CA Cultural Technology Group Limited — M&A Activity 2020

Jun 16, 2020

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

This announcement is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for shares.

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CA CULTURAL TECHNOLOGY GROUP LIMITED 華夏文化科技集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 01566)

SUPPLEMENTAL ANNOUNCEMENT DISCLOSEABLE TRANSACTION ACQUISITION OF THE ENTIRE ISSUED SHARE CAPITAL OF THE TARGET COMPANY INVOLVING ISSUE OF CONSIDERATION SHARES UNDER GENERAL MANDATE AND ESTABLISHMENT OF VIE ARRANGEMENT

Reference is made to the announcement of CA Cultural Technology Group Limited (the “ Company ”) dated 23 April 2020 (the “ Announcement ”) in relation to the acquisition of entire equity interests in the Target Company. Terms used herein shall have the same meanings as defined in the Announcement unless otherwise stated.

The Board wishes to provide the Shareholders and potential investors of the Company with additional information in relation to the Acquisition as follows.

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SUPPLEMENTAL AGREEMENT

As disclosed in the Announcement, the Target Company will have effective control and hold the entire interest of the Target PRC Company through the establishment of certain VIE arrangement. Such VIE arrangement is subject to the execution of certain VIE agreements between the PRC subsidiary of the Target Company and the Target PRC Company.

After further negotiation between the parties to the Sale and Purchase Agreement and in order to facilitate the Acquisition, the parties thereto have further reached agreement on the following new arrangement:

• (1) The WFOE (an indirect wholly-owned company of the Company) has entered into certain VIE Contracts, including (i) the Exclusive Call Option Agreement; (ii) the Exclusive Business Cooperation Agreement; (iii) the Share Pledge Agreement; and (iv) the Shareholders’ Voting Right Entrustment Agreement, with the Registered Shareholder of the Target PRC Company and/or the Target PRC Company (as the case may be). Details of the VIE Contracts are set out below; and

• (2) As a consideration for entering into the VIE Contracts and setting up the VIE arrangement, the Company shall, through the Purchaser, acquire the entire issued share capital of the Target Company from the Vendor (who is also the Registered Shareholder of the Target PRC Company) at the Consideration as agreed in the Sale and Purchase Agreement.

Therefore, the Purchaser and the Vendor further entered into a supplemental agreement (the “ Supplemental Agreement ”) dated 16 June 2020 (after trading hours of the Stock Exchange), pursuant to which the parties agree that, the Completion shall be subject to each of the VIE Contracts becoming effective from the Date of Registration, i.e. the registration of the share pledge under the Share Pledge Agreement.

Upon the completion of the Sale and Purchase Agreement and the Supplemental Agreement, the Purchaser would (1) obtain effective control over the Target PRC Company via the VIE Contracts and (2) acquire the entire issued share capital of the Target Company.

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INFORMATION OF THE VIE CONTRACTS

Reasons for use of the VIE Contracts

Further to the disclosure in the Announcement, in addition to the production and sales of toys and gifts, the Target PRC Company also involves (1) developing of VR technology and its application in, among others, on-line game and on-line shopping, and (2) developing and promoting on-line game with enhanced visual stimulation supported by VR technology (the “ On-line Game Business ”).

Foreign investment activities in the PRC are mainly governed by the Catalog of Industries for Encouraged Foreign Investment (2019 Edition) (《鼓勵外商投資產業目錄 (2019 年版 )》) and Special Administrative Measures for the Access of Foreign Investment (Negative List) (2019 Edition) ( 外商投資准入特別管理措施（負面清單） (2019 年版 )) (the “ Negative List ”), which was promulgated and is amended from time to time jointly by the MOFCOM and the NDRC. The Negative List and other relevant laws divide industries into four categories in terms of foreign investment, namely, “encouraged”, “restricted”, “prohibited” and “permitted” (the last category of which includes all industries not listed under the “encouraged”, “restricted” and “prohibited” categories). On 30 June 2019, the NDRC and the MOFCOM jointly promulgated the Negative List, which became effective on 30 July 2019.

As advised by the PRC Legal Adviser, the On-line Game Business falls with the scope of value-added telecommunications business under the restricted category, pursuant to which foreign investors are restricted from holding more than 50% of the equity interests in any enterprise engaging in a value-added telecommunications business as an Internet content provider. In addition, the operation of the On-line Game Business is also subject to the regulatory requirements with respect to on-line publication business and/or on-line game operation business under the prohibited category, pursuant to which foreign investors are prohibited from holding any equity interest in any enterprise engaging in such businesses.

As a result, to comply with the applicable PRC Laws, the WFOE, the Target PRC Company, the Target Company and/or (as the case may be) the Registered Shareholder of the Target PRC Company entered into the VIE Contracts, all of which will take effect from the Date of Registration, to enable the entire economic benefits of the businesses of the Target PRC Company to flow into the WFOE, to enable the consolidation of the financial results of the Target Company in the Group’s consolidated accounts after completion, and to enable the WFOE to gain effective control over the Target PRC Company.

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VIE Contracts

Principal terms of each the VIE Contracts are set out as follows:

(A) Exclusive Call Option Agreement

Parties: (i) WFOE;

(ii) Registered Shareholder of the Target PRC Company; and

• (iii) Target PRC Company

Options: The Registered Shareholder of the Target PRC Company irrevocably and unconditionally grants, to the WFOE or any person(s) designated by the WFOE, the exclusive option to purchase (at any time, in one or more times), to the extent permitted under relevant PRC Laws, all or part of the shares in the Target PRC Company held by the Registered Shareholder of the Target PRC Company (the “ Call Option ”).

Other than the WFOE and any person(s) designated by the WFOE, no third party shall be entitled to the Call Option or any rights related to the shares in the Target PRC Company held by the Registered Shareholder of the Target PRC Company and the assets of the Target PRC Company.

Consideration: The consideration for the exercise of the Call Option shall be a nominal price, unless another price is required by the relevant PRC authority or PRC Laws, in which case, the consideration shall be the minimum price in compliance with such requirement.

The Registered Shareholder of the Target PRC Company and/or the Target PRC Company shall, and the Registered Shareholder of the Target PRC Company have undertaken to, return any consideration they received from the WFOE or the person(s) as designated by the WFOE.

Term:

The Exclusive Call Option Agreement takes effect from the Date of Registration and up to the date that the shares in the Target PRC Company held by the Registered Shareholder of the Target PRC Company and/or the assets have all been transferred to the WFOE and/or the person(s) as designated by the WFOE.

Notwithstanding the foregoing, the WFOE shall have the right to terminate the Exclusive Call Option Agreement and claim damages where the Registered Shareholder of the Target PRC Company or the Target PRC Company has violated any term and condition under the Exclusive Call Option Agreement and failed to cure the breach within any reasonable time granted. Unless otherwise mandatorily provided by PRC Laws, the Registered Shareholder of the Target PRC Company and the Target PRC Company have no right to terminate the Exclusive Call Option Agreement unilaterally.

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(B) Exclusive Business Cooperation Agreement

Parties: (i) WFOE; and

• (ii) Target PRC Company

Services:

The Target PRC Company agrees to engage the WFOE as its exclusive service provider to provide the Target PRC Company with comprehensive business support, technical services and consulting services relating to the business of the Target PRC Company, including but not limited to, technical services, technical consultation, business consultation, intellectual property licensing, equipment and leasing, marketing consultation, products research and development, system maintenance, and the provision of management consulting services related to the business operation of the Target PRC Company, and in the circumstances permitted by the PRC Laws, the provision at times of any other consultation and services related to the foregoing as requested by the Target PRC Company.

Unless with the prior written consent of the WFOE, the Target PRC Company shall not accept any consultation and/or services provided by any third party, and shall not cooperate with any third party. However, the WFOE may designate any third party to provide any consultation and/or services to the Target PRC Company.

Fees and Sole Discretion:

In consideration of the services provided by the WFOE, the Target PRC Company shall pay the WFOE fees (the “ Service Fee ”) equivalent to 100% of the net income of the Target PRC Company. Such net income of the Target PRC Company refers to the net profit after tax of the Target PRC Company. The Service Fee shall be due and payable on a monthly basis.

The WFOE shall have the right to adjust the above Service Fee at its sole discretion without the consent of the Target PRC Company, particularly in cases that the Target PRC Company records loss or its net profit as per the audited financial statements of the Target PRC Company is less than the aggregate amount of monthly payment paid by the Target PRC Company to the WFOE during that fiscal year.

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Within ninety (90) days after the end of each fiscal year, the Target PRC Company shall (a) deliver its audited financial statements to the WFOE, and (b) pay an amount to the WFOE equal to the shortfall, if any, of the net income of the Target PRC Company for such fiscal year as compared to the aggregate amount of the monthly payment paid by the Target PRC Company to the WFOE in such fiscal year.

The WFOE may, at its sole discretion, provide support to the Target PRC Company to the extent that relevant PRC Laws permit.

Term:

The Exclusive Business Cooperation Agreement has an initial term of twenty years from the Date of Registration, the WFOE may at any time choose to extend the Exclusive Business Cooperation Agreement by delivering a confirmation letter to the Target PRC Company.

The Exclusive Business Cooperation Agreement shall be terminated in accordance with the following provisions or circumstances:

• (i) on the date that the Target PRC Company goes bankrupt, is liquidated, terminated or dissolved according to relevant laws within the validity period of the Exclusive Business Cooperation Agreement;

• (ii) on the date that all the shares of the Target PRC Company have been transferred to the WFOE or its designated party in accordance with the Exclusive Call Option Agreement;

• (iii) once the PRC Laws allow the WFOE to directly hold the shares of the Target PRC Company and the WFOE and its subsidiaries and branches can legally engage in the Target PRC Company’s business, the date on which the WFOE is duly registered as the Target PRC Company’s sole equity owner;

• (iv) the WFOE terminates the Exclusive Business Cooperation Agreement by giving a prior written notice to the Target PRC Company at any time during the valid period of the Exclusive Business Cooperation Agreement; and

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• (v) early termination as mutually agreed by both the Target PRC Company and the WFOE in accordance with the provisions of the Exclusive Business Cooperation Agreement.

The Target PRC Company has no right to terminate the Exclusive Business Cooperation Agreement unilaterally.

(C) Share Pledge Agreement

Parties: (i) WFOE;

(ii) Registered Shareholder of the Target PRC Company; and

• (iii) Target PRC Company

Pledge:

The Registered Shareholder of the Target PRC Company agrees to pledge all his shares in the Target PRC Company to the WFOE as collateral for the timely and full repayment of the secured indebtedness due by the Target PRC Company and/ or the Registered Shareholder of the Target PRC Company under the VIE Contracts (the “ Secured Obligations ”) and the performance of all the contractual obligations of the Target PRC Company and the Registered Shareholder of the Target PRC Company under the VIE Contracts (the “ Contractual Obligations ”). The Target PRC Company agrees with the abovementioned pledge by the Registered Shareholder of the Target PRC Company under the Share Pledge Agreement.

The Registered Shareholder of the Target PRC Company undertakes to the WFOE, among others, that except for the performance of the Exclusive Call Option Agreement, without the prior written consent of the WFOE, the Registered Shareholder of the Target PRC Company shall not, or allow others to, transfer all or any part of the shares, create or allow any security interest or other encumbrance that may affect the rights and interests of the WFOE in the shares of the Target PRC Company.

If the Registered Shareholder of the Target PRC Company and/or the Target PRC Company breach(es) any Secured Obligations or Contractual Obligations, the WFOE, as the pledgee, is entitled to enforce its rights under the Share Pledge Agreement.

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Term:

The pledge shall take effect on the date of its registration with the administration for industry and commerce where the Target PRC Company locates (the “ Date of Registration ”). The term of the pledge shall take effect from the Date of Registration until:

• (i) the Secured Obligations and the Contractual Obligations have been fully performed and discharged;

• (ii) all the shares in the Target PRC Company held by the Registered Shareholder of the Target PRC Company have been transferred to the WFOE and/or its designated party pursuant to the Exclusive Call Option Agreement, which is allowed by the PRC Laws.

(D) Shareholders’ Voting Right Entrustment Agreement

• Parties: (i) WFOE;

• (ii) Registered Shareholder of the Target PRC Company; and

• (iii) Target PRC Company

Subject matter:

The Registered Shareholder of the Target PRC Company irrevocably undertakes to grant to the WFOE all his voting rights in the Target PRC Company, among others:

• (i) as the agent of the Registered Shareholder of the Target PRC Company, to propose, convene and attend the shareholders’ meetings of the Target PRC Company;

• (ii) to exercise all shareholder’s rights and shareholder’s voting rights enjoyed by the Registered Shareholder of the Target PRC Company in accordance with the PRC Laws and the articles of association (as amended from time to time) of the Target PRC Company, including but not limited to the right to sale or transfer or pledge or disposal of all or part of the Target PRC Company’s shares, and to appoint director and other senior management of the Target PRC Company on behalf of the Registered Shareholder of the Target PRC Company; and

• (iii) to exercise all the other rights of shareholders under the articles of association (as amended from time to time) of the Target PRC Company.

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Term:

The Shareholders’ Voting Right Entrustment Agreement shall take effect from the Date of Registration and shall remain effective irrevocably, unless instructed to the contrary by the WFOE or by the WFOE’s early termination.

Once the PRC Laws allow the WFOE or its directly or indirectly controlled subsidiaries to directly hold the shares of the Target PRC Company, and to legally engage in the Target PRC Company’s online game business, the Shareholders’ Voting Right Entrustment Agreement shall terminate accordingly.

(E) Spousal Consent Letter

Parties:

The spouse of the Registered Shareholder of the Target PRC Company who is a married natural person

Subject matter:

The spouse of the Registered Shareholder of the Target PRC Company who is a married natural person shall execute a spousal confirmation to the WFOE to the effect that, among others:

• (i) the spouse unconditionally and irrevocably consents to the execution of the Exclusive Call Option Agreement, the Share Pledge Agreement, the Shareholders’ Voting Right Entrustment Agreement and the Exclusive Business Cooperation Agreement (collectively, the “ Transaction Documents ”) and that the Registered Shareholder of the Target PRC Company’s shares in the Target PRC Company shall be disposed of pursuant to the Transaction Documents;

• (ii) the spouse undertakes not to make any claim for the shares in the Target PRC Company held by the Registered Shareholder of the Target PRC Company, whether the Registered Shareholder of the Target PRC Company becomes incapable or gets divorced; and

• (iii) the performance under the Transaction Documents by the Registered Shareholder of the Target PRC Company and any further amendment or termination of the Transaction Documents does not require the authorisation or consent of the spouse.

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Dispute Resolution

Each of the VIE Contracts provide that the parties thereto shall negotiate to resolve the dispute in the event of any dispute with respect to the construction and performance of the provisions. In the event that the parties fail to reach an agreement on the resolution of such a dispute within 30 days after any party’s request for resolution of the dispute through negotiations, any party may submit the relevant dispute to the Shenzhen International Economic and Trade Arbitration Commission for arbitration, in accordance with the then effective arbitration rules. The arbitration shall be conducted in Shenzhen, and the language used during arbitration shall be Chinese. The arbitration ruling shall be final and binding on all parties. Any party shall have the right to apply to the courts with competent jurisdiction for enforcement of arbitration rulings after the arbitration rulings come into force.

Each of the VIE Contracts also provide that (i) the arbitral tribunal may award remedies over the equity interests, assets or property interest of the Target PRC Company, injunctive relief (e.g. for the conduct of business or to compel the transfer of assets) or order the winding up of the Target PRC Company; and (ii) the courts of Hong Kong, the Cayman Islands (being the place of incorporation of the Company) and other jurisdiction also have jurisdiction for the grant or enforcement of the arbitral award and the interim remedies against the shares or property interest of the Target PRC Company.

Succession

The VIE Contracts contain provisions to the effect that, in the event of death, incapability, marriage, divorce, bankruptcy of the Registered Shareholder of the Target PRC Company or the occurrence of any other circumstances which may affect the shares in the Target PRC Company held by the Registered Shareholder of the Target PRC Company, the successor(s) (including the spouse, children, parents, brothers, sisters, paternal grandparents and maternal grandparents) or assignees of the Registered Shareholder of the Target PRC Company shall be deemed signing parties to the VIE Contracts to which the Registered Shareholder of the Target PRC Company is a party, and shall inherit or take up the rights and obligations of the Registered Shareholder of the Target PRC Company under the VIE Contracts.

Liquidation

Pursuant to the Exclusive Call Option Agreement, in the event of dissolution or liquidation of the Target PRC Company, the Registered Shareholder of the Target PRC Company shall authorise the WFOE to appoint a liquidator for the Target PRC Company and to manage the assets of the Target PRC Company. The Target PRC Company shall, to the extent permitted by the PRC Laws, dispose all its assets to the WFOE or any person(s) designated by the WFOE, at an aggregate consideration of the minimum purchase price permitted by the PRC Laws.

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Arrangement to Address Potential Conflict of Interests

Upon the completion of the Sale and Purchase Agreement and the Supplemental Agreement, the Group’s control over the Target PRC Company is based on the VIE Contracts. Therefore, conflict of interests of the Registered Shareholder of the Target PRC Company will adversely affect the interests of the Group.

Pursuant to the Shareholders’ Voting Right Entrustment Agreement, the Registered Shareholder of the Target PRC Company shall irrevocably grant to the WFOE all his voting rights in the Target PRC Company as shareholder of the Target PRC Company. Therefore, it is unlikely that there will be potential conflict of interests between the Group and the Registered Shareholder of the Target PRC Company.

Compliance of the VIE Contracts with PRC Laws

The PRC Legal Adviser is of the opinion that, the VIE Contracts do not violate PRC Laws applicable to the business of the WFOE and the Target PRC Company. The PRC Legal Adviser confirms that the VIE Contracts would not be deemed as “concealing illegal intentions with a lawful form” and void under the PRC contract law. The VIE Contracts are legally binding on and enforceable against each party of each of the agreements in accordance with their terms and provisions under relevant PRC Laws except certain terms of the VIE Contracts as set out in the paragraph headed “Risk Factors in relation to the VIE Contracts” below.

As at the date of this announcement, the Target PRC Company has not encountered any interference or encumbrance from any governing bodies in operating its business. To the best knowledge of the Directors, it is not aware of any interference or encumbrance by any governing bodies in operating the business of the Target PRC Company that may be encountered from the Acquisition or under the VIE Contracts.

In light of the above, the Directors believe that save as disclosed, the VIE Contracts are enforceable under the relevant PRC Laws, and that the VIE Contracts will provide a mechanism that enables the WFOE to exercise effective control over the Target PRC Company.

ACCOUNTING TREATMENT

The Company has confirmed with the Company’s auditors that the Company will have indirect control over the Target PRC Company and enjoy the economic interest and benefits of the Target PRC Company via the VIE Contracts and the net profit of the Target PRC Company will be consolidated into the Group under the applicable accounting principles upon the VIE Contracts becoming effective.

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RISK FACTORS IN RELATION TO THE VIE CONTRACTS

If the PRC government finds that the agreements establishing the VIE structure for the Company and/or the Target PRC Company to operate certain businesses in the PRC through the VIE Contracts do not comply with applicable PRC Laws, or if these regulations or their interpretations change in the future, the Company and/or the Target PRC Company could be subject to severe consequences, including the nullification of the VIE Contracts and the relinquishment of the Company’s interest in the Target PRC Company.

Despite there is currently no indication that the VIE Contracts will be interfered or objected by any PRC regulatory authorities, the PRC Legal Adviser has advised that there is a possibility that the relevant PRC regulatory authorities may have different opinions on the interpretation of the relevant regulations and would not agree that the VIE Contracts comply with the current PRC Laws or those that may be adopted in future, and the authorities may deny the validity, effectiveness and enforceability of the VIE Contracts.

According to the second paragraph of Article 2 of the 2019 Foreign Investment Law of the PRC (《中華人民共和國外商投資法》) (“ 2019 FIL ”), “foreign investment referred to in this law refers to the investment activities of foreign natural persons, enterprises or other organisations (hereinafter referred to as “ foreign investors ”), whether directly or indirectly, in the PRC, which includes the following situations: (1) foreign investors setting up foreigninvested enterprises in the PRC whether alone or together with other investors; (2) foreign investors acquiring shares, equity interest, sharing in property or other similar rights and interests of Chinese domestic enterprises; (3) foreign investors investing in new projects in the PRC whether alone or together with other investors; and (4) other forms of investment prescribed by laws, administrative regulations or the State Council.”* (the original text is “ 本 法所稱外商投資，是指外國的自然人、企業或者其他組織 ( 以下稱外國投資 一 者 ) 直接或者間接在中國境內進行的投 資活動，包括下列情形：( ) 外國投 資者單獨或者與其他投資者共同在中國境內設立外商投資企業；( 二 ) 外國投 資者取得中國境內企業的股份、股權、財產份額或者其他 類似權益；( 三 ) 外 國投資者單獨或者與其他投資者共同在中國境內投資新建項目；( 四 ) 法律、 行政法規或者國務院規定的其他方式的投資。”). As regards the terms “directly or indirectly” in the foregoing provision and “other forms of investment” in item (4), there is no further detailed regulation whether in the 2019 FIL or other prevalent laws, regulations, or other regulatory documents.

The concepts of “actual control” and “contractual control” introduced in the consultation draft of the Foreign Investment Law of the PRC* (《中華人民共和國外國投資法（草案徵求 意見稿）》) published in 2015 have been deleted in the formally promulgated 2019 FIL, and that contractual control arrangement is not included in the scope of foreign investment under regulation. Therefore, the PRC Legal Adviser is of the view that the formally promulgated 2019 FIL will not affect the legality and validity of the VIE Contracts, and that the VIE Contracts will be binding on the relevant contractual parties upon due execution.

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Uncertainties exist with respect to the interpretation and implementation of 2019 FIL and how it may impact the viability of the current corporate structure, VIE Contracts, corporate governance and business operations of the Company and the Target PRC Company.

The VIE Contracts may not be as effective as direct ownership in providing control over the Target PRC Company

The Group relies on the VIE Contracts to operate the business of the Target PRC Company. Such VIE Contracts may not be as effective in providing the WFOE with control over the Target PRC Company as direct ownership. If the WFOE has direct ownership of the Target PRC Company, it will be able to exercise its rights as a shareholder to effect changes in the board of directors of the Target PRC Company, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the VIE Contracts, the Group relies on the performance by the Registered Shareholder of the Target PRC Company and the Target PRC Company of their obligations under the VIE Contracts to exercise control over the Target PRC Company. Therefore, the VIE Contracts with the Registered Shareholder of the Target PRC Company and/or the Target PRC Company may not be as effective in ensuring the WFOE’s control over the Target PRC Company as direct ownership would be.

The Registered Shareholder of the Target PRC Company may have potential conflict of interests with the Group

The Group’s control over the Target PRC Company is based on the VIE Contracts. Therefore, conflict of interests of the Registered Shareholder of the Target PRC Company will adversely affect the interests of the Group. Pursuant to the Shareholders’ Voting Right Entrustment Agreement, the Registered Shareholder of the Target PRC Company shall irrevocably appoint the WFOE as their attorney-in-fact to act for all matters pertaining to the Target PRC Company and to exercise all of their rights as shareholders of the Target PRC Company. Therefore, it is unlikely that there will be potential conflict of interests between the Group and the Registered Shareholder of the Target PRC Company. However, in the unlikely event that conflict of interests arises between the Registered Shareholder of the Target PRC Company and the Group and such conflict cannot be resolved, the Company will consider to remove and replace the Registered Shareholder of the Target PRC Company under the VIE Contracts.

The VIE Contracts may be subject to the scrutiny of the PRC tax authorities and additional tax may be imposed

The Group could face material adverse tax consequences if the PRC tax authorities determine that the arrangements under the VIE Contracts were not entered into based on arm’s length negotiations. In that case, the PRC tax authorities may adjust the income and expenses of the WFOE and/or the Target PRC Company for PRC tax purposes, which could result in higher tax liabilities on the WFOE and/or the Target PRC Company. The operating and financial results of the Group may be materially and adversely affected if the tax liabilities of the Target PRC Company or those of the WFOE increase significantly or if they are required to pay interest on late payments.

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The Group does not have any insurance which covers the risks relating to the VIE Contracts and the transactions contemplated thereunder

The insurance of the Group does not cover the risks relating to the VIE Contracts and the transactions contemplated thereunder and the Company has no intention to purchase any insurance in this regard. If any risk arises from the VIE Contracts in the future, such as those affecting the enforceability of the VIE Contracts and the operation of the Target PRC Company, the financial results and financial position of the Group may be adversely affected. However, the Group will monitor the relevant legal and operational environment from time to time to comply with the applicable laws and regulations.

The WFOE’s ability to acquire the shares in the Target PRC Company may be subject to various limitations and substantial costs

In case the WFOE exercises its option to acquire all or part of the shares in the Target PRC Company under the Exclusive Call Option Agreement, such acquisition may only be conducted to the extent as permitted by applicable PRC Laws and will be subject to necessary approvals and relevant procedures under applicable PRC Laws. In addition, the abovementioned acquisitions may be subject to a minimum price limitation (such as an appraised value for the shares in the Target PRC Company) or other limitations as imposed by applicable PRC Laws. Further, a substantial amount of other costs (if any), expenses and time may be involved in transferring the ownership of the Target PRC Company, which may have a material adverse impact on the Group’s business, prospects and results of operation.

Economic risks the WFOE bears as the primary beneficiary of the Target PRC Company, financial support to the Target PRC Company and potential exposure of the Target Company to losses

As the primary beneficiary of the Target PRC Company, the WFOE will share both profit and loss of the Target PRC Company. Equally, the WFOE bears economic risks which may arise from difficulties in the operation of the Target PRC Company’s business. The WFOE may have to provide financial support in the event of financial difficulty of the Target PRC Company. Under these circumstances, the Group’s financial results and financial position may be adversely affected by the worsening financial performance of the Target PRC Company and the need to provide financial support to the Target PRC Company.

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INTERNAL CONTROL MEASURES TO BE IMPLEMENTED BY THE GROUP

In addition to the protective measures provided in the VIE Contracts, it is the intention of the Company, following the completion of the Sale and Purchase Agreement and the Supplemental Agreement, to implement, through the WFOE, additional internal control measures against the Target PRC Company as appropriate, having regard to the internal control measures adopted by the Group from time to time, which may include but not limited to the following:

Management controls

• (i) The Group will appoint one or more executive directors (the “ Responsible Director(s) ”) to the board of directors of the Target PRC Company. The Responsible Director(s) shall be mainly responsible for enforcing all management controls of the Target PRC Company, and shall be required to conduct monthly reviews on the operations of the Target PRC Company and submit such monthly reviews to the Board;

• (ii) the Responsible Director(s) shall establish a team to be funded by the Group who shall station at the Target PRC Company and shall be actively involved in various aspects of the daily managerial and operational activities of the Target PRC Company;

• (iii) upon receiving notification of any material events of the Target PRC Company, the Responsible Director(s) must report to the Board as soon as practicable;

• (iv) the Responsible Director(s) shall conduct regular site visits to the Target PRC Company and conduct interviews with the relevant senior management of the Target PRC Company every six months and submit the interview notes to the Board; and

• (v) all seals, chops, incorporation documents and all other legal documents of the Target PRC Company and its subsidiary (if any) must be kept at the office of the WFOE.

Financial controls

• (i) The financial team of the Company shall collect monthly management accounts, bank statements and cash balances and major operational data of the Target PRC Company within 15 days after each month end for review. The financial team of the Company will seek explanations from the senior management of the Target PRC Company on any material fluctuations of the aforesaid collected items. Upon discovery of any suspicious matters, the financial team of the Company must report to the Responsible Director(s) as soon as practicable, who shall in turn report to the Board;

• (ii) if the payment of the service fees from the Target PRC Company to the WFOE under the VIE Contracts is delayed, the financial team of the Company must meet with the Registered Shareholder of the Target PRC Company to investigate, and should report any suspicious matters to the Board. In extreme cases, the Registered Shareholder of the Target PRC Company will be removed and replaced under the VIE Contracts; and

• (iii) the Target PRC Company must assist and facilitate the Company to conduct all on-site internal audits on the Target PRC Company if so required by the Company.

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Legal review

The Responsible Director(s) will consult the Company’s PRC legal adviser from time to time to check if there are any legal developments in the PRC affecting the VIE Contracts, and should immediately report to the Board so as to allow the Board to determine if any modification or amendment are required to be made.

In case there would be material and adverse effect on the business of the Target PRC Company arising from 2019 FIL, the Company will disclose, as soon as possible: (i) updates of material development to 2019 FIL as and when it occurs; (ii) specific measures taken by the Company to fully comply with the development to 2019 FIL; and (iii) any material impact of the development of 2019 FIL on the Company’s operations and financial position.

The Board’s view on the VIE Contracts

Based on the above, the Board is of the view that the VIE Contracts are narrowly tailored to achieve the Target PRC Company business purpose and to minimise the potential conflict with and are enforceable under relevant PRC Laws. The VIE Contracts enable the WFOE to gain control over the financing and business operations of the Target PRC Company, and enjoy the economic benefits generated by the Target PRC Company. The VIE Contracts also provide that the WFOE may unwind the VIE Contracts as soon as relevant PRC Laws allow the WFOE to register itself as the shareholder of the Target PRC Company.

RELEVANT CORPORATE STRUCTURE BEFORE AND AFTER COMPLETION AND THE ESTABLISHMENT OF THE VIE ARRANGEMENT

The following diagram illustrates the corporate structure of the Target Company, WFOE and the Target PRC Company before the completion of the Sale and Purchase Agreement and the Supplemental Agreement and the establishment of the VIE arrangement:-

==> picture [409 x 157] intentionally omitted <==

----- Start of picture text -----

Purchaser (note 1) Vendor (note 3)
100% 100%
Target Company
offshore
onshore
WFOE Target PRC Company (note 2)
----- End of picture text -----

Notes:

1. The Purchaser is an indirect wholly-owned subsidiary of the Company;

2. Target PRC Company is wholly owned by the Registered Shareholder of the Target PRC Company; and

3. The Vendor, Mr. Liu Zhongsheng, is also the Registered Shareholder of the Target PRC Company.

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The following diagram illustrates the corporate structure of the Target Company, WFOE and the Target PRC Company after the completion of the Sale and Purchase Agreement and the Supplemental Agreement and the establishment of the VIE arrangement:

==> picture [411 x 298] intentionally omitted <==

----- Start of picture text -----

Purchaser (note)
100% 100%
Target Company
offshore
onshore
WFOE Registered Shareholder of the
Target PRC Company
(1) Exclusive Call Option Agreement
(2) Share Pledge Agreement
(3) Shareholders’ Voting Right Entrustment Agreement 100%
Target PRC Company
(1) Exclusive Business Cooperation Agreement
(2) Exclusive Call Option Agreement
(3) Share Pledge Agreement
(4) Shareholders’ Voting Right Entrustment Agreement
----- End of picture text -----

Note: the Purchaser is an indirect wholly-owned subsidiary of the Company.

DEFINITIONS

In this announcement, the following expressions have the meanings set out below unless the context requires otherwise:

“MOFCOM”

Ministry of Commerce of the PRC

“NDRC”

National Development and Reform Commission of the PRC

“PRC Laws”

any laws, regulations, rules, notices, interpretation or other binding documents issued by any central or local legislative, executive or judicial authorities in the PRC

“PRC Legal Adviser”

Grandlex & PMT (Qianhai) Law Firm* (國匠麥家榮（前海） 聯營律師事務所 ), the legal adviser of the Company as to the PRC Laws

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“Registered Shareholder of the Target PRC Company”

Mr. Liu Zhongsheng (劉忠生), the solo registered owner of the entire share equity of the Target PRC Company for the time being, and an Independent Third Party as at the date of this announcement

“VIE Contracts”

collectively, (i) the Exclusive Call Option Agreement; (ii) the Exclusive Business Cooperation Agreement; (iii) the Share Pledge Agreement; (iv) the Shareholders’ Voting Right Entrustment Agreement; and (v) the Spousal Consent Letter, all of which were entered into on 29 April 2020 and shall take effect from the Date of Registration

“WFOE”

Wald (Shenzhen) Technology Incorporate 深圳華爾德動 漫科技有限公司, a wholly foreign-owned enterprise and the entire share equity of which is owned by the Purchaser, which is in turn wholly-owned by the Company through its intermediate companies

On behalf of the Board CA Cultural Technology Group Limited Chong Heung Chung Jason Chairman and Executive Director

Hong Kong, 16 June 2020

As of the date of this announcement, the executive Directors are Mr. Chong Heung Chung Jason, Mr. Ting Ka Fai Jeffrey and Ms. Liu Moxiang, and the independent non-executive Directors are Mr. Ni Zhenliang, Mr. Tsang Wah Kwong and Mr. Hung Muk Ming.

• For identification purposes only

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