at June 30, 2012, 2011 and December 31, 2011 and 2010, respectively   43,301,744    43,818,866    43,611,572    - 
Total shareholders’ equity   5,000,001    5,000,001    5,000,001    21,491 
                     
Cash Flow Data:                    
Net cash used in operating activities  $(114,768)  $(70,825)  $(780,255)  $(6,781)
Net cash used in investing activities   (6,784)   (50,250,000)   (50,255,577)   - 
Net cash provided by financing activities   -    51,124,506    51,002,486    174,155 

 

-14-
 

 

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF CDGC

 

CGEI is providing the information set forth below to assist you in your analysis of the financial aspects of the business combination. CDGC’s balance sheet data as of June 30, 2012 and the statements of income and cash flows data for the six months ended June 30, 2012 and 2011 are derived from CDGC’s unaudited financial statements, which are included elsewhere in this proxy statement.

 

CDGC’s balance sheet data as of December 31, 2011 and 2010 and statements of income and cash flows data for the years ended December 31, 2011 and 2010 are derived from CDGC’s audited financial statements, which are included elsewhere in this proxy statement.

 

This information should be read together with financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this proxy statement. The historical results included below and elsewhere in this proxy statement are not indicative of the future performance of CDGC.

 

(In U.S. Dollars, except number of shares)

 

   For the Six months ended    For the year ended  
  June 30, 2012   June 30, 2011   December 31,
   December 31,
 
Statement of Income Data:  (Unaudited)   (Unaudited)     2011    2010 
Revenue  $119,094,081   $107,355,835   $226,953,070   $131,405,665 
Gross Profit   63,498,852    61,368,982    128,046,084    72,682,137 
Operating income   58,846,039    57,217,058    118,601,366    65,522,344 
Net income before income taxes and minority interest   58,256,571    64,361,337    126,499,331    64,790,676 
Net income before non-controlling interest   58,256,571    64,361,337    126,499,331    64,790,676 
Net income   43,392,735    49,934,966    96,392,261    48,234,280 
                     
Weighted average ordinary shares — basic   52,677,323    52,677,323    52,677,323    52,264,994 
Weighted average number of diluted ordinary shares   62,690,310    62,690,310    62,690,310    52,264,994 
Basic earnings per share  0.82   0.83   1.71   0.50 
Diluted earnings per share  0.69   0.80   1.54   0.50 
                     
Balance Sheet Data:                    
Total current assets  $204,873,323   $128,594,047   $160,257,293   $102,411,948 
Total assets   322,892,811    233,311,373    283,299,242    179,235,351 
Total current liabilities   23,415,730    18,868,882    24,287,264    11,910,076 
Total liabilities   23,415,730    27,538,653    24,287,264    27,529,071 
Shareholder's equity   249,412,146    155,707,785    208,947,043    107,776,357 
                     
Cash Flows Data:                    
Net cash provided by operating activities  $47,296,699   $42,457,539   $67,151,092   $51,757,688 
Net cash used in investing activities   -    (28,237,572)   (47,811,882)   (24,965,015)
Net cash provided by/(used in) financing activities   1,006    (983,702)   12,408    36,894,673 
Net increase in cash   47,297,705    13,236,265    19,351,618    63,687,346 

  

-15-
 

 

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF PINGTAN FISHING

 

Because Merchant Supreme currently does not have any operating activities, it would not be significant to CGEI. Following the reorganization with Pingtan Fishing, Merchant Supreme will have no activities other than holding an indirect controlling interest in Pingtan Fishing, and its financial statements will effectively be those of Pingtan Fishing (with Pingtan Fishing treated as the accounting acquiror). For this reason, CGEI is including the financial data of Pingtan Fishing in this proxy statement to assist you in your analysis of the financial aspects of the business combination. Pingtan Fishing’s balance sheet as of June 30, 2012 and the related statements of operations, shareholders’ equity and cash flows for the six months ended June 30, 2012, and the period from January 1, 2012 to June 30, 2012 are derived from Pingtan Fishing’s unaudited financial statements, which are included elsewhere in this proxy statement.

   

Pingtan Fishing’s balance sheet data as of December 31, 2011 and statements of income and cash flows data for the years ended December 31, 2011 and 2010 are derived from Pingtan Fishing’s audited financial statements, which are included elsewhere in this proxy statement.

 

This information should be read together with financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this proxy statement. The historical results included below and elsewhere in this proxy statement are not indicative of the future performance of Pingtan Fishing.

 

 
(In U.S. Dollars)                      

 

   For the six months ended   For the year ended 
  June 30, 2012   June 30,  2011   December
   December 31,
 
Statement of Income Data:   (Unaudited)   (Unaudited)   31, 2011    2010 
Revenue  $25,944,626   $10,867,161   $25,600,636   $14,548,027 
Gross Profit   7,965,822    6,395,855    11,000,057    5,400,878 
Operating income   7,353,132    6,091,758    10,365,242    4,830,120 
Net income before income taxes and minority interest   6,008,947    6,637,053    10,440,337    4,502,945 
Net income   6,008,947    6,637,053    10,440,337    4,502,945 
Comprehensive income   6,202,932    7,035,461    11,181,735    4,906,733 
                     
Balance Sheet Data:                    
Total current assets  $128,306,957   $41,921,760   $69,015,422   $38,611,742 
Total assets   138,142,042    44,204,727    75,383,351    39,682,914 
Total current liabilities   79,884,423    22,924,646    49,956,995    25,438,293 
Total liabilities   106,513,471    22,924,646    49,956,995    25,438,293 
Shareholder's equity   31,628,571    21,280,081    25,426,356    14,244,621 
                     
Cash Flows Data:                    
Net cash provided by operating activities   $1,307,443  $10,227,681   $7,060,220   $5,898,007 
Net cash used in investing activities   (40,232,318)   (3,040,010)   (29,435,226)   (11,211,329)
Net cash provided by financing activities   37,330,178   (7,444,255)   23,642,852    5,609,712 
Net increase in cash   (1,579,020)   (248,106)   1,308,264    309,376 

 

-16-
 

  

SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

 

The selected unaudited pro forma condensed combined financial data has been derived from, and should be read in conjunction with, the unaudited condensed combined financial statements included elsewhere in this proxy statement.

 

The unaudited pro forma condensed balance sheet data combines the historical financial position of CDGC, Pingtan Fishing and CGEI as of June 30, 2012, giving effect to the business combination as if it had been completed on June 30, 2012. The unaudited pro forma condensed combined income statements give effect to the business combination as if it took place on January 1, 2011.

 

The historical financial data has been adjusted to give effect to pro forma events that are related and/or directly attributable to the business combination, are factually supportable and, in the case of the unaudited pro forma statement of income data, are expected to have a continuing impact on the combined results. The adjustments presented in the unaudited pro forma condensed combined financial data have been identified and presented in “Unaudited Pro Forma Condensed Combined Financial Data” to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the business combination.

 

This information should be read together with CDGC’s, Pingtan Fishing’s and CGEI’s financial statements and related notes, “Unaudited Pro Forma Condensed Combined Financial Data”, “Information About CGEI – Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “ Information About China Dredging Group Co., Ltd. - Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and “ Information About Pingtan Fishing - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this proxy statement.

 

The unaudited pro forma financial data are not necessarily indicative of the financial position or results of operations that may have actually occurred had the transaction taken place on the dates noted, or the future financial position or operating results of the combined company.

 

   As of June 30, 2012 
   Assuming No
Redemption
Pro Forma Combined
   Assuming Max
Redemption
Pro Forma Combined
 
Selected Balance Sheet Data          
Cash and cash equivalents  $205,040,987   $161,739,243 
Accounts receivable/Account receivable - third party customers/Account receivable - related parties   32,304,197    32,304,197 
Cost and estimated earnings in excess of billings on contracts in progress   19,595,364    19,595,364 
Other receivables/Other receivables - third parties   10,115,916    10,115,916 
Due from related parties   80,815,965    80,815,965 
Property, plant and equipment, net   56,612,641    56,612,641 
Security deposits   48,418,070    48,418,070 
Total assets   507,742,841    464,441,097 
Short-term loans   30,546,515    30,546,515 
Accounts payable/Accounts payable - third party suppliers/Accounts payable - related parties   9,385,254    9,385,254 
Accrued liabilities and other payables/Other payables and accrued liabilities - third parties   1,783,466    1,783,466 
Due to related parties   42,228,319    42,228,319 
Total shareholders’ equity   377,813,640    334,511,896 
Shares outstanding   83,465,000    78,962,376 
           
Selected Statement of Operations Data          
Total revenue/Contract revenue  $145,038,707   $145,038,707 
Gross profit   71,464,674    71,464,674 
Net income for the six months ended June 30, 2012   49,401,682    49,401,682 
           
Per share data          
Basic net income per ordinary share  $0.59   $0.63 
Diluted net income per ordinary share   0.59    0.63 

  

-17-
 

 

COMPARATIVE PER SHARE DATA

 

The following table sets forth selected historical equity ownership information for CGEI, CDGC and Pingtan Fishing and unaudited pro forma combined per share data after giving effect to the business combination, assuming (i) that no holders of CGEI Ordinary Shares exercise their redemption rights and CGEI does not make any permitted repurchases of CGEI Ordinary Shares and (ii) that holders of CGEI Ordinary Shares have properly exercised their redemption rights and/or CGEI has made permitted repurchases of CGEI Ordinary Shares subject to the condition that the amount of cash held in trust is not less than $5,000,001, after giving effect to the redemption and/or repurchases but prior to expenses and certain other amounts. Pro forma per share data for CDGC and Pingtan Fishing is not separately presented as CDGC and Pingtan Fishing shares can be exchanged for CGEI Ordinary Shares on a one for one basis. CGEI is providing this information to aid you in your analysis of the financial aspects of the business combination. The historical information should be read in conjunction with the sections entitled “Selected Consolidated Historical Financial Data of CDGC”, “Selected Consolidated Historical Financial Data of Pingtan Fishing” and “Selected Historical Financial Data of CGEI” included elsewhere in this proxy statement. The unaudited pro forma per share data is derived from, and should be read in conjunction with the section entitled “Unaudited Pro Forma Condensed Combined Financial Data” included elsewhere in this proxy statement.

 

The unaudited pro forma consolidated per share data does not purport to represent what the actual results of operations of CGEI, CDGC and Pingtan Fishing would have been had the business combination been consummated at an earlier date or to project CGEI’s, CDGC’s or Pingtan Fishing’s results of operations that may be achieved after the business combination. The unaudited pro forma book value per share data below does not purport to represent what the value of CGEI, CDGC and Pingtan Fishing would have been had the business combination been consummated at an earlier date nor the book value per share for any future date or period.

 

   Six months
ended June
30, 2012
   Year ended
December 31,
2011
 
China Growth Equity Investment Ltd. - Historical          
Loss per share from continuing operations - Basic  $(0.05)  $(0.07)
Loss per share from continuing operations - Diluted   (0.05)   (0.07)
Cash dividends declared per ordinary share   -    - 
Book value per share of ordinary shares   0.80    0.80 

 

   Six months
ended June
30, 2012
   Year ended
December 31,
2011
 
China Dredging Group Co., Ltd – Historical          
Income per share from continuing operations – Basic  $0.82   $1.71 
Income per share from continuing operations – Diluted   0.69    1.44 
Cash dividends declared per ordinary share   -    - 
Book value per ordinary share   4.73    3.97 

 

    Six months
ended June
30, 2012
    Year ended
December 31,
2011
 
Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd.  - Historical          
Income per share from continuing operations - Basic   $-    $- 
Income per share from continuing operations - Diluted   -    - 
Cash dividends declared per ordinary share   -    - 
Book value per ordinary share   -    - 

 

   Six months
ended June
30, 2012
   Year ended
December 31,
2011
 
Pro Forma Per Share of the Combined Company  - Historical          
Assuming no redemptions:          
Income per share from continuing operations - Basic  $0.59   $1.23 
Income per share from continuing operations - Diluted   0.59    1.23 
Book value per ordinary share   4.53    NA 
Assuming maximum redemptions:          
Income per share from continuing operations - Basic  $0.63   $1.31 
Income per share from continuing operations - Diluted   0.63    1.31 
Book value per ordinary share   4.24    NA 

  

-18-
 

 

 

MARKET PRICE AND DIVIDEND INFORMATION

 

CGEI ordinary shares are quoted on the Nasdaq Capital Market under the symbol “CGEI”. CGEI warrants are quoted on the Nasdaq Capital Market under the symbol “CGEIW”. CGEI units are quoted on the Nasdaq Capital Market under the symbol “CGEIU”. The following table sets forth, for the periods indicated, the high and low sales prices per CGEI Ordinary Share, warrant and unit on the Nasdaq Capital Market.

 

   CGEI Ordinary Shares   CGEI Warrants   CGEI Units 
   High   Low   High   Low   High   Low 
Fiscal Year 2011                              
First Quarter   -    -    -    -    -    - 
Second Quarter   -    -    -    -    10.20    9.99 
Third Quarter   9.50    9.49    0.53    0.39    11.00    9.95 
Fourth Quarter   9.56    9.44    0.50    0.44    10.20    9.86 
Fiscal Year 2012                              
First Quarter   9.82    9.52    0.55    0.45    10.02    9.80 
Second Quarter   9.80    9.61    0.60    0.40    10.08    9.92 
Third Quarter   10.36    9.70    0.51    0.24    10.00    9.92 

 

Neither CGEI, CDGC nor Pingtan Fishing has paid dividends on ordinary shares during 2012 or 2011.

 

There were 6,250,000, 8,966,667 and 5,000,000 holders of CGEI Ordinary Shares, warrants and units, respectively, as of October 19, 2012

 

CDGC is a privately held company and there is no established public trading market for its ordinary shares.

 

Pingtan Fishing is a privately held company and there is no established public trading market for its ordinary shares.

  

-19-
 

 

RISK FACTORS

 

In addition to the other information contained in or incorporated by reference into this proxy statement, you should carefully consider the following risk factors in deciding whether to vote or instruct your vote to be cast to approve the proposals described in this proxy statement.

 

Risk Factors Relating to the Business Combination

 

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Failure to successfully combine and integrate the businesses of CGEI, CDGC and Pingtan Fishing in the expected time frame may adversely affect CGEI’s future results.

 

The success of the business combination will depend, in part, on CGEI’s ability to realize the anticipated benefits from combining the businesses of CGEI, CDGC and Pingtan Fishing as further described in the section titled “The Business Combination — Recommendation of the CGEI Board; CGEI’s Reasons for the Business Combination” beginning on page 164. To realize these anticipated benefits, the businesses of CGEI, CDGC and Pingtan Fishing must be successfully integrated and combined. CGEI, CDGC and Pingtan Fishing have been independent, and they will continue to be operated as such until the completion of the business combination. The management of CGEI may face significant challenges in consolidating the functions of CDGC, Pingtan Fishing and CGEI, integrating the technologies, organizations, procedures, policies and operations, as well as addressing the different business cultures at the three companies, and retaining key personnel. If the combined company is not successfully integrated, the anticipated benefits of the business combination may not be realized fully or at all or may take longer to realize than expected. The integration may also be complex and time consuming, and require substantial resources and effort. The integration process and other disruptions resulting from the business combination may also disrupt each company’s ongoing businesses and/or adversely affect their relationships with employees, customary regulators and others with whom they have business or other dealings.

 

Obtaining required regulatory approvals may prevent or delay completion of the business combination or reduce the anticipated benefits of the business combination or may require changes to the structure or terms of the business combination.

 

Consummation of the business combination is conditioned upon, among other things, the expiration or termination of the waiting period (and any extensions thereof) applicable to the business combination under the HSR Act. At any time before or after the business combination is consummated, any of the U.S. Department of Justice, which is referred to as the DOJ, the Federal Trade Commission, which is referred to as the FTC, or U.S. state attorneys general could take action under the antitrust laws in opposition to the business combination, including seeking to enjoin completion of the business combination, condition completion of the business combination upon the divestiture of assets of CGEI, CDGC, Pingtan Fishing or their subsidiaries or impose restrictions on CGEI’s post-consummation operations. These could negatively affect the results of operations and financial condition of the combined company following completion of the business combination. Any such requirements or restrictions may prevent or delay completion of the business combination or may reduce the anticipated benefits of the business combination, which could also have a material adverse effect on the combined company’s business and cash flows, financial condition and results of operations. Additionally, CGEI has agreed to take certain actions, conditioned on the closing, to the extent necessary to ensure satisfaction, on or prior to the outside date (as it may be extended), of certain conditions to the closing of the business combination relating to regulatory approvals. Certain of these actions may be taken after receipt of the CGEI business combination approval.

 

The loss of CDGC’s or Pingtan Fishing’s key personnel could negatively affect the operations and profitability of CGEI.

 

Although CGEI contemplates that certain members of CDGC’s and Pingtan Fishing’s respective management teams will transition to positions in CGEI following the business combination, it is possible that members of the management of CDGC or Pingtan Fishing will not wish to make such a transition. In addition, while it is anticipated that CGEI and certain members of CDGC’s and Pingtan Fishing’s senior management will enter into employment agreements, such agreements with CGEI have not been finalized. The loss of CDGC’s or Pingtan Fishing’s key personnel could negatively affect the operations and profitability of CGEI.

 

The amount of merger consideration is fixed and not subject to adjustment based on the market price of CGEI Ordinary Shares.

 

The consideration to be received by the holders of CDGC or Merchant Supreme shares in the business combination consists of CGEI Ordinary Shares. The Merger Agreement and Pingtan Fishing share purchase agreement do not include an exchange ratio or adjustment mechanism based on the market price of CGEI Ordinary Shares for the determination of the amount of merger consideration that will be paid.

 

The value of the CGEI Ordinary Shares issued in the business combination will depend on its market price at the time of the business combination, as the exchange ratio for the CGEI Ordinary Shares at the closing of the business combination is fixed.

 

Pursuant to the Merger Agreement and the Pingtan Fishing share purchase agreement, the exchange ratio used to determine the number of CGEI Ordinary Shares that CDGC and Merchant Supreme shareholders will receive is unaffected by the share price of CGEI Ordinary Shares, as reflected on the Nasdaq Capital Market. Increases in the value of CGEI Ordinary Shares will result in a higher price being paid by CGEI Ordinary Shares for CDGC and Merchant Supreme shares and more value received by CDGC and Merchant Supreme shareholders in the business combination. Pursuant to the Merger Agreement and the Pingtan Fishing share purchase agreement, respectively, CGEI will not have the right to terminate or renegotiate the Merger Agreement and the Pingtan Fishing share purchase agreement or to re-solicit proxies as a result of any increase in the value of CGEI Ordinary Shares.

 

The market price of CGEI Ordinary Shares could decline as a result of the large number of shares that will become eligible for sale after consummation of the business combination.

 

If the business combination is consummated, some of the new CGEI Ordinary Shares issued as consideration will become saleable beginning three month after the closing of the business combination. Consequently, after such period, a substantial number of additional CGEI Ordinary Shares will be eligible for resale in the public market. Current shareholders of CGEI and former shareholders of CDGC and Merchant Supreme may not wish to continue to invest in the operations of the combined company after the business combination, or for other reasons, may wish to dispose of some or all of their interests in CGEI after the business combination. Sales of substantial numbers of shares of both the newly issued and the existing CGEI Ordinary Shares in the public market following the business combination or could adversely affect the market price of such shares.

 

If the conditions to the merger are not met or waived, the merger will not occur.

 

Even if the Merger Agreement is approved and adopted by the shareholders of CGEI, specified conditions must be satisfied or waived to complete the business combination. These conditions are described in the sections entitled “The Agreements — Description of the Merger Agreement” and “The Agreements — Description of the Pingtan Fishing Share Purchase Agreement” of the proxy statement and in the Merger Agreement attached hereto as Annex A and the Pingtan Fishing share purchase agreement attached hereto as Annex B. All of the conditions may not be satisfied. If the conditions are not satisfied or waived, the business combination will not occur or will be delayed, which would result in the loss of some or all of the expected benefits of the business combination.

 

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Because Pingtan Fishing is a private company, CGEI may be required to expend substantial sums in order to bring it into compliance with the various reporting requirements applicable to public companies and/or to prepare required financial statements, and such efforts may harm CGEI operating results or be unsuccessful altogether.

 

Pingtan Fishing is not subject to many of the requirements applicable to public companies, including Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which requires that Pingtan Fishing evaluate and report on its system of internal controls. In addition, CGEI will need to evaluate the system of internal controls for CDGC and integrate the systems of internal control for CGEI, CDGC and Pingtan Fishing Furthermore, CGEI may not have the ability to conduct a formal evaluation of CDGC’s and Pingtan Fishing’s internal controls over financial reporting prior to the consummation of the business combination. If CGEI’s finance and accounting staff or internal controls over financial reporting are inadequate, it may be required to hire additional staff and incur substantial legal and accounting costs to address such inadequacies. Moreover, CGEI cannot be certain that its remedial measures will be effective. Any failure to implement required or improved controls, or difficulties encountered in their implementation, could harm CGEI’s operating results or increase its risk of material weaknesses in internal controls.

 

CGEI, CDGC and Pingtan Fishing will be subject to business uncertainties and contractual restrictions while the business combination is pending.

 

Uncertainty about the effect of the business combination on employees and customers may have an adverse effect on CGEI, CDGC or Pingtan Fishing and consequently on the combined company. These uncertainties may impair CDGC’s or Pingtan Fishing’s ability to retain and motivate key personnel and could cause customers and others that deal with CDGC or Pingtan Fishing to defer entering into contracts with CDGC or Pingtan Fishing or making other decisions concerning CDGC or Pingtan Fishing or seek to change existing business relationships with CDGC or Pingtan Fishing. Certain of CDGC’s and Pingtan Fishing’s agreements with their customers have provisions that may allow such customers to terminate the agreements if the business combination is completed. If key employees depart because of uncertainty about their future roles and the potential complexities of the business combination, CGEI’s, CDGC’s and Pingtan Fishing’s business could be harmed. In addition, the Merger Agreement and the Pingtan Fishing share purchase agreement restrict CGEI, CDGC and Pingtan Fishing from making certain acquisitions and taking other specified actions until the business combination occurs without the consent of the other party. These restrictions may prevent CGEI from pursuing attractive business opportunities that may arise prior to the completion of the business combination. See the section entitled “The Agreements — Description of the Merger Agreement — Additional Agreements” beginning on page 174 for a description of the restrictive covenants applicable to CGEI.

 

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Certain directors and executive officers of CGEI may have interests in the business combination that are different from, or in addition to or in conflict with, yours.

 

Executive officers of CGEI negotiated the terms of the business combination and the CGEI board approved the Merger Agreement and the transactions contemplated thereby and unanimously recommend that you vote in favor of the proposal to approve and adopt the Merger Agreement. These directors and executive officers may have interests in the business combination that are different from, or in addition to or in conflict with, yours. These interests include continued positions of certain directors of CGEI as directors of CGEI, and the indemnification of former CGEI directors and CGEI officers by CGEI and the surviving company. You should be aware of these interests when you consider your board of directors’ recommendation that you vote in favor of the approval and adoption of the merger agreement and the consummation of the transactions contemplated thereby. For a discussion of the interests of directors and executive officers in the business combination, see “The Business Combination — Interests of the Current CGEI Directors and Officers in the Business Combination” beginning on page 166.

 

CGEI shareholders will have a reduced ownership and voting interest after consummation of the business combination and will exercise less influence over management.

 

After the completion of the business combination, the CGEI shareholders will own a smaller percentage of CGEI than they currently own. Upon completion of the business combination, it is anticipated that CGEI shareholders (including CGEI’s founders) shareholders will hold approximately 7.75% of the ordinary CGEI shares issued and outstanding immediately after the consummation of the business combination, assuming that no CGEI Ordinary Shareholder exercise their redemption rights. Consequently, CGEI shareholders, as a group, will each have reduced ownership and voting power in the combined company compared to their ownership and voting power in CGEI. In particular, CGEI shareholders, as a group, will have less than a majority of the ownership and voting power of CGEI and, therefore, will be able to exercise less collective influence over the management and policies of CGEI than they currently do.

 

Failure to complete the business combination could negatively affect the share prices, businesses and financial results of CGEI.

 

If the business combination is not completed, the ongoing businesses of CGEI may be adversely affected and CGEI will be subject to several risks and consequences, including the following:

 

CGEI may be required, under certain circumstances, to pay the other party a termination fee of $3 million (depending on the specific circumstances);

  

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CGEI will be required to pay certain costs relating to the business combination, whether or not the business combination is completed, such as significant fees and expenses relating to financing arrangements and legal, accounting, financial advisor and printing fees;

 

CGEI may be required to pay significant fees and expenses relating to financing arrangements, whether or not the business combination is completed, which may include investment banking fees and commissions, commitment fees, early termination or redemption premiums, professional fees and other costs and expenses;

 

under the Merger Agreement, CGEI is subject to certain restrictions on the conduct of its business prior to completing the business combination which may adversely affect its ability to execute certain of its business strategies;

 

under the Pingtan Fishing share purchase agreement, CGEI may be obligated to pay Merchant Supreme a $3 million termination fee (depending on the specific circumstances); and

 

matters relating to the business combination may require substantial commitments of time and resources by CGEI management, which could otherwise have been devoted to other opportunities that may have been beneficial to CGEI as an independent company.

 

In addition, if the business combination is not completed, CGEI and may experience negative reactions from the financial markets. CGEI also could be subject to litigation related to a failure to complete the business combination or to enforce its respective obligations under the Merger Agreement and the Pingtan Fishing share purchase agreement. If the business combination is not consummated, the risks described may materially affect the business, financial results and share prices of CGEI.

 

CGEI, CDGC and Pingtan Fishing will incur significant transaction and merger-related transition costs in connection with the business combination.

 

CGEI, CDGC and Pingtan Fishing expect that they will incur significant, non-recurring costs in connection with consummating the business combination and integrating the operations of CGEI, CDGC and Pingtan Fishing. CGEI may incur additional costs to maintain employee morale and to retain key employees. CGEI, CDGC and Pingtan Fishing will also incur significant fees and expenses relating to financing arrangements and legal, accounting and other transaction fees and costs associated with the business combination. Some of these costs are payable regardless of whether the business combination is completed. Moreover, under specified circumstances, CGEI may be required to pay a termination fee of $3 million (depending on the specific circumstances) if the business combination is not consummated. See “The Agreements — Description of the Merger Agreement — Termination and Abandonment” beginning on page 177 and “The Agreements — Description of Pingtan Fishing Share Purchase Agreement — Termination and Termination Fee” beginning on page 184.

 

The unaudited pro forma financial information included in this document may not be indicative of what CGEI’s actual financial position or results of operations would have been.

 

The unaudited pro forma financial information in this proxy statement is presented for illustrative purposes only, has been prepared based on a number of assumptions and is not necessarily indicative of what the combined company’s actual financial position or results of operations would have been had the business combination been completed on the dates indicated. The unaudited pro forma consolidated financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the business combination or the costs to combine the operations of CGEI and CDGC or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. See “Unaudited Condensed Combined Pro Forma Financial Data” beginning on page 193 for more information.

  

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CGEI’s working capital will be reduced if CGEI shareholders exercise their right to redeem their shares for cash, which reduced working capital may adversely affect CGEI’s business and future operations.

 

Pursuant to CGEI’s amended and restated memorandum and articles of association, CGEI shareholders may demand that CGEI redeem their shares, calculated as of one business day prior to the anticipated consummation of the business combination, into a pro rata share of the trust account. If the amount remaining in the trust account after these expenses are paid is insufficient to fund CGEI’s working capital requirements, CGEI would need to seek to borrow funds necessary to satisfy such requirements. Such funds may not be available to CGEI on terms favorable to it or at all. If such funds were not available to CGEI, it may adversely affect CGEI’s operations and profitability.

 

CGEI’s warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and result in dilution to CGEI’s shareholders.

 

Outstanding warrants to purchase an aggregate of 3,966,667 CGEI Ordinary Shares will become exercisable after the consummation of the business combination. These warrants likely will be exercised only if the $12 per share exercise price is below the market price of the CGEI Ordinary Shares. To the extent such warrants are exercised, additional CGEI Ordinary Shares will be issued, which will result in dilution to the holders of ordinary shares in the share capital of CGEI and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of CGEI’s Ordinary Shares.

 

If CGEI shareholders fail to deliver their shares in accordance with the redemption requirements specified in this proxy statement, they will not be entitled to redeem their shares in the share capital of CGEI for a pro rata portion of the trust account.

 

CGEI shareholders may demand that CGEI convert their shares into a pro rata portion of the trust account, calculated as of one business day prior to the anticipated consummation of the merger. CGEI shareholders who seek to exercise this redemption right must deliver their shares (either physically or electronically) to American Stock Transfer & Trust Company, CGEI’s transfer agent, prior to the CGEI extraordinary general meeting. Any CGEI shareholder who fails to deliver his or her shares in accordance with the procedures described in this proxy statement will not be entitled to redeem his or her shares into a pro rata portion of the trust account. See the section entitled “The Business Combination — Redemption Rights of CGEI Shareholders” for the procedures to be followed if you wish to redeem your shares to cash.

 

The exercise of discretion by CGEI’s directors’ and officers’ in agreeing to changes or waivers in the terms of the business combination may result in a conflict of interest when determining whether such changes to the terms of the merger or waivers of conditions are appropriate and in shareholders’ best interests.

 

In the period leading up to the closing of the business combination, events may occur that, pursuant to the Merger Agreement or the Pingtan Fishing share purchase agreement that would require CGEI to agree to amend such agreement to consent to certain actions taken by the other parties to the agreement or to waive rights that they are entitled to under such agreements. Such events could arise because of changes in the course of the respective business of another party to the business combination, a request by another party to undertake actions that would otherwise be prohibited by the terms of the Merger Agreement or the occurrence of other events that would have a material adverse effect on CGEI’s businesses and would entitle CGEI to terminate the agreement. In any of such circumstances, it would be discretionary on CGEI, acting through its respective board of directors, to grant its consent or waive its rights. The existence of the financial and personal interests of the directors described in preceding risk factors may result in a conflict of interest on the part of one or more of the directors between what he or she may believe is best for CGEI and what he may believe is best for himself in determining whether or not to take the requested action. As of the date of this proxy statement, CGEI does not believe there will be any changes or waivers that its respective directors and officers would be likely to make after shareholder approvals of the merger proposal have been obtained. While certain changes could be made without further shareholder approval, CGEI will circulate a new or amended proxy statement and resolicit CGEI’s shareholders if changes to the terms of the transaction that would have a material adverse impact on CGEI shareholders are required prior to the shareholder vote on the merger proposal.

 

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If the business combination is completed, a portion of the funds in the trust account may be used to redeem CGEI Ordinary Shares. As a consequence, if the business combination is completed, such funds will not be available to CGEI for working capital and general corporate purposes and the number of beneficial holders of CGEI’s securities may be reduced to a number that may preclude the quotation, trading or listing of CGEI’s securities other than on the OTCBB.

 

After the payment of expenses associated with the transaction, including investment banking and finder’s fees and deferred underwriting commissions, the balance of funds in the trust account will be available to CGEI for working capital and general corporate purposes. However, a portion of the funds in the trust account may be used to acquire CGEI ordinary shares from holders thereof who elect to redeem their shares into cash. As a consequence of such purchases:

 

the funds in the trust account that are so used will not be available to CGEI after the business combination and the actual amount of such funds that CGEI may retain for its own use will be diminished; and

 

the public “float” of CGEI’s Ordinary Shares may be reduced and the number of beneficial holders of CGEI’s securities may be reduced, which may make it difficult to obtain the quotation, listing or trading of CGEI’s securities on The Nasdaq Capital Market or any other national securities exchange.

 

Risks Factors Relating to CGEI’s Business

 

CGEI may not be able to consummate an initial business combination within the required time frame, in which case, it will dissolve and liquidate its assets.

 

Pursuant to CGEI’s memorandum and articles of association CGEI must complete its initial business combination within 21 months after the consummation of its initial offering, by February 26, 2013. If CGEI fails to consummate a business combination within the required time frame, CGEI will, in accordance with its memorandum and articles of association, liquidate and subsequently dissolve.

 

If the merger proposal with CDGC is not approved by CGEI’s shareholders, CGEI will not complete the business combination and may not be able to consummate an alternative business combination within the required time frame, either due to insufficient time or insufficient operating funds.

 

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CGEI may have insufficient time or funds to complete an alternative business combination if the business combination is not approved by CGEI’s shareholders or the business combination is otherwise not completed.

 

CGEI must complete its initial business combination by February 26, 2013. If the merger proposal and amendments to memorandum and articles of association proposal are not approved by CGEI’s shareholders, CGEI will not complete the business combination and may not be able to consummate an alternative business combination within the required time frame, either due to insufficient time or insufficient operating funds. In addition, CGEI’s negotiating position and CGEI’s ability to conduct adequate due diligence on any potential target may be reduced as the deadline for the consummation of a business combination approaches.

 

If CGEI is unable to consummate a business combination, its ordinary shareholders may be forced to wait until February 26, 2013 before receiving liquidation distributions.

 

CGEI has 21 months from its initial offering in which to complete its initial business combination. CGEI has no obligation to return funds to investors prior to such date unless it consummates the initial business combination or if CGEI receives shareholder approval to consummate a business combination prior thereto and only then in cases where shareholders have sought redemption of their shares. Only after the expiration of this full time period will ordinary shareholders be entitled to liquidation distributions if CGEI is unable to complete the initial business combination. Accordingly, investors’ funds may be unavailable to them until such date.

 

Subsequent to CGEI’s consummation of the initial business combination, CGEI may be required to subsequently take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition, results of operations and its share price, which could cause you to lose some or all of your investment.

 

Even if CGEI were to conduct extensive due diligence on CDGC and Pingtan Fishing, this diligence may not surface all material issues that may be present inside CDGC’s or Pingtan Fishing’s respective business. It may not be possible to uncover all material issues through a customary amount of due diligence, and factors outside CDGC’s or Pingtan Fishing’s respective business and outside of CGEI’s control may later arise. As a result of these factors, CGEI may be forced to later write-down or write-off assets, restructure its operations, or incur impairment or other charges that could result in its reporting losses. Even if CGEI’s due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with CGEI’s preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on CGEI’s liquidity, the fact that CGEI report charges of this nature could contribute to negative market perceptions about CGEI or its securities. In addition, charges of this nature may cause CGEI to violate net worth or other covenants to which CGEI may be subject as a result of assuming pre-existing debt held by CDGC or Pingtan Fishing or by virtue of CGEI obtaining post-combination debt financing.

 

If CGEI is forced to liquidate its trust account before the completion of an initial business combination and distribute the trust account, holders of CGEI Ordinary Shares may receive less than $10.00 per share and CGEI’s warrants may expire worthless.

 

 If CGEI fails to complete an initial business combination prior to February 26, 2013, it will notify the holders of CGEI Ordinary Shares that it will compulsorily repurchase all CGEI Ordinary Shares using the proceeds in the trust account.

 

 In these circumstances, the per-share repurchase distribution may be less than $10.05 because of the expenses of CGEI’s initial public offering, CGEI’s general and administrative expenses and the anticipated costs of seeking an initial business combination. CGEI’s sponsor and its beneficial owners will not have shareholder redemption rights with respect to any CGEI Ordinary Shares owned by them, directly or indirectly, including CGEI Ordinary Shares purchased by them in CGEI’s initial public offering or in the secondary market. If CGEI is unable to conclude its initial business combination, the actual per-share redemption price will be equal to the aggregate amount then in the trust account, and including accrued interest, net of any interest income on the trust account balance required for CGEI to pay its tax obligations incurred and net of interest income previously released to CGEI to fund its working capital requirements (calculated as of one business day prior to the consummation of the business combination), divided by the number of CGEI Ordinary Shares. As of September 30, 2012, the per-share redemption price would be approximately $10.05. Furthermore, there will be no distribution with respect to CGEI’s outstanding warrants.

 

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CGEI may proceed with the business combination only if it has at least $5,000,001 of cash held in the trust account (after giving effect to payment of all holders of CGEI Ordinary Shares who exercise their redemption right), which may reduce its ability to enter into any business combination.

 

The CGEI memorandum and articles of association requires CGEI to provide all of CGEI’s shareholders with an opportunity to redeem all of their shares in connection with the consummation of any initial business combination. Notwithstanding the foregoing, the merger will not be consummated unless CGEI has more than $5.0 million of cash held in the trust account (after giving effect to payment of all holders of CGEI Ordinary Shares who exercise their redemption right but excluding payments to be made for transaction fees and pay-off of related party debt). Consequently, despite the provisions of the CGEI memorandum and articles of association, if approximately 90% or more of the outstanding publicly held CGEI Ordinary Shares exercise their redemption rights, CGEI would not proceed with such redemption, would not close the merger and may instead search for an alternate business combination.

 

In connection with an initial business combination approved by the CGEI shareholders, CGEI’s Ordinary Shareholders, together with any affiliates of theirs or any other person with whom they are acting in concert or as a “group,” will be restricted from seeking conversion rights with respect to more than 10% of the shares sold in the initial offering.

 

Since CGEI is seeking shareholder approval of any business combination, under its memorandum and articles of association, CGEI will offer each Ordinary Shareholder (but not holders of its initial shares) the right to have his, her, or its ordinary shares converted into cash. Notwithstanding the foregoing, an Ordinary Shareholder, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” will be restricted from seeking conversion rights with respect to more than 10% of the shares sold in the initial offering. Accordingly, if a shareholder purchased more than 10% of the shares sold in the initial offering and the proposed business combination is approved, such shareholder will not be able to seek conversion rights with respect to the full amount of their shares and may be forced to hold such shares over 10% or sell them in the open market. The value of such shares may not appreciate over time following a business combination and the market price of CGEI’s ordinary shares may not exceed the per-share conversion price.

 

If third parties bring claims against CGEI, the proceeds held in trust could be reduced and the per-share liquidation price received by shareholders may be less than $10.05.

 

If CGEI is unable to complete its initial business combination within 21 months from the consummation of the initial offering and is forced to liquidate its assets, the per-share liquidation distribution may be less than the initial $10.05 estimated funds in trust, because the proceeds deposited in the trust account could become subject to the claims of CGEI’s creditors which could have higher priority than the claims of CGEI’s Ordinary Shareholders. Therefore, the actual per-share liquidation price could be less than $10.05 because of certain expenses, including, without limitation, the expenses of the initial offering, CGEI’s general and administrative expenses and the costs of the business combination.

 

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Third party claims may include contingent or conditional claims and claims of directors and officers entitled to indemnification under CGEI’s memorandum and articles of association. CGEI intends to pay any claims, to the extent sufficient to do so, from its funds not held in trust. Although CGEI will seek to have all vendors, service providers and prospective target businesses or other entities with which CGEI executes agreements waive any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of its Ordinary Shareholders, they may not execute such agreements. Even if they execute such agreements, they could bring claims against the trust account including but not limited to fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with a claim against CGEI’s assets, including the funds held in the trust account. If any third party refused to execute an agreement waiving such claims to the monies held in the trust account, CGEI would perform an analysis of the alternatives available to CGEI if it chose not to engage such third party and evaluate if such engagement would be in the best interest of CGEI’s shareholders if such third party refused to waive such claims.

 

Examples of possible instances where CGEI may engage a third party that refused to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a provider of required services willing to provide the waiver. In any event, CGEI’s management would perform an analysis of the alternatives available to it and would only enter into an agreement with a third party that did not execute a waiver if management believed that such third party’s engagement would be significantly more beneficial to CGEI than any alternative. In addition, such entities may not agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with CGEI and not seek recourse against the trust account for any reason. Accordingly, the proceeds held in the trust account could be subject to claims that could take priority over the claims of CGEI’s Ordinary Shareholders and the per-ordinary share liquidation price could be less than the $10.05 per ordinary share held in the trust account, plus interest (net of any taxes due on such interest, which taxes shall be paid from the trust account), due to claims of such creditors. If CGEI is unable to complete the initial business combination and liquidate the company, CGEI’s officers and directors will be liable, jointly and severally, if CGEI did not obtain a valid and binding waiver enforceable under law from any vendor, service provider, prospective target business or other entity of any rights or claims to the trust account, to the extent necessary to ensure that such claims do not reduce the per share amount in the trust account below $10.05 a share (or $10.01 if the over-allotment is exercised in full). CGEI’s officers and directors may not be able to satisfy the obligations. The indemnification provisions are set forth in letter agreements executed by CGEI’s officers and directors. The letter agreement specifically sets forth that in the event CGEI obtains a valid and binding waiver, enforceable under law of any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of CGEI’s shareholders from a vendor, service provider, prospective target business or other entity, the indemnification from CGEI’s officers and directors will not be available.

 

Additionally, if CGEI is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against CGEI which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in CGEI’s bankruptcy estate and subject to the claims of third parties with priority over the claims of CGEI’s shareholders. To the extent any bankruptcy claims deplete the trust account, CGEI may not be able to return to its Ordinary Shareholders at least $10.05 per ordinary share

 

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CGEI’s shareholders may be held liable for claims by third parties against CGEI to the extent of distributions received by them.

 

CGEI’s memorandum and articles of association provide that it will continue in existence only until 21 months from the consummation of the initial offering, in the event that CGEI fails to consummate an initial business combination on or prior to February 26, 2013. CGEI’s failure to consummate an initial business combination by this deadline will trigger the winding-up of the company, and CGEI will liquidate and distribute the proceeds held in the trust account and any remaining net assets to its Ordinary Shareholders. No shareholder vote will be required to commence such winding-up and dissolution. In such a situation, a liquidator would normally give at least 31 days’ notice to creditors by notifying known creditors (if any) who have not submitted claims and by placing a public advertisement in the Cayman Islands Official Gazette, that CGEI has been placed into liquidation and they are required to submit particulars of their debts or claims to CGEI, although in practice this notice requirement need not necessarily delay the distribution of assets as the liquidator may be satisfied that no creditors would be adversely affected as a consequence of a distribution before this time period has expired. As soon as the affairs of the company are fully wound-up, the liquidator must lay his final report and accounts before a final general meeting which must be called by a public notice approximately one month before it takes place. After the final meeting, the liquidator must make a return to the Registrar of Companies confirming the date on which the meeting was held and three months after the date of such filing the company is dissolved. However, it is CGEI’s intention to liquidate the trust account to its Ordinary Shareholders as soon as reasonably possible and CGEI’s directors and officers have agreed to take any such action necessary to dissolve CGEI and liquidate the trust account as soon as reasonably practicable if CGEI does not complete an initial business combination within the required time period. Pursuant to CGEI’s memorandum and articles of association, failure to consummate its initial business combination within 21 months from the date of the consummation of the initial offering will trigger an automatic winding-up of the company. As such, CGEI’s shareholders could potentially be liable for any claims to the extent of distributions received by them pursuant to such process and any liability of our shareholders may extend beyond the date of such dissolution. Accordingly, third parties may seek to recover from CGEI’s shareholders amounts owed to them by CGEI. However, the potential shareholder liability would only extend until the formal voluntary liquidation and dissolution of CGEI pursuant to Cayman Islands law.

 

If CGEI is unable to consummate an initial business combination within the required time periods, CGEI’s purpose and powers will be limited to dissolving and winding up. Upon notice from CGEI, the trustee of the trust account will distribute the amount in CGEI’s trust account to CGEI’s Ordinary Shareholders as part of CGEI’s plan of dissolution and distribution. Concurrently, CGEI shall pay, or reserve for payment, from funds not held in trust, CGEI’s liabilities and obligations, although there may not be sufficient funds for such purpose.

 

If CGEI is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against CGEI, which is not dismissed, any distributions received by shareholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by CGEI‘s shareholders. Furthermore, because CGEI intends to distribute the proceeds held in the trust account to CGEI’s Ordinary Shareholders promptly after CGEI’s termination, this may be viewed or interpreted as giving preference to CGEI’s Ordinary Shareholders over any potential creditors with respect to access to or distributions from CGEI’s assets. Furthermore, CGEI’s board may be viewed as having breached their fiduciary duties to CGEI’s creditors and/or may have acted in bad faith, and thereby exposing itself and CGEI to claims of punitive damages, by paying Ordinary Shareholders from the trust account prior to addressing the claims of creditors. Claims may be brought against CGEI for these reasons.

 

CGEI’s disinterested independent directors may decide not to enforce the indemnification obligations of CGEI’s officers and directors, resulting in a reduction in the amount of funds in the trust account available for distribution to CGEI’s Ordinary Shareholders.

 

Certain directors and officers have agreed that they will be liable, jointly and severally, to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by CGEI for services rendered or contracted for or products sold to CGEI, but only to the extent CGEI has not obtained a valid and enforceable waiver from such parties. In the event that the proceeds in the trust account are reduced and one or more of CGEI’s directors and officers assert that they are unable or unwilling to satisfy their obligations or that they have no indemnification obligations related to a particular claim, CGEI’s independent directors would determine whether CGEI would take legal action against such directors and officers to enforce their indemnification obligations. While CGEI currently expects that CGEI ‘s independent directors would take action on CGEI’s behalf against CGEI’s directors and officers to enforce their indemnification obligations, it is possible that CGEI’s independent directors in exercising their business judgment may choose not to do so. If CGEI’s independent directors choose not to enforce the indemnification obligations of CGEI’s directors and officers, the amount of funds in the trust account available for distribution to CGEI’s Ordinary Shareholders may be reduced and the per ordinary share liquidation distribution could be less than the initial $10.05 per ordinary share held in the trust account.

 

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Holders of CGEI shares may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts and enforce federal securities laws or other legal rights may be limited.

 

CGEI is a company incorporated under the laws of the Cayman Islands, and all of its assets are located outside the U.S. In addition, certain of CGEI’s directors and officers are nationals or residents of jurisdictions other than the U.S., including the PRC, and all or a substantial portion of their assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process within the U.S. upon CGEI directors or executive officers, or enforce judgments obtained in the U.S. courts against CGEI’s directors or officers. Moreover, CGEI has been advised that the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the U.S. Further, it is unclear if extradition treaties now in effect between the U.S. and the PRC would permit effective enforcement of criminal penalties of the U.S. federal securities laws.

 

CGEI’s corporate affairs are governed by its memorandum and articles of association, the Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of CGEI’s directors to CGEI under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Cayman Islands. The rights of CGEI’s shareholders and the fiduciary responsibilities of its directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the U.S. In particular, the Cayman Islands has a less developed body of securities laws as compared to the U.S., and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the U.S.

 

Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognised and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty; and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

 

The majority of CGEI’s directors and officers reside outside of the U.S. and all of CGEI’s assets are located outside of the U.S. The system of laws and the enforcement of existing laws and contracts in the PRC may not be as certain in implementation and interpretation as in the U.S. The Chinese judiciary is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. As a result, it may be difficult, or in some cases not possible, for investors in the U.S. to enforce their legal rights, to effect service of process upon majority of CGEI’s directors or officers or other individuals resident in the PRC, to bring an original action to enforce liabilities based on the U.S. federal securities laws, to enforce judgments of U.S. courts predicated upon the civil liability provisions of the U.S. federal securities laws, and criminal penalties on CGEI’s directors and officers or other individuals resident in the PRC under U.S. laws.

 

As a result of all of the above, Ordinary Shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.

 

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CGEI’s working capital will be reduced if holders of CGEI’s Ordinary Shares exercise their right to redeem their shares for cash, which reduced working capital may adversely affect CGEI’s business and future operations.

 

Pursuant to the CGEI’s memorandum and articles of association, CGEI is offering each current holder of the CGEI Ordinary Shares the right to have such holder’s shares redeemed into cash if such holder either (i) votes against the business combination and timely exercises such redemption right or (ii) votes in favor of the business combination but elects to exercise such shareholder’s right to redeem. CGEI’s sponsor and its beneficial owners will not have shareholder redemption rights with respect to any CGEI Ordinary Shares owned by them, directly or indirectly, including CGEI Ordinary Shares purchased by them in CGEI’s initial public offering or in the secondary market. The actual per-share redemption price will be equal to the aggregate amount then in the trust account, and including accrued interest, net of any interest income on the trust account balance required for CGEI to pay its tax obligations incurred and net of interest income previously released to CGEI to fund its working capital requirements (calculated as of one business day prior to the consummation of the business combination), divided by the number of CGEI Ordinary Shares.

 

If the amount remaining in the trust account after any redemptions is insufficient to fund CGEI’s working capital requirements, CGEI would need to seek to borrow funds necessary to satisfy such requirements. Such funds may not be available to CGEI on terms favorable to it or at all. If such funds were not available to CGEI, it may adversely affect CGEI’s operations and profitability.

 

The Nasdaq Capital Market may delist CGEI’s securities, which could limit investors’ ability to transact in CGEI’s securities and subject CGEI to additional trading restrictions.

 

Although CGEI’s securities are currently listed on the Nasdaq Capital Market since the initial offering, CGEI’s securities may not continue to be listed on the Nasdaq Capital Market. Additionally, it is likely that the Nasdaq Capital Market would require CGEI to file a new initial listing application and meet its initial listing requirements, as opposed to its more lenient continued listing requirements, at the time of the business combination. CGEI may not be able to meet those initial listing requirements at that time.

 

If the Nasdaq Capital Market delists CGEI’s securities from trading, CGEI could face significant consequences, including:

 

·a limited availability for market quotations for CGEI’s securities;
·reduced liquidity with respect to CGEI’s securities;
·a determination that CGEI’s ordinary shares are “penny stocks,” which will require brokers trading in CGEI’s ordinary shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for CGEI’s ordinary shares;
·limited amount of news and analyst coverage for CGEI; and
·a decreased ability to issue additional securities or obtain additional financing in the future.

 

In addition, CGEI would no longer be subject to Nasdaq Capital Market rules, including rules requiring CGEI to have a certain number of independent directors and to meet other corporate governance standards.

 

If CGEI’s Ordinary Shares become subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in CGEI’s securities may be adversely affected.

 

If at any time CGEI has net tangible assets of $5,000,001 or less and its ordinary shares have a market price per share of less than $5.00, transactions in CGEI’s ordinary shares may be subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:

 

·make a special written suitability determination for the purchaser;
·receive the purchaser’s written agreement to the transaction prior to sale;
·provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and

 

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·obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.

 

If CGEI’s ordinary shares become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in CGEI’s securities may be adversely affected. As a result, the market price of CGEI’s securities may be depressed, and you may find it more difficult to sell CGEI’s securities.

 

Risks Factors Relating to CDGC’s Business

 

CDGC’s performance depends upon public spending on marine transportation infrastructure, which may significantly decline.

 

CDGC’s ability to generate revenues significantly depends upon the PRC government’s public spending on marine transportation infrastructure, primarily for the construction and improvement of ports and waterways.  CDGC’s major customers include PRC government agencies at the national, provincial and local levels, and state-owned enterprises.  CDGC is therefore affected by changes in public works’ budgets.  The future growth of the dredging industry in the PRC depends significantly upon the continued availability of major marine transportation infrastructure projects.  The nature, extent and timing of these projects will, however, be determined by the interplay of a variety of factors, including the PRC government’s spending in the marine transportation infrastructure industry in the PRC and the general conditions and prospects of the PRC economy.  The PRC government’s spending in the marine transportation infrastructure industry has historically been, and CDGC expects to continue to be, affected by general PRC economic trends and subject to fluctuation.  Should there be a significant reduction in public spending on marine transportation infrastructure projects in the PRC and CDGC fails to open up new markets in or outside the PRC, CDGC’s operations and profits could be materially and adversely affected.

 

CDGC’s profitability is subject to inherent risks because of the fixed-price nature of most of CDGC’s contracts.

 

CDGC’s revenues are derived from CDGC’s role as a subcontractor for general contractors of dredging projects.  Substantially all of the contracts between CDGC and the general contractors are fixed-price contracts or fixed unit price in nature.  Under a fixed-price contract, the customer agrees to pay a specified price for its performance of the entire contract.  Fixed-price contracts carry inherent risks, including risks of losses from underestimating costs of materials, operational difficulties and other changes that may occur during the contract period.  As a result, CDGC will only realize profits on these contracts if CDGC successfully estimate project costs and avoid cost overruns.

 

 One of the most significant factors affecting the profitability of a dredging project is the weather at the project site.  Inclement or hazardous weather conditions can result in substantial delays in dredging and additional contract expenses.  Due to these factors, it is possible that CDGC will not be able to perform obligations under fixed-price contracts without incurring additional expenses.  Should CDGC significantly underestimate the costs on one or more significant contracts, the resulting losses could have a material adverse effect on CDGC.

 

 In the past several years CDGC has derived a significant portion of CDGC’s revenues from a small group of customers and CDGC expects this to continue to be the case.  The loss of any one of these customers could have a material adverse effect on CDGC’s business, operating results and financial condition.

 

 CDGC’s customer base has been, and CDGC expects it to remain, highly concentrated.   For the six months ended June 30, 2012, four customers accounted for 68.0% of our total revenues. For each of the years ended December 31, 2011, 2010 and 2009, CDGC’s customers accounted for 65.8%, 78.1% and 100%, respectively, of CDGC’s total revenues.  CDGC expects CDGC’s total revenues to remain heavily concentrated with a small group of customers.  CDGC may lose customers from time to time, and if CDGC’s customer base remains highly concentrated, the loss of, or reduction of CDGC’s sales to, any such major customers could have a material adverse effect on CDGC’s business, operating results and financial condition.

 

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 CDGC’s general contractor customers may continue to expand internal capacity and modernize their fleets which may reduce their reliance on subcontracting and limit CDGC’s business growth.

 

 CDGC’s largest general contractor customers have subcontracted a substantial amount of dredging work in the past, reflecting a large shortfall in internal capacity.  If these customers continue to invest in a modern fleet for larger capacity and better efficiency, they may reduce reliance on subcontracting.  Since CDGC’s prospects for growth are primarily driven by increases in subcontracting by CDGC’s major customers, a reduced subcontracting demand from those customers would adversely impact CDGC’s growth prospects.

 

 CDGC’s operations may cause substantial harm to persons, property and the environment, which could hurt CDGC’s reputation and, to the extent they are not covered contractually or by insurance, could cause CDGC to incur substantial costs.

 

 CDGC’s operations are subject to hazards inherent in providing dredging and related support services, such as the risk of equipment failure, vessel collision or other transit related accidents, industrial accidents, fire and explosion.  These hazards can cause personal injuries and losses of lives, business interruptions, property and equipment damage, pollution and environmental damage.  CDGC may be subject to claims as a result of incidents relating to these and other hazards.  For example, Fujian Service was sued in four related lawsuits brought by several individuals in Wenzhou, China, in May 2010.  The lawsuits related to a traffic accident that allegedly caused the deaths of two people and injuries to two other people.  The plaintiffs alleged that a truck was hired for the Wenzhou Lingkun working area multiple function port construction project, or the Lingkun Construction Project, and that the owner, the general contractor and Fujian Service as the subcontractor of the Lingkun Construction Project, all of whom were named as co-defendants in these lawsuits, were responsible for the damages.  The plaintiffs claimed total damages of approximately $0.6 million.  Although in 2011 Fujian Service was held not responsible for any of the plaintiffs’ claims, similar unpredictable events could occur in the future and adversely affect CDGC’s operations. CDGC normally seek to limit CDGC’s exposure to these claims and liabilities through contractual limitations of liability and insurance.  These measures, however, may not always be effective for various reasons outside of CDGC’s control, including, among others:

 

·In some of the jurisdictions in which CDGC operates, environmental and workers’ compensation liabilities may be assigned to CDGC as a matter of law and may not be limited through contracts; and
·Insurance coverage may not be sufficient because it may not be possible to obtain adequate insurance against some risks on commercially reasonable terms, or at all.  Insurance products, in particular, have become increasingly expensive and sometimes very difficult to obtain.  In this regard, consistent with what CDGC believes is customary practice in the PRC, CDGC does not carry any business interruption insurance.  While CDGC does have Ship Pollution Liability coverage for certain environmental damage and third-party losses that arise from fuel or chemical leaks from the three vessels that CDGC owns, there may be circumstances in which CDGC would not be fully covered or compensated for losses and liabilities arising from interruptions to CDGC’s operations, construction accidents, defects in CDGC’s work or other risks by insurance that CDGC have maintained.  CDGC’s Ship Pollution Liability coverage is for up to approximately $775,000 annually for Xinggangjun #66, $388,000 annually for Xinggangjun #3, $327,000 annually for Xinggangjun #6 and $327,000 annually for Xinggangjun #9.

 

Failure to effectively cover these risks for any of the above reasons could expose CDGC to substantial costs and potentially lead to material losses.  Additionally, the occurrence of any of these risks may harm CDGC’s reputation, which may materially inhibit CDGC’s ability to win more projects.

 

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 Customers pay CDGC by way of progress payments, and delay in progress payments may affect working capital and cash flow. 

 

Most of CDGC’s contracts provide for progress payments from CDGC’s general contractor customers based upon the value of work completed upon reaching certain milestones.  Generally a site engineer issues a progress certificate certifying the work progress in the preceding contract stage.  The customers then effect payments with reference to these certificates.  As a result, CDGC is often required to commit resources to projects prior to receiving payment from customers in amounts sufficient to cover expenditures on the projects as they are incurred.  These progress payments may not be remitted by customers to CDGC on a timely basis and CDGC may not be able to efficiently manage the level of bad debt arising from such payment practice.

 

 Delays in progress payments from customers would increase CDGC’s working capital needs.  If a customer defaults in making its payments on a project to which CDGC has devoted significant resources, it would also affect CDGC’s liquidity and decrease the capital resources that are otherwise available for other uses.  In such cases, CDGC may file a claim for compensation of the loss of a payment default, but settlement of disputes of this nature generally takes substantial time in the PRC and expenditure of financial and other resources, and the outcome is often uncertain.

 

CDGC requires substantial capital and any failure to obtain the capital needed on acceptable terms, or at all, may adversely affect CDGC’s expansion plans and growth prospects.

 

The transportation infrastructure industry in which CDGC operates is generally capital intensive.  It requires significant capital to acquire, maintain and operate CDGC’s vessels and facilities, resulting in high fixed costs.  It also requires significant capital to purchase dredging equipment, develop new services and implement new technologies.  CDGC’s capital expenditures may increase as a result of the further upgrade of CDGC’s dredging fleet and expansion of CDGC’s scope of operations.

 

 Under most of CDGC’s contracts, CDGC is required to finance dredging equipment, and performance of engineering, construction and other work on projects for periods averaging approximately one month before receiving progress payments from customers in amounts sufficient to cover expenditures. CDGC may therefore have significant working capital requirements. CDGC’s working capital requirements would materially increase if CDGC’s general contractor customers impose extended payment terms in line with their corporate averages, which approach three months. To the extent that CDGC’s working capital funding requirements exceed CDGC’s financial resources, CDGC will be required to seek additional debt or equity financing or to defer planned expenditures. In the past, CDGC has financed CDGC’s working capital and capital expenditures through a combination of sources, including cash flow from CDGC’s operations and bank and other borrowings. If CDGC is unable to obtain financing in a timely manner and at a reasonable cost, CDGC’s expansion plans may be delayed, project progress may be constrained, and CDGC’s growth, competitive position and future profitability may be adversely affected.

 

CDGC’s backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of CDGC’s future earnings.

 

Backlog represents CDGC’s estimate of the contract value of work that remains to be completed on firm contracts that have not yet commenced and on contracts in progress as at a certain date.  The contract value of a project represents the revenue CDGC expect to receive under the terms of the contract if it is performed in accordance with its terms.   The revenues anticipated by CDGC’s backlog may not be realized and, if realized, may not result in profits.  Projects may remain in backlog for an extended period of time.  In addition, project cancellations or scope adjustments may occur from time to time, which could reduce the dollar amount of the backlog and the revenue and profits that are ultimately earned from the contracts.  For instance, in October 2010 CDGC formally deferred three contracts totaling approximately $44.6 million that were reported in CDGC’s backlog as of June 30, 2010, which by mutual agreement were replaced by three other one-year contracts with an aggregate contract value of approximately $61.0 million.  Accordingly, investors should not unduly rely on the backlog information presented in herein as an indicator of CDGC’s future earnings.  In addition, since CDGC’s backlog represents less than six months of potential revenue, CDGC’s longer-term results depend significantly on CDGC’s ability to convert CDGC’s bid- and negotiation-stage project pipeline into backlog, which CDGC may be unable to do.

 

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Failure to meet schedule requirements of contracts could require CDGC to pay liquidated damages.

 

Substantially all of CDGC’s contracts with general contractors are subject to specific completion schedule requirements with liquidated damages charged to CDGC if it does not achieve the schedules.  Liquidated damages are typically levied at an agreed rate for each day of delay that is deemed to be CDGC’s responsibility.  Any failure to meet the schedule requirements of the contracts could cause CDGC to pay significant liquidated damages, which would reduce or eliminate profit on the relevant contracts and could adversely affect liquidity and cash flows and have a material adverse effect on CDGC’s business, financial condition, results of operations and prospects.

 

CDGC is subject to extensive environmental, safety and health regulations in the PRC, the compliance with which may be difficult or expensive.

 

The PRC government has published extensive environmental, safety and health regulations with which CDGC needs to comply.  Failure to comply with these regulations may result in penalties, fines, suspension or revocation of CDGC’s licenses or permits to conduct business, and litigation.  Given the magnitude and complexity of these regulations, compliance with them may be difficult or involve the expenditure of significant financial and other resources to establish effective compliance and monitoring systems.  In addition, these regulations are constantly evolving.  The PRC government may impose additional or stricter laws or regulations, compliance with which may cause CDGC to incur significant costs that CDGC may not be able to pass on to CDGC’s customers.  Furthermore, some of the new overseas markets that CDGC is seeking to enter may have more onerous environmental, safety and health regulations than China, compliance with which may be very costly and could hinder CDGC’s endeavors to enter these new overseas markets.  In addition, CDGC faces numerous PRC regulatory risks associated with CDGC’s operations in China.  Please see “— Risks Relating to Doing Business in the PRC”.

 

CDGC’s operations depend heavily on the timely availability of an adequate supply of supplies and consumable parts at acceptable prices and quality. 

 

To operate successfully, CDGC must obtain from CDGC’s suppliers sufficient quantities of supplies and consumable parts, such as mud pipe and dredge pumps at acceptable prices and quality and in a timely manner. In the six months ended June 30, 2012, the cost of supplies and consumable parts accounted for approximately 70.8% of its total cost of contract revenue. In 2011, 2010 and 2009, the cost of supplies and consumable parts accounted for approximately 71.3%, 73.1% and 76.8%, respectively, of CDGC’s total cost of contract revenue. During times of short supply, CDGC may have to pay significantly higher prices to obtain the supplies and consumable parts required for CDGC’s operations. Most of CDGC’s dredging contracts specify a fixed unit price and CDGC is responsible for procuring supplies and consumable parts needed for the projects. As a result, when prices of such supplies and consumable parts increase, CDGC is unlikely to be able to pass the price increases on to CDGC’s customers. In addition, CDGC has entered into fixed price supply contracts with some of CDGC’s suppliers, under which CDGC is obligated to procure a fixed amount of supplies and consumable parts annually. Although CDGC negotiates these agreements on an annual basis, in the event when prices of such supplies and consumable parts drop, CDGC is unlikely to be able to procure the supplies and consumable parts of similar quality from a cheaper source. The profitable performance of CDGC’s contracts also requires components and supplies of high quality. If quality supplies and consumable parts are not available, it could directly and adversely affect the quality, timeliness or efficiency of CDGC’s work, undermine CDGC’s reputation and increase the chances of potential disputes and liabilities, all or any of which may negatively affect future profits and projected growth.

 

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CDGC faces significant competition in the markets in which CDGC operates, which could adversely affect CDGC’s financial results and business prospects. 

 

CDGC faces significant competition in the PRC markets in which CDGC operate.  CDGC’s competition comes from various sources, including the internal operations of CDGC’s general contractor customers and numerous private companies providing dredging services as general contractors or subcontractors.  Some of CDGC’s competitors may have advantages over CDGC in terms of capacity, access to capital pricing and management expertise.  CDGC’s market position and growth prospects depend on CDGC’s ability to anticipate and respond to various competitive factors, including pricing strategies adopted by competitors, changes in customer preferences or work priorities, availability of capital and financing resources and the introduction of new or improved equipment, technology and services.

 

CDGC’s current or potential competitors may offer services or products comparable or superior to those that CDGC offers at the same or lower prices or adapt more quickly than CDGC does to evolving industry trends or changing market conditions.  CDGC may lose CDGC’s customers to CDGC’s competitors if, among other things, CDGC fails to keep CDGC’s prices at competitive levels or to sustain and upgrade CDGC’s capacity and technology.  Increased competition may result in price reductions, reduced profit margins and loss of market share.

 

CDGC’s operations require permits or licenses and the loss of these permits or licenses could significantly hinder CDGC’s business and reduce CDGC’s expected revenue and profits.

 

CDGC requires operating permits and licenses to conduct CDGC’s business in PRC waters and CDGC must comply with the restrictions and conditions imposed by various levels of government to maintain CDGC’s permits and licenses.  Such restrictions include limitations on foreign ownership of the enterprises which own the PRC-registered vessels and the licensed entity performing dredging works, maintenance of sufficient number of qualified personnel, maintenance of sufficient project track records and compliance with safety regulations and environment protection regulations and maintenance of various licenses of the dredging vessels.  If CDGC fails to comply with any of the regulations required for the maintenance of CDGC’s licenses, CDGC’s licenses could be temporarily suspended or even revoked, or the renewal of CDGC’s licenses upon expiration of their original terms may be delayed, which would directly impact CDGC’s ability to undertake dredging work and reduce CDGC’s revenue and profit.  For a detailed discussion of the effects of restrictions on foreign ownership of the enterprise which owns the PRC-registered vessels, the licensed entity performing dredging works and other conditions, please see “— Risks Relating to Doing Business in the PRC.”

 

CDGC may encounter unexpected difficulties in expanding into new markets.

 

As CDGC broadens the scope of CDGC’s geographical operations within the PRC it places additional demands on CDGC’s management resources.  Such expansion also increases the requirements for spare parts and consumable inventories because CDGC’s business model contemplates maintaining minimum quantities of key items close enough to each vessel to be delivered quickly.  Further, it requires CDGC to become familiar with and manage its operations in keeping with local requirements with which it may not be familiar.  Any of these factors could adversely affect the cost and efficiency of CDGC’s dredging operations and its financial performance. 

 

Although CDGC has no plans to do so, CDGC may expand the geographical coverage of CDGC’s operations outside the PRC to meet the evolving needs of CDGC’s key customers who are expanding internationally to places such as Vietnam, Taiwan and other Asian countries.  Expansion into overseas markets carries with it many associated risks, including risks relating to being relatively new in such markets and unfamiliar with and unable to manage the requirements of operating there.  Expansion into overseas markets could also stretch CDGC’s capital, personnel and management resources to a greater extent than further geographical expansion within the PRC.  In addition, there may be many established incumbent players in these markets, who already enjoy a significant presence, and it may be difficult for CDGC to win market share from them.  Some of the overseas markets that CDGC could potentially enter may have high barriers of entry to foreign competitors and any such expansion outside of the PRC may not be successful.

 

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CDGC’s continued success requires hiring and retaining qualified personnel.

 

 CDGC’s future success is dependent upon CDGC’s ability to attract and retain personnel, including executive officers and key qualified personnel, who have the necessary and required experience and expertise.  Particularly, CDGC’s success is largely attributable to the highly qualified and experienced personnel that CDGC has been able to attract and retain in the past such as captains and chief engineers for dredgers or construction-related geology analysts.  Competition for qualified personnel is intense and CDGC has periodically experienced difficulties in recruiting suitable personnel.  CDGC may lose these persons to those competitors who are able to offer more competitive packages, or CDGC may have to significantly increase CDGC’s related staff costs.

 

CDGC significantly depends on its Chief Executive Officer.

 

CDGC is dependent on the principal members of CDGC’s management staff, and in particular Xinrong Zhuo, CDGC’s Chief Executive Officer.  While CDGC has entered into a three-year employment agreement with Mr. Zhuo, there are circumstances under the agreement in which Mr. Zhuo may elect to terminate his employment.  Even if Mr. Zhuo were to terminate employment with CDGC in breach of his agreement, CDGC would have little or no practical recourse against Mr. Zhuo under PRC law.  Mr. Zhuo may not continue to be employed by CDGC for as long as CDGC requires his services.  In addition, CDGC relies on members of CDGC’s senior management team with dredging industry experience for important aspects of CDGC’s operations, and CDGC believes that losing the services of these executive officers could be detrimental to CDGC’s operations because they would be difficult to replace.  CDGC does not have key-man life insurance for any of CDGC’s executive officers or other employees.

 

RISKS RELATING TO DOING BUSINESS IN THE PRC

 

The political and economic policies of the PRC government could affect CDGC’s businesses and results of operations.

 

 The economy of the PRC differs from the economies of most developed countries in a number of respects, including the degree of government involvement, control of capital investment, and the overall level of development.  Before its adoption of reform and open up policies in 1978, China was primarily a planned economy.  In recent years the PRC government has been reforming the PRC economic system and the government structure.  These reforms have resulted in significant economic growth and social progress.  Economic reform measures, however, may be adjusted, modified or applied inconsistently from industry to industry or across different regions of the country.  As a result, CDGC may not continue to benefit from all, or any, of these measures.  In addition, it cannot be predicted whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on CDGC’s current or future business, financial condition and results of operations.

 

The PRC legal system is evolving and has inherent uncertainties regarding interpretation and enforcement of PRC laws and regulations that could limit the legal protections available to you.

 

 Fujian Service, CDGC’s operating company, is organized under the laws of the PRC.  The PRC legal system is based on written statutes.  Prior court decisions may be cited for reference but have limited weight as precedents.  Since 1979, the PRC government has been developing a comprehensive system of commercial laws and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade.  However, because these laws and regulations are relatively new, and because of the limited number and non-binding nature of published cases, the interpretation and enforcement of these laws and regulations involve uncertainties.

 

CDGC’s operations and assets in the PRC are subject to significant political and economic uncertainties.

 

 Changes in PRC laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on CDGC’s business, results of operations and financial condition.  The PRC government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization.  The PRC government may continue to pursue these policies, and it may significantly alter these policies from time to time without notice.

  

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CDGC may be required to obtain prior approval from Ministry of Commerce and the China Securities Regulatory Commission for its prior merger, this proposed merger and the listing and trading of CDGC’s securities on any U.S. stock exchange. 

 

On August 8, 2006, six PRC regulatory authorities, including the Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006 and was amended on June 22, 2009 by the MOFCOM, or the M&A Regulations.  The M&A Regulations, among other things, require that the approval from MOFCOM be obtained for acquisitions of affiliated domestic entities by foreign entities established or controlled by domestic natural persons or enterprises, and also require that an offshore special purpose vehicle, or SPV, formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals, obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.  On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by SPVs.  The CSRC approval procedures require the filing of a number of documents with the CSRC.

 

As of the date of this proxy statement, the application of the M&A Regulations remains unclear, with no consensus among leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.  CDGC’s PRC legal counsel, based on its understanding of current PRC laws, regulations and rules, has advised CDGC that the M&A Regulations are not applicable to CDGC or the series of transactions CDGC previously consummated to establish CDGC’s current corporate structure and that the consummation of the transaction contemplated by the Merger Agreement would not require CSRC’s approval because CDGC’s founder and controlling shareholder, Mr. Xinrong Zhuo, is not a mainland PRC natural person.  However, the relevant PRC government authorities, including MOFCOM and the CSRC, may reach a different conclusion than CDGC’s PRC counsel.  If prior approval from MOFCOM or the CSRC is required but not obtained, CDGC may face sanctions by MOFCOM, the CSRC or other PRC regulatory agencies.  Consequently, MOFCOM, the CSRC or other PRC regulatory agencies may impose fines and penalties on CDGC’s operations in the PRC, limit CDGC’s operations in the PRC, or take other actions that could have a material adverse effect on CDGC’s business, financial condition, results of operations, reputation and prospects, as well as the trading price of CDGC’s securities.  MOFCOM, the CSRC or other PRC regulatory agencies may also take actions requiring CDGC, or making it advisable for CDGC, not to commence a public offering. 

 

The Circular of the General Office of the State Council on the Establishment of Security Review System Regarding the Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or the Circular of Security Review, and the Regulations of Implementing the Security Review System Regarding Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated by MOFCOM on August 25, 2011, or the Regulations of Security Review collectively, provide that any foreign investor should file an application with MOFCOM for the merger and acquisition of domestic enterprises in sensitive sectors or industries. Furthermore, the Regulations of Security Review shall not be substantially evaded by VIE control or any other methods. The Circular of Security Review was put into effect on March 5, 2011. As CDGC’s current ownership structure and contractual arrangements were established before 2011, CDGC’s PRC counsel has advised it that the Regulations of Security Review do not apply to CDGC or the series of transactions CDGC previously consummated to establish CDGC’s current corporate structure. However, the relevant PRC regulatory authorities may have a different view or interpretation in this regard when implementing the Regulations of Security Review. As a result, CDGC’s future mergers and acquisitions of PRC domestic enterprises may be subject to PRC security review, which could be time-consuming and complex, and in turn affect CDGC’s ability to expand CDGC’s business or maintain CDGC’s market share.

 

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Due to various restrictions under PRC laws on the distribution of dividends by CDGC’s PRC operating companies, CDGC may not be able to pay dividends to CDGC’s shareholders.

 

The Wholly-Foreign Owned Enterprise Law (1986), as amended, The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended, and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by Wholly-Foreign Owned Enterprises, or WFOEs.  Under these regulations, WFOEs may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.  Additionally, they are required to set aside each year 10% of its net profits (if any), based on PRC accounting standards, to fund a statutory surplus reserve until the accumulated amount of such reserve reaches 50% of their respective registered capital.  These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes.  The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC.  CDGC may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the profits of Fujian WangGang.

 

Furthermore, if CDGC’s subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments.  If CDGC or CDGC’s subsidiaries are unable to receive all of the revenues from CDGC’s operations through these contractual or dividend arrangements, CDGC may be unable to pay dividends on CDGC’s Ordinary Shares.

 

Because CDGC’s principal assets are located outside of the United States and CDGC’s directors and officers reside outside of the United States, it may be difficult for CDGC’s investors to enforce their rights based on the United States federal securities laws against CDGC and its officers and directors in the United States or to enforce foreign judgments or bring original actions in the PRC against CDGC or its management. 

 

All of CDGC’s officers and directors reside outside of the United States.  In addition, CDGC’s operating subsidiaries are located in the PRC and all of their assets are located outside of the United States.  The PRC does not have a treaty with United States providing for the reciprocal recognition and enforcement of judgments of courts.  It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States Federal securities laws against CDGC in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in PRC courts.

 

 In addition, since CDGC is incorporated under the laws of the BVI and CDGC’s corporate affairs are governed by the laws of the BVI, it may not be possible for CDGC’s investors to originate actions against CDGC or its directors or officers based upon PRC laws, and it may be difficult, if possible at all, to bring actions based upon BVI laws in the PRC in the event that you believe that your rights as a shareholder have been infringed.

 

If the PRC government determines that CDGC’s contractual arrangements that establish the structure for CDGC’s business operations do not comply with applicable PRC laws, rules and regulations, CDGC could be subject to severe penalties or be forced to restructure CDGC’s ownership structure.

 

Foreign ownership of ships that are authorized to operate within PRC waters is subject to significant restrictions under current PRC laws, rules and regulations.  According to the Regulation of Ship Registration of the PRC and other related regulations, a ship with more than 50% foreign ownership may not be registered with China nationality.  In addition, a ship without a China nationality is not allowed to operate within PRC waters. According to the requirements of the Rules of PRC Governing Vessels of Foreign Nationality, effective as of September 18, 1979, and other applicable rules and regulations, foreign vessels are required to obtain applicable permissions from the PRC administrative authorities for port entries into, navigations in, and exits from the PRC inland waterways and territorial seas.  Furthermore, the Regulations Related to Foreign-Invested Construction Enterprises, or the RAFCE, provides that wholly foreign-owned construction enterprises may only undertake certain types of construction projects prescribed by the RAFCE within the scope of their qualifications.  According to such stipulations, the business operations of CDGC’s operating company, Fujian Service, or any similar operating company used in the future, will be adversely affected if its foreign-owned equity is increased to more than 50%. 

 

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To comply with applicable PRC laws, rules and regulations, CDGC directly owns 50% equity interests of Fujian Service, CDGC’s operating company, and entered into the VIE Agreements with Wonder Dredging, which is a PRC domestic company and legal owner of the other 50% equity interests of Fujian Service, and the shareholders of Wonder Dredging.  CDGC believes these contractual arrangements give it total control and 100% beneficial interest in the 50% of Fujian Service and 100% of Wonder Dredging that CDGC does not directly own.  CDGC may enter into similar contractual arrangements in the future with other entities. CDGC has been advised by CDGC’s PRC legal counsel that (a) CDGC’s contractual arrangements are in compliance with the requirements of applicable PRC laws and regulations and are in full force and effect; (b) the execution, delivery, effectiveness, enforceability and performance of the such contractual arrangements by any of the CDGC’s subsidiaries do not (i) result in any violation of the provisions of the articles of association, business licenses or other constitutive documents of such parties, (ii) conflict with or constitute a breach of any contracts, agreements, or other instruments to which any such parties is a party or by which any of them may be bound, or to which any of the property or assets of such parties is subject, or (iii) result in any violation of any judgment, award, order, writ or decree of any government body, court, arbitration panel, domestic or foreign, having jurisdiction over any such party.  However, the relevant PRC regulatory authorities have broad discretion in determining whether a particular corporate structure or contractual arrangement violates applicable PRC laws, rules and regulations, and may take a different view from that of CDGC’s PRC legal counsel.  If the current or future ownership structure or contractual arrangements is found to be in violation of any existing or future PRC laws, rules or regulations, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including imposition of fines, revocation of the business and operating licenses of Fujian Service, whose business and operating licenses are essential to the operation of CDGC’s business, confiscation of CDGC’s income or the income of Fujian Service, or requiring CDGC, CDGC’s PRC subsidiary and Fujian Service to restructure the relevant ownership structure, operations or contractual arrangements and taking other regulatory or enforcement actions that could be harmful to CDGC’s business.

 

In addition, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to CDGC’s corporate structure and contractual arrangements.  The imposition of any of these penalties and the effect of any new PRC laws, rules and regulations applicable to CDGC’s corporate structure and contractual arrangements could have a material adverse effect on CDGC’s financial condition and results of operations.

 

Contractual or other arrangements among CDGC’s affiliates may be subject to scrutiny by PRC tax authorities, and a finding that CDGC or CDGC’s affiliates owe additional taxes could substantially reduce CDGC’s profitability and the value of your investment.

 

As a result of CDGC’s contractual arrangements, CDGC is entitled to substantially all of the economic benefits of ownership of Fujian Service and Wonder Dredging and also bear substantially all of their economic risks.  If the PRC tax authorities determine that the economic terms, including pricing, of CDGC’s arrangements in respect of Fujian Service were not determined on an arm’s length basis, CDGC could be subject to significant additional tax liabilities and other penalties, which may materially adversely affect CDGC’s operation results. 

 

Contractual arrangements, including voting proxies, with CDGC’s affiliated entities for CDGC’s dredging businesses may not be as effective in providing operational control as direct or indirect ownership. 

 

Since applicable PRC laws, rules and regulations restrict foreign ownership in the enterprises which own the ships allowed to operate within PRC waters, CDGC only directly owns 50% equity interests of Fujian Service, CDGC’s operating company, and entered into a series of contractual arrangements with Wonder Dredging, which is a PRC domestic company and legal owner of the other 50% equity interests of Fujian Service, and all the shareholders of Wonder Dredging. CDGC may enter into similar contractual arrangements in the future with other entities. Fujian Service holds the licenses and approvals pertaining to the operation of CDGC’s dredging business.  CDGC conducts CDGC’s dredging business and derives related revenues through the direct ownership and contractual arrangements.  As CDGC does not have a controlling ownership interest in Fujian Service, these contractual arrangements, including the voting proxies granted to cdgc, may not be as effective in providing CDGC with control over these companies as 100% direct or indirect ownership.  If CDGC were the controlling shareholder of Fujian Service with direct or indirect ownership, CDGC would be able to exercise CDGC’s rights as shareholder to effect changes in the board of directors more effectively, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. 

 

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However, pursuant to CDGC’s contractual arrangements, if Fujian Service, Wonder Dredging or the shareholders of Wonder Dredging fail to perform their obligations under these contractual arrangements, CDGC may be forced to (i) incur substantial costs and resources to enforce such arrangements, including the voting proxies, and (ii) rely on legal remedies available under PRC law, including exercising CDGC’s call option right over the equity interests in Fujian Service, seeking specific performance or injunctive relief, and claiming monetary damages.  In the event that CDGC is unable to enforce these contractual arrangements, or if CDGC suffers significant time delays or other obstacles in the process of enforcing these contractual arrangements, CDGC’s business, financial condition and results of operations could be materially and adversely affected. 

 

If SAFE determines that its foreign exchange regulations concerning “round-trip” investment apply to CDGC and its shareholding structure, a failure by CDGC’s shareholders or beneficial owners to comply with these regulations may restrict CDGC’s ability to distribute profits, restrict CDGC’s overseas and cross-border investment activities or subject CDGC to liability under PRC laws, which may materially and adversely affect CDGC’s business and prospects. 

 

In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Roundtrip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005 and which was supplemented by several notices and regulations thereafter.  CDGC refers to them collectively as SAFE Circular No. 75.  Under SAFE Circular No. 75, PRC citizens, residents and entities that make, or have previously made prior to the implementation of SAFE Circular No. 75, direct or indirect investments in offshore SPVs will be required to register those investments with the local branch of SAFE.  In addition, any PRC citizen, resident, or entity which is a direct or indirect shareholder of an SPV is required to update the previously filed registration with the local branch of SAFE, with respect to that SPV, to reflect any material change. Moreover, the PRC subsidiary of the SPV is required to urge its shareholders who are PRC citizens, residents, or entities to update their registration with the local branch of SAFE.  The registration and filing procedures under SAFE Circular No. 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders’ loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds or the return of funds upon a capital reduction

 

Because CDGC’s founder and controlling shareholder, Mr. Xinrong Zhuo, obtained his Hong Kong identity card in 2005 and surrendered his PRC identity subsequently thereto but still resides in mainland China, there is a risk that he may be determined as the PRC resident defined in SAFE Circular No. 75.  Due to the uncertainty over how SAFE Circular No. 75 will be interpreted and implemented, CDGC cannot predict how it will affect CDGC’s business operations or future strategies.  If SAFE Circular No. 75 were determined to apply to CDGC or any of its PRC resident shareholders, none of whom has made registrations or filings according to SAFE Circular No. 75, a failure by any of CDGC’s shareholders or beneficial owners to comply with SAFE Circular No. 75 may subject the relevant shareholders or beneficiaries to penalties under PRC foreign exchange administrative regulations, and may subject CDGC to fines or legal sanctions, restrict CDGC’s overseas or cross-border investment activities, limit CDGC’s subsidiaries’ ability to make distributions or pay dividends or affect CDGC’s ownership structure and capital inflow from the offshore entity, which would have a material adverse effect on CDGC’s business, financial condition, results of operations and liquidity as well as CDGC’s ability to pay dividends or make other distributions to CDGC’s shareholders.  In addition, CDGC may not be informed of the identities of the beneficial owners of CDGC’s company and CDGC’s Chinese resident beneficial owners, if any, may not comply with SAFE Circular No. 75.  The failure or inability of CDGC’s beneficial owners who are PRC citizens, residents or entities to make or amend any required registrations may subject these PRC residents or CDGC’s PRC subsidiary to fines and legal sanctions, and may also limit CDGC’s ability to contribute additional capital into CDGC’s PRC subsidiary and limit CDGC’s PRC subsidiary’s ability to make distributions or pay dividends to CDGC, as a result of which CDGC’s business operations and CDGC’s ability to distribute profits to its shareholders may be materially and adversely affected. 

 

In December 2009, the PRC State Administration for Taxation issued a notice, known as “Circular 698,” addressing PRC income tax issues in connection with transfers of equity by a non-PRC resident enterprise that directly or indirectly holds an interest in a PRC resident enterprise. Circular 698 requires certain tax filings with, and the submission of comprehensive information to, the applicable tax authorities regarding the transfer, which must be made by the seller within 30 days of entering into the agreement or receiving consideration in connection with the sale. The filings and submissions are designed to assist the taxing authorities in evaluating whether the transfer has a reasonable business purpose. If the transfer does not have a reasonable business purpose, Circular 698 provides that the seller is subject to PRC income tax on the gains received from the transfer of the PRC resident enterprise. Although the tax obligations generally apply to the seller, the PRC resident enterprise that is transferred is also subject to certain requirements to assist the PRC tax authorities in collecting the taxes, potentially including withholding agent obligations. Circular 698 is relatively new with limited implementation guidance, and it is uncertain how it will be interpreted, implemented or enforced. For example, there is no clear guidance regarding what constitutes a “reasonable business purpose” or the assistance obligation applicable to the transferred PRC resident enterprise. CDGC cannot predict how Circular 698 will apply to current or future acquisition strategies and business operations. For example, if CDGC acquires a PRC resident enterprise through the acquisition of an offshore holding company, the acquired PRC resident enterprise may have broad and uncertain obligations to assist the PRC tax authorities in collecting tax from the seller. Similarly, if CDGC sells or is deemed to have sold one of its PRC resident enterprises owned through an offshore holding company, CDGC may face comprehensive filing obligations that could delay the transaction, significant taxes, potential sanctions or other enforcement action, or other adverse considerations, which could have an adverse impact on its ability to consummate such a transaction or expand its business and market share.

 

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The dividends CDGC receives from its PRC subsidiaries and CDGC’s global income may be subject to Chinese enterprise income tax, which would have a material adverse effect on CDGC’s results of operations; CDGC’s foreign securities holders will be subject to a Chinese withholding tax upon the dividends payable by CDGC and subject to the income tax on the gains on the sale of securities, if CDGC is classified as a Chinese “resident enterprise.” 

 

Under the PRC’s Enterprise Income Tax Law, or the EIT Law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in China to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax.  Under the arrangement for avoidance of double taxation between mainland China and Hong Kong, the effective withholding tax applicable to a Hong Kong non-resident company is 5% if it directly owns no less than a 25% stake in the Chinese foreign-invested enterprise.

 

Under the EIT Law, an enterprise established outside China with its “de facto management body” within China is considered a “resident enterprise” in China and is subject to the Chinese enterprise income tax at the rate of 25% on its worldwide income.  CDGC may be deemed to be a PRC resident enterprise under the EIT Law and be subject to the PRC enterprise income tax at the rate of 25% on CDGC’s worldwide income.  It is also unclear whether the dividends CDGC receives from Fujian WangGang will constitute dividends between resident enterprises and therefore will be exempted from income tax, even if CDGC is deemed to be a “resident enterprise” for PRC enterprise income tax purposes.  If the Chinese tax authorities subsequently determine that CDGC should be classified as a resident enterprise, foreign securities holders will be subject to a 10% withholding tax upon dividends payable by CDGC and subject to income tax upon gains on the sale of securities under the EIT Law.  Any such tax may reduce the returns on the investment in CDGC.

 

Fujian Service has operated its construction business without the appropriate qualification certificate and therefore may be subject to various penalties.

 

PRC laws and regulations concerning construction or construction enterprises require that a construction enterprise must hold a qualification certificate for the purpose of undertaking construction projects.  Furthermore, there are three levels of qualifications for enterprises undertaking waterway engineering projects and a license holder may only carry out projects permitted by its level of qualification.  A construction enterprise is prohibited from undertaking projects without the requisite qualification certificate or exceeding the scope permitted by its level of qualification, otherwise it may be subject to penalties, fines, confiscation of the gains derived from the business activities or the suspension of operations.  In addition, if a construction enterprise without the requisite qualification certificate is involved in any dispute in relation with the construction, the relevant court may rule the construction contract to be void.  However, despite the void construction contract, if the construction has been completed and accepted after inspection, the construction enterprise would be entitled to make a claim for the project payment.

 

Where a construction enterprise, which has acquired the construction qualification, applies for a higher level of qualification or to add new items to its qualification, the approval authorities may not approve its application if the construction enterprise, within a year before the day of application, has undertaken a project beyond the scope permitted by its level of qualification.

 

CDGC’s operating company, Fujian Service, commenced its business operation since January 2008 but obtained Level-III qualification only in August 2010.  In addition, all major business contracts executed and performed by Fujian Service exceed the permitted scope for Level-III qualification.  Although Fujian Service has received all project payments in accordance with the related construction contracts so far, and has not received any notice from PRC authorities for its previous or existing non-compliance, PRC authorities may impose any of the sanctions described above on Fujian Service.

 

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To be eligible for the Level-II qualification, a construction company is required to meet certain criteria as set forth in the PRC Criterion for Qualifications of Construction Enterprises, or the Qualification Regulations.  Fujian Service meets all of the criteria for the Level-II qualification except the following:  (i) it does not have a dredger with 2 cubic meter volume; (ii) it does not have 150 or more engineers and financial managers; and (iii) the project manager does not have 10 years or more experience in construction management with a minimum of mid-level class qualification.  Fujian Service plans to recruit personnel with the requisite experience and qualifications and to purchase a dredger with 2 cubic meter volume in order to be eligible for the Level-II qualification.  However, it may take significant time for Fujian Service to meet such criteria.  As Fujian Service has not complied with the relevant laws and regulations, such application may not be approved.  If Fujian Service fails to upgrade its qualification in a timely manner and meanwhile continues to undertake projects exceeding the scope of Level-III qualification, it may be subject to fines, confiscation of the gains derived from the business activities or the suspension of operations, and the contracts may be ruled unenforceable or void if any dispute arises, which could materially and adversely affect CDGC’s business and results of operations. 

 

Fujian Service has not obtained the consents from construction project owners for a substantial number of contracts in-progress, which therefore may be held invalid and subject Fujian Service to confiscation of the associated income. 

 

According to the 1997 PRC Construction Law, or the Construction Law, and other related regulations, if a general contractor subcontracts part of the projects to subcontractors with appropriate qualifications, except for the subcontracting as permitted in the general contracting agreement, prior approval from project owners is required.  According to the Interpretation by the PRC Supreme Court Concerning the Application of Law in Trial of Dispute Cases Involving Construction Project Contracts, if a contractor illegally assigns or subcontracts the construction project, such act is invalid.  The people’s court may confiscate the illegal income already obtained by the party according to Article 134 of the Civil Law General Principles.  Among Fujian Service’s historical subcontracts, only a few general contractors have obtained the consent from the project owner, and of construction projects in progress no such consents have been obtained.  CDGC has not been involved in disputes with general contractors or project owners so far, but CDGC may encounter such disputes in the future.  In the event a court determines that a general contractor has subcontracted the construction project illegally, the revenues of Fujian Service may be confiscated, which could materially and adversely affect CDGC’s business and results of operations. 

 

Fujian Service may face fines or other penalties as the required certificates of the dredgers owned or leased by it are missing or expired, and the crews of such vessels may face fines or the temporary seizure of their job qualification certificates.

 

The PRC Ship Minimum Safety Manning Rules, implemented by PRC Ministry of Communications, or the MOC, in June 2004, provides that the vessels with PRC Nationality should hold the Ship Minimum Safety Manning Certificate issued by maritime affairs administration authority. Further, the PRC Provisions of Inland River Maritime Affairs Administrative Penalty, issued by MOC in December 2004, provides that the owner or the operator of the vessel without the Ship Minimum Safety Manning Certificate should be ordered to make the correction within the time limit and imposed the fine from RMB10,000 to RMB100,000. In the case that such owner or the operator does not make any correction they may be ordered to cease the operation.

 

The PRC Administrative Rules for Vessels Endorsement Book, implemented by MOC in May 2007, provides that vessels with PRC nationality should hold the Endorsement Book of Vessels. The PRC Provisions of Inland River Maritime Affairs Administrative Penalty provides that such vessels may be fined between RMB5000 to RMB50,000 or even prohibited from the port entry or exit. The vessels’ crews taking charge of such matter may face temporary seizure of the relevant competence certificates from 3 months to 6 months.

 

PRC Enforcement Regulations for Water Pollution and Prevention and Control, issued by the PRC State Council, provides that the vessels over 400 Tons which are navigating in inland water should hold the Oil Record Book required by the maritime affairs administrative authority. According to the PRC Admistrative Regulation for the Inland Water Environment Ship Pollution Prevention the owner of the vessels may be fined RMB10,000 for the vessels without the Oil Record Book .

 

PRC Admistrative Regulation for the Inland Water Environment Ship Pollution Prevention provides that the vessels over 400 Tons without the valid prevention document, such as Shipboard Oil Pollution Emergency Plan, may be fined below RMB10,000.

 

PRC Radio Management Regulations, promulgated by PRC National Council and PRC Centre Military Committee in September 1993, provides that an enterprise radio station in a vessal without a license may be penalized, including sealing up or confiscation of such radio station facilities or confiscation of illegal gains. In the cases of gross violation of the said regulations, such enterprise may fined from RMB1,000 to RMB5,000 or be revoked the station license.

 

The Enforcement Regulation of Mobile Communication Service Identification Management Method, promulgated by Ministry of Communications in November 2007, provides that all the vessels with a PRC national flag and specified equipment of must have the Ocean Mobile Communication Operation Identification Code Certificate. Any violations of such stipulations may lead to orders to cease the use of ID code or revoking of the ship station license.

 

Currently the required certificates, as stated above, of some of the dredgers owned or leased by Fujian Service are missing or expired. Accordingly Fujian Service may face fines or other penalties, the specified crews of such vessels may face fines or the temporary seizure of their job qualification certificates.

 

Fujian Service has not obtained permits for Above-water and Under-water Construction Works and, therefore, may be subject to fines or ordered to rebuild, move or remove the works. 

 

Under the Safety Administration Regulation on Above-water and Under-water Construction Works and Navigation, or the Above-water and Under-water Regulation, promulgated by the PRC Ministry of Transportation, or MOTRAN, the project owner or the contractor of a construction project is required to obtain the permit for above-water and under-water construction works and navigation.  However, it is not explicitly specified whether the project owner, the general contractor or each of the various subcontractors are ultimately responsible for obtaining the permit.  If the permit is not obtained upon the commencement of an above-water or under-water construction project, the relevant government authorities may impose penalties upon any of the enterprises involved in the project for violation of such regulations.  The penalties may include fines and orders to rebuild, move or remove the works.  Fujian Service has not obtained such permit for its construction works.  Although Fujian Service has not received any notice regarding penalties, there is risk that it may be subject to penalties due to non-compliance. 

 

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Fujian Service is responsible for the quality of the construction works undertaken by it, and any non-compliance with the related regulations may subject Fujian Service to penalties that may adversely affect CDGC’s operations. 

 

Under the Regulation on the Quality Management of Construction Projects issued by the State Council which took effect in January 2000, or the Supervision of Quality Regulations, the subcontractors will be jointly and severally responsible for the quality of the construction work in the case that the general contractor subcontracts part of the project work to the subcontractors.  If Fujian Service does not comply with Supervision of Quality Regulations, it may be subject to fines, suspension of operations, degradation of the construction qualification, rework, repair and compensation, which may adversely affect CDGC’s operations.  Although the projects in which Fujian Service participated have all passed the inspection and acceptance upon its completion, there is risk that it may be subject to penalties due to the future non-compliance.

 

 CDGC’s employment practices may be adversely impacted under the labor contract law of the PRC. 

 

The PRC National People’s Congress promulgated the Labor Contract Law, which became effective on January 1, 2008.  Compared to previous labor laws, the Labor Contract Law provides stronger protection for employees and imposes more obligations on employers.  According to the Labor Contract Law, employers have the obligation to enter into written labor contracts with employees to specify the key terms of the employment relationship.  The law also stipulates, among other things, (i) that all written labor contracts shall contain certain requisite terms; (ii) that the length of trial employment periods must be in proportion to the terms of the relevant labor contracts, which in any event may not be longer than six months; (iii) that in certain circumstances, a labor contract is deemed to be without a fixed term and thus an employee can only be terminated with cause; and (iv) that there are certain restrictions on the circumstances under which employers may terminate labor contracts as well as the economic compensations to employees upon termination of the employee’s employment.  A significant number of CDGC’s employees are contracted through Fujian Haiyi International Ship Service Agency Co., Ltd., a third-party agency company, in the case of the dredgers owned by Fujian Service, and through the lessors, in the case of the dredgers leased by Fujian Service.  Fujian Haiyi International Ship Service Agency Co., Ltd. and the lessors are responsible for managing, among others, payrolls and social insurance contributions of these employees.

 

CDGC may be held jointly liable if Fujian Haiyi International Ship Service Agency Co., Ltd. or the lessors fails to pay such employees their wages and other benefits or otherwise become liable to these employees for labor law violations.  In addition, in the event CDGC decides to significantly change or downsize CDGC’s workforce, the Labor Contract Law could restrict CDGC’s ability to terminate employee contracts and adversely affect CDGC’s ability to make such changes to CDGC’s work force in a manner that is most favorable to CDGC’s business or in a timely and cost effective manner, which in turn may materially and adversely affect CDGC’s financial condition and results of operations.  CDGC’s employment practices may be deemed to violate the Labor Contract Law.  If CDGC is subject to severe penalties or incur significant legal fees in connection with labor law disputes or investigations, CDGC’s business, financial condition and results of operations may be adversely affected.

 

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Fujian Service has not made past housing fund payments for and on behalf of its employees and may be required to make such payments and may be subject to fines or penalties. 

 

Under the Administrative Regulation on Housing Fund, an employer must make a housing fund payment and deposit registration upon its establishment and pay the housing fund for and on behalf of its employees at a percentage between 5% and 12% of the respective employee’s monthly average wage of the preceding year.  Where an employer fails to make the housing fund payment and deposit registration, the housing fund administration authority may order it to complete the registration within a time limit or be assessed a fine of RMB10,000 to RMB50,000.  Where an employer fails to make the housing fund payment for and on behalf of its employees within the time limit or under the requisite percentage, it may be ordered by the housing fund administration authority to deposit the fund within a time limit, together with late fees of 0.03% of such amount.  Fujian Service has not made the housing fund payment and deposit registration or paid the housing fund for and on behalf of its employees due to inconsistent implementation and interpretation by local authorities in the PRC and different levels of acceptance of the social security system by employees.  In the future, Fujian Service may be required to make such past housing fund payments, pay late fees, and pay fines for non-compliance.  Any judgment or decision against Fujian Service in respect of outstanding housing fund matters could have an adverse effect on CDGC’s results of operations. 

 

Currency fluctuations and restrictions on currency exchange may adversely affect CDGC’s business, including limiting CDGC’s ability to convert Renminbi into foreign currencies and, if Renminbi were to decline in value, reducing CDGC’s revenue in U.S. dollar terms. 

 

CDGC’s reporting currency is the U.S. dollar and CDGC’s operations in the PRC use their local currency as their functional currencies.  Substantially all of CDGC’s revenue and expenses are in Renminbi.  CDGC is subject to the effects of exchange rate fluctuations with respect to any of these currencies.  For example, the value of the Renminbi depends to a large extent on PRC government policies and the PRC’s domestic and international economic and political developments, as well as supply and demand in the local market.  Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar.  However, in July 2005, the PRC government changed its policy of pegging the value of Renminbi to the U.S. dollar.  Under the new policy, Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies.  As a result of this policy change, Renminbi appreciated more than 20% against the U.S. dollar in the following three years.  Since July 2008, however, the Renminbi has traded within a narrow range against the U.S. dollar.  As a consequence, the Renminbi has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar.  On June 19, 2010, the People’s Bank of China, or the PBOC, announced that the PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate.  It is difficult to predict how this new policy may impact the Renminbi exchange and the Renminbi may not be stable against the U.S. dollar or any other foreign currency. 

 

The statements of CDGC’s operations are translated into U.S. dollars at the average exchange rates in each applicable period.  To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions results in reduced revenue, operating expenses and net income for CDGC’s operations.  Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for CDGC’s operations.  CDGC is also exposed to foreign exchange rate fluctuations as CDGC convert the financial statements of CDGC’s foreign subsidiaries into U.S. dollars in consolidation.  For example, CDGC’s net income as measured in Renminbi was RMB620.4 million for the year ended December 31, 2011 compared to RMB326.0 million for the year ended December 31, 2010, an increase of 90.3%.  However, CDGC’s net income as measured in U.S. dollars was $96.4 million for the year ended December 31, 2011 compared to $48.2 million for the year ended December 31, 2010, an increase of 99.8%.  If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income.  In addition, if CDGC has assets or liabilities that are denominated in currencies other than the relevant entity’s functional currency, changes in the functional currency value of these assets and liabilities would create fluctuations that lead to a transaction gain or loss.  CDGC has not entered into agreements or purchased instruments to hedge exchange rate risks, although CDGC may do so in the future.  The availability and effectiveness of any hedging transaction may be limited and CDGC may not be able to successfully hedge its exchange rate risks. 

 

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Although PRC governmental policies were introduced in 1996 to allow the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the PBOC.  These approvals, however, do not guarantee the availability of foreign currency conversion.  CDGC may not be able to obtain all required conversion approvals for CDGC’s operations and PRC regulatory authorities may impose greater restrictions on the convertibility of Renminbi in the future.  Because a significant amount of CDGC’s future revenue may be in the form of Renminbi, CDGC’s inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit CDGC’s ability to utilize revenue generated in Renminbi to fund CDGC’s business activities outside of the PRC, or to repay foreign currency obligations, including CDGC’s debt obligations, which would have a material adverse effect on CDGC’s financial condition and results of operations.

 

RISKS RELATING TO CDGC’S SECURITIES

 

If CDGC fails to list CDGC’s shares on a qualifying stock exchange by December 31, 2013, CDGC will face a redemption obligation with CDGC’s preferred shareholders.

 

The holders of CDGC’s preferred shares have the right to receive 20% of the $5.00 purchase price after December 31, 2013 if not yet converted. Substantially, this is the right to $1.00 per share if CDGC fails to have the ordinary shares underlying CDGC’s preferred shares both successfully registered with the SEC and listed on the Nasdaq Stock Market LLC, or the Nasdaq, the New York Stock Exchange, or the NYSE, or the NYSE Amex, or another major international securities exchange. Under these circumstances, in addition to this substantive obligation to pay the $1.00 per share, the holders of preferred shares would have the right to demand redemption of the shares at $5.00 per share. The Nasdaq, NYSE, and NYSE Amex recently adopted a “seasoning” requirement for the listing of former reverse merger companies, which includes trading in another market for an adequate period of time at certain minimum price levels and completing SEC filings during this time, although there is an exception to this requirement for firmly underwritten public offerings of at least $40 million. CDGC does not expect it will be able to comply with seasoning requirements for listing prior to the listing deadline and CDGC may be unable to qualify for the $40 million exception, which substantially increases the possibility that CDGC may need to pay to redeem the preferred shares.  Efforts to list on an international securities exchange or obtain waivers from preferred shareholders may also be unsuccessful. If CDGC must redeem the preferred shares in addition to paying the $1.00 per share, CDGC’s liquidity and financial position will be materially and adversely affected. For example, payment of the $1.00 per share, if required in 2012, would result in a charge of approximately $1.7 million to net income in 2012, representing the portion that had not already been reflected as a liability on the balance at December 31, 2011. The effect on CDGC’s liquidity and financial position could also have additional material and adverse effects CDGC’s results of operations. 

 

CDGC’s corporate actions are substantially controlled by CDGC’s officers, directors and principal shareholders and their affiliated entities.

 

CDGC’s executive officers, directors and principal shareholders and their affiliated entities beneficially own approximately 74.2% of CDGC’s issued and outstanding shares. These shareholders, if they acted together, would control matters requiring approval by CDGC’s shareholders, including the election of directors and the approval of mergers or other business combination transactions, and they may not act in the best interests of CDGC’s minority shareholders. This concentration of ownership may also discourage, delay or prevent a change in control of CDGC’s company, which could deprive CDGC’s shareholders of an opportunity to receive a premium for their shares as part of a sale of CDGC’s company. These actions may be taken even if they are opposed by CDGC’s other shareholders.

 

CDGC may need additional capital, and the sale of additional equity securities could result in additional dilution to CDGC’s shareholders.

 

CDGC believes that CDGC’s cash and cash equivalents, and anticipated cash flow from operations will be sufficient to meet CDGC’s anticipated cash needs for the foreseeable future. CDGC may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions CDGC may decide to pursue. If these resources are insufficient to satisfy CDGC’s cash requirements, CDGC may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to CDGC’s shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict CDGC’s operations. It is uncertain whether financing will be available in amounts or on terms acceptable to CDGC, if at all. 

 

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Because CDGC does not expect to pay dividends in the foreseeable future you must rely on price appreciation of CDGC’s shares for return on your investment.

 

CDGC has never declared or paid any cash dividends on CDGC’s ordinary shares or preferred shares.  CDGC does not anticipate paying any cash dividends on CDGC’s ordinary shares in the foreseeable future and plan to retain earnings, if any, for use in the development of CDGC’s business.  Therefore, you should not rely on an investment in CDGC’s shares as a source for any future dividend income.   CDGC’s board of directors has significant discretion as to whether to distribute dividends. Even if CDGC’s board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, CDGC’s future results of operations and cash flow, CDGC’s capital requirements and surplus, the amount of distributions, if any, received by CDGC from its subsidiaries, CDGC’s financial position, contractual restrictions, BVI and PRC laws, and other factors deemed relevant by CDGC’s board of directors.  Accordingly, the return on your investment in CDGC’s shares will likely depend entirely upon any future price appreciation of CDGC’s shares.  CDGC’s shares may not appreciate in value or even maintain the price at which you purchased CDGC’s shares. 

 

CDGC’s shareholders may face difficulties in protecting their interests, and their ability to protect their rights through the United States federal courts may be limited because CDGC is incorporated under BVI law, CDGC conducts substantially all of CDGC’s operations in China and all of CDGC’s directors and officers reside outside the United States. 

 

CDGC is incorporated in the BVI and conducts substantially all of CDGC’s operations in China through CDGC’s PRC subsidiary. All of CDGC’s directors and officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible for CDGC shareholders to bring an action against CDGC or against these individuals in the BVI or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if CDGC shareholders are successful in bringing an action of this kind, the laws of the BVI and of China may render you unable to enforce a judgment against CDGC’s assets or the assets of CDGC’s directors and officers.

 

Any final and conclusive monetary judgment obtained against CDGC in the courts of United States, for a definite sum, may be treated by the courts of the British Virgin Islands as a cause of action in itself so that no retrial of the issues would be necessary provided that in respect of the foreign judgment:

 

a)the foreign court issuing the judgment had jurisdiction in the matter and CDGC either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;
   

b)the judgment given by the foreign court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of CDGC;
   

c)in obtaining judgment there was no fraud on the part of the person in whose favour judgment was given or on the part of the court;
   

d)recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and
   

e)the proceedings pursuant to which judgment was obtained were not contrary to natural justice.

 

The PRC does not have a treaty with United States providing for the reciprocal recognition and enforcement of judgments of courts.

 

CDGC’s corporate affairs are governed by CDGC’s memorandum and articles of association, as amended and restated from time to time, or CDGC’s Articles of Association, and by the statutory and common law of the BVI. The rights of shareholders to take legal action against CDGC and CDGC’s directors, actions by minority shareholders and the fiduciary responsibilities of CDGC’s directors are to a large extent governed by the common law of the BVI. The common law of the BVI is derived in part from comparatively limited judicial precedent in the BVI as well as from English common law, which provides persuasive, but not binding, authority on a court in the BVI. The rights of CDGC’s shareholders and the fiduciary responsibilities of CDGC’s directors under BVI law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the BVI has a less developed body of securities laws than the United States and provides significantly less protection. In addition, BVI companies may not have standing to initiate a shareholder derivative action in United States federal courts. 

 

The BVI Business Companies Act, or the Companies Act, has introduced a series of remedies available to shareholders. Where a company incorporated under the Companies Act conducts some activity which breaches the Act or CDGC’s amended and restated memorandum and articles of association, the court can issue a restraining or compliance order. Shareholders can now also bring derivative, personal and representative actions under certain circumstances. The traditional English basis for members’ remedies have also been incorporated into the Act—where a member of a company considers that the affairs of the company have been, are being or are likely to be conducted in a manner likely to be oppressive, unfairly discriminating or unfairly prejudicial to him, such shareholder may now apply to the court for an order on such conduct. Any member of a company may apply to BVI court for the appointment of a liquidator for the company and the court may appoint a liquidator for the company if it is of the opinion that it is just and equitable to do so.

 

The Companies Act provides that any shareholder of a company is entitled to payment of the fair value of his shares upon dissenting from any of the following: (a) a merger; (b) a consolidation; (c) any sale, transfer, lease, exchange or other disposition of more than 50 per cent in value of the assets or business of the company if not made in the usual or regular course of the business carried on by the company but not including: (i) a disposition pursuant to an order of the court having jurisdiction in the matter, (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the members in accordance with their respective interest within one year after the date of disposition, or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof; (d) a redemption of 10 per cent, or fewer of the issued shares of the company required by the holders of 90 percent, or more of the shares of the company pursuant to the terms of the Act; and (e) an arrangement, if permitted by the BVI court.

 

Generally any other claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the British Virgin Islands or their individual rights as shareholders as established by the company’s fifth amended and restated memorandum and articles of association. There are common law rights for the protection of shareholders that may be invoked, largely dependent on English common law, since the common law of the British Virgin Islands for BVI business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the company. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s fifth amended and restated memorandum and articles of association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following:

 

·a company is acting or proposing to act illegally or beyond the scope of its authority;
   

·the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained;
   

·the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or
   

·those who control the company are perpetrating a “fraud on the minority.”
   

As a result, CDGC’s shareholders may have more difficulty in protecting their interests through actions against CDGC, its management, its directors or its major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

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 CDGC has identified what believe would constitute a material weakness in CDGC’s internal control over financial reporting and may identify future material weaknesses which, if uncorrected, may adversely affect CDGC’s ability to accurately and timely report CDGC’s financial results or prevent fraud, decrease investor confidence in CDGC and negatively impact the value of CDGC’s securities. 

 

CDGC is a company with limited accounting personnel and other resources to address CDGC’s internal control over financial reporting. In connection with the audit of CDGC’s financial statements for the years ended December 31, 2010 and 2011, CDGC identified what CDGC believes would constitute a “material weakness” in CDGC’s internal control over financial reporting. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, or the PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of CDGC’s annual or interim financial statements will not be prevented or detected on a timely basis by CDGC’s internal controls. The material weakness CDGC identified was that none of CDGC’s employees had any formal training in U.S. GAAP and the rules and regulations of the U.S. Securities and Exchange Commission, or the SEC. CDGC’s Chief Financial Officer also does not have such training, and CDGC may not be able to remediate this material weakness without significant expense, if at all. CDGC has identified similar material weaknesses in the past, and CDGC may also face additional material weaknesses in the future. Therefore, there is a risk that CDGC’s current or future financial statements may not be properly prepared in accordance with the U.S. GAAP or that CDGC’s current or future disclosures are not in compliance with SEC rules and regulations. If CDGC fails to timely achieve and maintain the adequacy of CDGC’s internal controls, CDGC may not be able to conclude that CDGC has effective internal control over financial reporting. As a result, CDGC’s failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of CDGC’s financial statements, which in turn could harm CDGC’s business and negatively impact the value of CDGC’s securities.

 

Compliance with rules and requirements applicable to public companies will cause CDGC to incur additional costs, and any failure by CDGC to comply with such rules and requirements could negatively affect investor confidence in CDGC and cause the value of its securities to decline. 

 

As a public company, CDGC will incur significant legal, accounting and other expenses that CDGC did not incur as a private company, many of which are not reflected in CDGC’s historical financial statements. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the SEC, has required changes in the corporate governance practices of public companies. CDGC expect these rules and regulations to increase CDGC’s legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. Complying with these rules and requirements may be especially difficult and costly for CDGC because it may have difficulty locating sufficient personnel in China with experience and expertise relating to U.S. GAAP and United States public company reporting requirements, and such personnel may command high salaries. If CDGC cannot employ sufficient personnel to ensure compliance with these rules and regulations, CDGC may need to rely more on outside legal, accounting and financial experts, which may be very costly. In addition, CDGC will incur additional costs associated with CDGC’s public company reporting requirements. CDGC cannot predict or estimate the amount of additional costs CDGC may incur or the timing of such costs. 

 

 Risks Related to Pingtan Fishing’s Business

 

Pingtan Fishing will need additional financing in order to execute its business plan.

 

Pingtan Fishing will need to obtain additional capital in order to execute its business plan to expand its operations by enlarging its fishing vessel fleet, expanding fishing ground worldwide and extend its business to fishmeal processing . Such additional capital may be raised by issuing securities through various financing transactions or arrangements, including joint ventures of projects, debt financing, equity financing or other means. Additional financing may not be available when needed on commercially reasonable terms or at all. The inability to obtain additional capital may reduce Pingtan Fishing’s ability to continue to conduct its business operations as currently contemplated.

 

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Regulation of Pingtan Fishing’s industry may have an adverse impact on its business.

 

For years, the international community has been aware of and concerned with the worldwide problem of depletion of natural fish stocks. In the past, these concerns have resulted in the imposition of quotas that subject individual countries to strict limitations on the amount of fish they are allowed to catch. Environmental groups have been lobbying to have additional limitations on fishing imposed and have even made suggestions that would limit the activities of fish farms. If international organizations or national governments were to impose additional limitations on fishing, this could have a negative impact on Pingtan Fishing’s results of operations.

 

The growth of Pingtan Fishing’s business depends on its ability to secure fishing licenses directly or through third parties.

 

Fishing is a highly regulated industry. Pingtan Fishing’s operations require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities. For example, commercial fishing operations are subject to government license requirements that permit them to make their catch. Pingtan Fishing’s ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to changes in regulations and policies and to the discretion of the applicable governments, among other factors. Pingtan Fishing’s inability to obtain, or a loss or denial of extensions, to any of these licenses or permits could hamper its ability to produce revenues from its operations.

 

Pingtan Fishing is dependent on affiliates and third parties for its operations.

 

A large portion of Pingtan Fishing’s transportation operations are conducted by two of Pingtan Fishing’s affiliates, Haifeng Dafu Enterprise Company Limited and Hai Yi Shipping Limited. If for any reason these two companies became unable or unwilling to continue to provide services to Pingtan Fishing, this would likely lead to a temporary interruption in transportation at least until Pingtan Fishing found another entity that could provide these services. Failure to find a suitable replacement, even on a temporary basis, may have an adverse effect on Pingtan Fishing’s results of operations.

 

A large portion of Pingtan Fishing’s operations are conducted from a base owned PT. Avona Mina Lestari, or Avona, an affiliate of Pingtan Fishing. Pingtan Fishing contracts with Avona for the right to use the base. Avona also handles certain agency services, including customs applications and fees for Pingtan Fishing. If for any reason Avona became unable or unwilling to continue to provide its services to Pingtan Fishing, this would likely lead to a temporary interruption in Pingtan Fishing’s operations, at least until Pingtan Fishing found another entity that could provide these services. Failure to find a suitable replacement for Avona, even on a temporary basis, may have an adverse effect on Pingtan Fishing’s results of operations.

 

It may be difficult to effect service of process and enforcement of legal judgments upon Pingtan Fishing and its officers and directors because some of them reside outside the United States.

 

All of Pingtan Fishing’s key directors and officers reside outside the United States. As a result, service of process on Pingtan Fishing’s key directors and officers may be difficult to effect within the United States. Also, substantially all of Pingtan Fishing’s assets are located outside the United States and any judgment obtained in the United States against Pingtan Fishing may not be enforceable outside the United States.

 

Pingtan Fishing may be adversely affected by fluctuations in raw material prices and selling prices of its products.

 

The products and raw materials Pingtan Fishing use may experience price volatility caused by events such as market fluctuations, weather conditions or changes in governmental programs. Raw materials consist primarily of bait, including sardines, anchovies, mackerel and other small fish. The market price of these raw materials may also experience significant upward adjustment, if, for instance, there is a material under-supply or over-demand in the market. These price changes may ultimately result in increases in the selling prices of its products, and may, in turn, adversely affect Pingtan Fishing’s sales volume, revenue and operating profit.

 

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Pingtan Fishing may not be able to effectively manage its growth, which may harm its profitability.

 

Pingtan Fishing’s strategy envisions expanding its business. If Pingtan Fishing fails to effectively manage its growth, its financial results could be adversely affected. Growth may place a strain on Pingtan Fishing’s management systems and resources. Pingtan Fishing must continue to refine and expand its business development capabilities, its systems and processes and its access to financing sources. As Pingtan Fishing grows, it must continue to hire, train, supervise and manage new employees. Pingtan Fishing may not be able to:

 

· meet its capital needs;

 

· expand its systems effectively or efficiently, or in a timely manner;

 

· allocate its human resources optimally;

 

· identify and hire qualified employees or retain valued employees; or

 

· incorporate effectively the components of any business that it may acquire in its effort to achieve growth.

 

If Pingtan Fishing is unable to manage its growth, Pingtan Fishing’s operations and its financial results could be adversely affected by inefficiency, which could diminish its profitability.

 

Pingtan Fishing’s business may suffer if it does not attract and retain talented personnel.

 

Pingtan Fishing’s success will depend in large measure on the abilities, expertise, judgment, discretion, integrity and good faith of its management and other personnel in conducting the business of the company. Pingtan Fishing has a small management team, and the loss of a key individual or inability to attract suitably qualified staff could materially adversely impact its business.

 

Pingtan Fishing’s success depends on the ability of its management and employees to interpret and respond to economic, market and environmental conditions in Pingtan Fishing’s operating areas correctly. Further, Pingtan Fishing’s key personnel may not continue their association or employment with Pingtan Fishing and replacement personnel with comparable skills may not be available. Pingtan Fishing plans to continue appropriately compensating management and any key employees; however, their services cannot be guaranteed. If Pingtan Fishing is unable to attract and retain key personnel, its business may be adversely affected.

 

Pingtan Fishing may incur penalties that could impair its business.

 

Failure to comply with government regulations could subject Pingtan Fishing to civil and criminal penalties, could require Pingtan Fishing to forfeit property rights, and may affect the value of its assets. Pingtan Fishing may also be required to take corrective actions, such as installing additional equipment or taking other actions, each of which could require it to make substantial capital expenditures. Pingtan Fishing could also be required to indemnify its employees in connection with any expenses or liabilities that they may incur individually in connection with regulatory action against them. As a result, Pingtan Fishing’s future business prospects could deteriorate due to regulatory constraints, and its profitability could be impaired by its obligation to provide such indemnification to its employees.

 

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Pingtan Fishing’s insurance coverage may be inadequate to cover liabilities Pingtan Fishing may incur or to fully replace a significant loss of assets.

 

Pingtan Fishing’s involvement in the fishing industry may result in liability for pollution, property damage, personal injury or other hazards. Although Pingtan Fishing believes it has obtained insurance in accordance with PRC industry standards to address such risks, such insurance has limitations on liability and/or deductible amounts that may not be sufficient to cover the full extent of such liabilities or losses. In addition, such risks may not, in all circumstances, be insurable or, in certain circumstances, Pingtan Fishing may choose not to obtain insurance to protect against specific risks due to the high premiums associated with such insurance or for other reasons. The payment of such uninsured liabilities would reduce the funds available to Pingtan Fishing. If Pingtan Fishing suffers a significant event or occurrence that is not fully insured, or if the insurer of such event is not solvent, Pingtan Fishing could be required to divert funds from capital investment or other uses towards covering its liability or loss for such events.

 

Fluctuations in foreign exchange rates could have an adverse effect on Pingtan Fishing’s results of operations.

 

Pingtan Fishing’s operations are conducted in foreign currencies. For example, most of its sales are received in RMB while most of the expenses are paid for in RMB and USD. The value of the RMB fluctuates relative to the U.S. Dollar. As a result, Pingtan Fishing is exposed to exchange rate fluctuations, which could have an adverse effect on its results of its operations in a given period.

 

Earthquakes, tsunamis, adverse weather or oceanic conditions or other calamities may disrupt Pingtan Fishing’s operations and could adversely affect its sales.

 

Pingtan Fishing’s fishing expeditions are based out of the Arafura Sea, Indonesia, and Pingtan Fishing has cold storages located in MaWei in the Fujian province on the southeast coast of China. In 2004, an undersea earthquake occurred off the west coast of Sumatra Indonesia. This earthquake triggered a series of devastating tsunamis along the costs of most landmasses boarding the Indian Ocean. More than 225,000 people in 11 countries were killed, and coastal communities were inundated with waves up to 100 feet. Due to the location of Pingtan Fishing’s business, it may be at risk of experiencing another tsunami, earthquake or other adverse weather or oceanic conditions. This may result in the breakdown of Pingtan Fishing’s facilities, such as its cold storage facilities, which will in turn lead to deterioration of its products with the potential for spoilage. This could adversely affect Pingtan Fishing’s ability to fulfill its sales orders and adversely affect its profitability. Adverse weather conditions affecting the fishing grounds where the fishing vessels owned by Pingtan Fishing operates, such as storms, cyclones and typhoons or cataclysmic events such as tsunamis may also decrease the volume of Pingtan Fishing’s fish catches or may even hamper its fishing operations. Pingtan Fishing’s operations may also be adversely affected by major climatic disruptions such as El Nino which in the past has caused significant decreases in seafood catches worldwide.

 

Pingtan Fishing may be affected by global climate change or by legal, regulatory or market responses to such changes.

 

The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Fresh products, including seafood products, are vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common but difficult to predict and may be influenced by global climate change. Similarly, changing weather patterns, along with the increased frequency or duration of extreme weather conditions, could impact the availability of the fish species Pingtan Fishing catches.

 

Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For example, proposals that would impose mandatory requirements on GHG emissions may be considered by policy makers in the territories in which Pingtan Fishing operates. Laws enacted that directly or indirectly affect Pingtan Fishing’s production, distribution, packaging, cost of raw materials, fuel, and water could all impact Pingtan Fishing’s business and financial results.

 

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A dramatic reduction in fish resources may adversely affect Pingtan Fishing’s business.

 

Pingtan Fishing is in the business of catching and selling marine catch. Due to over-fishing, the stocks of certain species of fish may be dwindling and to counteract such over-fishing, governments may take action that may be detrimental to Pingtan Fishing ability to conduct its operations. If the solution proffered or imposed by the governments controlling the fishing grounds were to limit the types, quantities and species of fish that Pingtan Fishing is able to catch, its operations and prospects may be adversely affected.

 

Changes in the policies of the PRC government may adversely affect Pingtan Fishing’s business.

 

The fishing industry in the PRC is subject to policies implemented by the PRC government. The PRC government may impose restrictions on aspects of Pingtan Fishing’s business such as regulations for the management and ownership of vessels. If the raw materials used by Pingtan Fishing or its products become subject to any form of government control, then depending on the nature and extent of the control and Pingtan Fishing’s ability to make corresponding adjustments, there could be a material adverse effect on Pingtan Fishing’s business and operating results.

 

Separately, Pingtan Fishing’s business and operating results also could be adversely affected by changes in policies of the Chinese government such as: changes in laws, regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion, imports on sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform policies for approximately two decades to liberalize the economy and introduce free market aspects, the government may not continue to pursue such policies and such policies may be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China’s political, economic and social life.

 

Certain political and economic considerations relating to PRC could adversely affect Pingtan Fishing.

 

The PRC is passing from a planned economy to a market economy. The Chinese government has confirmed that economic development will follow a model of market economy under socialism. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans adopted by the government that set down national economic development goals. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms are unprecedented or experimental for the PRC government, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on Pingtan Fishing’s operations or future business development. Pingtan Fishing’s operating results may be adversely affected by changes in the PRC’s economic and social conditions as well as by changes in the policies of the PRC government, which Pingtan Fishing may not be able to foresee, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the rate or method of taxation, and imposition of additional restrictions on currency conversion.

 

The recent nature and uncertain application of many PRC laws applicable to Pingtan Fishing create an uncertain environment for business operations and they could have a negative effect on Pingtan Fishing.

 

The PRC legal system is a civil law system. Unlike the common law system, such as the legal system used in the United States, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on Pingtan Fishing’s business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

 

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The consummation of the acquisition contemplated by the Pingtan Fishing share purchase agreement and the reorganization plan contemplated by Pingtan Fishing require prior approval from the Ministry of Commerce.

 

As of the date of this proxy statement, the application of the M&A Regulations remains unclear, with no consensus among leading PRC law firms regarding the scope and applicability of the CSRC approval requirement. Pingtan Fishing’s PRC legal counsel has advised, based on its understanding of current PRC laws, regulations and rules, that the M&A Regulations are not applicable to the consummation of the acquisition contemplated by the Pingtan Fishing share purchase agreement or the reorganization plan contemplated by Pingtan Fishing. because Merchant Supreme’s founder and controlling shareholder, Mr. Xinrong Zhuo, is not a mainland PRC natural person. However, the relevant PRC government authorities, including MOFCOM and the CSRC, may reach a different conclusion. If prior approval from MOFCOM or the CSRC is required, but not obtained, Merchant Supreme may face sanctions by MOFCOM, the CSRC or other PRC regulatory agencies. Consequently, MOFCOM, the CSRC or other PRC regulatory agencies may impose fines and penalties on Pingtan Fishing’s operations in the PRC, limit such operations, or take other actions that could have a material adverse effect on Pingtan Fishing’s business, financial condition, results of operations, reputation and prospects.

 

The Circular of the General Office of the State Council on the Establishment of Security Review System Regarding the Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or the Circular of Security Review, and the Regulations of Implementing the Security Review System Regarding Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated by MOFCOM on August 25, 2011, or the Regulations of Security Review, collectively, provide that any foreign investor should file an application with MOFCOM for the merger and acquisition of domestic enterprises in sensitive sectors or industries. Further, MOFCOM has, for its inner review process, stipulated a range of the business operation items which are required to be reviewed. With reference to such business items, Pingtan Fishing believes that the Regulations of Security Review do not apply to the business operations of Pingtan Fishing. However, the relevant PRC regulatory authorities may have a different view or interpretation in this regard when implementing the Regulations of Security Review. As a result, the consummation of the business combination contemplated by the Pingtan Fishing share purchase agreement may be subject to PRC security review, which could be time-consuming and complex and in turn affect Pingtan Fishing’s ability to expand its business or maintain its market share.

 

If SAFE determines that its foreign exchange regulations concerning “round-trip” investment apply to CGEI and Merchant Supreme’s shareholding structure, a failure by Merchant Supreme’s shareholders or beneficial owners to comply with these regulations may restrict Merchant Supreme’s ability to distribute profits, restrict Merchant Supreme’s overseas and cross-border investment activities or subject it to liability under PRC laws, which may materially and adversely affect Pingtan Fishing’s business and prospects.

 

SAFE Circular No. 75 provides that those domestic individuals who hold a PRC identity card, passport or other legal identity supporting document, or who have no such legal identity in mainland PRC but are habitually residing in PRC for the reasons of economic interest relationship, whether they hold a PRC identity supporting document or not, should register with the local SAFE branch prior to their establishment or control of an offshore entity established for the purpose of an overseas equity financing involving onshore assets or equity interests held by them, or an SPV. In addition, any PRC citizen, resident, or entity which is a direct or indirect shareholder of an SPV is required to update the previously filed registration with the local branch of SAFE, with respect to that SPV, to reflect any material change. Moreover, a PRC subsidiary of an SPV is required to urge its shareholders who are PRC citizens, residents, or entities to update their registration with the local branch of SAFE. If a PRC shareholder with a direct or indirect equity interest in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Failure to comply with the SAFE Circular No. 75 could result in liability under PRC law for violation of the relevant rules relating to transfers of foreign exchange.

 

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Because Merchant Supreme’s founder and controlling shareholder, Mr. Xinrong Zhuo, obtained his Hong Kong identity card in 2005 and surrendered his PRC identity subsequently thereto, but still resides in mainland China, there is a risk that he may be determined as the PRC resident defined in SAFE Circular No. 75. Due to the uncertainty over how SAFE Circular No. 75 will be interpreted and implemented, Pingtan Fishing cannot predict how it will affect its business operations or future strategies. If SAFE Circular No. 75 were determined to apply to Merchant Supreme or any of Merchant Supreme’s PRC resident shareholders, none of whom has made registrations or filings according to SAFE Circular No. 75, a failure by any of Merchant Supreme’s shareholders or beneficial owners to comply with SAFE Circular No. 75 may subject the relevant shareholders or beneficiaries to penalties under PRC foreign exchange administrative regulations, and may subject Merchant Supreme to fines or legal sanctions, restrict Merchant Supreme’s overseas or cross-border investment activities, limit Merchant Supreme’s subsidiaries’ ability to make distributions or pay dividends or affect Merchant Supreme’s ownership structure and capital inflow from the offshore entity, which would have a material adverse effect on Merchant Supreme’s business, financial condition, results of operations and liquidity, as well as Pingtan Fishing’s ability to pay dividends or make other distributions to its shareholders. In addition, you may not be informed that the identities of the beneficial owners of Merchant Supreme and Merchant Supreme’s Chinese resident beneficial owners, if any, are not compliant with SAFE Circular No. 75. The failure or inability of Merchant Supreme’s beneficial owners who are PRC citizens, residents or entities to make or amend any required registrations may subject these PRC residents or Merchant Supreme’s PRC subsidiary to fines and legal sanctions, and may also limit Merchant Supreme’s ability to contribute additional capital into its PRC subsidiaries and limit Merchant Supreme’s PRC subsidiaries’ ability to make distributions or pay dividends to Merchant Supreme, as a result Pingtan Fishing’s business operations and its ability to distribute profits may be materially and adversely affected. 

 

In addition, Circular 698 requires certain tax filings with, and the submission of comprehensive information to, the applicable tax authorities regarding transfers of equity by a non-PRC resident enterprise that directly or indirectly holds an interest in a PRC resident enterprise. The filings and submissions are designed to assist the taxing authorities in evaluating whether the transfer has a reasonable business purpose. If the transfer does not have a reasonable business purpose, Circular 698 provides that the seller is subject to PRC income tax on the gains received from the transfer of the PRC resident enterprise. Although the tax obligations generally apply to the seller, the PRC resident enterprise that is transferred is also subject to certain requirements to assist the PRC tax authorities in collecting the taxes, potentially including withholding agent obligations. Circular 698 is relatively new with limited implementation guidance, and it is uncertain how it will be interpreted, implemented or enforced. For example, there is no clear guidance regarding what constitutes a “reasonable business purpose” or the assistance obligation applicable to the transferred PRC resident enterprise. Pingtan Fishing cannot predict how Circular 698 will apply to current or future acquisition strategies and business operations. For example, if Pingtan Fishing or affiliated PRC entities are sold or deemed to have been sold through an offshore holding company, Merchant Supreme may face comprehensive filing obligations that could delay the transaction, significant taxes, potential sanctions or other enforcement action, or other adverse considerations, which could have an adverse impact on its ability to consummate such a transaction or expand its business and market share.

 

Merchant Supreme may be classified as a PRC “resident enterprise” under the PRC enterprise income tax law, which could result in unfavorable tax consequences for Merchant Supreme and its shareholders and have a material adverse effect on Merchant Supreme’s results of operations.

 

Under the PRC’s Enterprise Income Tax Law, or the EIT Law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in China to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. Under the arrangement for avoidance of double taxation between mainland China and Hong Kong, the effective withholding tax applicable to a Hong Kong non-resident company is 5% if it directly owns no less than a 25% stake in the Chinese foreign-invested enterprise.

 

Under the EIT Law, an enterprise established outside China with its “de facto management body” within China is considered a “resident enterprise” in China and is subject to the Chinese enterprise income tax at the rate of 25% on its worldwide income. Merchant Supreme, a BVI holding company, may be deemed to be a PRC resident enterprise under the EIT Law and be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. It is also unclear whether the dividends Merchant Supreme receives from Guansheng Ocean Aquatic Products Co., Ltd. will constitute dividends between resident enterprises and therefore will be exempted from income tax, even if Merchant Supreme is deemed to be a “resident enterprise” for PRC enterprise income tax purposes. If the Chinese tax authorities subsequently determine that Merchant Supreme should be classified as a resident enterprise, foreign securities holders will be subject to a 10% withholding tax upon dividends payable by Merchant Supreme and subject to income tax upon gains on the sale of securities under the EIT Law. Any such tax may reduce the returns on the investment in Merchant Supreme.

 

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Due to historical defects in its capital contributions of Pingtan Fishing may be subject to administrative liability.

 

The current PRC Companies Law provides that shareholders must make the full amount of capital contribution subscribed to by such shareholder under the articles of association of the company. The form of capital contribution may be currency or non-currency property, such as property, intellectual property rights and land-use rights that can be evaluated in the form of currency and transferred in accordance with the applicable law. Under the PRC Companies Law, the non-currency property to be contributed as capital shall undergo an asset valuation and verification, and shall not be overvalued or undervalued. The property rights of such non-currency property shall be transferred in accordance with legally prescribed procedures. If a company obtains company registration in violation of the PRC Companies Law by making false statement of registered capital, submitting false certificates or by concealing material facts through other fraudulent means, the company shall be ordered to make rectification. In the event false statements regarding registered capital were made, the company shall also be fined no less than five percent but no more than fifteen percent of the amount of registered capital falsely stated. Further, a company submitting false certificates or concealing material facts may be fined no less than RMB50,000 but no more than RMB500,000.

 

Pingtan Fishing was established in February 1998 with registered capital of RMB10,000,000, by three founders, Fujian Pingtan County Fishing Development Co., Fujian Pingtan County Shengfa Pingtan Fishing Co.,Ltd. and Fujian Pingtan County Shunda Fishing Co., Ltd., all of whom made in-kind contributions to Pingtan Fishing. However, no information regarding any specific category of in-kind contribution was disclosed in the registration records of Pingtan Fishing in Pingtan County SAIC. Further, no assessment report or materials regarding the title transfer for such in-kind contributions were disclosed in the registration record.

 

In September 2002, Fujian Pingtan County State-owned Asset Operation Co., Ltd., or Pingtan State-owned Co., a PRC state-owned enterprise, injected investment of non-currency property, which was half of its land-use right in an area in Pingtan County, at the price of RMB7,000,000 and obtained 70% equity interest in Pingtan Fishing. However, the transfer procedure for such land-use right has not been conducted and the registered capital of Pingtan Fishing was never changed.

 

The local government authority for company registration has confirmed that since its establishment no information record has been found regarding the violation of the applicable governmental company management laws by Pingtan Fishing. However, due to the lack of certain documents in the registration record of Pingtan Fishing, if in the future the applicable company registration authority determines that Pingtan Fishing has had one or more deficiencies in it historical capital contributions, Pingtan Fishing may be subject to the fines.

 

Due to the defect in the state-owned equity interest transfer in Pingtan Fishing’s past, it may be subject to a determination of invalidity of such equity interest transfer and may be liable for the applicable administrative liability.

 

According to the Provisional Regulations of Supervision and Administration of State-owned Assets in the Enterprise, promulgated by the State Council on May 27, 2003, and the Provisional Management Measure for the Transfer of the State-owned Equity in an Enterprise, promulgated by State-owned Assets Supervision and Administration Commission and Ministry of Finance on December 31, 2003, or collectively the State-owned Assets Regulations, the State-owned assets supervision and administration authority shall determine the matters of the transfer of its state-owned equity in an enterprise which it has invested. Further, the sale of state-owned equity in a company by a state-owned entity shareholder must be approved by the governmental authority at the same ranking as that of the state-owned entity shareholder, provided that after the transfer the state-owned entity may not hold more than 50% equity interest in such company.

 

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On December 10, 2004, Fujian Yihai Investment Co., Ltd and Chen Cheng obtained all the equity interest in Pingtan Fishing by an equity interest transfer from the former shareholders, or the 2004 Equity Transfer, including Pingtan State-owned Co., and the registered capital of Pingtan Fishing increased to RMB25,000,000. A state-owned asset transfer was involved in the equity interest transfer, as Pingtan State-owned Co. is a state-owned company. According to State-owned Assets Regulations, such equity interest transfer should be determined by the Fuzhou municipal state-owned asset supervising authority and approved by the Fuzhou Municipal Government. However, the applicable approval was not obtained at the time of the 2004 Equity Transfer, which was only approved by Pingtan County Government. According to 1999 PRC Contract Law, a contract shall be null and void under any of the following circumstances: (1) a contract is concluded through the use of fraud or coercion by one party to damage the interests of the state; (2) malicious collusion is conducted to damage the interests of the state, a collective or a third party; (3) an illegitimate purpose is concealed, under the guise of legitimate acts; (4) public interests are damaged; or (5) a violation the compulsory provisions of the laws and administrative regulations. Currently, none of the violations described above have been found with regard to the equity transfer contract for the 2004 Equity Transfer. Given that the 2004 Equity Transfer was on an arm’s length basis and such transfer has been confirmed by Pingtan Government, Pingtan Fishing believes that it is unlikely that the transfer is determined to be invalid. However, the government authority may render the different determination and Pingtan Fishing may face an order of rectification which will be time consuming and the business operation of Pingtan Fishing may be adversely affected.

 

Pingtan Fishing must re-apply for the Overseas Investment Certificate for certain of its overseas investment.

 

According to Provisional Management Method for Overseas Investment Project promulgated by PRC National Development and Reform Committee on October 9, 2004, or the Management Method, a company who wishes to carry out overseas investments must obtain approval from the applicable Provincial Development and Reform Committee, according to Measures for Overseas Investment Management, promulgated by MOFCOM on March 16, 2009, or the Investment Management Measures. Where an enterprise, within two years from the day of obtaining the Enterprise Overseas Investment Certificate, or the Overseas Investment Certificate, fails to complete the relevant legal formalities in the host country or region or fails to handle the domestic formalities at the relevant departments in China, the original approval document and the Overseas Investment Certificate automatically becomes invalid and the Overseas Investment Certificate has to be surrendered to the original approving organ. If the company still wishes to continue the overseas investment, it must go through the approval procedure again according to the Investment Management Measures.

 

On February 12, 2007, Pingtan Fishing decided to invest $7,200,000 for an 80% of equity interest in Avona. Pingtan Fishing has obtained a Chinese Overseas Investment Approval Certificate, or the Certificate, issued by MOFCOM for the project. However, the project was not approved by the Fujian Provincial Development and Reform Committee. Further, the Certificate was effective until February 12, 2008 and Pingtan Fishing was obliged to handle the necessary domestic procedures before that time, such as formalities with regard to the applicable foreign exchange authority, banking and state-owned assets management authority. From June 25, 2007 to November 20, 2009, Pingtan Fishing remitted $5,470,000 to Avona, but has not obtained any equity interest in Avona and the Certificate is therefore invalid. Pingtan Fishing and Avona have entered into a Memorandum of Understanding pursuant to which Pingtan Fishing will not be legally liable for not obtaining the 80% equity interest in Avona. However, Pingtan Fishing must renew the Certificate for the further formalities to consummate the acquisition of 80% equity interest in Avona and such procedure is time-consuming.

 

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Pingtan Fishing may be subject to certain penalties due to lacking various PRC certificates or licenses and its business may be affected by the failure to renew some such certificates or licenses.

 

According to the PRC Fishing Vessels Inspection Regulation promulgated by PRC National Council in June 2003, if a fishing vessel operates without the Inspection Certificate after the applicable inspection process, such vessel will be confiscated by the relevant authority. The owner of a fishing vessel who does not apply for the required operation inspection for such vessel can be ordered to cease operations and apply for inspection within the time limit required by the relevant authority. In the event that a company fails to apply for an annual inspection, as ordered by the relevant authority, the company may be fined between RMB1,000 to RMB10,000 and the Annual Inspection Certificates held by the company may be temporarily suspended.

 

According to to PRC Radio Management Regulations promulgated by the PRC National Council and PRC Centre Military Committee in September 1993, as well as the License of Radio Station Management Regulations promulgated by Ministry of Industry and Information Technology in February 2009, a company who sets up or uses a radio station in a vessel must obtain a Radio Station License. Failing to do so may result in a fine of up to RMB5,000 and the radio station facilities may be confiscated.

 

The PRC is a member of 1973 International Pollution Prevention Convention, amended in 1978. According to the provisions of such convention and relevant PRC laws and regulations, the vessels owned by Pingtan Fishing should have a Sewage Pollution Prevention Certificates. Pingtan Fishing may be subject to a fine of up to RMB200,000 once its vessels enter into PRC territorial seas due to lacking the certificate and relevant facilities for pollution prevention.

 

According to the PRC Fishery Management Regulation promulgated by PRC Ministry of Agriculture in April 2003, in the event that an enterprise has not obtained a valid inspection certificate or any other applicable certificates, such company may be subject to penalties imposed by applicable governmental authorities. Further, an enterprise carrying out its ocean fishery business without the approval of the Ministry of Agriculture may be subject to penalties imposed by applicable governmental authority pursuant to applicable laws and regulations. The most serious penalty is permanent suspension of its fishing business operation.

 

In addition, under PRC laws and regulations, Pingtan Fishing is required to hold certain certificates or licenses in order to use its vessels to conduct fishing outside PRC territorial seas. Some of the certificates or licenses are subject to renewal on a regular basis. Pingtan Fishing may not be able to renew its certificates or licenses. Failure to renew such certificate or licenses may cause temporary or even permanent suspension of Pingtan Fishing’s operations, which would have adverse effects on Pingtan Fishing’s business and financial conditions. In addition, Pingtan Fishing may face fines pursuant to the above-mentioned laws and regulations.

 

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Pingtan Fishing has not paid the tax for its prior equity interest transfers and may be subject to a fine.

 

On December 10, 2004, Fujian Yihai Investment Co., Ltd and Chen Cheng obtained all the equity interest in Pingtan Fishing in the 2004 Equity Transfer, including Pingtan State-owned Co. A state-owned assets transfer was involved in the 2004 Equity Transfer as Pingtan State-owned Co. was a state-owned enterprise. On July 2, 2011, the Pingtan County Government issued Minutes for the Coordinating Meeting regarding the issue of Pingtan Fishing’s Tax Supplemental Payment, or the Minutes. In the Minutes, the Pingtan County Government resolved that Pingtan Fishing should make a supplemental payment for its outstanding tax liabilities incurred in connection with the 2004 Equity Transfer. The amount of such supplemental payment is RMB709,900, of which the Pingtan County Government shall pay RMB 290,000. It was further resolved that Pingtan Fishing will be exempt from the overdue fine and other fines for the above-mentioned outstanding tax. As of the date of this Proxy Statement, Pingtan Fishing has not paid the RMB 709,900 of outstanding taxes and may be subject to overdue fines in addition to the liability of the such tax payment.

 

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Pingtan Fishing has neither entered into the employment contracts with its employees nor bought the required social insurance for its employees and may be imposed fines by the relevant authority. 

 

Compared to previous labor laws, the Labor Contract Laws provides stronger protection for employees and imposes more obligations on employers. The Labor Contract Laws stipulates, among other things, that (i) that all written labor contracts shall contain certain requisite terms; (ii) that the length of trial employment periods must be in proportion to the terms of the relevant labor contracts, which in any event may not be longer than six months; (iii) that in certain circumstances, a labor contract is deemed to be without a fixed term and thus an employee can only be terminated with cause; and (iv) that there are certain restrictions on the circumstances under which employers may terminate labor contracts as well as the economic compensations to employees upon termination of the employee’s employment.  

 

PRC Social Insurance Law provides that the employers should apply for Social Insurance Registration Certificates at the social insurance authority within thirty days from its establishment and the employers should apply for the social insurance registration to the social insurance authority for their employees within thirty days from the employment date. The employees should have the basic endowment insurance, basic medical insurance, work-related injury insurance, unemployment insurance and applicable maternity insurance for its employees. The premium of work-related injury insurance and maternity insurance should be paid by the employers and the premium of the other three kind of insurance should be paid by the employees and employers jointly. Employers who have not managed the application of social insurance registration in time may be ordered by the social insurance authority to make the rectification and may fined for the twice or triple of the unpaid premium for any delay in such rectification. Employers who have not paid the premium of applicable social insurance for their employees should be ordered to make the payment in time and be charged an overdue fine in the amount of 5/10,000 per day of the unpaid premium from the due date, and, if they have not paid in time as required by such order, may be fined for an amount of twice to triple the unpaid premium. Further, employers have the obligations to withhold the premium of endowment insurance, medical insurance and unemployment insurance and for their employees, and should be charged 5/10,000 per day of the overdue withholding premium by the social insurance authority.

 

Pingtan Fishing has not entered into employment agreements with its employees and a registry of employees have not been established. Nor has it obtained any Social Security Certificates. None of its employees has endowment insurance, basic medical insurance, insurance against injury at work, maternity insurance and unemployment insurance. Due to this lack of insurance, Pingtan Fishing may be imposed overdue payment and fines and in turn Pingtan Fishing’s financial condition and operation result may be adversely affected. Pingtan Fishing is actively endeavoring to enter into the employment contracts with its employees, purchase the social insurance for it employees and taking other remedial action. However, such actions may not be completed on a timely basis, or at all, and may not avoid fines or other penalties.

 

Pingtan Fishing may be subject to fines for the violation of Fishing Management Regulations.

 

PRC laws set forth rigorous standards to the amount and qualification of the seamen serving on vessels. The applicable laws include, among other things, the 1983 PRC Navigation Safety Act, Pingtan Fishing Management Regulations which was promulgated by Ministry of Agriculture on April 14, 2003, the PRC Seamen Regulations which was promulgated by State Council on March 28, 2007, Fishing Port Navigation Safety Management Regulations which was promulgated by State Council on May 5, 1989, and PRC Administrative Penalty Regulations for the Supervising of the Water Safety which was promulgated by Ministry of Communications on November 26, 1997. All these laws and regulations, collectively referred to as the Fishing Management Regulations, provide that the vessels should be equipped with qualified seamen, in a number required by the standard criteria to ensure the safety of such vessels and the seamen in Pingtan Fishing’s vessels should be trained by the professional training institution permitted by Ministry of Agriculture and hold a Professional Sailor Certificate and the Professional Training Qualification. Further, the owners of the Pingtan Fishing’s enterprises must apply for a Seafarer’s Passport for the seamen on their vessels and the seamen in the voyage or on the duty of marine engine work must have a Certificate of Competence. The owner of the vessel may be ordered to rectify the failure to equip vessels with qualified seamen and are subject to a fine between RMB5000 to RMB10,000 for such violation or for the seamen on such vessels lacking of valid Certificates of Competence.

 

Pingtan Fishing has not historically had procedures in place to ensure its vessels are equipped with sufficient qualified crews, who have the Seafarer’s Passport and Certificate of Job Qualification or other certificates required by applicable Fishing Management Regulations, to ensure the safety of such vessels. Accordingly, Pingtan Fishing may be subject to fines for such violations.

 

 

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Pingtan Fishing has not made past housing fund payments for and on behalf of its employees and may be required to make such payments and be subject to fines or penalties. 

 

Under the Administrative Regulation on Housing Fund, an employer must make a housing fund payment, deposit registration upon its establishment and pay the housing fund for and on behalf of its employees at a percentage between 5% and 12% of the respective employee’s monthly average wage of the preceding year.  If an employer fails to make the housing fund payment and deposit registration, the housing fund administration authority may order it to complete the registration within a time limit or be assessed a fine of RMB10,000 to RMB50,000.  Where an employer fails to make the housing fund payment for and on behalf of its employees within the time limit or under the requisite percentage, it may be ordered by the housing fund administration authority to deposit the fund, together with late fees of 0.03% of such amount.  Due to inconsistent implementation and interpretation by local authorities in the PRC and different levels of acceptance of the social security system by employees, Pingtan Fishing has not made the housing fund payment and deposit registration or paid the housing fund for and on behalf of its employees.  In the future, Pingtan Fishing may be required to make such past housing fund payments, pay late fees and pay fines for non-compliance.  Any judgment or decision against Pingtan Fishing with respect to outstanding housing fund matters could have an adverse effect on Pingtan Fishing’s results of operations.

 

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INFORMATION ABOUT CGEI

 

Overview

 

CGEI, a Cayman Islands exempted liability company, was incorporated on January 18, 2010, as a blank check company, with the purpose of directly or indirectly acquiring, through a merger, share exchange, asset acquisition, plan of arrangement, recapitalization, reorganization or similar business combination, an operating business, or control of such operating business through contractual arrangements, that has its principal business and/or material operations located in the PRC (although CGEI may acquire an entity that is not incorporated in China but has its principal business and/or material operations in China). CGEI’s efforts to identify a prospective target business are not limited to a particular industry.

 

On June 2, 2011, CGEI completed an initial public offering of 5,000,000 units, each unit consists of one Ordinary Share and one redeemable purchase warrant. CGEI has neither engaged in any operations, nor generated any revenues, nor incurred any debt or expenses other than in connection with its initial public offering and, thereafter, expenses related to identifying and pursuing acquisitions of targets and expenses related to liquidating its trust fund for the benefit of its ordinary shareholders and reconstituting CGEI as an ongoing business company. It has incurred expenses only in connection with (i) the preparation and filing of its quarterly reports on Form 10-Q, annual reports on Form 10-K and prospectuses and (ii) travel expenses related to finding and developing acquisition candidates. CGEI believes its travel expense policies are consistent with good business practice, and CGEI tries to minimize such costs to the extent possible.

 

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Opportunities for market expansion have emerged for businesses with operations in China due to certain changes in the PRC’s political, economic and social policies as well as certain fundamental changes affecting the PRC and its neighboring countries. CGEI believes that China represents both a favorable environment for making acquisitions and an attractive operating environment for a target business for several reasons, including, among other things, increased government focus within China on privatizing assets, improving foreign trade and encouraging business and economic activity, which have led China to have one of the highest gross domestic product growth rates among major industrial countries in the world as well as strong growth in many sectors of its economy driven, in part, by emerging private enterprises. Notwithstanding the foregoing, business combinations with companies having operations in the PRC entail special considerations and risks, including the need to obtain financial statements audited or reconciled in accordance with U.S. generally accepted accounting principles, or GAAP, or prepared or reconciled in accordance with the International Financial Reporting Standards of potential targets that have previously kept their accounts in accordance with GAAP of the PRC, the possible need for restructuring and reorganizing corporate entities and assets and the requirements of complex Chinese regulatory filings and approvals. These may make it more difficult for CGEI to consummate its initial business combination.

 

Subject to the requirement that CGEI’s initial business combination must be with a target business having its principal business and/or material operations in China (although CGEI may acquire one entity that is not incorporated in China but has its principal business and/or material operations in China), CGEI’s management has virtually unrestricted flexibility in identifying and selecting a prospective target business, subject to the limits of PRC law. CGEI has not established any other specific attributes or criteria (financial or otherwise) for prospective target businesses. In evaluating a prospective target business, management may consider a variety of factors, including one or more of the following:

 

• financial condition and results of operation;

 

• growth potential;

 

• experience and skill of management and availability of additional personnel;

 

• capital requirements;

 

• competitive position;

 

• barriers to entry;

 

• stage of development of the products, processes or services;

 

• degree of current or potential market acceptance of the products, processes or services;

 

• proprietary features and degree of intellectual property or other protection of the products, processes or services;

 

• regulatory environment of the industry; and

 

• costs associated with effecting the business combination.

 

These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by management in effecting CGEI’s initial business combination consistent with its business objective. In evaluating a prospective target business, CGEI will conduct an extensive due diligence review which will encompass, among other things, meetings with incumbent management and inspection of facilities, as well as review of financial and other information which is made available to CGEI. This due diligence review will be conducted either by CGEI management or by unaffiliated third parties CGEI may engage, although CGEI has no current intention to engage any such third parties. CGEI is also required to have all prospective target businesses execute agreements with CGEI waiving any right, title, interest or claim of any kind in or to any monies held in the trust account. If any prospective target business refused to execute such agreement, CGEI would cease negotiations with such target business.

 

Shareholder Redemption Rights

 

At the time CGEI seeks shareholder approval of any initial business combination, it will provide holders of its Ordinary Shares with the opportunity to redeem their Ordinary Shares for cash equal to a pro rata share of the aggregate amount then on deposit in the trust account, less franchise and income taxes payable, upon the consummation of the initial business combination, subject to the limitations described herein. CGEI will consummate the initial business combination only if a majority of the issued and outstanding ordinary shares voted are voted in favor of the business combination. In such case, CGEI’s initial shareholders have agreed to vote their founder shares in accordance with the majority of the votes cast by the Ordinary Shares and to vote any Ordinary Shares purchased during or after the initial public offering in favor of the initial business combination. In the event that CGEI qualifies as a “foreign private issuer,” within the meaning of the rules promulgated under the Exchange Act, at the time CGEI would otherwise conduct a shareholder vote, CGEI would not be subject to the proxy rules at such time, and thus would comply with the tender offer rules as opposed to seeking a shareholder vote in connection with a business combination.

 

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In no event, however, will CGEI redeem the Ordinary Shares in an amount that would cause its net tangible assets to be less than $5,000,001. If CDGC enters into an acquisition with a prospective target that requires as a closing condition to the initial business combination that it maintains a minimum net worth or certain amount of cash that is substantially greater than $5,000,001, CGEI will communicate the details of the closing condition to its Ordinary Shareholders through its tender offer or proxy solicitation materials, as applicable. CGEI is required to provide all of its shareholders with an opportunity to redeem all of their shares in connection with the consummation of any initial business combination. Consequently, if accepting all properly submitted redemption requests would cause CGEI net tangible assets to be less than $5,000,001 or such greater amount necessary to satisfy a closing condition, as described above, CGEI would not proceed with such redemption and the related business combination and may instead search for an alternate business combination.

 

Notwithstanding the foregoing, an Ordinary Shareholder, together with any affiliate of his or any other person with whom he is acting in concert or as a partnership, syndicate or other group for the purpose of acquiring, holding or disposing of CGEI’s securities, will be restricted from exercising shareholder redemption rights with respect to more than 10% of the shares sold in CGEI’s initial public offering. Such an Ordinary Shareholder would still be entitled to vote against a proposed initial business combination with respect to all shares owned by him or his affiliates. CGEI believes this restriction will discourage shareholders from accumulating large blocks of ordinary shares before the vote held to approve a proposed initial business combination and attempt to use the shareholder redemption right as a means to force CGEI or its management to purchase their ordinary shares at a significant premium to the then current market price. Absent this provision, an Ordinary Shareholder who owns in excess of 10% of the ordinary shares sold in CGEI’s initial public offering could threaten to vote against a proposed business combination and seek conversion, regardless of the merits of the transaction, if his shares are not purchased by CGEI or its management at a premium to the then current market price (or if management refuses to transfer to him some of their shares). By limiting a shareholder’s ability to redeem only 10% of the Ordinary Shares sold in CGEI’s initial public offering, CGEI believes CGEI has limited the ability of a small group of shareholders to unreasonably attempt to block a transaction which is favored by CGEI’s other Ordinary Shareholder. However, CGEI is not restricting the shareholders’ ability to vote all of their shares against the transaction.  

 

Management

 

CGEI’s management team represents a mix of entrepreneurs and investment and financial professionals with extensive operating and transactional experience in the PRC. CGEI believes that the combination of the backgrounds of its management team and their networks of contacts will provide CGEI with access to unique opportunities to effect its initial business combination.

 

CGEI’s management team, including its executive officers and the majority of its directors, has already been involved in the initial public offerings and the subsequent consummation of business combinations for two U.S. listed prior blank check companies focused on acquisition targets with operations in China as well as having acted as an advisor to two companies which each completed transactions with blank check companies. ChinaGrowth North Acquisition Corporation completed an initial public offering in January 2007, raising gross proceeds of approximately $40 million at an offering price of $8.00 per unit. In January 2009, ChinaGrowth North Acquisition Corporation acquired UIB Group Limited, an insurance brokerage firm in China. The combined entity has since deregistered under the Securities Exchange Act, and there is no longer any public market for the stock of UIB Group Limited. ChinaGrowth South Acquisition Corporation completed an initial public offering in January 2007, raising gross proceeds of approximately $40 million at an offering price of $8.00 per unit. In January 2009, ChinaGrowth South Acquisition Corporation merged with Olympia Media Holdings Limited, an aggregator and operator of print media businesses in China, which was renamed China TopReach, Inc. (OTCBB: CGSXF.OB) post-acquisition. Mr. Michael W. Zhang continues to serve as an independent director of China TopReach Inc. Mr. Zhang is a Director of Chum Capital Group Limited, a merchant banking firm in China which acted as the sole advisor to Origin Agritech Ltd. (NASDAQ:SEED) and Hollysys Automation Technologies, Ltd. (NASDAQ:HOLI) in their respective mergers with Chardan China Acquisition Corporation and Chardan North China Acquisition Corporation.

 

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Offering Proceeds Held in Trust

 

On June 2, 2011, CGEI consummated its IPO of 5,000,000 units, with each unit consisting of one CGEI Ordinary Share and one warrant to purchase one CGEI Ordinary Share at an exercise of $12.00 per share. The units in CGEI’s IPO were sold at an offering price of $10.00 per unit, generating total gross proceeds of $50 million. Simultaneously with the consummation of the IPO, CGEI consummated the private sale of 3,966,667 Insider Warrants to the sponsor at a price of $0.75 per warrant, generating gross proceeds of $2,975,000. Net proceeds from the IPO and the sale of the Insider Warrants were approximately $51,151,641, net of the non-deferred portion of the underwriting commissions of $1,250,000 and offering costs and other expenses of approximately $573,359.

 

As of June 30, 2012, $ 50,263,824 was held in the trust account (including $2,250,000 of deferred underwriting discounts and commissions and $2,975,000 from the sale of the Insider Warrants). Through June 30, 2012, CGEI had not withdrawn any funds from interest earned on the trust account proceeds. Other than the deferred underwriting discounts and commissions, no amounts are payable to the underwriters of the initial offering in the event of a business combination. For the period from January 18, 2010 (inception) through June 30, 2012, CGEI had a net loss of $644,796. None of the funds held in the trust account will be released until the earlier of the completion of CGEI’s initial business combination and the redemption of 100% of CGEI’s Ordinary Shares if CGEI is unable to consummate a business combination within 21 months from the closing of this offering (subject to the requirements of law).

 

 Fair Market Value of Target Business

 

Most blank check companies are required to consummate their initial business combination with a target whose fair market value is equal to at least 80% of the amount of money held in the trust account of the blank check company at the time of entry into a definitive agreement for a business combination. Because CGEI is not subject to this requirement, and because CGEI is not required to obtain a controlling interest in a target, CGEI has additional flexibility in identifying and selecting a prospective acquisition candidate.

 

Opportunity for Shareholder Approval of Business Combination

 

Because CGEI is proposing the business combination, CGEI is submitting the merger proposal to its shareholders. The quorum required to constitute this meeting, as for all meetings of CGEI shareholders in accordance with the CGEI memorandum and articles of association, is two members being individuals present in person or proxy or if a corporation or other non-natural person by its duly authorized representative. CGEI will consummate the merger only if the required number of shares, represented by shareholders present and voting, are voted in favor of the merger, and the other conditions to the merger are satisfied. If a majority of the outstanding ordinary shares, represented by shareholders present and voting at the meeting, are not voted in favor of the merger, CGEI may continue to seek other target businesses with which to effect its initial business combination until February 26, 2013.

 

CGEI’s initial shareholders have agreed to vote their founder shares with the majority of the votes cast by the Ordinary Shareholders in connection with an initial business combination and any Ordinary Shares purchased during or after the initial public offering in favor of CGEI’s initial business combination. CGEI’s initial shareholders own 20% of CGEI’s outstanding Ordinary Shares.

 

Additionally, as per the terms of the merger agreement, the merger will not be consummated unless CGEI has at least $5.0 million of cash held in the trust account (after giving effect to payment of all holders of CGEI Ordinary Shares who exercise their redemption right).

 

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Liquidation If No Business Combination

 

If CGEI has not completed a business combination within 21 months from the date of the consummation of its initial offering, Ordinary Shareholders shall be entitled to receive a pro rata share of the trust account. If CGEI is forced to liquidate, under Cayman Islands’ Law, a liquidator would normally give at least 21 days’ notice to creditors by notifying known creditors (if any) who have not submitted claims and by placing a public advertisement in the Cayman Islands Official Gazette that CGEI has been placed into liquidation and such creditors are required to submit particulars of their debts or claims to CGEI, although in practice this notice requirement need not necessarily delay the distribution of assets as the liquidator may be satisfied that no creditors would be adversely affected as consequence of a distribution before this time period has expired.

 

Pursuant to CGEI’s memorandum and articles of association, upon the expiration of 21 months from the date of the consummation of the initial offering CGEI’s purpose and powers will be limited to winding up its affairs and liquidating. Liquidating distributions will take place promptly after the expiration of 21 months. Also included in CGEI’s memorandum and articles of association are the provisions requiring the voluntary liquidation of CGEI at that time. While CGEI’s board of directors and its management have agreed not to propose any amendment to CGEI’s memorandum and articles of association relating to its business combination or automatic dissolution, nor to conduct a solicitation of shareholders for such purpose, CGEI’s shareholders have the ability under Cayman Islands’ law to effect such an amendment with supermajority approval. In the event shareholders amend CGEI’s memorandum and articles of association, CGEI’s articles do not provide for redemption rights in connection with such amendment. All of CGEI’s officers and directors directly or indirectly own ordinary shares in CGEI but have waived their right to receive distributions (other than with respect to ordinary shares, or any ordinary shares underlying units, they purchase in connection with this offering or in the aftermarket) upon the liquidation of the trust account.

 

Competition

 

If CGEI succeed in effecting the merger with CDGC or another business combination, there will be, in all likelihood, intense competition from competitors of the target business. CGEI cannot assure you that, subsequent to a business combination, CGEI will have the resources or ability to compete effectively.

 

Facilities

 

CGEI maintains its principal executive offices at CN11 Legend Town, No. 1 Balizhuangdongli, Chaoyang District, Beijing, 100025, PRC. CGEI has also agreed to pay a monthly fee of $10,000 to Chum Capital Group Limited, an affiliate of Messrs. Song and Shi, for office space, utilities and for general and administrative services, including but not limited to receptionist, secretarial and general office services. This agreement commences on the date CGEI’s securities are first quoted on the Nasdaq Capital Market and shall continue until the earlier of the consummation of CGEI’s initial business combination and the winding-up and liquidation of CGEI. CGEI considers its current office space, combined with the other office space otherwise available to its executive officers, adequate for CGEI’s current operations.

 

Employees

 

CGEI has two executive officers. These individuals are not obligated to devote any specific number of hours to CGEI’s matters and intend to devote only as much time as they deem necessary to CGEI’s affairs. The amount of time they will devote in any time period will vary based on whether a target business has been selected for the business combination and the stage of the business combination process the company is in. Accordingly, once management locates a suitable target business or businesses to acquire, they will spend more time investigating such target businesses and negotiating and processing the business combination (and consequently spend more time on CGEI’s affairs) than they would prior to locating a suitable target business. CGEI presently expects each of its executive officers to devote an average of approximately 10 hours per week to CGEI’s business. CGEI does not intend to have any full time employees prior to the consummation of its initial business combination.

 

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Legal Proceedings

 

There is no material litigation, arbitration or governmental proceeding currently pending against CGEI or any members of its management team in their capacity as such, and CGEI and the members of its management team have not been subject to any such proceeding in the prior 12 months.

 

Available Information

 

CGEI files or submits to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. While CGEI does not have a website with available filings, CGEI will provide at no additional charge, copies of these reports, proxy and information statements and other information upon request to its address at CN11 Legend Town, No. 1 Balizhuangdongli, Chaoyang District, Beijing, 100025, PRC. These reports, proxy and information statements and other information, and related exhibits and schedules may also be inspected and copied at the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website that contains reports, proxy, information statements and other information filed electronically by CGEI with the SEC which are available on the SEC’s website at http://www.sec.org.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the CGEI’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this proxy statement. CGEI’s actual results may differ materially from those discussed in forward-looking statements because of the risks and uncertainties inherent in future events.

 

Results of Operations for the Six Months Period Ended June 30, 2012 and 2011

 

Through June 30, 2012, CGEI’s efforts have been limited to organizational activities, activities relating to its initial offering, identifying and evaluating prospective acquisition candidates and general corporate matters. CGEI has not generated any revenues, other than interest income earned on the proceeds held in the Trust Account. As of June 30, 2012, $50,263,824 was held in the Trust Account (including $2,250,000 of deferred underwriting discounts and commissions and $2,975,000 from the sale of the Insider Warrants). In addition, CGEI has cash outside of trust of $12,476 and advances to affiliate of $230,498 available to pay operating expenses. Through June 30, 2012, CGEI had not withdrawn any funds from interest earned on the Trust Account proceeds. Other than the deferred underwriting discounts and commissions, no amounts are payable to the underwriters of its initial offering in the event of a business combination. For the six months period ended June 30, 2012 and 2011, CGEI had a net loss of $309,828 and $92,684, respectively. The operating expenses during the six months ended June 30, 2012 and 2011, were $317,351 and $84,946, respectively.

 

CGEI has agreed to pay Chum Capital Group, an entity owned and controlled by the CGEI’s Chairman and Chief Financial Officer, a total of $10,000 per month for office space, administrative services and secretarial support. Total expenses for the six months ended June 30, 2012 and 2011 and the period from January 18, 2010 (inception) to June 30, 2012 were $60,000, $10,000 and $130,000, respectively.

 

Results of Operations for the Year Ended December 31, 2011

 

Through December 31, 2011, CGEI’s efforts have been limited to organizational activities, activities relating to its initial offering, identifying and evaluating prospective acquisition candidates and general corporate matters. CGEI has not generated any revenues, other than interest income earned on the proceeds held in the Trust Account. As of December 31, 2011, $50,255,577 was held in the Trust Account (including $2,250,000 of deferred underwriting discounts and commissions and $2,975,000 from the sale of the Insider Warrants). In addition, CGEI had cash outside of trust of $134,028, $382,830 in advances to affiliates, $100,844 in prepaid expenses and $11,500 in accrued expenses. Through December 31, 2011, CGEI had not withdrawn any funds from interest earned on the Trust Account proceeds. Other than the deferred underwriting discounts and commissions, no amounts are payable to the underwriters of its initial offering in the event of a business combination. For the period from January 18, 2010 (inception) through December 31, 2011, CGEI had a net loss of $334,968.

 

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CGEI has agreed to pay Chum Capital Group, an entity owned and controlled by the CGEI’s Chairman and Chief Financial Officer, a total of $10,000 per month for office space, administrative services and secretarial support. For the period from January 18, 2010 (inception) to December 31, 2011, CGEI has incurred $70,000 for these costs.

 

Off-Balance Sheet Arrangements

 

CGEI has no obligations, assets or liabilities which would be considered off-balance sheet arrangements. CGEI does not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

CGEI has not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial assets.

 

Contractual Obligations

 

CGEI does not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities other than a monthly fee of $10,000 for office space, administrative services and secretarial support payable to Chum Capital Group, an entity owned and controlled by CGEI’s Chairman and Chief Financial Officer. CGEI began incurring this fee on June 2, 2011 and will continue to incur this fee monthly until the earlier of the completion of the business combination and CGEI’s liquidation.

 

Liquidity and Capital Resources

 

As of June 30, 2012, CGEI had cash of $12,476, $230,498 in advances to affiliate and $50,263,824 in investments held in trust. Until the consummation of the initial public offering CGEI’s only source of liquidity was the initial purchase of shares (the “Founder Shares”) by CGEI’s sponsor and an unsecured promissory note with an officer of CGEI.

 

On June 2, 2011, CGEI consummated its initial public offering of 5,000,000 units at a price of $10.00 per unit. Simultaneously with the consummation of the initial public offering, CGEI consummated the private sale of 3,966,667 Insider Warrants for $2,975,000 in proceeds. CGEI received net proceeds from the initial public offering and the sale of the Insider Warrants of approximately $51,151,641, net of the non-deferred portion of the underwriting commissions of $1,250,000 and offering costs and other expenses of approximately $573,359

 

CGEI will depend on sufficient interest being earned on the proceeds held in the trust Account to provide CGEI with additional working capital it may need to identify one or more target businesses, conduct due diligence and complete its initial business combination, as well as to pay any franchise and income taxes that CGEI may owe. The amounts in the trust account may be invested only in U.S. government treasury bills with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act. The current low interest rate environment may make it more difficult for such investments to generate sufficient funds, together with the amounts available outside the trust account, to locate, conduct due diligence, structure, negotiate and close its initial business combination. If CGEI is required to seek additional capital, it would need to borrow funds from its sponsor or management team to operate or may be forced to liquidate. Neither CGEI’s sponsor nor its management team is under any obligation to advance funds to CGEI in such circumstances. Any such loans would be repaid only from funds held outside the Trust Account or from funds released to CGEI upon completion of the initial business combination. If CGEI is unable to complete the initial business combination because it does not have sufficient funds available to it, CGEI will be forced to cease operations and liquidate the trust account.

 

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Recent Accounting Pronouncements

 

CGEI’s management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the CGEI’s financial statements.

 

Critical Accounting Policies

 

CGEI’s significant accounting policies are described in Note 2 to its audited financial statements. CGEI believe the following critical accounting polices involved the most significant judgments and estimates used in the preparation of its financial statements.

 

Quantitative and Qualitative Disclosures about Market Risk

 

CGEI was incorporated in the Cayman Islands on January 18, 2010 for the purpose of effecting a merger, capital stock exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more operating businesses. CGEI was considered in the development stage at June 30, 2012 and had not yet commenced any operations. All activity through June 30, 2012 relates to CGEI’s formation, its public offering and seeking a target business.

 

 The net proceeds from CGEI’s initial public offering, including the amounts held in the trust account may be invested in United States government securities within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, having a maturity of 180 days or less, or in money market funds meeting conditions under Rule 2a-7 under the Investment Company Act, until the earlier of (i) consummation of an initial business combination, or (ii) liquidation of CGEI. These funds are currently invested in U.S. government treasury bills having a maturity of three months or less.

 

Directors and Executive Officers

 

CGEI’s current executive officers and directors are as follows:

 

Name   Age   Position
Xuesong Song   44   Chairman of the Board and Chief Financial Officer
Xuechu He   50   Vice Chairman and Director
Jin Shi   43   Chief Executive Officer and Director
Michael W. Zhang   44   Director
Dongying Sun   42   Director
Teng Zhou   49   Director
Xue Bai   30   Secretary

 

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Xuesong Song has served as CGEI’s chairman of the board of directors and chief financial officer since CGEI’s inception. From May 2006 through January 2009, Mr. Song served as the chairman of ChinaGrowth North Acquisition Corporation, a special purpose acquisition company, which acquired UIB Group Limited in January 2009, the second largest insurance brokerage firm in China. Following the acquisition, Mr. Song served as a director of UIB Group Limited from January 2009 through May 2010. From May 2006 through January 2009, Mr. Song also served as the executive vice president of business development and a director of the board of ChinaGrowth South Acquisition Corporation, a special purpose acquisition company, which acquired Olympia Media Holdings Ltd. in January 2009, the largest privately owned newspaper aggregator and operator in China. Mr. Song has been a principal of Chum Capital Group Limited since August 2001, a merchant banking firm that invests in growth Chinese companies and advises them in financings, mergers & acquisitions and restructurings, which successfully acted as the sole advisor of Origin Agritech Ltd. (NASDAQ: SEED) and Hollysys Automation Technologies, Ltd (NASDAQ: HOLI) in their respective mergers with Chardan China Acquisition Corporation and Chardan North China Acquisition Corporation, respectively, and chief executive officer of Beijing Chum Investment Co., Ltd. since December 2001. Mr. Song was the chairman and chief executive officer of Shanghai Jinqiaotong Enterprise Developments Corporation Ltd. from April 2005 to May 2010, a direct investment company that owned approximately 18.4% of equity interest in Hollysys Automation Technologies, Ltd. before its merger with Chardan North China Acquisition Corporation. Mr. Song has been a director of Mobile Vision Communication Ltd. since July 2004. Between February 2001 and December 2001, Mr. Song was the vice president of ZZNode Holdings Ltd. Prior to joining ZZNode, Mr. Song held various positions from president assistant, vice president to deputy executive president at China Resources Investment & Management Co., Ltd. from October 1997 to December 2000. From January 1994 to July 1995, Mr. Song assumed positions from deputy representative of Beijing Office to representative of Hainan Office at Wins Group Holdings Ltd. Between July 1989 and January 1994, Mr. Song was an engineer with Tianjin Office, General Administration of Civil Aviation of China. Mr. Song received a Masters of Business Administration degree from Oklahoma City/Tianjin Program and an Associates degree in electrical engineering from Civil Aviation University of China. CGEI believes Mr. Song is well-qualified to serve as a member of its board of directors due to his prior service as an executive and director of special purpose acquisition companies focused on China, as well as his contacts.

 

Xuechu He has served as CGEI’s vice-chairman of the board since March 2011. Mr. He is a permanent resident of the Hong Kong SAR. Mr. He has been engaged in direct investments in the PRC for the past six years as a successful investor and dealmaker. Mr. He earned his reputation as a value creator in the capital markets from several marquee cases in which he acted as chairman of the board and the controlling shareholder at several public companies listed on the Hong Kong Stock Exchange from June 1999 to present. Since October 2007, Mr. He has been the chairman and executive director of Honbridge Holdings Ltd. (HK:8137), a HK listed investment holding company that focuses on the new and traditional energy and resources sector, the production and development of highly purified silicon, as well as fashion and lifestyle publications. Since March 2005, Mr. He has been a director of Guorun Group Ltd., a direct investment company. From May 2006 through January 2009, Mr. He served as a director of ChinaGrowth North Acquisition Corporation, a special purpose acquisition company, which acquired UIB Group Limited in January 2009, the second largest insurance brokerage firm in China. From May 2006 through January 2009, Mr. He also served as the chairman of ChinaGrowth South Acquisition Corporation, a special purpose acquisition company, which acquired Olympia Media Holdings Ltd. in January 2009, the largest privately owned newspaper aggregator and operator in China. Mr. He was Chairman of the board of South China Information & Technology Ltd., from July 2002 to June 2005, a publicly listed company in Hong Kong Stock Exchange whose name was changed to Guorun Holdings Ltd. in July 2002 and merged with Geely Automobile Holdings Ltd. in May 2005, the largest private automobile manufacturer in the PRC. Between September 2001 and April 2003, Mr. He was Chairman of Fourseas.com Ltd., a publicly listed company on the Hong Kong Stock Exchange whose name was changed to Shanghai Century Ltd. in June 2002 and merged with Shanghai Zendai Holdings in February 2003. Between August 2000 and November 2000, Mr. He was also Chairman of Interchina Holdings Ltd., a publicly listed company on the Hong Kong Stock Exchange acquired by him and merged with an operating company in the PRC. Mr. He was also Executive Director of Interchina Holdings Ltd. from November 2000 to September 2001. Prior to becoming an active investor, Mr. He established and operated his own businesses from May 1997 to June 1999, including property development, international trade and R&D of electric-powered vehicles. From December 1989 to May 1997, Mr. He assumed various positions at Finance Department of China Resources Holdings Co., Ltd. in Hong Kong, including audit manager, assistant general manager and deputy general manager, responsible for internal auditing, setting up internal control system, financial statements analysis, evaluating investment and financing projects, and providing to the board of directors critical analysis and advice related with finance in their decision-making process. Prior to joining China Resources Holdings Co., Ltd. in Hong Kong, Mr. He was the deputy director of the accounting department at China Resources Co., Ltd. in Beijing, responsible for financing and accounting activities related with import and export business from January 1985 to December 1989. Mr. He worked at the Ministry of Commodities (currently Ministry of Commerce), responsible for structuring accounting provisions for businesses between July 1983 and January 1985. Mr. He received a B.S. degree in finance and accounting from Anhui Finance and Trade College in 1983. Mr. He speaks Mandarin and Cantonese dialects of Chinese. Mr. He also currently serves as a director for Honbridge Management Limited, a Hong Kong company, Jessicacode Limited, a Hong Kong company, Kailun Photovoltaic Materials Investments Ltd., a Hong Kong company and Superb Taste Company Limited, a Hong Kong company. CGEI believes Mr. He is well-qualified to serve as a member of its board of directors due to his experience with direct investment in the PRC, as well as his prior executive and board experience , including on publicly listed companies.

 

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Jin Shi has served as CGEI’s Chief Executive Officer since March 2011, and Mr. Shi has served as a director since CGEI’s inception. Mr. Shi served as vice-chairman of CGEI’s Board of Directors from its inception until March 2011. From May 2006 through January 2009, Mr. Shi served as the chief executive officer and a director of the board of ChinaGrowth North Acquisition Corporation, which acquired UIB Group Limited in January 2009, the second largest insurance brokerage firm in China. From May 2006 through January 2009, Mr. Shi also served as the chief financial officer and a director of the board of ChinaGrowth South Acquisition Corporation, which acquired Olympia Media Holdings Ltd. in January 2009, the largest privately owned newspaper aggregator and operator in China. Mr. Shi has been a principal of Chum Capital Group Limited since February 2007, a merchant banking firm that invests in growth Chinese companies and advises them in financings, mergers & acquisitions and restructurings, which successfully acted as the sole advisor of Origin Agritech Ltd. (NASDAQ: SEED) and Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI) in their respective mergers with Chardan China Acquisition Corporation and Chardan North China Acquisition Corporation, respectively, and a principal of Global Vestor Capital Partners LLC since November 2005. Mr. Shi has also been the chairman of Shanghai RayChem Industries Co., Ltd., a research & development based active pharmaceutical ingredient producer, since he founded the company in January 2005. Since September 2004, Mr. Shi has been the chief executive officer of Yihua Investment Co. Ltd., a direct investment company and the parent holding company of Shanghai RayChem Industries Co. Ltd. in China. Mr. Shi is also the president of PharmaSource Inc., a company he founded in 1997. Between June 1995 and October 1997, Mr. Shi was vice president of Sales and Marketing of Darsheng Trade & Technology Development Co., Ltd., the U.S. subsidiary of Tianjin Pharmaceuticals Corporation. From August 1992 through May 1995, Mr. Shi was with Tianjin Pharmaceuticals Corporation in China. Mr. Shi received a Bachelor of Science degree in Chemical Engineering from Tianjin University. CGEI believes Mr. Shi is well-qualified to serve as a member of its board of directors due to his prior service as an executive and director of special purpose acquisition companies focused on China, as well as his contacts. 

 

Michael W. Zhang has served as a member of CGEI’s board of directors since its inception and as CGEI’s chief executive officer from January to March 2011. From May 2006 through January 2009, Mr. Zhang served as the chief executive officer and a director of the board of ChinaGrowth South Acquisition Corporation, which acquired Olympia Media Holdings Ltd. in January 2009, the largest privately owned newspaper aggregator and operator in China in which he remains as a director on the board. From May 2006 through January 2009, Mr. Zhang also served as the chief financial officer and was a director of the board of ChinaGrowth North Acquisition Corporation, which acquired UIB Group Limited in January 2009, the second largest insurance brokerage firm in China since February 2007. Mr. Zhang is the Managing Partner of Helios Capital Management Co., Ltd., a private equity firm focused on Chinese growth companies. Prior to Helios, Mr. Zhang was a partner with Chum Capital Group Limited, which successfully acted as the sole advisor of Origin Agritech Ltd. (NASDAQ: SEED) and Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI) in their respective mergers with Chardan China Acquisition Corporation and Chardan North China Acquisition Corporation, respectively. He has been a principal of Global Vestor Capital Partners LLC since 2005. Prior to Global Vestor Capital Partners LLC, Mr. Zhang was an Investment Professional with Avera Global Partners LP, a hedge fund in which he screened and analyzed public equity in global markets. Prior to attaining an MBA degree from Yale University, Mr. Zhang gained rich experience in equity investment and mergers & acquisitions advisory transactions through several positions both in and outside of China, including investment manager with a wealthy family affiliated with Pacific Investment Corporation where he sourced and evaluated target companies in China, the co-founder and chief executive officer of IQBay Technology Inc., an e-commerce service provider based in Shanghai, and investment banker with Deutsche Bank Securities Inc. in the United States, where he completed more than $6 billion in mergers & acquisitions and financing transactions. Mr. Zhang received a Masters of Business Administration degree from Yale University, a Bachelor of Science in Finance from Indiana University in Bloomington and an Associate degree from the College of International Business, Shanghai University. He is currently a director of the board with China TopReach Inc., Shanghai Kinetic Medical Co., Ltd. and Chum Capital Group Limited. CGEI believes Mr. Zhang is well-qualified to serve as a member of its board of directors due to his extensive experience executive and board experience, as well as his background in equity investment and mergers and acquisitions.

 

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Dongying Sun has been a member of CGEI’s board of directors since inception. Mr. Sun has been a senior partner at Guantao Law Firm. For the past 15 years, Mr. Sun has served as PRC legal counsel to multinational corporations, both state-owned and privately-owned Chinese companies, private equity and venture capital funds as well as entrepreneurs in a wide range of industries relating to mergers & acquisitions and divestitures in China, and issuing equity and debt securities in domestic and international capital markets. From 1994 to 2000, Mr. Sun was a legal consultant in China Machine Building International Corp. Mr. Sun received the attorney qualification in 1995, an LL.M degree from Chicago-Kent College of Law in Illinois Institute of Technology in 2004, and an LL.B degree from China University of Politics and Law in 1994. CGEI believes Mr. Sun is well-qualified to serve as a member of its board of directors due to his international legal experience, and specifically his experience advising state-owned and privately-owned Chinese companies, as well as his contacts.

 

Teng Zhou has served as a member of CGEI’s board of directors since March 2011. Mr. Zhou is a permanent resident of the Hong Kong SAR. Mr. Zhou has been engaged in direct investments in the PRC for the past six years as a successful investor. Mr. Zhou was a key member of the team, led by Mr. He, that successfully completed various transactions of merging operating assets with listed companies on the Hong Kong Stock Exchange. Mr. Zhou has been CEO of Guorun Group Ltd. since March 2005, a direct investment company. From May 2006 through January 2009, Mr. Zhou served as an executive vice president and director of ChinaGrowth North Acquisition Corporation, a special purpose acquisition company, which acquired UIB Group Limited in January 2009, the second largest insurance brokerage firm in China. From May 2006 through January 2009, Mr. Zhou also served as a director of ChinaGrowth South Acquisition Corporation, a special purpose acquisition company, which acquired Olympia Media Holdings Ltd. in January 2009, the largest privately owned newspaper aggregator and operator in China. From July 2002 to June 2005, Mr. Zhou was Executive Director of South China Information & Technology Ltd., a publicly listed company on the Hong Kong Stock Exchange whose name was changed to Guorun Holdings Ltd. in July 2002 and merged with Geely Automobile Holdings Ltd. in May 2005, the largest private automobile manufacturer in the PRC. Between September 2001 and April 2003, Mr. Zhou was Executive Director of Fourseas.com Ltd., a publicly listed company in Hong Kong Stock Exchange whose name was changed to Shanghai Century Ltd. in June 2002 and merged with Shanghai Zendai Holdings in February 2003. Mr. Zhou was also the president and director of Lifestyle International (HK) Co., Ltd. and Triumphant Glory Investments Ltd. Prior to becoming an active investor, Mr. Zhou operated his own business in trade, food service and capital market investment from August 1997 to September 2001. Mr. Zhou was assigned by China Resources Holdings Co., Ltd. in Hong Kong to manage an industrial manufacturing subsidiary from April 1986 to August 1997, during which he assumed various positions including Finance Director, CFO, Vice President and President. Mr. Zhou joined China Resources Holdings Ltd. in January 1985. From August 1983 to January 1985, Mr. Zhou researched cost accounting framework for the construction industry at China Academy of Building Research. Mr. Zhou received a B.S. in Accounting from Hunan Finance and Economic College. Mr. Zhou speaks Mandarin and Cantonese dialects of Chinese. Mr. Zhou also serves as a director for Shandong Hengyuan New Energy Technology Ltd., Shezhen Lifestyle Fashion & Accessories Co., Ltd., Shanxi Wusheng Aluminium Ltd., Prosper Glory Holdings Ltd., and Venture Link Assets Ltd. . CGEI believes Mr. Zhou is well-qualified to serve as a member of its board of directors due to his prior experience with direct investment in the PRC, as well as his executive experience, including on publicly listed companies.

 

Xue Bai has served as CGEI’s secretary since March 2011. Ms. Bai has been an associate at Chum Capital Group Limited since July 2007, a merchant banking firm that invests in growth Chinese companies and advises them in financings, mergers & acquisitions and restructurings, which successfully acted as the sole advisor of Origin Agritech Ltd. (NASDAQ: SEED) and Hollysys Automation Technologies, Ltd. (NASDAQ: HOLI) in their respective mergers with Chardan China Acquisition Corporation and Chardan North China Acquisition Corporation. Prior to joining Chum, Ms. Bai attended the University of Melbourne (Australia) from March 2002 until December 2006 and Ms. Bai received a Bachelor Degree in Commerce and a Bachelor Degree in Information Systems from the University of Melbourne (Australia).

 

Number and Terms of Office of Directors and Officers

 

CGEI’s board of directors is divided into three classes, with only one class of directors being elected in each year and each class serving a three-year term. CGEI’s memorandum and articles of association provide that the number of directors which may constitute the board of directors shall be two or greater. Upon completion of this offering CGEI’s board of directors will have six members. The term of office of the first class of directors, consisting of Dongying Sun and Michael W. Zhang, will expire at CGEI’s first annual meeting of shareholders following the completion of the initial offering. The term of office of the second class of directors, consisting of Mr. Xuechu He and Mr. Teng Zhou, will expire at the second annual meeting following the completion of the initial offering. The term of office of the third class of directors, consisting of Xuesong Song, and Jin Shi, will expire at the third annual meeting following the completion of the initial offering.

 

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Board of Directors Leadership Structure

 

CGEI’s memorandum and articles of association provide its board of directors with the flexibility to combine or separate the positions of Chairman and Chief Executive Officer. Historically, these positions have been separate. CGEI’s board believes that the separation of these positions allows it to have a Chairman focused on the leadership of the board while allowing its Chief Executive Officer to focus more of his time and energy on managing its operations. CGEI’s board of directors believes that Mr. Song's service as both Chairman of the Board and Chief Financial Officer is in the best interest of CGEI and its shareholders. Mr. Song possesses detailed and in-depth knowledge of the issues, opportunities, and challenges facing the company, and CGEI believes he is the person best positioned to develop agendas that ensure that the Board's time and attention is focused on the most critical matters. CGEI’s board believes that his combined role enables clear accountability and enhances its ability to communicate CGEI’s message and strategy clearly and consistently to shareholders. Each of the directors other than Mr. Song and Mr. Shi is independent under the rules of Nasdaq and the SEC, and the board of directors believes that the independent directors provide effective oversight of management. Although the board of directors currently believes that the combination of the Chairman and Chief Financial Officer roles is appropriate in the current circumstances, it will maintain the flexibility to separate these positions in the future. While CGEI does not currently intend to separate these positions, a change in leadership structure could be made if the board of directors determined it was in the best long-term interests of shareholders.

 

Committees of the CGEI Board

 

CGEI’s board of directors has formed an audit committee and a governance and nominating committee. Each committee is composed of three directors.

 

Audit Committee

 

CGEI’s audit committee consists of Michael W. Zhang, Xuechu He and Teng Zhou. As required by the rules of the Nasdaq Capital Market, each of the members of CGEI’s audit committee is financially literate, and CGEI considers Mr. He to qualify as an “audit committee financial expert” and “financially sophisticated” as defined under SEC and Nasdaq Capital Market rules, respectively. CGEI will have an audit committee composed of three independent directors within one year of the date of the prospectus. The responsibilities of the audit committee will include:

 

·meeting with CGEI’s management periodically to consider the adequacy of CGEI’s internal control over financial reporting and the objectivity of CGEI’s financial reporting;

 

·appointing the independent registered public accounting firm, determining the compensation of the independent registered public accounting firm and pre-approving the engagement of the independent registered public accounting firm for audit and non-audit services;

 

·overseeing the independent registered public accounting firm, including reviewing independence and quality control procedures and experience and qualifications of audit personnel that are providing audit services to CGEI;

 

·meeting with the independent registered public accounting firm and reviewing the scope and significant findings of the audits performed by them, and meeting with management and internal financial personnel regarding these matters;

 

·reviewing CGEI’s financing plans, the adequacy and sufficiency of CGEI’s financial and accounting controls, practices and procedures, the activities and recommendations of the auditors and CGEI’s reporting policies and practices, and reporting recommendations to CGEI’s full board of directors for approval;

 

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·establishing procedures for the receipt, retention and treatment of complaints regarding internal accounting controls or auditing matters and the confidential, anonymous submissions by employees of concerns regarding questionable accounting or auditing matters;

 

·following the completion of this offering, preparing the report required by the rules of the SEC to be included in CGEI’s annual proxy statement;

 

·monitoring compliance on a quarterly basis with the terms of this offering and, if any noncompliance is identified, immediately taking all action necessary to rectify such noncompliance or otherwise causing compliance with the terms of this offering; and

 

·reviewing and approving all payments made to CGEI’s officers, directors and affiliates. Any payments made to members of CGEI’s audit committee will be reviewed and approved by CGEI’s board of directors, with the interested director or directors abstaining from such review and approval.

 

Governance and Nominating Committee

 

CGEI’s governance and nominating committee consists of Xuechu He and Teng Zhou and Dongying Sun. The functions of CGEI’s governance and nominating committee include:

 

·recommending qualified candidates for election to CGEI’s board of directors;

 

·making recommendations to CGEI’s board of directors regarding governance matters, including CGEI’s memorandum and articles of association and charters of CGEI’s committees; and

 

·developing and recommending to CGEI’s board of directors governance and nominating guidelines and principles applicable to CGEI.

 

Code of Ethics and Committee Charters

 

CGEI has adopted a code of ethics that applies to its officers, directors and employees. Copies of the code of ethics and the board committee charters have been filed with its registration statement on Form S-1 (No. 333-173323), as amended. You will be able to review these documents by accessing CGEI’s public filings at the SEC’s web site at www.sec.gov. In addition, CGEI will provide a copy of its code of ethics upon request, without charge. CGEI intends to disclose any amendments to or waivers of certain provisions of its code of ethics in a Form 8-K.

 

Limitation on Liability and Indemnification of Directors and Officers

 

Cayman Islands’ law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands’ courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. CGEI’s memorandum and articles of association will provide for indemnification of CGEI’s officers and directors for any liability incurred in their capacities as such, except through their own fraud or willful default. CGEI has entered into indemnification agreements with each of its officers and directors which indemnify such individuals to the extent allowable under Cayman Islands’ law.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling CGEI pursuant to the foregoing provisions, CGEI has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is theretofore unenforceable.

 

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Conflicts of Interest

 

CGEI has the following potential conflicts of interest:

 

·None of CGEI’s officers and directors is required to commit their full time to CGEI’s affairs and, accordingly, they may have conflicts of interest in allocating their time among various business activities.

 

·In the course of their other business activities, CGEI’s officers and directors may become aware of investment and business opportunities which may be appropriate for presentation to CGEI as well as the other entities with which they are affiliated. CGEI’s management may have conflicts of interest in determining to which entity a particular business opportunity should be presented.

 

·CGEI’s officers and directors may in the future become affiliated with entities, including other blank check companies, engaged in business activities similar to those intended to be conducted by CGEI, although they have agreed not to participate in the formation of, or become an officer or director of, any other blank check company until CGEI has entered into a definitive agreement regarding its initial business combination or CGEI has failed to complete its initial business combination within 21 months of the date of the closing of the initial offering.

 

·Other than with respect to the initial business combination, CGEI has not adopted a policy that expressly prohibits its directors, officers, shareholders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by CGEI or in any transaction to which CGEI is a party or have an interest. Nor does CGEI have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by CGEI. Accordingly, such parties may have an interest in certain transactions in which CGEI is involved, and may also compete with CGEI.

 

·CGEI’s directors and officers may purchase ordinary shares as part of the units sold in the initial public offering or in the open market. CGEI’s directors and officers have agreed to vote any ordinary shares acquired by them in the initial public offering and any ordinary shares acquired by them after the initial offering in favor of CGEI’s initial business combination.

 

·If CGEI was to make a deposit, down payment or fund a “no shop” provision in connection with a potential business combination, CGEI may have insufficient funds available outside of the trust account to pay for due diligence, legal, accounting and other expenses attendant to completing a business combination. In such event, CGEI’s officers or directors or other parties may have to incur such expenses in order to proceed with the proposed business combination. As part of any such combination, CGEI’s officers and directors or other parties may negotiate the repayment of some or all of any such expenses, without interest or other compensation, which if not agreed to by the target business’s management, could cause CGEI’s management to view such potential business combination unfavorably, thereby resulting in a conflict of interest.

 

·The founder shares owned by CGEI officers and directors will be released from escrow only if a business combination is successfully completed, and the insider warrants purchased by CGEI’s officers and directors, and any warrants which they may purchase in the aftermarket will expire worthless if a business combination is not consummated. Additionally, CGEI’s officers and directors will not receive liquidation distributions with respect to any of their founder shares. Furthermore, the purchasers of the insider warrants have agreed that such securities will not be sold or transferred by them (except to certain permitted transferees) until 30 days after CGEI has completed its initial business combination. For the foregoing reasons, CGEI’s board may have a conflict of interest in determining whether a particular target business is appropriate to effect a business combination with.

 

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Accordingly, as a result of multiple business affiliations, CGEI’s officers and directors may have similar legal obligations relating to presenting business opportunities meeting the above-listed criteria to multiple entities. In addition, conflicts of interest may arise when CGEI’s board evaluates a particular business opportunity with respect to the above-listed criteria. CGEI cannot assure you that any of the above mentioned conflicts will be resolved in CGEI’s favor.

 

Under Cayman Islands’ law, CGEI’s directors have fiduciary duties to act honestly, in good faith and with a view to CGEI’s best interests. CGEI’s directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to CGEI, CGEI’s directors must ensure compliance with CGEI’s memorandum and articles of association. In certain limited circumstances, a shareholder has the right to seek damages if a duty owed by CGEI’s directors is breached.

 

In order to minimize potential conflicts of interest which may arise from multiple corporate affiliations in the case of individuals, each of CGEI’s officers and directors has agreed, until the earliest of CGEI’s initial business combination, its liquidation or in the case of individuals such time as he ceases to be an officer or director, to present to CGEI for CGEI’s consideration, prior to presentation to any other entity, any suitable business opportunity which may reasonably be required to be presented to CGEI, subject to any pre-existing fiduciary or contractual obligations he might have. The following table summarizes the relevant pre-existing fiduciary or contractual obligations of CGEI’s officers and directors:

 

Name of Individual  

Name of Affiliated

Company

  Priority/Preference Relative to
China Growth Equity Investment Ltd.
         
Xuesong Song   Mobile Vision Communication Ltd.   Mr. Song is a director of Mobile Vision Communication Ltd. or MVC. MVC is a mobile media content provider and distributor in the PRC. In the event that CGEI seeks to acquire an operating business in the mobile media industry in the PRC, a conflict may arise because Mr. Song has a pre-existing relationship with MVC. Such conflict is likely to be resolved in favor of MVC as Mr. Song must present acquisitions on the mobile media sector in the PRC to MVC before presenting to CGEI.

 

Xuechu He   Honbridge Holdings Ltd.   Mr. He is the chairman of Honbridge Holdings Ltd., a Hong Kong listed investment holding company that focuses on the new and traditional energy and resources sector, highly purified silicon business, as well as publication. In the event that CGEI seeks to acquire an operating business in the energy industry in the PRC, a conflict may arise because Mr. He has a pre-existing relationship with Honbridge Holdings Ltd. Such conflict is like to be resolved in favor of Honbridge Holdings Ltd. as Mr. He must present acquisitions on the energy sector in the PRC to Honbridge Holdings Ltd. before presenting to CGEI.

 

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Michael W. Zhang   China TopReach Inc.   Mr. Zhang is a director of China TopReach Inc. or CTR. CTR is an aggregator and operator of print media businesses in the PRC. In the event that CGEI seeks to acquire an operating business in the print media sector in the PRC, a conflict may arise because Mr. Zhang has a pre-existing relationship with CTR. Such conflict is likely to be resolved in favor of CTR as Mr. Zhang must present acquisition opportunities in the print media business in the PRC to CTR before presenting to CGEI.
         
    Helios Capital
Management Co., Ltd.
  Mr. Zhang is also the Managing Partner of Helios Capital Management Co., Ltd. or Helios, a private equity firm focused on Chinese growth companies. In the event that CGEI seeks to acquire a Chinese growth company, a conflict may arise because Mr. Zhang has a pre-existing relationship with Helios, which may be resolved in favor of Helios.

 

In addition, Xuesong Song, Jin Shi and Michael W. Zhang are each affiliated with Chum Capital Group Limited. Chum Capital Group Limited is a privately owned merchant bank which invests in growth companies and advises mid-market companies in accessing international capital markets through public listing or mergers and acquisitions. CGEI does not believe there is any conflict between Messrs. Song’s, Shi’s and Zhang’s responsibilities at Chum Capital Group Limited and their obligations to CGEI because Chum Capital Group Limited does not make investments in excess of $15 million, and CGEI expects that its initial business combination will be well in excess of this threshold. In addition, Chum Capital has granted CGEI a right of first refusal for any investments in excess of $25 million and/or investments in companies seeking a public offering.

 

CGEI will not acquire an entity with which any of its officers or directors, through their other business activities, is currently having acquisition or investment discussions. To further minimize potential conflicts of interest, CGEI has agreed not to (i) acquire an entity with which CGEI’s officers or directors, through their other business activities, had acquisition or investment discussions in the past, (ii) consummate an initial business combination with an entity which is, or has been within the past five years, affiliated with any of CGEI’s officers, directors, initial shareholders or their affiliates, including an entity that is either a portfolio company of, or has otherwise received a material financial investment from, any private equity fund or investment company (or an affiliate thereof) that is affiliated with such individuals; or (iii) enter into a business combination where CGEI acquire less than 100% of a target business and any of CGEI’s officers, directors, initial shareholders or their affiliates acquire the remaining portion of such target business, unless, in any case, CGEI obtains an opinion from an independent investment banking firm reasonably acceptable to Deutsche Bank Securities Inc. that the business combination is fair to its unaffiliated shareholders from a financial point of view. Furthermore, in no event will any of its existing officers, directors, shareholders or advisors, or any entity with which they are affiliated, be paid any finder’s fee, consulting fee or other compensation prior to, or for any services they render in order to effectuate, the consummation of CGEI’s initial business combination.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires CGEI’s officers, directors and persons who beneficially own more than 10% of the CGEI Ordinary Shares to file reports of ownership and changes in ownership with the SEC. These reporting persons are also required to furnish CGEI with copies of all Section 16(a) forms they file. Based solely upon a review of such forms, management of CGEI believes that all of these reports were filed in a timely manner.

 

Executive Compensation

 

Compensation Discussion and Analysis

 

CGEI’s officers and directors have not received any compensation for services rendered. Commencing on June 2, 2011 and through the earlier of consummation of CGEI’s initial business combination or the liquidation of its trust account, CGEI will pay Chum Capital Group a total of $10,000 per month for accounting, legal and operational support, access to support staff, and information technology infrastructure. CGEI believes that such fees are at least as favorable as CGEI could have obtained from an unaffiliated third party for such services. No compensation of any kind, including finders’ and consulting fees, will be paid either by CGEI or by any affiliated entity for services rendered to CGEI by any of its sponsor, officers and directors or any of their respective affiliates, for services rendered prior to or in connection with the consummation of an initial business combination. However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on CGEI’s behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. There is no limit on the amount of reimbursement these individuals may receive. After an initial business combination, members of CGEI’s management team who remain with CGEI may be paid consulting, management or other fees from the combined company with any and all amounts being fully disclosed to shareholders, to the extent then known, in the proxy solicitation materials furnished to its shareholders. It is unlikely the amount of such compensation will be known at the time of a shareholder meeting held to consider an initial business combination, as it will be up to the directors of the post-combination business to determine executive and director compensation. CGEI does not have a long-term incentive plan or pension plan and do not provide retirement benefits to its employees. CGEI has no plans or arrangements that result in the compensation of an executive officer or director in the event such person’s employment is terminated following a change of control.

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

The following table sets forth certain information regarding the beneficial ownership of CGEI’s ordinary shares on October 19, 2012, by (1) each director and named executive officer of CGEI, (2) all directors and named executive officers of CGEI as a group, and (3) each person known by CGEI to own more than 5% of CGEI’s ordinary shares. Applicable percentage ownership in the following table is based on 6,250,000 shares ordinary shares in the share capital of CGEI outstanding as of October 19, 2012.

 

Unless otherwise indicated, CGEI believes that all persons named in the table have sole voting and investment power with respect to all ordinary shares beneficially owned by them. The following table does not reflect beneficial ownership of the 3,966,667 insider warrants because these warrants are not exercisable until the later of one year after the date of CGEI’s initial public offering and 30 days following the consummation of CGEI’s initial business combination.

 

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Name and Address of Beneficial Owner(1)  Amount and
Nature of
Beneficial
Ownership(2)
   Approximate
Percentage of
Outstanding
Ordinary Shares
Beneficially Owned
 
Xuesong Song   1,150,000(3)    18.4%
Jin Shi   1,150,000(3)    18.4%
Xuechu He   50,000    
Teng Zhou   50,000    
Michael W. Zhang   0    0%
Xue Bai   0    0%
Dongying Sun   0    0%
All directors and executive officers as a group (four individuals)   1,250,000    20%
Principal Shareholders:          
Polar Securities Inc. and North Pole Capital Master Fund(4)   600,000    9.6%
AQR Capital Management, LLC(5)   480,000    7.68%
Highbridge Capital Management, LLC, Highbridge International LLC and Glenn Dubin(6)   500,000    7.77%
Fir Tree Capital Opportunity Master Fund, L.P. and Fir Tree Value Master Fund, L.P.(7)   375,000    5.2%

 

* Less than 1%

 

(1) Unless otherwise indicated, the business address of each of the individuals is CN11 Legend Town, No. 1 Balizhuangdongli, Chaoyang District, Beijing, 100025, PRC.

 

(2) Assumes no forfeiture of the founder earnout shares.

 

(3) Represents shares held by Chum Capital Group Limited, an entity owned entirely by Mr. Xuesong Song and Mr. Jin Shi.

 

(4) Information based on the most recent Form 13G filed by such owners. The business address of the owner is 401 Bay Street, Suite 1900, PO Box 19, Toronto, Ontario  M5H 2Y4, Canada.

 

(5) Information based on the most recent Form 13G filed by such owners. The business address of the owner is Two Greenwich Plaza, 3rd floor Greenwich, CT 06830 USA.

 

(6) Information based on the most recent Form 13G filed by such owners. Highbridge Capital Management LLC is the trading manager of Highbridge International LLC and Glenn Dubin is the CEO of Highbridge Capital Management LLC. All three can be considered beneficial owners with shared power to vote and dispose the shares. The business address of the owners is 40 West 57th Street, 33rd Floor New York, New York 10019.

 

(7) Information based on the most recent Form 13G filed by such owners. Fir Tree Inc. is the investment manager of each Fir Tree Valve Master Fund, L.P. & Fir Tree Capital Opportunity Master Fund, L.P. and has granted shared power to direct the vote and dispose of the 375,000 ordinary shares. The business address of the owners is 505 Fifth Avenue, 23rd Floor, New York, New York 10017.

 

Certain Relationships, Related Transactions and Director Independence

 

In January 2010, CGEI issued 1,955,000 Ordinary Shares to Chum Capital Group Limited for $25,000 in cash, at a purchase price of approximately $0.013 per share. Chum Capital Group is controlled by Mr. Xuesong Song and Mr. Jin Shi. As of December 31, 2010, 1,955,000 Ordinary Shares were issued and outstanding, of which 225,000 Ordinary Shares were subject to forfeiture to the extent that the underwriters’ over-allotment option was not exercised in full.

 

Chum Capital Group Limited agreed to forfeit, and CGEI subsequently cancelled, 230,000 of these shares in March 2011. In addition, Chum Capital Group Limited transferred 50,000 shares to each of Messrs. He and Zhou for approximately $0.013 per share in March 2011. In May 2011, CGEI’s initial shareholders agreed to forfeit, and CGEI subsequently cancelled, 287,500 shares. On July 28, 2011, Chum Capital Group forfeited, and CGEI cancelled, 187,500 shares in connection with the expiration of the underwriters’ over-allotment option.

 

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On June 2, 2011, Chum Capital Group, Mr. Xuechu He and Mr. Teng Zhou (the “Insiders”) purchased an aggregate of 3,966,667 warrants (the “Insider Warrants”) from CGEI in a private placement pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. The Insider Warrants were sold for a total purchase price of $2,975,000 or $0.75 per warrant. The private placement took place simultaneously with the consummation of the initial offering. All of the proceeds received from this purchase were placed into the trust account. The Insider Warrants are identical to the warrants in the initial offering except that the Insider Warrants may be exercisable for cash or on a cashless basis, at the holder’s option, and will not be redeemable by CGEI, in each case so long as such securities are held by the Insiders or their affiliates. Additionally, all Insiders have waived their rights to receive distributions upon the CGEI’s liquidation prior to a business combination with respect to the insider shares. Furthermore, all Insiders have agreed that the Insider Warrants will not be sold or transferred until 30 days after CGEI has completed its initial business combination. Except for certain permitted transferees, the Insider Warrants will not be transferable, assignable or salable until 30 days after the completion of CGEI’s initial business combination.

 

CGEI entered into an unsecured promissory note with Mr. Xuesong Song in an aggregate principal amount of $200,000. The note did not bear interest and was payable upon the completion of the initial offering.   The loan was repaid in full in June 2011 with proceeds from the Offering.

 

CGEI has agreed to pay Chum Capital Group Limited a total of $10,000 per month for office space, utilities, secretarial and general and administrative services for a period commencing June 2, 2011 and ending on the earlier of the consummation by CGEI of an initial business combination or CGEI’s liquidation. Chum Capital Group Limited is an affiliate of Xuesong Song, Jin Shi and Michael W. Zhang, CGEI’s executives. Total expenses related to office space, utilities, secretarial and general and administrative services for the year ended December 31, 2011 was $70,000.

 

Other than the $10,000 per-month administrative fee which CGEI paid Chum Capital Group Limited and the reimbursements for out-of-pocket expenses paid to CGEI’s officers and directors, no compensation or fees of any kind, including finders and consulting fees, were paid to any of CGEI’s initial shareholders, officers or directors, or to any of their affiliates prior to the distribution of the trust fund.

 

On October 15, 2011, CGEI’s board of directors authorized it to advance up to $390,000 to Chum Capital Group Limited in order to reduce potential losses incurred by Chinese currency appreciation against the U.S. dollar. The advance will be used to fund the operating expenses of CGEI. Total expenses paid by Chum Capital Group Limited on behalf of the CGEI for the three months ended June 30, 2012 and 2011 were $34,279 and $0, respectively. For the six months ended June 30, 2012 and 2011 and the period from January 18, 2010 (inception) to June 30, 2012, Chum Capital Group Limited paid $151,596, $0 and $151,596 in expenses on behalf of CGEI. Foreign exchange losses recognized for the three months ended June 30, 2012 and 2011 were $1,154 and $0, respectively. For the six months ended June 30, 2012 and 2011 and the period from January 18, 2010 (inception) to June 30, 2012, CGEI recognized foreign exchange losses of $737, $0, and $105 on the advance which is recorded in other income on the condensed statement of operations. As of June 30, 2012 and December 31, 2011 CGEI has a receivable of $230,498 and $382,830, respectively, from Chum Capital Group Limited.

 

Director Independence

 

At present, CGEI’s board of directors has determined that each of Dongying Sun, Xuechu He, Teng Zhou and Michael W. Zhang qualify as “independent directors” within the meaning of Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley Act of 2002, and Rule 5605 of the Nasdaq Marketplace Rules.

 

Pursuant to Rule 5615(a)(3) of the Nasdaq Marketplace Rules, because CGEI is a foreign based entity, CGEI needs only comply with Cayman Islands’ law, to the extent not contrary to federal securities law, with respect to the composition of CGEI’s board of directors. Cayman Islands’ law does not require independent directors or an independent audit committee, however, pursuant to Section 10A(m) of the Securities Exchange Act of 1934, as amended, and Section 3 of the Sarbanes-Oxley Act, CGEI is required to have an independent audit committee. As Cayman Islands’ law does not require CGEI to have independent directors on its board, CGEI is not required to comply with Rule 5615(a)(3) of the Nasdaq Marketplace Rules, which requires a Nasdaq-listed company to have a board of directors comprised of a majority of independent directors. Prior to completion of CGEI initial business combination, CGEI intends to be in full compliance with the standards imposed by the Securities Exchange Act of 1934 and Sarbanes-Oxley Act of 2002.

 

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INFORMATION ABOUT CHINA DREDGING GROUP CO., LTD.

 

History and Development of CDGC

 

CDGC’s Corporate Structure

 

CDGC is a British Virgin Islands, or BVI, holding company incorporated on April 14, 2010.  CDGC conducts its dredging operations through its PRC subsidiary, Fujian Service.  Before the reorganization in May 2010, Fujian Service was owned by Mr. Qing Lin and Mr. Panxing Zhuo, who are, respectively, the brother-in-law and the father of Mr. Xinrong Zhuo, CDGC’s Chairman and Chief Executive Officer.  Mr. Qing Lin and Mr. Panxing Zhuo, pursuant to an agreement, held their interests as the representatives of the family.  The agreement also gave Mr. Xinrong Zhuo the exclusive right to make executive decisions and manage Fujian Service.  CDGC was incorporated by three entities, namely, Venus Seed Co., Ltd., or Venus, whose beneficial owner is Kit Chan, one of CDGC’s independent directors, Saturn Glory Co., Ltd., or Saturn, whose beneficial owner is Bin Lin, CDGC’s Senior Vice President, and Mars Harvest Co., Ltd., or Mars, whose beneficial owner is Xinrong Zhuo, CDGC’s Chairman and Chief Executive Officer.

 

 CDGC’s wholly-owned subsidiary, China Dredging HK, was organized under the laws of Hong Kong on April 26, 2010 to serve as a holding company for Fujian WangGang, a PRC company organized on June 12, 2010 and a WFOE under PRC law.  On June 29, 2010, Fujian WangGang acquired a 50% direct equity interest in Fujian Service.  The remaining 50% equity interest in Fujian Service is held by Wonder Dredging, a PRC company owned by Qing Lin and Panxing Zhuo who, pursuant to an agreement, hold their interests in Fujian Service indirectly as the representatives of the family.  The agreement also gave Xinrong Zhuo the exclusive rights to make executive decisions and manage Fujian Service.  Pursuant to its certificate of incorporation, Fujian Service’s corporate existence terminates on January 7, 2028.

 

Fujian Service, which is CDGC’s operating entity with Renminbi 200,000,000 ($29,002,371 at December 31, 2011) registered capital, was incorporated in January 8, 2008.  Before the reorganization in May 2010, Fujian Service was originally owned by two individuals, Qing Lin and Panxing Zhuo, who respectively held 91% and 9% ownership interests.  Pursuant to an agreement, they held their interests as representatives of the family and accepted Xinrong Zhuo’s right to make all executive decisions and manage the business.  Qing Lin and Panxing Zhuo are the brother-in-law and the father of Mars’ sole shareholder, Xinrong Zhuo.

 

In May 2010, Qing Lin and Panxing Zhuo sold all of their ownership interests in Fujian Service to Wonder Dredging, which they also owned fully and in the same percentages as their ownership interests in Fujian Service.  Subsequent to this transaction, Wonder Dredging owned 100% of Fujian Service.

 

In June 2010, Fujian WangGang acquired a 50% ownership interest in Fujian Service from Wonder Dredging by committing to invest, as a capital contribution, approximately $23.6 million into Fujian Service, which commitment was fully satisfied in January 2011.  This reduced Wonder Dredging’s ownership interest in Fujian Service to 50%.

 

In June 2010, Fujian WangGang entered into the VIE Agreements with Fujian Service, Wonder Dredging, Mr. Qing Lin and Mr. Panxing Zhuo to obtain irrevocable management control over both Wonder Dredging and Fujian Service.  Through these agreements, Fujian WangGang (1) receives substantially all of the economic benefits of Fujian Service’s ongoing operations, (2) has the right to purchase the other 50% ownership interest in Fujian Service from Wonder Dredging for consideration which is equivalent to the net asset value of the latest quarterly report of Fujian Service under U.S. GAAP preceding the purchase date, (3) has the right to receive all the payment by Fujian Service payable to Wonder Dredging.

 

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In October 2010, CDGC merged with and into Chardan Acquisition Corporation, or CAC, a public reporting, non-trading shell company domiciled in the BVI (the “CAC Merger”).  CAC had become a public company in the U.S. in December 2008 by filing a Form 10 registration statement pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, or the Exchange Act.  The former executive officer and director of CAC owns less than 1% of CDGC’s outstanding ordinary shares and serves as the president of Chardan Capital Markets LLC, or Chardan, the lead placement agent in CDGC’s 2010 Private Placement.  CDGC chose to merge with CAC because CDGC believed becoming a public company would facilitate the consummation of a private placement on more favorable terms than would otherwise be available to it as a private company.  CDGC believes that investors are more likely to give lower valuations, require warrant coverage or other economic rights, and attempt to obtain special voting and information rights or to otherwise gain influence on corporate decisions in a private company, particularly one having substantial operations in China, as compared to a public company that is subject to audit, internal control and public disclosure obligations.  In addition, CDGC believed that the merger with CAC was in CDGC’s best interest because, CDGC may be regarded as more creditworthy, have greater access to the capital markets, and enjoy other advantages associated with being a public company. 

 

The terms of the CAC Merger were set forth in a merger agreement, which provided that CDGC would continue as the surviving company following the merger.  CDGC has accounted for the merger as a recapitalization, with CDGC being treated as the accounting acquirer.  Immediately prior to, and in contemplation of, the consummation of the merger, CDGC redesignated its shares to retroactively adjust its legal capital.  At the time of the CAC Merger, all of the issued shares of CAC were exchanged for 500,000 of CDGC’s ordinary shares, or 0.95% of its outstanding ordinary shares, while its shareholders immediately prior to the CAC Merger retained 52,177,323 of CDGC’s ordinary shares, or 99.05% of CDGC’s outstanding ordinary share.  As a result of the merger, CDGC became a public reporting company.  CAC, being the non-surviving company, ceased its corporate existence, and was removed from the Register of Companies maintained in the BVI by the Registry of Corporate Affairs. 

 

In October 2012, CDGC formed Pingtan Zhuoying Dredging Engineering Construction Co., Ltd, or Pingtan Zhuoying, a limited liability company incorporated pursuant to PRC laws. The registered capital of Pingtan Zhuoying is $1,000,000, which is to be contributed according to its articles of association. Also in October 2012, Pingtan Xingyi Port Services Co., Ltd, or Pingtan Xingyi, is a limited liability company incorporated pursuant to PRC Laws. The registered capital of Pingtan Xingyi is RMB6,000,000, which has been fully contributed. CDGC is in the process of establishing contractual arrangements for Pingtan Zhuoying and Pingtan Xingyi.

 

The following diagram illustrates CDGC’s current corporate structure:

 

 

 

 

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(1) Xinrong Zhuo is CDGC’s Chairman of the Board of Directors and Chief Executive Officer, Bin Lin is CDGC’s Senior Vice President, and Kit Chan is one of CDGC’s independent directors.

 

(2) Assumes the conversion of all of CDGC’s preferred shares into ordinary shares.

 

(3) Qing Lin is the brother-in-law of Xinrong Zhuo, CDGC’s Chairman of the Board of Directors and Chief Executive Officer, and holds 91% interest as the representative of the family.

 

(4) Panxing Zhuo is the father of Xinrong Zhuo, CDGC’s Chairman of the Board of Directors and Chief Executive Officer, and holds 9% interest as the representative of the family.

 

2010 Private Placement

 

Concurrently with the closing of the merger with CAC, CDGC entered into a securities purchase agreement, or the Purchase Agreement, with certain investors (the “2010 Private Placement”).  Pursuant to the Purchase Agreement, through multiple closings between October and December 2010, such investors purchased 10,012,987 of CDGC’s preferred shares, at a purchase price of $5.00 per share, for aggregate proceeds of approximately $50.0 million.  Each preferred share is convertible into one of CDGC’s ordinary shares.  Chardan acted as the lead placement agent in connection with the private placement.  Net proceeds to CDGC, after deducting offering expenses of approximately $3.6 million, were approximately $46.4 million.  CDGC paid Chardan a cash fee of approximately $3.1 million in addition to a $50,000 retainer fee. In connection with the 2010 Private Placement, CDGC agreed to redeem CDGC’s preferred shares at a 20% premium if CDGC’s ordinary shares are not listed by October 2012 on the NYSE, the Nasdaq, the NYSE Amex, or another major international securities exchange. This payment and redemption deadline has been extended to December 31, 2013.

 

Variable Interest Entity Agreements

 

Under applicable PRC laws, foreign ownership in certain industries is restricted and may not exceed a government specified level.  Wholly-Foreign Owned Enterprises, or WFOEs may only undertake certain types of construction projects, and foreign ownership in a Chinese-foreign joint venture construction enterprise is restricted to no more than 75% according to the RAFCE.  Additionally, as a marine contractor working on restricted projects within the PRC, Fujian Service is required to register its vessels under the flag of the PRC, and foreign ownership of the enterprises which own the PRC-registered vessels is limited to no more than 50%.  While Wonder Dredging qualifies as a PRC entity under PRC law and owns 50% equity of Fujian Service, Fujian WangGang’s direct ownership of 50% of Fujian Service allows Fujian Service to meet both the requirements for foreign ownership under its qualifications as a marine construction company and as an operator of dredging vessels within PRC waters.

 

In June 2010, Fujian WangGang entered into an equity investment agreement with Wonder Dredging pursuant to which Fujian WangGang invested approximately $23.6 million in Fujian Service in exchange for a 50% equity interest in Fujian Service.  Accordingly, Wonder Dredging holds 50% of the equity interest of Fujian Service and Fujian WangGang holds the other 50%.  Fujian Service, Wonder Dredging, Fujian WangGang, Mr. Qing Lin and Mr. Panxing Zhuo have entered into a series of contractual arrangements, referred to as the VIE Agreements, that allow Fujian WangGang to, among other things, fully control Fujian Service’s business operations, policies and management, approve all matters requiring shareholders’ approval, and receive 100% of the annual net income earned by Fujian Service.  Below is a summary of the VIE Agreements.

 

Exclusive Purchase Right of Equity Interest

 

In June 2010, Wonder Dredging, Fujian WangGang and Fujian Service entered into an exclusive option agreement, or the Exclusive Option Agreement, pursuant to which Wonder Dredging irrevocably granted to Fujian WangGang an exclusive right to purchase up to all of the equity interest in Fujian Service that is held by Wonder Dredging, to the extent allowed under the current PRC laws.  Accordingly, if and when the current limitations on direct ownership of Fujian Service by Fujian WangGang are eased or ceased to apply under the PRC laws, Fujian WangGang may exercise its option to purchase and directly own the equity interests of Fujian Service.  The purchase price for the equity interest in Fujian Service held by Wonder Dredging would be equivalent to the net asset value reflected in Fujian Service’s then current quarterly report prepared according to U.S. GAAP.  The term of the Exclusive Option Agreement is 20 years, which term continuously renews unless the option is exercised in full or the agreement is otherwise terminated by the parties.  The agreement also provides that upon consummation of the exercise of the option, Wonder Dredging will contribute, without additional consideration, any funds actually received by it from Fujian WangGang for the transfer of its equity interest in Fujian Service to Fujian WangGang.  The agreement further provides that, as of the date of the agreement, Fujian WangGang is entitled to all the future payments by Fujian Service to Wonder Dredging, together with all the profits of Fujian Service.

 

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Contracted Management Agreement

 

In June 2010, Wonder Dredging, Fujian WangGang and Fujian Service entered into a management agreement, or the Management Agreement, pursuant to which Fujian WangGang has the exclusive right to manage, operate and control the business operations of Fujian Service, including, but not limited to, establishing and implementing policies for management, using all of the assets of Fujian Service, appointing Fujian Service’s directors and senior management, directing Fujian Service to enter into loan agreement, making administrative decisions regarding employee wages or hiring and firing employees and other actions customarily associated with Fujian Service’s senior management and directors of Fujian Service and its subsidiaries.  As consideration for its business management services, Fujian WangGang has agreed to pay to Fujian Service an annual fee of approximately $155,000 (RMB1 million), and Fujian Service will pay to Fujian WangGang 100% of the net profits of Fujian Service.  The Management Agreement terminates upon the earlier of (i) Fujian WangGang’s exercise in full of the option to purchase the equity interests of Fujian Service, pursuant to the Exclusive Option Agreement, and Fujian WangGang and/or its designees individually or jointly own all of the equity interests in Fujian Service, or (ii) June 30, 2030, subject to the right of Fujian WangGang to renew the term of the Management Agreement for additional consecutive 20-year period.

 

Powers of Attorney

 

In June 2010, Wonder Dredging executed irrevocable power of attorney granting to Fujian WangGang or its designees the power to vote, pledge or dispose of all equity interests in Fujian Service that Wonder Dredging holds.  Additionally, the powers of attorney allows Fujian WangGang or its designees to sign and carry out the intentions of the Management Agreement, the Equity Pledge Agreement and the Exclusive Option Agreement.  At the same time, Qing Lin and Panxing Zhuo executed irrevocable power of attorney granting to Fujian WangGang or its designees the power to vote, pledge, or dispose of all equity interests in Wonder Dredging, and to appoint directors and senior management of Wonder Dredging.

 

Equity Interest Pledge Agreement

 

In June 2010, Qing Lin, Panxing Zhuo, Fujian WangGang and Wonder Dredging entered into an equity interest pledge agreement, or the Equity Interest Pledge Agreement.  To ensure that Fujian Service and its shareholders perform their obligations under the Exclusive Option Agreement, the Management Agreement, and a letter of undertaking whereby Wonder Dredging waived its right to receive a dividend of approximately $51.1 million declared by Fujian Service in May 2010, Qing Lin and Panxing Zhuo, who collectively hold 100% of the equity interests in Fujian Service, pledged their entire interest in Wonder Dredging to Fujian WangGang.  The Equity Interest Pledge Agreement terminates upon the earlier of (i) the purchase of the entire equity interest in Fujian Service by Fujian WangGang or (ii) June 30, 2030, subject to the right of Fujian WangGang to renew the term of the Equity Interest Pledge Agreement for additional consecutive 20 year periods in case of Fujian WangGang or its designee’s failure to purchase the entire equity interest in Fujian Service by June 30, 2030.

 

Business Overview

 

CDGC is a British Virgin Islands (“BVI”) holding company, which conducts its dredging operations through its PRC subsidiary and variable interest entities. CDGC was incorporated under the BVI Business Companies Act, 2004. China Dredging HK was organized under the Hong Kong Companies Ordinance. Fujian WangGang was organized under the Company Law of the PRC (2006), the Wholly-Foreign Owned Enterprise Law (1986), as amended, and the Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended. Fujian Service was organized under the Company Law of the PRC (2006). Wonder Dredging was organized under the Company Law of the PRC (2006). Pingtan Zhuoying was organized under the Company Law of the PRC (2006). Pingtan Xingyi was organized under the Company Law of the PRC (2006).

 

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CDGC provides specialized dredging services exclusively to the Chinese marine infrastructure market and, based on the number and capacity of the dredging vessels CDGC operates, it believes that it is one of the leading independent (not state-owned) providers of such services in the PRC. Since inception, it has functioned exclusively as a specialist subcontractor, performing dredging services for other companies licensed to function as general contractors. It engages in capital dredging, maintenance dredging and reclamation dredging projects. CDGC primarily sources its projects by subcontracting projects from general contractors. Through CDGC’s management skills, efficient operation and effective cost control, CDGC believes that it has established a competitive edge and gained a credible reputation in its market. Moreover, by successfully executing numerous projects, CDGC has strengthened its relationship with its general contractors, an important factor in establishing a secure pipeline of future business.

 

Three of CDGC’s customers have indicated to CDGC through non-binding long-term cooperation agreements their intent to increase the level of project activity subcontracted to CDGC over the five year period from 2010 through 2014. Collectively, these non-binding agreements represent approximately $3.0 billion of estimated aggregate revenue over the remaining three years and approximately $721.6 million during 2012 that CDGC believes is potentially available to it and that could sustain the anticipated growth of its fleet and ongoing high utilization levels. However, as these agreements are non-binding, they may not actually result in any potential contract value and CDGC may realize considerably less value under each of these agreements.

 

Operating Process

 

CDGC’s operations principally involve identifying potential projects, signing subcontracts and carrying out the contract dredging work. CDGC has developed a comprehensive project management system spanning the project execution process, including project planning, contract management, contract performance, project control and project completion.

 

CDGC’s Role and Participation Level

 

CDGC participates in dredging activities solely as a subcontractor to qualified large general contractors such as China Communications, since its dredging projects are typically one portion of a much larger-scale construction project that could cover elements such as port construction, cofferdam, and other fields of work in which it does not engage.

 

Identifying Projects

 

CDGC identifies potential projects from a variety of sources, including advertisements by governmental agencies, through the efforts of its business development personnel and through meetings with general contractors and other industry participants. After determining which projects are available, CDGC makes a decision on which projects to pursue based on factors including project size, duration, availability of personnel, current backlog, competitive advantages and disadvantages, prior experience, geographic location and type of contract.

 

Pre-Qualification

 

CDGC is generally required to complete a prequalification process with the applicable general contractor for the project. General contractors generally require that CDGC meet certain qualification requirements before negotiating or accepting CDGC’s application for a project. The prequalification process may require the submission of information concerning financial condition, past experience and the availability of personnel and equipment. If a general contractor determines that a prospective subcontractor does not meet its criteria it will not award the proposed project to the subcontractor.

 

Project Pricing and Negotiation

 

Prior to agreeing on a subcontract, CDGC performs a study of the proposed project, including an evaluation of the technical and commercial conditions and requirements of the project followed by a site visit. The information CDGC collects is then analyzed to arrive at the cost of items included in a detailed project budget used in the negotiation of price terms with the general contractors. Most of CDGC’s dredging contracts are awarded and carried out on a fixed-price basis, subject to adjustment factors for unforeseen conditions, with a predetermined timetable for project completion. These types of contracts generally commit the contractor to provide specified resources and to complete the project for a fixed sum or at fixed unit prices on a specified schedule. As is typical for dredging subcontracts, CDGC’s contracts to date were the result of negotiations with the general contractor customers and are not competitively bid.

 

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CDGC’s contracts to date have not contained escalation clauses since they are of short duration and raw materials with volatile prices, such as fuel, are typically supplied by the prime contractor for use on the job at no cost to CDGC. Correctly estimating the costs involved in a fixed-price contract is crucial to achieving profitability. CDGC carefully estimates the costs of each project prior to signing a subcontract. CDGC’s estimates are based upon both the general contractors’ estimates of material quantities to be dredged and CDGC’s own experience in estimating project costs. There are a number of factors that can influence the final project costs as compared to the original contract price. The most important factors include site and environmental conditions that differ from those assumed in the original bid, the geographic location of the project, the availability and pricing of raw materials, and inclement weather conditions.

 

Payment Terms

 

The specific payment terms on CDGC’s subcontracts vary from project to project. However, they have generally provided for CDGC to receive payments following completion of each stage of completed work, which is customary in the industry. CDGC’s typical short-duration subcontract provides for payment to CDGC of 20% to 30% at the end of the second month of work, 20% to 30% at the end of the third month of work and the balance within 7 to 180 days after completion. Prior to payment, each stage of the project is certified as completed by a site engineer and accepted by the general contractor. All of CDGC’s projects completed to date have been performed within the range of 10 to 366 days. CDGC carefully monitors its costs throughout the life of a project to protect it against or to minimize significant cost overruns.

 

Project Implementation

 

CDGC is responsible for all project activities. The project manager of CDGC divides work on a project into distinct components and assigns each component to a responsible crew based upon the nature of such work and the crew’s qualifications and experience. Project managers typically prepare a detailed plan for the project that includes the following elements:

 

·project schedule (consistent with the project conditions and payment schedule);

 

·labor deployment (consistent with the skill level and the estimated number of workers for each type of work);

 

·provision of temporary office and public utilities, for example, water, electricity and telephone; and

 

·work plans/instructions detailed for each phase of the project.

 

The implementation process includes devising detailed dredging plans, procuring materials, assigning work to captains, coordinating with general contractors or their consultants, coordinating with suppliers, and taking charge in the overall management of the project.

 

Project History

 

CDGC had successfully completed 126 projects from its formation in January 2008 to June 30, 2012.

 

Vessels

 

CDGC operates trailer suction hopper dredgers, non-self-propelling cutter suction dredgers and grab dredgers.  Trailer suction hopper dredgers are typically self-propelled and have the general appearance of an ocean-going vessel.  The dredger has hollow hulls, or “hoppers,” into which material is suctioned hydraulically and deposited.  Once the hoppers are filled, the dredger sails to the designated disposal site and either bottom-dumps the material or pumps the material from the hoppers through a pipeline to a designated location.  Hopper dredgers can operate in rough waters, and are less likely to interfere with ship traffic than other types of dredgers.  They can also move quickly from one project to another.

 

Non-self-propelling cutter suction dredgers remove material using a revolving cutter head which cuts and churns the sediment on the ocean floor and hydraulically pumps the material by pipe to the disposal location.  These dredgers are very powerful and can dredge some types of rock.  Certain materials can be directly pumped as far as seven miles with the aid of booster pumps.  Cutter suction dredgers work with an assortment of support equipment that assists with the positioning and movement of the dredger, handling of the pipelines, and the placement of the dredged material.

 

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Grab dredgers are a type of mechanical dredger that remove hard-packed sediments and debris and can work in tight areas, such as areas along docks or terminals.  Grab dredgers with specialized buckets are more suitable for handling material requiring controlled disposal.  The dredged material is placed onto material barges for transport to the designated relocation site.  The barges are emptied by bottom-dumping, direct pump-out or removal by crane.

  

The following table sets forth information regarding the vessels CDGC currently operates:

 

Trailer Suction
Hopper Dredgers
  Capacity
(cubic
meters per
hour)
     Leased/Owned     Purchase/Lease Date     Year Built 
Hengshengjun #88   3,500    Leased    January 2008    1983 
Liya #10   6,500    Leased    June 2010    1990 

 

Non-Self-Propelling Cutter
Suction Dredgers
  Capacity
(cubic
meters per
hour)
     Leased/Owned     Purchase/Lease Date     Year Built 
Xinggangjun #3   2,000    Owned    May 2008    2008 
Xinggangjun #66   3,500    Owned    March 2008    2008 
Xinggangjun #6   2,500    Owned    May 2008    2008 
Xinggangjun #9   2,500    Owned    June 2008 (1)    2008 
Xiechang #18   2,500    Leased    June 2010    2009 
Honglinjun #19   3,800    Leased    April 2011    2009 

 

Grab Dredgers  Capacity
(cubic
meters per
hour)
     Leased/Owned     Purchase/Lease Date     Year Built 
Hengshunda #1   350    Leased    June 2011    2007 
Hengshunda #10 (formerly known as Liya #2)   350    Leased    June 2011    2006 

 

(1) CDGC commenced leasing Xinggangjun #9 in June 2008 and acquired it in January 2011.

 

In May 2009 Fujian Service entered into a purchase agreement with Yiyang Zhonghai Shipyard Co., Ltd., or Yiyang, a non-related company, for a new non-self-propelling cutter suction dredger, at a purchase price of approximately $31.8 million, on which CDGC made a down payment of approximately $2.4 million. The contract stipulates that payments toward the purchase price of the new dredger, after giving effect to the down payment, are payable according to the following schedule: 30% within five months before delivery, 25% within one months before delivery, 25% within two months after delivery and 20% within five months after delivery. Delivery of the vessel is expected in or before December 2012.

 

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In May 2011, Fujian WangGang entered into a construction agreement with Yiyang to build a new non-self-propelling 3,800 cubic meter per hour cutter suction dredger, for approximately $41.3 million (RMB260 million). Construction is expected to take approximately 18 months. Fujian WangGang made a down payment of approximately of $20.7 million. Payments toward the construction price of the new dredger after giving effect to the down payment, are to be made by CDGC as follows: 20% within seven days after the completion of the main dredger hull, 20% within seven days after the dredger is launched, and 10% after completion of mooring trial of the dredger but before delivery. Delivery of the vessel is expected in or before December 2012. Fujian WangGang will withhold approximately $0.1 million as quality earnest money, to be paid after a one-year warranty period.

 

Component Suppliers

 

CDGC purchases supplies and component parts from recognized suppliers with pricing terms negotiated on a yearly basis. These contracts are generally fixed price supply contracts, under which CDGC is obligated to procure a fixed amount of supplies and consumable parts annually.

 

The following table sets forth information regarding the suppliers that, as of June 30, 2012 and 2011 are listed below.

 

Supplier   Vessel Component List  Purchase
Amount in
the Six
Months
ended June 30,
2012
($ in
millions)
   Purchase
Amount in
the Six
Months ended
June 30,
2011
($ in
millions)
 
Dalian Locomotive and Rolling Stock
Co., Ltd. CNR Group
  Mud tube, steel tube, floating body, anchors floating, rubber hose, etc.   4.2    3.9 
Guangzhou Diesel Engine Factory Co., Ltd.   Mud tube, steel tube, floating body, anchors floating rubber hose, etc.   4.3    - 
Taizhou Haiguang Mechanical Manufacturing Industrial Co., Ltd   Steel plate, angle iron, one-piece compound plate, etc.   -    0.7 
Shijiazhuang Shengshi Pump Industry Co., Ltd   Rake head, lacquer, seal ring, steel tube, etc.   1.3    5.0 
Sinohydro Bureau 13 Co., Ltd Rubber & Plastic Factory   Floating pipe, rubber hose, rubber mat, etc.   7.2    6.2 
Ningbo Lingrun Hydraulic Co., Ltd.   Mud tube, steel tube, floating body, anchors floating, rubber hose, etc.   0.7    - 

 

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The following table sets forth information regarding the suppliers that, as of December 31, 2011, 2010 and 2009 are listed below.

 

Supplier   Vessel Component List  Purchase
Amount in
2011
($ in
millions)
   Purchase
Amount in
2010
($ in
millions)
   Purchase
Amount in
2009
($ in
millions)
 
Dalian Locomotive and Rolling Stock Co., Ltd. CNR Group   Mud tube, steel tube, floating body, anchors floating, rubber hose, etc.   8.3    9.6    19.5 
Tianjin Puyou Mech. & Elec. Equipment MFG. Co., Ltd.   Anchor, pump, solenoid valve, governor rotating components, pressure sensors, etc.   -    -    9.2 
Taizhou Haiguang Mechanical Manufacturing Industrial Co., Ltd   Steel plate, angle iron, one-piece compound plate, etc.   1.6    1.4    1.5 
Shijiazhuang Shengshi Pump Industry Co., Ltd   Rake head, lacquer, seal ring,  steel tube, etc.   10.1    9.1    - 
Sinohydro Bureau 13 Co., Ltd Rubber & Plastic Factory   Floating pipe, rubber hose, rubber mat, etc.   13.5    9.1    - 

 

Purchasing of major components such as mud pipes are budgeted and ordered after thorough on-site investigation and a calculation of the demands of each project, and usually are exclusively used in one project. CDGC usually buys an extra percentage of each component to use as replacement parts. All materials bought from these four suppliers are delivered to the construction site of each project after the suppliers have received payments. After completion of each project, used and abandoned components are sent back to the suppliers.

 

Dredging Service Procedure

 

 

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Dredging Methods

 

Three dredging methods are commonly used: the stow-and-hold method, the side discharge method and the reclamation method. CDGC’s trailer suction hopper dredgers use the stow-and-hold method, which is illustrated in the following chart:

 

 

CDGC’s non-self-propelling cutter suction dredgers use the reclamation method, which is illustrated in the following chart: 

 

 

CDGC’s grab dredgers use the side discharge method, which is illustrated in the following chart:

 

 

Quality, Safety and Environmental Protection Control

 

CDGC has established and implemented a unified quality, safety and environmental protection control and management system that govern all projects. The management system specifies the standards to be met in terms of quality, safety and environmental protection control, clarifies the responsibility of various departments and personnel, identifies procedures, materials and other factors that are subject to the control of management, and provides for measures to be undertaken to ensure that various standards are met. CDGC is committed to achieving a high standard of quality in the management and performance of CDGC’s contract work. CDGC believes CDGC has established a favorable reputation for quality and technical ability.

 

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CDGC has a Safety and Dispatching Department which is responsible for regulating labor, hygiene and safety conditions, and monitoring compliance with statutory environmental regulations relating to air, water, noise and solid waste pollution. Department managers focus on applying safety and anti-pollution measures, as well as regular internal safety and environmental inspections, at all stages of the operational process to reduce the possibility of work-related accidents and injuries, occupational illness and environmental contamination. CDGC’s general contractor customers also monitor the safety of workers and environmental impact of CDGC’s work. It is CDGC’s policy and practice to provide safety education to employees and safety standards have been established in connection with matters such as purchasing, installing and operating new equipment, constructing new facilities and improving existing facilities.

 

CDGC seeks to develop new technology and operational know-how to improve safety conditions and to protect the environment. Management believes that CDGC’s safety control systems, environmental protection systems and facilities are adequate to comply with applicable PRC national and local regulations.

 

Customers

 

CDGC has established close, cooperative relationships with China Communications, the largest state-owned general contractor in the PRC that undertakes dredging projects, and with and Changjiang Waterway. The following table sets forth all CDGC’s customers, the revenues derived from such customers, and the percent of total revenue for the periods indicated:

 

   For the Six Months Ended June 30, 
   2012   2011 
Customer  Revenue   Percent of
Total
Revenue
   Revenue   Percent of
Total
Revenue
 
CCCC Guangzhou
Dredging Co., Ltd
(State-Owned)
  $21,306,748    17.9%  $14,359,422    13.4%
Shenzhen Guoyuan Engineering Co., Ltd   -    -    6,229,136    5.8%
CCCC Shanghai Dredging Co., Ltd (State-Owned)   24,511,432    20.6%   41,895,180    39.0%
SDC Waterway Construction Co., Ltd.(State-Owned)   -    -    7,935,934    7.4%
Nanjing Water Conservancy Construction Company Ltd (State-Owned)   13,260,996    11.1%   -    - 
Guangdong Jindonghai Holding Co., LTD   11,600,629    9.7%   11,172,813    10.4%
Tianjin Hongdeshengyu Port Engineering Co., LTD   -    -    15,355,265    14.3%
CCCC Tianjin Dredging Co., Ltd (State-Owned)   21,922,480    18.4%   -    - 
China Ocean Engineering Construction General Bureau-Dalian Bureau (State-Owned)   10,846,758    9.1%   10,408,085    9.7%
CCCC Third Harbor Engineering Co., Ltd.(State-Owned)   690,035    0.6%   -    - 
Tianjin Port & Channel Engineering Co. Ltd.(State-Owned)   707,828    0.6%   -    - 
Dongguan Zhongyan Engineering Co., Ltd.   5,181,532    4.4%   -    - 
Fujian Jingwei Group Co., Ltd.   7,622,339    6.4%   -    - 
CCCC Fourth Harbor Engineering Co., Ltd.(State-Owned)   1,443,304    1.2%   -    - 
Total  $119,094,081    100.0%  $107,355,835    100.0%

 

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   For the Years Ended December 31, 
   2011   2010   2009 
Customer  Revenue   Percent of
Total
Revenue
   Revenue   Percent of
Total
Revenue
   Revenue   Percent of
Total
Revenue
 
CCCC Guangzhou Dredging Co., Ltd (State-Owned)  $29,254,980    12.9%  $27,171,214    20.7%  $25,832,823    32.2%
Shenzhen Guoyuan Engineering Co., Ltd   8,470,170    3.7%   7,682,169    5.8%   8,804,504    10.9%
CCCC Shanghai Dredging Co., Ltd (State-Owned)   76,019,835    33.5%   47,876,031    36.4%   13,354,633    16.6%
SDC Waterway Construction Co., Ltd.(Stated Owned)   13,193,095    5.8%   -    -    -    - 
Changjiang Wuhan Waterway Engineering Company (State-Owned)   -    -    5,086,628    3.9%   32,341,931    40.3%
Guangdong Jindonghai Holding Co., LTD   22,754,178    10.0%   4,297,557    3.3%   -    - 
Tianjin Hongdeshengyu Port Engineering Co., LTD   15,541,267    6.9%   13,920,732    10.6%   -    - 
CCCC Tianjin Dredging Co., Ltd (State-Owned)   19,507,709    8.6%   13,694,917    10.4%   -    - 
China Ocean Engineering Construction General Bureau-Dalian Bureau   21,413,519    9.4%   10,739,467    8.2%   -    - 
China Ocean Engineering Construction General Bureau   4,028,783    1.8%   -    -    -