Dear all,

Following this morning’s (your evening) conference call, please see below our thoughts for your consideration:

 

1.       Summary of current situation (as we see it)

-          BHR has contractual claims against the Defaulting LP in respect of its breach of relevant LP agreements (“BHR Claims”)

 

-          Sinopec has contractual claims against BHR for the RMB2.05 billion unfunded amount, contingent liability up to RMB60 million (“Sinopec Claims”)

 

-          Defaulting LP is relying on certain representations and covenants made by Sinopec in the investment agreement (e.g., no investigations, no proceedings) as the basis for withdrawing its funds.  Defaulting LP has NO contractual privity with Sinopec as it is NOT a party to any of the investment agreements

 

-          on a related note, BHR is holding cash (generated from the CGN deal) in an amount exceeding RMB60 million in its HK account on behalf of Defaulting LP.  Defaulting LP is petitioning for the release of such amounts    

 

2.       Action Plan

 

Interim board meeting

we will be convening an all-member board meeting with the agenda and notice to be issued shortly

 

In respect of the BHR Claims

-          we have received a fee quote from one firm, waiting on another.  Will select law firm within today or tomorrow

 

-          we plan to proactively pursue all available legal and other remedies against Defaulting LP and subject to legal advice, we will commence arbitral proceedings with HKIAC in respect of seizing Defaulting LP’s cash in our HK account and with CIETAC in respect of recovering damages under the LP agreements (damages will include all damages payable to Sinopec as result of Defaulting LP’s non-funding, management fees, carry and all such other direct and indirect damages)

 

-          will also explore with lawyers U.S. jurisdiction and possibility of filing a suit in the U.S. against Defaulting LP

 

Ideally we hope to come to an agreement with the Defaulting LP whereby it agrees to pay all damages assessed on us to Sinopec without having to undergo legal or arbitral proceedings but we are prepared and will take all legal actions available to us.

 

In respect of the Sinopec Claims

-          independently of pursing our claims against the Defaulting LP, we will approach Sinopec in a private capacity to discuss damages.  Arguments for not funding may be made on the basis of certain provisions in the investment agreements (representations and covenants as to Sinopec not subject to any investigations, MAC provisions) but then again, we did subscribe to RMB39.5 billion and unless and until circumstances absolutely so warrant, we want to remain on friendly terms with Sinopec

 

-          we hope to resolve the disputes privately and discreetly, ideally through settlement rather than through judicial or arbitral channels.  Sinopec’s lawyers will likely be contacting us soon, we will formulate our course of action once we have more visibility on Sin opec’s position

 

3.       Other Considerations

While we will pursue all remedies available against the Defaulting LP, we hope to employ all resources to engage with Sinopec on how to minimize the impact and liabilities (financial and reputational) of this incident.  The key is to maintain a low profile.

 

4.       Public Relations / Press Coverage

Our position remains that (i) this is an isolated incident solely caused by one LP’s intentional breach of its funding commitment, (ii) due to the deal-fund nature of the transaction, we were not able to move around other funds to plug the hole caused by the Defaulting LP and (ii) this incident is not a reflection of BHR’s commitment to the Sinopec transaction or BHR’s fundraising abilities.

 

Thus far, we have not been referenced or identified in any news coverage despite a number of articles on the matter and we are optimistic that information regarding our funding deficiency will be contained to the immediate circles involved.  Subject to the board’s views, we have no intentions of engaging any PR services at this point in time.

 

Going forward, Xinzhong, Xin, Felix and myself will coordinate the legal efforts and apprise shareholders and board members of any updates.  Xia Yu will remain the spokesperson domestically in respect of media questions but his comments will be strictly limited to the official line as stated above.

Regards,

Jonathan

 

From: "Jason zhu <jason.zhu@bhrpe.com>"

To: "Devon Archer <darcher@rosemontcapital.com>"

CC: "Hunter Biden <hbiden@rosemontseneca.com>","Bulger Jim <jbulger@thorntonai.com>","Michael Lin <michael.c.l.lin@gmail.com>","Leonard Mike <mleonard@thorntonai.com>","Sebastian Momtazi <smomtazi@rosemontseneca.com>","Jonathan.li <jonathan.li@bhrpe.com>","xueming<xueming@bhrpe.com> <xueming@bhrpe.com>","xin.wang<xin.wang@bhrpe.com> <xin.wang@bhrpe.com>","李新中 <xinzhong.li@bhrpe.com>","夏雨（Yu XIA） <yu.xia@bhrpe.com>","YU, Felix <felix.yu@bhrpe.com>"

Sent: 2015-03-08 14:19

Subject: 回复: The Notice of Sinopec Deal

Dear Devon,

Based on your suggestion, we will schedule a meeting 9:30 tomorrow morning Beijing time. I will send you the dial-in number and code later.

Jason Zhu

-------- 原始邮件 --------
主题：Re: The Notice of Sinopec Deal
发件人：Devon Archer
收件人：Jason Zhu
抄送：Hunter Biden,Bulger Jim ,Michael Lin,Leonard Mike,Sebastian Momtazi ,"Jonathan.li"," "," ",李新中,夏雨（Yu XIA）,"YU, Felix "

Jason,

Thank you for the unfortunate explanation.  We need to do everything in our power to ensure BHR doesn't get named here, and if we do get named we must place the blame fluidly and immediately onto the said LP.  This has potential to be a major credibility hit with the US Embassy and SACAC which will be very unhelpful in our development if BHR is named.

Can we please schedule a Board call soonest so we can discuss and understand further the remedies and ramifications of this.  I suggest your Monday morning Beijing time.  Please advise.

Devon

Devon D. Archer

646 436 3745

On Mar 7, 2015, at 9:55 AM, Jason Zhu <jason.zhu@bhrpe.com> wrote:

Dear all,

 

In reference to the SMC Capital Increase deal, we would like to update everyone as follows:

 

- following the signing of all relevant subscription and investment agreements in September 12, 2014 for a total subscription amount of RMB6 billion, Sinopec finally issued its capital call notice on February 2, 2015 requesting that all funds be fully invested by February 13, 2015

 

- by closing of business on February 13, 2015, BHR transferred a total of RMB3.75 billion to Sinopec whereas the remaining RMB2.25 billion was not made available at the time due to the withdrawal of funds by one of our original LPs (the “Defaulting LP”).  Sinopec agreed to extend BHR’s closing date to March 4, 2015

 

- as we continued to negotiate with the Defaulting LP, we immediately launched alternative fundraising efforts despite the intervening Chinese New Year holiday (which meant many of our contacts were either unavailable to not able procure the necessary funds in time).  By the closing of March 4, 2015, we were able to raise an additional RMB0.2 billion, bringing BHR’s total investment amount to RMB3.95 billion

 

- as of March 6, 2015, Sinopec officially closed its subscription accounts, also terminating BHR’s rights to make any further subscriptions beyond the RMB3.95 invested

 

This unfortunate incident caught each of us by surprise and despite the team’s best efforts, we were not able to raise the defaulted amount given the extremely tight timing from first receiving the capital call on February 2 to being notified at the very last minute before the original Feb. 13 closing date of the Defaulting LP’s funding withdrawal and finally to the closing of the subscription window on the morning of March 6. 

 

Sinopec issued an announcement in relation to the closing of the SMC Capital Increase last night which touched upon the failure to fund by an investor but did not name BHR.  All involved parties understand and agree that BHR's failure to f und the entire amount is an isolated event which is solely attributable to liquidity difficulties with an LP and should not serve as a testament of BHR’s abilities.  While we are confident that this incident will not have any adverse effect in the long run, we must deal with the possibility of short-term credibility issues once the market picks up the story (which will be soon).  Our position is that we maintain our support for the SMC deal as attested by our RMB3.95 billion subscription amount but given the deal fund structure of this particular transaction, we were not able to maneuver other committed funds to cover the deficiency caused by the Defaulting LP. 

 

For now, we must deal with the legal aftermath of the situation.  On the one hand, we are, vis-à-vis Sinopec, in breach of our funding obligations in respect of the RMB2.05 billion uninvested amount, which may involve monetary damages of up to RMB63.5 million.  On the other hand, we are pursuing all remedies against the Defaulting LP for its breach of relevant LP agreements, which directly caused our breach of the Sinopec agreements.  

 

Finally, we are in close discussions with Sinopec to coordinate our efforts and to mitigate any spillover effect this incident may have on our SOE fundraising efforts or on our ability to partake in future SOE reform opportunities.  We ask that all inquiries in relation to this transaction be directed to Mr. Xia Yu, who will be the house speaker on this matter on behalf of BHR. 

 

 

Regards,

 

诸晨刚 Jason Zhu 

执行董事 Executive Director

 

渤海华美（上海）股权投资基金管理有限公司

Bohai Harvest RST (Shanghai) Equity Investment Fund Management Co., Ltd.

北京市朝阳区建国路79号华贸中心写字楼2座31层3101室邮编：100025

31/F, Unit 3101, Tower 2, China Central Place, 79 Jianguo Road,

Chaoyang District, Beijing 100025, China

Cellphone: 136 8169 7246

Tel:  86 10 5969 5858

Fax:  86 10 5969 6123

Email: jason.zhu@bhrpe.com