1

Acquisition of a Hotel in the PRCby Rick Kirkbride & Linda Ngan

I. Background

Hotel Investment Company (“HIC”)intends to purchase the Hotel in thePRC1. The Hotel is currently ownedby Hotel Owner (“Hotel Owner”), asingle purpose FIE set out by a HongKong company. The Hotel will besold free and clear of all liens andencumbrances, and that all hotel man-agement and operating contracts willbe terminated as of the closing date,leaving the purchaser free to re-flagthe Hotel. However, the purchaserwill be required to employ the Hotel’sexisting employees at their currentsalary levels. The Hotel will be struc-tured as an asset sale.

HIC wants to insulate all parent com-pany entities from employer andoperator liability with respect to theoperations of the hotels. HIC hasrequested our advice as to how it maybest structure the acquisition andoperation of the Hotel in view ofthese objectives.

II. Ownership of Land andBuildings

A. Ownership of Land BuildingsIn acquiring a hotel in the PRC, HICshould establish an FIE in China asthe Purchaser of the Hotel by obtain-ing the following approval andlicences:

a. COFTEC approval is requiredfor the establishment of thePurchaser, if the total investment ofthe Purchaser is USD30 million orbelow.

b. The regional SAIC must issue theBusiness License to the Purchaser.c. The regional SAFE must issuethe Certificate of Registration ofForeign Exchange to the Purchaser.

d. The regional State Administrationof Taxation of The People’s Republicof China and Local Taxation Bureaumust issue Certificates of Registrationof Tax to the Purchaser.

B. Procedures and Estimated TimeInvolved for Obtaining Approvals andLicences

a. HIC shall decide theregistered/legal address of thePurchaser. The location of thePurchaser’s registered address is rele-vant in determining the geographicallocation of government departmentsthat have jurisdiction to grantapprovals and licenses to thePurchaser for its establishment andoperation of business. Usually, gov-ernment departments such asCOFTEC, SAIC and SAFE at amunicipal, provincial or autonomousregion level have exclusive regionaljurisdiction over all the FIEs thathave their registered addresses locatedin that region.

b. HIC shall apply to the regionalSAIC to reserve the name of thePurchaser (approval expected within2-3 working days from application).

c. HIC shall prepare and submit tothe regional Planning Commission forapproval of the project proposal andfeasibility study of the Purchaser.

The regional Planning Commissionwill then submit the project proposaland feasibility study to MOFTEC andSTB at the national level for review,and to the Planning Commission atthe national level for approval; if thetotal investment (Hotel acquisitioncosts as well as the working capitalexpected for putting the Hotel intofull operation) exceeds RMB200 mil-lion, the project proposal and feasibil-ity study shall also be endorsed byState Council (equivalent to the feder-al government of the USA). Theproject proposal and feasibility studydescribes the project that thePurchaser intends to carry out, esti-mates the total investment (Hotelacquisition costs as well as the esti-mated working capital for putting theHotel into full operation) required forsuch project and the return to be gen-erated from such project.

d. HIC shall submit to the regionalCOFTEC, to obtain approval for theestablishment of the Purchaser, thefollowing documents in the Chineselanguage: (i) the feasibility study andapproval thereof by PlanningCommission and, as the case may be,by State Council, (ii) the Articles ofAssociation, (iii) a list of the membersof the board of directors of thePurchaser, (iv) the real property cer-tificate for the registered office of thePurchaser, (vi) a set of certifiedcopies of the constituent corporatedocuments of HIC, (vii) a power ofattorney (if any) of HIC, (viii) in rela-tion to HIC, a bank reference letter

Paul, Hastings, Janofsky & Walker LLP

Spec i a l Ed i t i o n 2 00 2

HospitalityRRReport

Resort, Restaurant & Recreation Practice Group

1 Defined terms, not defined in the text itself, can befound on the last page of this Hospitality RRReport.

2

that supports its financial ability toput up its subscribed capital in thePurchaser, (ix) duly signed applicationforms of the regional COFTEC and(x) such additional documents as theregional COFTEC may consider nec-essary based upon the particular cir-cumstances of the proposed transac-tion.

e. The regional COFTEC willapprove in writing the Articles ofAssociation and also issue aCertificate of Approval to thePurchaser. Usually, the approval willbe obtained within 30 working daysfrom delivery of a fully completedapplication.

f. Upon the issuance of theCertificate of Approval for thePurchaser, HIC needs to presentitems (a) to (e) above to the regionalSAIC and submit these documents tothe regional SAIC together withapplication form of the regionalSAIC and apply for a BusinessLicense for the Purchaser. TheBusiness License shall specify thescope of business that the Purchaseris permitted to carry out during itsbusiness operation period. ThePurchaser will be considered legallyincorporated from the first day of thebusiness operation period set out inits Business License. It usually takes3-4 working days for the BusinessLicense to be issued after the regionalSAIC receives a fully completed appli-cation.

g. The Purchaser will need to pres-ent items (a) to (f) above, submitapplication form of the regionalSAFE, and obtain a Certificate ofRegistration of Foreign Exchangeissued by the regional SAFE. It isusually obtained within one week ofsubmission of a fully completedapplication.

h. The Purchaser will need to pres-ent items (a) to (g) above, submitapplication forms of the regionalState Administration of Taxation ofThe People’s Republic of China and

Local Taxation Bureau and obtainfrom them each a Certificate ofRegistration of Tax. It is usuallyobtained within one week of submis-sion of a fully completed application.

C. Taxes Involved for Hotel Acquisition

Unless otherwise specified below, thefollowing taxes are payable by theHotel Owner and HIC shouldremember that these will invariably beabsorbed in the Hotel purchase price.

a. Stamp duty payable on each ofthe executed documents

0.05% of the contract value for con-tracts in connection with transfer oftitle to property, copyright, the exclu-sive right to the use of a trademark, apatent, the right to use proprietarytechnology, etc; 0.03% of the saleprice for contracts in relation to saleof inventory, fixed assets, or usedmotor vehicle and motorcycle.

b. Business tax

Business tax at 5% of the sale price isapplicable to the seller if the transac-tion involves the sale of the intangi-ble assets (including land use rights,patent rights, non-patented technolo-gy, trademark rights, copyrights andgoodwill) or immovable property(including buildings and other attach-ments to land) of the company.

c. Value-added tax

17% VAT for sale of inventory, 4%VAT for sale of used fixed assets, and4% for sale of used motor vehicleand motorcycle at price higher thanits original value.

d. Deed tax payable by the Purchaser

3%-5% of contract price for transferof land use right and real property.

e. Land appreciation tax

30%-60% on an increase of value ofthe land. (30% tax is charged ifincreased value of land is not morethan 50%, 40% tax is charged ifincreased value of land is between 50-100%, 50% tax is charged if increasedvalue of land is between 100-200%,

60% tax is charged if increased valueof land is more than 200%.)

f. Pay-back of custom duty andVAT exemption benefits at originalapplicable rates on disposal of duty-free imported equipment.

III. Overview of AcquisitionProcessA. Preliminary Negotiations

HIC and Hotel Owner will negotiatethe terms. While negotiations or pre-liminary discussions are conducted,HIC will be shown the Hotel andgiven access to information withrespect to the Hotel. HIC may alsoelect to conduct a physical inspectionof the Hotel with an outside inspec-tor. In some, cases, where HIC wish-es to conduct a more comprehensivephysical inspection, it is only permit-ted to do so once it provides anassurance that it is committed to thepurchase by entering into a letter ofintent with the Hotel Owner.

B. Delivery of Non-Binding Statement toPurchase

A letter of intent/non-binding state-ment to purchase the Hotel is pre-sented to Hotel Owner.

C. Due Diligence

Lawyers representing parties to thetransaction conduct due diligenceinvestigations. The investigationshould cover information on theHotel as Hotel address, constructiontype and legal restrictions imposedupon the Hotel such as zoning, build-ing restrictions and whether it is sub-ject to city plans for developments(for example, a planned widening ofcity streets). The Purchaser mayrequest the Hotel Owner to give rep-resentations and warranties these mat-ter and make the Hotel Owner liablefor breaches of inaccuracy in thestatements.

D. Execution of Purchase Agreement

A preliminary purchase and saleagreement is entered into pursuant to

which the HIC delivers a non refund-able deposit, which is capped to 20%of the purchase price according tothe PRC laws. If Hotel Owner termi-nates the transaction, the custom isthat Hotel Owner pays a cancellationfee equal to double the above depositamount. HIC may also cancel thetransaction by giving up its deposit.Such cancellations, generally, may bemade up until the closing.

The agreement terms are usually verysimple, Hotel Owner’s representationsand warranties are limited and anearly closing is provided for.

E. Closing

Although not common, escrows areacceptable in the PRC. The followingevents shall take place at or after clos-ing:

a. The Purchaser, the Hotel Ownerand the Bank enter into an accountsupervision agreement pursuant towhich the Purchaser shall deposit theremaining balance of the Hotel pur-chase price with an account openedwith the Bank, and upon thePurchaser’s satisfaction of conditionsprecedent to payment of Hotel pur-chase price (including the issue ofReal Property Title Certificate record-ing the Purchaser as the owner of theHotel), the Bank shall transfer theremaining balance of the Hotel acqui-sition costs and interest, if any, toHotel Owner; if the conditions prece-dent fail to satisfy the Purchaser inaccordance with the account supervi-sion agreement, the remaining balanceof the Hotel purchase price and inter-est, if any, shall be paid to thePurchaser.

b. The Purchaser and the HotelOwner shall enter into a sale and pur-chase agreement of the Hotel build-ing and land use right covering suchbuilding and register such agreementwith the LRPMB. In some regions,the LRPMB may only register a saleand purchase agreement that adoptsthe model agreement of such

LRPMB, or that has been notarizedby a local notary entity. ThePurchaser and the Hotel Owner shallascertain with the LRPMB as regardsthe proper form of sale and purchaseagreement and the requirement ofnotarization. If a model agreementof an LRPMB is used and does notcover all the essential terms agreed bythe Purchaser and the Hotel Owner,the Purchaser and the Hotel Ownershall negotiate with the LRPMB forregistration of a supplemental agree-ment that records other terms andconditions of the sale and purchase.

c. Purchaser and the Hotel Ownershall execute power of attorney, asthe case may be, for the executionand use of Company chops on thesale and purchase agreement, and onthe LRPMB registration applicationforms, for the Hotel. The power ofattorney executed by the Purchasershall be duly legalized by the Chineseembassy/ambassador located in theregion in which the Purchaser wasincorporated. The legalization is usu-ally a time-consuming process andcan consume a period from weeks tomonths.

d. The Purchaser and the HotelOwner shall submit items (a) to (c)above to LRPMB for title transfer.LRPMB will issue a receipt on the dayof receiving the filing and estimatethe taxes payable as a result of thesale and purchase as well as the out-standing land use right premium.LRPMB will not process the titletransfer unless such taxes and out-standing land use right premium arefully paid. As a term of the sale andpurchase agreement, the Purchaserand the Hotel Owner shall agree onthe payment of taxes arising from thesale and purchase of the Hotel build-ing and land use right and the out-standing land use right premium. Thetitle transfer is perfected when thePurchaser is recorded as the owner ofthe Hotel building and the land useright covering the building in therecords of LRPMB, the Purchaser

will be issued a Real Property TitleCertificate as evidence of its title.Such certificate is normally availableabout two-three weeks after the appli-cation is filed.

F. Mortgage Financed Hotel Purchase

If the Purchaser requires finance forthe Hotel acquisitions costs, it mayconsider borrowing funds either inRMB or foreign currency. If it bor-rows funds in foreign currency from abank that is not incorporated in thePRC or that has a branch in the PRClicenced to carry on foreign currencylending, it shall comply with the fol-lowing procedures:

a. It shall enter into a foreign debtloan agreement with the lender.

b. It shall register the loan agree-ment with the regional SAFE andobtain a Foreign Debt RegistrationCertificate; the registration allows thePurchaser to convert the borrowedfunds from foreign currency intoRMB for payment of the Hotel pur-chase price and to subsequently con-vert, and remit outside the PRC, thePurchaser’s RMB income into foreigncurrency for repayment of loan andinterest to the lender.

c. If the lender requires thePurchaser to provide any securityover the Hotel project, the Purchasershall also enter into a security docu-ment with the lender and firstly, dulyfile the document with the regionalSAFE and obtain a Foreign DebtSecurity Registration Certificate.Secondly, the Purchaser should regis-ter the security document with theregional LRPMB and SAIC whichhave jurisdiction over the land useright, building, machinery and equip-ment to be charged and obtain Landand Real Property EncumbranceCertificate and Movable AssetsCharge Registration Certificate. Thefiling and registration at the regionalSAFE, LRPMB and SAIC validate thesecurity interests created in favour ofthe lender.

3

If the Purchaser borrows funds inRMB from a PRC bank, it shall enterinto a loan agreement, and, as thecase may be, security document, withthe bank. Foreign Debt Registrationand Foreign Debt SecurityRegistration with a regional SAFE arenot needed but registration is neces-sary, in relation to the security docu-ment, with the regional LRPMB andSAIC which have jurisdiction over theland use right, building, machineryand equipment to be charged. As evi-dence of registration, the Purchasershould obtain Land and Real PropertyEncumbrance Certificate andMovable Assets Charge RegistrationCertificate. The registration atLRPMB and SAIC validate the securi-ty interests created in favour of thelender.

IV. Due DiligenceIn order to conduct a meaningful duediligence investigation of the Hotel,Hotel Owner’s cooperation and HIC’sfree access to Hotel and informationare necessary.

A. Title Search

HIC should obtain from the regionalLRPMB a record of the Hotel build-ing and land use right covering suchbuilding. One would expect that therecord shows all title matters, such asthe record owner, all encumbrancesof record (such as charges and taxseizures), payment of land use rightpremium as well as the boundary andsize, with respect to the Hotel build-ing and the land use right; it is how-ever quite common that the recorddoes not contain all such informationand it is essential for the PRC lawyerrepresenting HIC to conduct otherform of due diligence , inspect cor-porate and title documents and, ifnecessary, request the Hotel Owner togive representations and warranties.

HIC should obtain from the regionalSAIC a record of the Hotel Owner.The record should show key incorpo-

ration matters (such as the date ofincorporation, the registered office,registered capital and total invest-ment, and business scope of theHotel Owner), encumbrances ofrecord (which are limited to chargeover movable assets) and courtseizure orders. It is common that therecord does not contain all suchinformation and it is essential for thePRC lawyer representing HIC to con-duct other form of due diligence,inspect corporate and title documentsand, if necessary, request the HotelOwner to give representations andwarranties.

It is worthy to note that there isn’t acomprehensive public filing system inthe PRC which records encumbranceover all forms of assets of the HotelOwner or which records litigation andinsolvency matters. It is essential forthe Hotel Owner to give representa-tions and warranties.

A preclosing is recommended to con-firm that all documents necessary toeffectuate the transfer of a clean feetitle to the Purchaser will be deliveredon closing by Hotel Owner.

B. Visual Inspection

According to the PRC Civil LawGeneral Code, there is a concept thatis equivalent to easement, whichrequires an owner of a building orland use right to provide its neigh-bour with convenience and facility ofwater sewage, water dam, free flow ofair and light, and free access. A visualinspection of the Hotel should beconducted to assess the risk of ease-ment. For example, does the subjectHotel block access to public roads forthe adjacent Hotel owners? If any-thing from a visual inspection sug-gests the existence of an unrecordedencumbrance or potential boundarydispute, then interviews of adjacentland owners may be warranted. Inthis regard, it is also desirable torequire Hotel Owner to obtain agree-ments from the adjoining Hotel own-

ers to ensure that there are no bound-ary disputes. Hotel Owner’s coopera-tion is essential in such processes.

C. Physical Inspection

In the PRC, HIC relies upon HotelOwner’s warranty, express or impliedby law, for the condition of theimprovements on the Hotel andshould conduct a thorough inspectionto confirm the condition of theimprovements on the Hotel.

HIC should consider the need of aphysical inspection report, includingengineering report.

D. Environmental Searches

The PRC environmental laws do notimpose a land owner automaticallywith liability for environmental clean-up unless it is found to be the causeof the problem. Therefore, environ-mental surveys are generally not con-ducted for commercial properties.

If such a survey is neverthelessdesired, a consultant may be engagedto investigate on the historical use ofthe subject Hotel and current use ofadjacent Hotel owners will be sur-veyed.

E. Leases/Tenant Estoppels

Hotel Owner typically prepares alease schedule or rent-roll, including aschedule of deposits on hand, andwarrants to the accuracy of the infor-mation contained therein. Copies ofleases should be analyzed prior toclosing to confirm the informationprovided therein.

Visual inspection of the premises tomake sure the occupancy of thebuilding conform to the tenants listedon the rent roll and a backgroundcheck on tenants may also be war-ranted in order to ensure that the ten-ants are trouble-free.

Tenant estoppel certificates are not uti-lized in the PRC, If desired, HIC maynegotiate it, but it is a conceptunknown in the PRC and may disturb

4

5

the tenants or create uneasiness ontenants about the prospective newowner.

In order to enforce the existing leases,the Purchaser should require the leas-es to be registered with LRPMB andto be paid with stamp duty.

F. Buyer’s Acquisition Entity

HIC should ensure that thePurchaser, an entity that it intends touse to acquire the Hotel, is in placefor closing. The incorporation systemis time-consuming and HIC shouldallot sufficient time to complete theincorporation process, including theappropriate capitalization and pur-chase price funding. For details ofincorporation procedures, please referto Part II of this article.

It is necessary to note that the follow-ing items are essential to the incorpo-ration of the Purchaser and should berecorded in the Purchaser’s Articles ofAssociation. Any subsequent changeof these items require the regionalCOFTEC’s approval and SAIC’samendment of Business Licence. Asamendment of any of the followingitems are as time-consuming as theincorporation of a new FIE, we rec-ommend that HIC will set up an FIEfor each of the hotel project that itcarries out in the PRC; in addition, asingle purpose FIE will separate theproject risk that each hotel projectentails:

a. Total investment and registeredcapital

According to the PRC regulations, ifan FIE’s total investment is USD3million or below, its registered capitalshall be at least 70%.

If HIC wishes to increase the totalinvestment amount of the Purchaserin future, it shall increase proportion-ally the registered capital; in order toeffect such increase, the approvalfrom the regional COFTEC will berequired. If the increased total invest-ment amount shall exceed USD30million, MOFTEC’s final approval is

required after obtaining the approvalof the regional COFTEC.

b. Timing for payment of registeredcapital

According to the PRC regulations, atleast 15% of registered capital contri-bution by each party shall be paidwithin 3 months of the issuance ofthe Business License of thePurchaser, and the remaining 85% ofthe registered capital contribution canbe paid within one to two years,depending on the exact amount ofthe registered capital involved.

c. Registered/legal address

An FIE shall have a registered/legaladdress specified in the Joint VentureContract and the Articles ofAssociation. The location of theFIE’s registered address is relevant indetermining the geographical locationof government departments that havejurisdiction to grant approvals andlicenses to the FIE for its establish-ment and operation of business.

d. Scope of business

HIC shall specify the scope of busi-ness of the Purchaser in the Articlesof Association. The scope of busi-ness permitted by the regionalCOFTEC will be reflected in theCertificate of Approval issued byCOFTEC and the Business Licenseissued by the regional SAIC.

e. Business operation period

HIC will specify the scope of busi-ness of the Purchaser in the Articlesof Association. The business opera-tion period of the Purchaser shall notbe shorter than the ownership periodrecorded in the Land and RealProperty Certificate for the Hotel,which is usually 50 years from thedate of the issuance of the certificate.

G. Seller’s Authority

All of Hotel Owner’s corporate for-malities should be verified. Theseinclude Hotel Owner’s corporate reg-istry in the regional SAIC, Hotel

Owner’s corporate resolutions andcertificate of registered company seal.

H. Appraisals

The PRC real estate appraisers mayadopt any of the following method-ologies in valuing properties: marketcomparable, replacement cost, cashflow or income analysis. Thus, it isfor the Hotel Owner and HIC toagree on the methodology.

In sum, HIC relies heavily uponHotel Owner’s express and impliedwarranties with respect to the subjectHotel. HIC’s due diligence investiga-tion of an income producing Hotelfocus primarily on the economicaspect of the Hotel.

V. Operation of the HotelThe Purchaser would presumablyenter into an agreement with ManCofor the “flagging” and day-to-daymanagement of the hotel. Typically,such agreements obligate thePurchaser to furnish the Hotel prem-ises and all furniture, fixtures andequipment, supplies and labor neces-sary, in ManCo’s judgment, to operatethe Hotel in accordance with ManCo’sstandards for the flag chosen, withManCo providing only the generalmanager and perhaps a few key man-agement personnel with authority tomanage the Hotel on a day-to-daybasis. The Purchaser could employthe labor directly, or contract with athird party for some or all of therequired labor.

VI. Minimizing EmployerLiabilitySince Hotel Owner requires thePurchaser to employ the Hotel’s exist-ing employees at their current salaries,HIC has sought advice as to how tominimize potential liability withrespect thereto.

According to the PRC Civil LawGeneral Code, a company shall beresponsible for the acts of its legalrepresentative and staff who carry on

6

business activities in the name of thecompany and who inflict economiclosses on third parties. Other than theabove-mentioned provision, the con-cept of employer’s liability is notclearly defined in the PRC.

The Purchaser could either employlabor directly or contract with a thirdparty to provide the labor, but tominimize the risk of uncertainty thatmay arise from employer’s liability, werecommend that HIC set up anotherservicing co. (“EECo”) which wouldnot be majority owned by HIC enti-ties to act as the employer, perhaps aservice provider to HIC in the PRCwould be willing to be the majorityowner of EECo, with the Purchaseragreeing to pay the direct cost of theemployees plus an appropriate marginto EECo. So long as EECo isformed in good faith (i.e. not for anillegal or immoral purpose), is ade-quately capitalized, observes corpo-rate formalities, maintains its owncorporate books and records andfinancial affairs separate from thoseof its shareholders, etc., EECo shouldbe respected as an independent cor-porate entity, and HIC entities shouldnot have “employer liability” withrespect to EECo’s employees.

Under the PRC employment law,employment may be terminated at theexpiration of the employment con-tract or upon the occurrence of ter-minating event agreed by the employ-er and the employee. For any employ-ee that serves an FIE for more thansix months, the FIE should compen-sate him for living and medical subsi-dies. It is therefore beneficial to HICto negotiate a six-month limit on anycommitment toward the Hotel’semployees.

If HIC is successful in limiting theinitial commitment to six months, itwill have six months to decidewhether or not a particular employeemeets its standard for permanent

employment, and to establish its ownsalary and benefit policies. In theabsence of an explicit six-monthlimit, the employees would enjoy apresumption that their employmentwould continue indefinitely at theirexisting salary and benefits. Whetheror not HIC can succeed in negotiat-ing such a limit will depend primarilyon the strength of the employees’union and how the union views thefinancial strength of Hotel Ownerversus the new owner. If theemployees take the view that theyhave little job security with the cur-rent owner, they are more likely tocomprise with HIC.

To the extent the employees realizethe precarious state of their existingemployer, they should be willing tocooperate with a new, financiallycapable owner. Any new owner ofthe Hotel would intend to manage theHotel in accordance with its philoso-phy and standards, and would want tointroduce its own employment rulesand regulations and salary scale asquickly as possible. Furthermore, theemployees’ long-term job security andopportunity for promotion would belimited unless they are integrated intothe mainstream of the new owner’sworkforce. Despite the strength ofthese arguments, Hotel Owner maynot be able to obtain the employees’agreement to a six-month contract.In case no explicit six-month limit onemployment terms and conditionscan be negotiated, the issue of whatentity will take the employer liabilityrisk becomes much more significant,since the parameters of that risk arenot very clear under the PRC employ-ment law. If HIC can persuade athird party to be the majority ownerof EECo, HIC could limit its employ-er liability to (1) the amount its paysfor its minority interest in EECo plus(2) any payment or other benefit itagrees to provide to the third party to

take a majority of EECo’s shares. IfHIC is unable to negotiate a firmlimit on its obligation to the Hotelemployees and cannot find anotherparty to become the majority share-holder of EECo, HIC must considerwhether it is prepared to accept the“reputation risk” associated withemployer liability, since it may be verydifficult for HIC’s affiliated entity to“abandon” EECo (i.e. allow it to gobankrupt).

VII. Business LicensesThe purchaser of the Hotel will notsucceed as a matter of course a hotelBusiness License owned by HotelOwner. HIC must set up thePurchaser as an FIE and apply for aBusiness Licence that permits thePurchaser to own and operate theHotel business. For details of apply-ing for such Business Licence, pleaserefer to II of this article.

VIII. ConclusionIn short, HIC should be able toacquire and finance the real propertyassets comprising the Hotel by settingup two FIEs: the Purchaser to ownand operate the Hotel, and EECO tobe the employer of the Hotel employ-ees. Due to the rapid development ofthe PRC legal regime, it is recom-mended that HIC should structurethe acquisition deal with the advice ofits lawyers, accountants and otherexperts.

Rick Kirkbride is chair of the firm’sResort, Restaurant & Recreation PracticeGroup and is based in the Los Angelesoffice. Linda Ngan is Counsel in the firm’sHong Kong office. For additional informa-tion, please contact Mr. Kirkbride at (213)683-6261, or via email at rickkirkbride@paulhastings.com or Ms.Ngan at (852) 2867-9007 or via email atlindangan@paulhastings.com.

7

For more information regarding the Resort, Restaurant & Recreation practice group, please contact: Chair: Rick S. Kirkbride (LA) or Co-Chairs: Alan W. Weakland(LA), Richard M. Asbill (Atlanta), Ronnie Kreismann (NY), John Steed (Japan), Donald Koo (Hong Kong/China) or Keith Ott (London). If you know of someonewho might like to receive our Hospitality RRReport please contact Rick Kirkbride at (213) 683-6261, fax (213) 627-0705 or E-mail rickkirkbride@paulhastings.com.We will need their name, email and mailing addresses.

Atlanta, GA (404) 815-2400

Los Angeles, CA (213) 683-6000

New York, NY (212) 318-6000

Orange County, CA (714) 668-6200

San Francisco, CA (415) 856-7000

Stamford, CT (203) 961-7400

Washington, DC (202) 508-9500

Tokyo, Japan (81-3) 3586-4711

London, England (44-171) 562-4000

Beijing (10) 6554-2740 Hong Kong (852) 2867-9988

Hospitality RRReport is published solely for the interest of friends and clients of Paul, Hastings, Janofsky & Walker LLP and should in no way be relied upon orconstrued as legal advice. For specific information on recent developments or particular factual situations, the opinion of legal counsel should be sought. PaulHastings is a limited liability law partnership including professional corporations.

Definitions“Articles of Association” means the Articles of Association of the Purchaser.

“ASA” means the Administration of State Assets of the PRC, and as the context may require, any of its regional offices in thePRC.

“Bank” means a bank in the PRC designated by the Hotel Owner and the Purchaser for receiving and distributing the Hotelacquisitions costs in accordance with the instructions of the Hotel Owner and the Purchaser.

“COFTEC” means the Commission of Foreign Trade and Economic Co-operation of the PRC, which is an authorized regionaloffice of MOFTEC at any municipal, provincial or autonomous region level of the PRC government.1

“FIE” means a limited liability foreign invested entity incorporated under the laws of the PRC. An FIE may be in the form of awholly foreign-owned enterprise (“WFOE”), a Sino-foreign equity joint venture enterprise (“EJV”), or a Sino-foreign contractu-al/co-operative joint venture enterprise (“CJV”).

“Hotel” means the hotel to be acquired by HIC.

“LRPMB” means the Land and Real Property Management Bureau which has jurisdiction over the Hotel building and the landuse right covering the building.

“MANCO” means a hotel management company to be engaged by the Purchaser for the future management of the Hotel.

“MOFTEC” means the Ministry of Foreign Trade and Economic Co-operation of the PRC.

“Planning Commission” means State Planning Commission of the PRC.

“PRC” means the People’s Republic of China.

“RMB” means Renminbi, which is the legal currency circulating in the PRC.

“SAFE” means the State Administration of Foreign Exchange of the PRC, and as the context may require, any of its regionaloffices in the PRC.

“SAIC” means the State Administration of Industry and Commerce of the PRC, and as the context may require, any of itsregional offices in the PRC.

“STB” means State Tourism Board, and as the context may require, any of its regional offices in the PRC.

1 In the PRC, there are four municipalities (i.e. Beijing, Shanghai, Chongqing and Tianjin), over thirty provinces (e.g. Hunan,Hebei, Guangdong and Jiangsu) and more than four autonomous regions (e.g. Inner Mongolia, Ningxia and Guangxi).