As filed with the Securities and Exchange Commission on June 21, 2012
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM F-4
REGISTRATION
STATEMENT UNDER
THE SECURITIES ACT OF 1933
CHINA INFORMATION TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Not Applicable | ||
| (Translation of Registrant’s Name into English) | ||
| British Virgin Islands | 7372 | Not Applicable |
| (State or Other Jurisdiction of Incorporation or | (Primary Standard Industrial Classification Code | (IRS Employer Identification Number) |
| Organization) | Number) |
21st Floor, Everbright Bank Building
Zhuzilin,
Futian District
Shenzhen, Guangdong 518040
People’s
Republic of China
(+86) 755 -8370-8333
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant’s Principal Executive Offices)
____________________________
Corporation Service Company
80 State Street
Albany, New York 12207-2543
(800) 927-9800
(Name, Address, Include Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
____________________________
Copies to:
Louis A. Bevilacqua, Esq.
Joseph R. Tiano, Jr.,
Esq.
Pillsbury Winthrop Shaw Pittman LLP
2300 N Street,
N.W.
Washington, DC 20037
(202) 663-8000
____________________________
Approximate date of commencement of proposed sale of the
securities to the public:
As soon as practicable after the effectiveness of this
registration statement and the
satisfaction or waiver of all other conditions
under the merger agreement described herein.
____________________________
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender
Offer) [ ]
Exchange Act Rule 14d-1(d) (Cross-Border
Third-Party Tender Offer) [ ]
| CALCULATION OF REGISTRATION FEE | ||||
| Tile of each class of securities to be registered | Amount to be
registered(1) |
Proposed
maximum offering price per share(2) |
Proposed
maximum aggregate offering price(2)(3) |
Amount of
registration fee |
| Ordinary Shares, par value $0.01 per share | 27,007,608 | $0.98 | $26,467,455.84 | $3,033.17 |
| (1) |
Based upon the maximum number of ordinary shares of the registrant that may be issued and distributed to the holders of the common stock of China Information Technology, Inc. (“CNIT”), a Nevada corporation, on a share-for-share basis upon consummation of the merger of China Information Mergerco Inc., a Nevada corporation and a wholly owned subsidiary of the registrant, with and into CNIT. |
| (2) |
Reflects the market price of the common stock of CNIT, computed in accordance with Rule 457(c) and Rule 457(f)(1) under the Securities Act of 1933, as amended, based upon the average of the high and low prices of the common stock of CNIT as reported on the NASDAQ Global Select Market on June 18, 2012, and is estimated solely to determine the registration fee. Although there is no present market for the securities of the registrant, upon consummation of the merger, the ordinary shares of the registrant will be listed on the NASDAQ Global Select Market. |
| (3) |
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.
|
|
Subject to completion, dated June 21, 2012
Dear Stockholder:
You are cordially invited to attend the 2012 annual meeting of stockholders of China Information Technology, Inc., a Nevada corporation (“CNIT”), to be held on , 2012 at a.m., local time, at CNIT’s offices located at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China. Only stockholders of record at the close of business on , 2012 are entitled to notice of and to vote at the annual meeting.
At the annual meeting, you will be asked to vote on the important matters described in detail in the notice of annual meeting of stockholders and proxy statement/prospectus accompanying this letter. You will also have an opportunity to ask questions and receive information about CNIT’s business.
Included with the proxy statement/prospectus is a copy of CNIT’s Annual Report to Stockholders. We encourage you to read the Annual Report. It includes information on CNIT’s operations as well as CNIT’s audited financial statements.
One of the matters you will be asked to vote on at the annual meeting is the adoption of a merger agreement as part of a reorganization of the corporate structure of the group of companies controlled by CNIT. The merger agreement provides for a merger that would result in your shares of CNIT common stock being converted into the right to receive an equal number of ordinary shares in the capital of China Information Technology, Inc., a company incorporated in the British Virgin Islands (“CNIT BVI”), which will be issued by CNIT BVI in connection with the merger. Following the merger, CNIT BVI, together with its subsidiaries, will own and continue to conduct our business in substantially the same manner as is currently being conducted by CNIT and its subsidiaries. CNIT BVI will also be managed by the same Board of Directors and executive officers that manage CNIT today.
As further explained in the accompanying proxy statement/prospectus, our Board of Directors expects that the reorganization of CNIT’s corporate structure, which will be facilitated by approval of this proposal, will result in the following benefits:
-
reduction of our operational, administrative, legal and accounting costs over the long term through the reduction of our reporting obligations and related expenses because CNIT BVI is expected to qualify as a “foreign private issuer” under the rules and regulations of the Securities and Exchange Commission and be exempt from certain rules under the Securities Exchange Act of 1934, as amended, that would otherwise apply if CNIT BVI were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer; and
- providing us with additional flexibility to pursue listings on international stock exchanges, such as the Hong Kong Stock Exchange, should we desire to do so in the future.
We have chosen to reorganize under the laws of the British Virgin Islands because of its political and economic stability, effective judicial system, absence of exchange control or currency restrictions and availability of professional and support services. We could have selected a different jurisdiction outside of the United States, but we believe many non-Chinese companies operating in China are incorporated in the British Virgin Islands and as a result many of our current and potential strategic partners have substantial experience doing business with British Virgin Islands companies and corporate structures.
The merger cannot be completed unless the proposal to adopt the merger agreement is approved by the holders of a majority of CNIT’s outstanding shares entitled to vote at the annual meeting. There are a number of risks which you should be aware of in considering whether to vote in favor of the proposal to approve the merger. The accompanying proxy statement/prospectus contains important information about this proposal and the risks associated with the proposal and we encourage you to read it. In particular, you should carefully consider the discussion in the section of the proxy statement/prospectus entitled “Risk Factors” beginning on page 17.
Generally, for U.S. federal income tax purposes, stockholders of CNIT will not recognize gain or loss as a result of the merger. For a more detailed discussion of income tax considerations for stockholders, please see the section entitled “Taxation” in the accompanying proxy statement/prospectus. We urge you to consult your own tax advisor regarding the particular tax consequences of the merger for you.
Our Board of Directors has determined that the reorganization to be effected by the merger is advisable and in the best interests of CNIT and our stockholders and, as such, has unanimously approved the merger and the merger agreement. Our Board of Directors recommends that you vote "FOR" the proposal to adopt the merger agreement.
Please take this opportunity to participate in the affairs of CNIT by voting on the business to come before this meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, YOU ARE URGED TO SUBMIT YOUR PROXY AND VOTING INSTRUCTIONS OVER THE INTERNET OR BY TELEPHONE, OR COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
We look forward to seeing you at the meeting.
Sincerely,
__________________________
Jiang Huai Lin
Chairman and
CEO
Shenzhen,
China
, 2012
Neither the U.S. Securities and Exchange Commission nor any state securities regulatory authority has approved or disapproved of the securities to be issued in the merger or determined if this proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated , 2012, and is first being mailed to stockholders of CNIT with a form of proxy card or voting instruction card on or about , 2012.
CHINA INFORMATION TECHNOLOGY, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held
, 2012
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the “Annual Meeting”) of China Information Technology, Inc., a Nevada corporation (“CNIT”), will be held on , 2012 at a.m., local time, at CNIT’s offices located at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China, for the following purposes:
| 1. |
To elect five persons to the Board of Directors of CNIT, each to serve until the next annual meeting of stockholders of CNIT or until such person shall resign, be removed or otherwise leave office; |
| 2. |
To ratify the appointment of GHP Horwath, P.C. as the independent registered public accounting firm of CNIT for the fiscal year ending December 31, 2012; |
| 3. |
To conduct an advisory (non-binding) vote on executive compensation; |
| 4. |
To adopt the agreement and plan of merger and reorganization by and among CNIT, China Information Technology, Inc., a newly formed company incorporated under the laws of the British Virgin Islands that is currently a wholly owned subsidiary of CNIT (“CNIT BVI”), and China Information Mergerco Inc., a newly formed Nevada corporation that is currently a wholly owned subsidiary of CNIT BVI (“Merger Sub”), a copy of which is attached to the accompanying proxy statement/prospectus as Annex A, pursuant to which Merger Sub will merge with and into CNIT, with CNIT surviving the merger as a wholly owned subsidiary of CNIT BVI, and whereby each issued and outstanding share of the common stock of CNIT will be converted into the right to receive one ordinary share of CNIT BVI, which shares will be issued by CNIT BVI as part of the merger; and |
| 5. |
To transact such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof. |
The proposal is more fully described in the proxy statement/prospectus accompanying this notice. Only stockholders of record at the close of business on , 2012 are entitled to notice of, and to vote at, the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting in person. However, to assure your representation at the Annual Meeting, you are urged to submit your proxy and voting instructions over the Internet or by telephone, or complete, sign, date and return the enclosed proxy card as promptly as possible in the postage-paid envelope enclosed for that purpose. Any stockholder of record attending the Annual Meeting may vote in person even if he or she returned a proxy.
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to Be Held on , 2012: The proxy statement/prospectus is available free of charge at .
By Order of the Board of Directors,
_______________________________
Jiang Huai Lin
Chairman and CEO
Shenzhen, China
, 2012
YOUR VOTE IS IMPORTANT
To assure your representation at the Annual Meeting, you are asked to submit your proxy and voting instructions over the Internet or by telephone, or complete, sign and date the enclosed proxy as promptly as possible and return it in the enclosed postage-paid envelope, which requires no postage if mailed in the United States.
iii
CONVENTIONS
In this proxy statement/prospectus, we refer to China Information Technology, Inc., the Nevada corporation whose shares you currently own (together with its subsidiaries), as “CNIT.” Additionally, we sometimes refer to CNIT as “we,” “us,” or “our.” “You” refers to the stockholders of CNIT. We refer to China Information Technology, Inc., the newly formed company incorporated under the laws of the British Virgin Islands that is currently a wholly owned subsidiary of CNIT, as “CNIT BVI,” and we refer to China Information Mergerco Inc., the newly formed Nevada corporation that is currently a wholly owned subsidiary of CNIT BVI, as “Merger Sub.” In addition, we refer to the British Virgin Islands as “BVI” and to the People’s Republic of China as “PRC” or “China.” References herein to “Renminbi” and “RMB” are to the legal currency of China and references to “U.S. dollars,” “dollars,” “US$” and “$” are to the legal currency of the United States. Unless otherwise noted, all monetary amounts are stated in U.S. Dollars.
ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and financial information about CNIT from documents CNIT has filed with the U.S. Securities and Exchange Commission, or SEC, that are not included in or delivered with this proxy statement/prospectus. Please see the section entitled “Where You Can Find More Information.”
You can obtain the documents incorporated by reference into this proxy statement/prospectus by accessing the SEC website maintained at www.sec.gov. CNIT will also provide you with copies of the documents incorporated by reference into this proxy statement/prospectus, without charge. Those documents are available to any stockholder, including any beneficial owner, upon request directed to CNIT at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China, Attention: Corporate Secretary, or you may obtain copies of the documents free of charge at . To ensure timely delivery of such documents, any request should be made as soon as possible, and no later than , 2012. The exhibits to those documents will generally not be made available unless they are specifically incorporated by reference into this proxy statement/prospectus or are otherwise requested by you.
You should rely only on the information contained in, and incorporated by reference into, this proxy statement/prospectus. We have not authorized anyone to provide you with different or additional information. Neither CNIT BVI nor CNIT is making an offer of the securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this proxy statement/prospectus is accurate as of any date other than the date on the front cover of this proxy statement/prospectus or, in the case of documents incorporated by reference, the date of the referenced document, and neither the mailing of this proxy statement/prospectus to you nor the issuance of CNIT BVI ordinary shares in the merger shall create any implication to the contrary.
ABOUT THIS PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus, which forms a part of a registration statement on Form F-4 filed with the SEC by CNIT BVI, constitutes a prospectus of CNIT BVI under Section 5 of the Securities Act of 1933, as amended, or the Securities Act, with respect to the ordinary shares of CNIT BVI to be issued to CNIT stockholders in connection with the merger. This document also constitutes a proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules thereunder, and a notice of meeting with respect to the annual meeting of CNIT stockholders to consider and vote upon, among other proposals, the merger proposal and the adjournment proposal.
iv
INFORMATION ABOUT THE ANNUAL MEETING
AND THE PROPOSED MERGER
The Board of Directors of CNIT is providing this proxy statement/prospectus prepared in connection with CNIT’s annual meeting of stockholders, or the Annual Meeting, which will take place on , 2012 at a.m., local time, at CNIT’s offices located at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China. CNIT’s telephone number at that location is (+86) 755 -8370-8333. As a stockholder, you are invited to attend the Annual Meeting and are asked to vote on the proposals described in this proxy statement/prospectus.
Only stockholders of record at the close of business on , 2012, the Record Date, are entitled to notice of, and to vote at, the Annual Meeting. As of the Record Date, shares of CNIT’s common stock, par value $0.01per share, were issued and outstanding. CNIT’s stock transfer books will not be closed between the Record Date and the date of the Annual Meeting.
These proxy solicitation materials were mailed on or about
, 2012 to all stockholders entitled to vote at the
Annual Meeting.
The following questions and answers are intended to address briefly some commonly asked questions regarding the Annual Meeting and, in particular, the proposed merger. These questions and answers may not address all questions that may be
important to you. Please refer to the more detailed information contained elsewhere in this proxy statement/prospectus, its annexes and the documents referred to or incorporated by reference in this proxy statement/prospectus. For instructions on
obtaining the documents incorporated by reference, please see the section entitled “Where You Can Find More Information.”
Questions and Answers Relating to the Annual Meeting
| Q: |
What is the purpose of the Annual Meeting? |
|
| A: |
To vote on the following proposals: |
|
| 1. |
To elect five persons to the Board of Directors of CNIT, each to serve until the next annual meeting of stockholders of CNIT or until such person shall resign, be removed or otherwise leave office; |
|
| 2. |
To ratify the appointment of GHP Horwath, P.C. as the independent registered public accounting firm of CNIT for the fiscal year ending December 31, 2012; |
|
| 3. |
To conduct an advisory (non-binding) vote on executive compensation; |
|
| 4. |
To adopt the agreement and plan of merger and reorganization by and among CNIT, CNIT BVI and Merger Sub, or the Merger Agreement, a copy of which is attached to the accompanying proxy statement/prospectus as Annex A, pursuant to which Merger Sub will merge with and into CNIT, with CNIT surviving the merger as a wholly owned subsidiary of CNIT BVI, and whereby each issued and outstanding share of the common stock of CNIT will be converted into the right to receive one ordinary share of CNIT BVI, which shares will be issued by CNIT BVI as part of the merger; and |
|
| 5. |
To transact such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof. |
|
| Q: |
What is the Board of Directors' recommendation? |
|
| A: |
The Board of Directors of CNIT recommends that you vote your shares: |
|
|
“FOR” the election of the nominated directors (see Proposal 1); |
||
|
“FOR” the ratification of the appointment of GHP Horwath, P.C. as the independent registered public accounting firm of CNIT for the fiscal year ending December 31, 2012 (see Proposal 2); |
||
|
“FOR” the compensation of CNIT’s named executive officers (see Proposal 3); and |
||
|
“FOR” the adoption of the Merger Agreement (see Proposal 4). |
1
| Q: |
Who is entitled to vote at the Annual Meeting? |
| A: |
Stockholders Entitled to Vote. Stockholders who our records show owned shares of CNIT’s common stock as of the close of business on the Record Date ( , 2012) may vote at the Annual Meeting. |
Registered Stockholders. If your shares are registered directly in your name with CNIT’s transfer agent, you are considered, with respect to those shares, the stockholder of record, and these proxy materials are being provided to you directly by CNIT. As the stockholder of record, you have the right to grant your voting proxy directly to the individuals listed on the proxy card, or to vote in person at the Annual Meeting.
Street Name Stockholders. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in “street name.” These proxy materials are being forwarded to you by your broker, bank or other nominee, who is considered, with respect to those shares, the record holder. As the beneficial owner, you have the right to direct your broker, bank or other nominee how to vote, and you are also invited to attend the Annual Meeting. However, since you are not the record holder, you may not vote these shares in person at the Annual Meeting unless you follow your broker, bank or other nominee’s procedures for obtaining a legal proxy. Your broker, bank or other nominee has provided a voting instruction card for you to use.
| Q: |
How many votes do I have? |
| A: |
On the proposal to be voted upon, you have one vote for each share of CNIT common stock you own as of the Record Date. |
| Q: |
How may I obtain a separate set of proxy materials? |
| A: |
If you share an address with another stockholder, previously consented to receiving one copy of this proxy statement/prospectus on a voter instruction card submitted for last year’s annual meeting of stockholders and do not participate in electronic delivery of proxy materials, only one copy of this proxy statement/prospectus is being delivered to you. A stockholder at a shared address who received a single copy of this proxy statement/prospectus may request a separate copy either by calling the number provided below or by mailing a written request to CNIT at the address below: |
China Information Technology, Inc.
21st Floor, Everbright Bank Building
Zhuzilin, Futian District
Shenzhen, Guangdong 518040
People’s Republic of China
(+86) 755 -8370-8333
Attention: Corporate Secretary
CNIT will promptly mail a separate copy of this proxy statement/prospectus upon such request, but any such request should be made as soon as possible, and no later than , 2012, to ensure timely delivery.
Stockholders who share an address and received multiple copies of this proxy statement/prospectus may also request that a single copy of future proxy statements be delivered by filling out the applicable section of the voter instruction card for the Annual Meeting.
| Q: |
How can I vote my shares in person at the Annual Meeting? |
| A: |
Shares held in your name as the stockholder of record may be voted by you in person at the Annual Meeting. Shares held beneficially in street name may be voted by you in person at the Annual Meeting only if you obtain a legal proxy from the broker, bank or other nominee that holds your shares giving you the right to vote the shares. Even if you plan to attend the Annual Meeting, we recommend that you also submit your proxy or voting instructions as described below so that your vote will be counted if you later decide not to attend the meeting. |
2
| Q: |
How can I vote my shares without attending the Annual Meeting? |
| A: |
Whether you hold shares directly as the stockholder of record or beneficially in street name, you may direct how your shares are voted without attending the Annual Meeting. If you are a stockholder of record, you may vote by submitting a proxy. If you hold shares beneficially in street name, you may vote by submitting voting instructions to your broker, bank or other nominee. For directions on how to vote, please refer to the instructions below and those included on your proxy card or, for shares held beneficially in street name, the voting instruction card provided by your broker, bank or other nominee. |
By Internet: Stockholders of record with Internet access may submit proxies by following the “Internet” instructions on their proxy cards until , Eastern Time, on , 2012. Most stockholders who hold shares beneficially in street name may vote by accessing the web site specified on the voting instruction cards provided by their brokers, banks or other nominees. Please check the voting instruction card for Internet voting availability.
By Telephone: Stockholders of record who live in the United States may submit proxies by following the “Phone” instructions on their proxy cards until , Eastern Time, on , 2012. Most stockholders who hold shares beneficially in street name may vote by phone by calling the number specified on the voting instruction cards provided by their brokers, banks or other nominees. Please check the voting instruction card for telephone voting availability.
|
By Mail: Stockholders of record may submit proxies by completing, signing and dating their proxy cards and mailing them in the accompanying pre-addressed envelopes. Proxy cards submitted by mail must be received by the time of the meeting in order for your shares to be voted. Stockholders who hold shares beneficially in street name may vote by mail by completing, signing and dating the voting instruction cards provided by their brokers, banks or other nominees and mailing them in the accompanying pre-addressed envelopes. |
|
| Q: |
Can I change my vote? |
| A: |
For shares that you hold of record, you may change your proxy at any time prior to the proxy being used at the Annual Meeting by (i) delivering to the Corporate Secretary of CNIT at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China, a written notice of revocation or a duly executed proxy bearing a later date, or (ii) attending the Annual Meeting and voting in person. The mere presence at the Annual Meeting of a stockholder who has appointed a proxy will not revoke the prior appointment. If not revoked, the proxy will be voted at the Annual Meeting in accordance with the instructions indicated on the proxy card. For shares you hold beneficially in street name, you may change your vote by submitting new voting instructions to your broker, bank or other nominee following the instruction they provided, or, if you have obtained a legal proxy from your broker, bank or other nominee giving you the right to vote your shares, by attending the meeting and voting in person. |
| Q: |
How many shares must be present or represented to conduct business at the Annual Meeting? |
| A: |
The quorum requirement for holding the Annual Meeting and transacting business is that holders of a majority in voting power of the issued and outstanding shares of CNIT common stock entitled to vote at the Annual Meeting, as of the Record Date, must be present in person or represented by proxy. Abstentions are counted for the purpose of determining the presence of a quorum. Broker non-votes (described below) are not counted for the purpose of determining the presence of a quorum. |
| Q: |
What is the voting requirement to approve each of the proposals? |
| A: |
In the election of directors, a director must be elected by a plurality of the votes cast, meaning that the number of shares entitled to vote on the election of directors and represented in person or by proxy at the Annual Meeting casting their vote “FOR” a nominee must exceed the number of votes cast “WITHHELD” from a nominee. |
|
The proposal to ratify the appointment of GHP Horwath, P.C. as the independent registered public accounting firm of CNIT for the fiscal year ending December 31, 2012 requires the affirmative “FOR” vote of a majority of the total number of shares present in person or represented by proxy and entitled to vote on the proposal at the Annual Meeting. |
|
|
The advisory vote on executive compensation as described in this proxy statement/prospectus requires the affirmative vote of a majority of the votes cast in person or by proxy at the Annual Meeting in order to be approved. The vote is advisory and therefore not binding on our Board; however, the Board and the Compensation Committee of the Board will consider the result of the vote when making future decisions regarding our executive compensation policies and practices. |
3
|
For the merger to be able to proceed, the majority of the outstanding shares of CNIT’s common stock must vote “FOR” the adoption of the Merger Agreement. |
|
|
For any other matters on which stockholders are entitled to vote, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote, is required. |
|
| Q: |
How are votes counted? |
| A: |
In the election of directors, you may vote “FOR” or “WITHHOLD.” Abstentions with respect to the election of directors will be counted for purposes of determining the presence or absence of a quorum at the Annual Meeting, but will have no other legal effect upon election of directors. You may not cumulate your votes for the election of directors. |
|
For the proposal to ratify the appointment of GHP Horwath, P.C. as the independent registered public accounting firm of CNIT for the fiscal year ending December 31, 2012, you may vote “FOR,” “AGAINST” or “ABSTAIN.” If you elect to “ABSTAIN,” the abstention has the same effect as a vote “AGAINST” such proposal. |
|
|
For the advisory vote on executive compensation, you may vote “FOR,” “AGAINST” or “ABSTAIN.” If you elect to “ABSTAIN,” your vote will have no effect on the outcome of this proposal. |
|
|
For the proposal to approve the Merger Agreement, you may vote “FOR,” “AGAINST” or “ABSTAIN.” If you elect to “ABSTAIN,” the abstention has the same effect as a vote “AGAINST” such proposal. |
|
|
If you provide specific instructions with regard to the proposal, your shares will be voted as you instruct on the proposal. If no instructions are indicated, the shares will be voted as recommended by the Board. |
|
| Q: |
What is the effect of broker non-votes? |
| A: |
If you hold shares beneficially in street name and do not provide your broker, bank or other nominee with voting instructions, your shares may constitute “broker non-votes.” Generally, broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. At this Annual Meeting, only Proposal 2, to ratify the appointment of CNIT’s independent registered public accounting firm, is not subject to broker non-votes, and brokers, banks or other nominees may vote on Proposal 2, but may not vote on the other matters presented at this Annual Meeting, without instructions. |
|
In tabulating the voting result for the proposals to elect directors and the advisory votes on executive compensation, shares that constitute broker non-votes are not considered entitled to vote or votes cast on that proposal. Thus, broker non-votes will not affect the outcome of any of those proposals. |
|
|
Since the merger must be approved by the holders of a majority of the outstanding shares of CNIT’s common stock to proceed, for the purpose of determining whether the stockholders have approved the proposal, broker non-votes will have the effect of votes against the proposal. |
|
| Q: |
Who will bear the cost of soliciting votes for the Annual Meeting? |
| A: |
This solicitation is made by CNIT, and all costs associated with soliciting proxies will be borne by CNIT. CNIT has retained Advantage Proxy, Inc. to assist with the solicitation for an estimated fee of $5,000 plus reasonable out-of- pocket expenses. In addition, CNIT will reimburse brokerage firms, banks and other persons representing beneficial owners of shares for their expenses in forwarding solicitation materials to such beneficial owners. Proxies may be solicited by certain of CNIT’s directors, officers and regular employees personally or by telephone, facsimile or electronic mail. No additional compensation will be paid to these persons for such services. |
4
| Q: |
What if I have questions about lost stock certificates or need to change my mailing address? |
| A: |
You may contact our transfer agent, Island Stock Transfer, by telephone at 1-727-289-0010 or by going to its website at www.islandstocktransfer.com/contact if you have lost your stock certificate or need to change your mailing address. |
| Q: |
Whom should I contact with questions? |
| A: |
CNIT has retained Advantage Proxy, Inc. as proxy solicitor in connection with the Annual Meeting. You may contact our proxy soliciting agent by telephone at 877-870-8565 or in writing at PO Box 13581, Des Moines, WA 98198. |
|
Alternatively, you may obtain information from us by making a request by telephone at (+86) 755 -8370-8333 or in writing at the following address: |
|
|
China Information Technology, Inc. |
Questions and Answers Relating to the Merger
| Q: |
What is the merger? |
| A: |
Under the Merger Agreement, Merger Sub will merge with and into CNIT, with CNIT surviving the merger as a wholly owned subsidiary of CNIT BVI. Upon consummation of the merger, each issued and outstanding share of CNIT’s common stock will be converted into the right to receive one ordinary share in the capital of CNIT BVI, which shares will be issued by CNIT BVI in connection with the merger. Following the merger, CNIT BVI, together with its subsidiaries, will own and continue to conduct our business in substantially the same manner as it is currently being conducted by CNIT and its subsidiaries. CNIT BVI will also be managed by the same Board of Directors and executive officers that manage CNIT today. |
| Q: |
Why does CNIT want to engage in the merger? |
| A: |
The merger is part of a reorganization of CNIT’s corporate structure approved by our Board of Directors that we expect will, among other things, result in a reduction in operational, administrative, legal and accounting costs over the long term and provide us with flexibility to pursue listings on international stock exchanges such as the Hong Kong Stock Exchange. Please see the section entitled “Proposal 4: Approval of the Merger Agreement—Background and Reasons for the Merger.” However, there can be no assurance that following the merger we will be able to realize these expected benefits for the reasons discussed in the section entitled “Risk Factors—Risks Relating to the Merger and Reorganization—The expected benefits of the merger and reorganization may not be realized.” We also have incurred and will continue to incur transaction costs (the significant majority of which will have been incurred and expensed prior to your vote on the proposal). Please see the section entitled “Summary—Summary Pro Forma Financial Information” for a description of these transaction costs. |
| Q: |
Will the merger affect current or future operations? |
| A: |
The merger is not expected to have a material impact on how we conduct day-to-day operations. While the new corporate structure would not change our future operational plans to grow our business, including our focus on our China business, it may improve our ability to expand internationally. The location of future operations will depend on the needs of the business, which will be determined without regard to CNIT BVI’s jurisdiction of incorporation. Please see the section entitled “Proposal 4: Approval of the Merger Agreement—Background and Reasons for the Merger.” |
| Q: |
Is the merger taxable to me? |
| A: |
Because of U.S. federal income tax rules under Section 7874 of the Internal Revenue Code, or the Code, U.S. holders will not recognize gain or loss for U.S. federal income tax purposes upon receipt of CNIT BVI ordinary shares in exchange for CNIT common stock. The aggregate tax basis in the ordinary shares of CNIT BVI received in the merger will equal each such U.S. holder’s aggregate tax basis in the CNIT common stock surrendered. A U.S. holder’s holding period for the ordinary shares of CNIT BVI that are received in the merger will include such U.S. holder’s holding period for the common stock of CNIT surrendered, provided the surrendered CNIT common stock is held as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment).. Please see the section entitled “Taxation.” |
5
|
THE TAX TREATMENT OF THE MERGER UNDER STATE OR LOCAL LAW WILL DEPEND ON THE RELEVANT JURISDICTION. IT IS POSSIBLE THAT THE MERGER MAY BE TAXABLE UNDER THE TAX LAW OF SOME STATES OR LOCALITIES. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR PRIOR TO THE ANNUAL MEETING REGARDING THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO YOU. |
|
| Q: |
Has the U.S. Internal Revenue Service rendered a ruling on any aspects of the merger? |
| A: |
No ruling has been requested from the U.S. Internal Revenue Service, or the IRS, in connection with the merger. |
| Q: |
When do you expect to complete the merger? |
| A: |
If the adoption of the Merger Agreement is approved by our stockholders at the Annual Meeting, we anticipate that the merger will become effective at 4:30 p.m., Eastern Time, on , 2012, although the merger may be abandoned by our Board of Directors prior to its completion. Please see the section entitled “Risk Factors—Risks Relating to the Merger and Reorganization—Our Board of Directors may choose to defer or abandon the merger.” |
| Q: |
What types of information and reports will CNIT BVI make available to shareholders following the merger? |
|
| A: |
Following completion of the merger, CNIT BVI is expected to qualify as a “foreign private issuer” under the rules and regulations of the SEC. CNIT BVI will remain subject to the mandates of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and, as long as the CNIT BVI’s ordinary shares are listed on the NASDAQ Stock Market, or NASDAQ, the governance and disclosure rules of that stock exchange. However, as a foreign private issuer, CNIT BVI will be exempt from certain rules under the Exchange Act that would otherwise apply if CNIT BVI were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. For example: |
|
|
|
CNIT BVI may include in its SEC filings financial statements prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, or with the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB, without reconciliation to U.S. GAAP. |
|
|
|
CNIT BVI will not be required to provide as many Exchange Act reports, or as frequently or as promptly, as U.S. companies with securities registered under the Exchange Act. For example, CNIT BVI will not be required to file current reports on Form 8-K within four business days from the occurrence of specific material events. Instead, CNIT BVI will need to promptly furnish reports on Form 6-K any information that CNIT BVI (a) makes or is required to make public under the laws of the BVI, (b) files or is required to file under the rules of any stock exchange or (iii) otherwise distributes or is required to distribute to its shareholders. Unlike Form 8-K, there is no precise deadline by which Form 6-K must be furnished. In addition, CNIT BVI will not be required to file its annual report on Form 10-K, which may be due as soon as 60 days after its fiscal year end. As a foreign private issuer, CNIT BVI will be required to file an annual report on Form 20-F within four months after its fiscal year end. |
|
|
|
CNIT BVI will not be required to provide the same level of disclosure on certain issues, such as executive compensation. |
|
|
|
CNIT BVI will not be required to conduct advisory votes on executive compensation. |
|
|
|
CNIT BVI will be exempt from filing quarterly reports under the Exchange Act with the SEC. |
|
|
|
CNIT BVI will not be subject to the requirement to comply with Regulation FD, which imposes certain restrictions on the selected disclosure of material information. |
|
|
|
CNIT BVI will not be required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act. | |
|
|
Directors and offices of CNIT BVI will not be required to file public reports of their stock ownership and trading activities or be subject to “short-swing” profit liability for transactions in CNIT BVI stock under Section 16 of the Exchange Act. | |
6
CNIT BVI expects to take advantage of these exemptions if the merger is effected. Accordingly, after the completion of the merger, if you hold CNIT BVI securities, you may receive less information about CNIT BVI and its business than you currently receive with respect to CNIT and be afforded less protection under the U.S. federal securities laws than you are currently entitled to. However, consistent with our policy of seeking input from, and engaging in discussions with, our stockholders, on executive compensation matters, CNIT BVI intends to provide disclosure relating to its executive compensation philosophy, policies and practices and conduct an advisory vote on executive compensation once every year after the merger is effected. However, CNIT BVI expects to review this practice after the next such advisory vote and may at that time or in the future determine to conduct such advisory votes more or less frequently or to not conduct them at all.
If CNIT BVI loses its status as a foreign private issuer at some future time, then it will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if it were a company incorporated in the United States. The costs incurred in fulfilling these additional regulatory requirements could be substantial. Please see the sections entitled “Risk Factors—Risks Relating to the Merger and Reorganization—The expected benefits of the merger and reorganization may not be realized” and “Risk Factors—Risks Relating to the Merger and Reorganization—If CNIT BVI fails to qualify as a foreign private issuer upon completion of the merger, or loses its status as a foreign private issuer at some future time, CNIT BVI would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not incur as a foreign private issuer.”
| Q: |
Do I have to take any action to exchange my CNIT common stock and receive CNIT BVI ordinary shares? |
| A: |
The CNIT common stock registered in your name or which you beneficially own through your broker will be converted into the right to receive an equal number of CNIT BVI ordinary shares and such shares will be registered in your name (or your broker’s name, as applicable) in CNIT BVI’s register of members upon completion of the merger, without any further action on your part. Upon completion of the merger, only registered shareholders reflected in CNIT BVI’s register of members will have and be entitled to exercise any voting and other rights with respect to and to receive any dividend and other distributions upon CNIT BVI ordinary shares registered in their respective names. Any attempted transfer of CNIT stock prior to the merger that is not properly documented and reflected in the stock records maintained by CNIT’s transfer agent as of immediately prior to the time that the merger become effective, or the Effective Time, will not be reflected in CNIT BVI’s register of members upon completion of the merger. Registered holders of CNIT BVI’s ordinary shares seeking to transfer CNIT BVI ordinary shares following the merger will be required to provide customary transfer documents required by CNIT BVI’s transfer agent to complete the transfer. |
|
If you hold CNIT common stock in uncertificated book-entry form (for example, if you hold your shares through a broker), at the Effective Time the CNIT common stock registered in your name or which you beneficially own through your broker will be converted into the right to receive an equal number of CNIT BVI ordinary shares and such shares will be registered in your name (or your broker’s name, as applicable) in book-entry form without any action on your part. |
|
|
If you hold CNIT common stock in certificated form, you may exchange your CNIT stock certificates for new CNIT BVI share certificates promptly following the merger. We will request that all CNIT stock certificates be returned to CNIT BVI’s transfer agent following the merger. Soon after the closing of the merger, you will be sent a letter of transmittal from our exchange agent. It is expected that, prior to the Effective Time, Island Stock Transfer will be appointed as our exchange agent for the merger. The letter of transmittal will contain instructions explaining the procedure for surrendering your CNIT stock certificates for new CNIT BVI share certificates. YOU SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD. |
|
|
CNIT’s current transfer agent is Island Stock Transfer, which will continue to serve as the transfer agent for CNIT BVI ordinary shares after the Effective Time. |
7
| Q: |
Can I trade my CNIT common stock before the merger is completed? |
| A: |
Yes. CNIT common stock will continue trading on NASDAQ through the last trading day prior to the date of
completion of the merger, which date of completion is expected to be
, 2012 (U.S. time). |
| Q: |
After the merger, where can I trade my CNIT BVI ordinary shares? |
| A: |
We expect that as of the Effective Time, the CNIT BVI ordinary shares will be authorized for listing on NASDAQ, and we expect such shares will be traded on the exchange under the symbol “CNIT.” |
| Q: |
How will my rights as a shareholder of CNIT BVI change after the merger relative to my rights as a stockholder of CNIT prior to the merger? |
| A: |
Because of differences between Nevada law and BVI law and differences between the governing documents of CNIT and CNIT BVI, we are unable to adopt governing documents for CNIT BVI that are identical to the governing documents for CNIT, but we have attempted to preserve in the memorandum and articles of association of CNIT BVI the same allocation of material rights and powers between the shareholders and our Board of Directors that exists under CNIT’s bylaws and articles of incorporation. For example, under CNIT’s bylaws, a director must be elected by a plurality of the votes cast, meaning that the number of shares entitled to vote on the election of directors and represented in person or by proxy at an annual meeting casting their vote “FOR” a director must exceed the number of votes “WITHHELD” from a director. This provision is preserved in the articles of association of CNIT BVI. |
|
Nevertheless, CNIT BVI’s proposed memorandum and articles of association differ from CNIT’s bylaws and articles of incorporation, both in form and substance, and your rights as a shareholder of CNIT BVI will change relative to your rights as a stockholder of CNIT as a result of the merger and you may not be afforded as many rights as a shareholder of CNIT BVI under applicable laws and the CNIT BVI memorandum and articles of association as you were as a stockholder of CNIT under applicable laws and the CNIT articles of incorporation and bylaws. Please see the sections entitled “Risk Factors—Risks Relating to the Merger and Reorganization—Your rights as a stockholder of CNIT will change as a result of the merger and you may not be afforded as many rights as a shareholder of CNIT BVI under applicable laws and the CNIT BVI memorandum and articles of association as you were as a stockholder of CNIT under applicable laws and the CNIT articles of incorporation and bylaws,” “Description of Share Capital of CNIT BVI” and “Differences in Corporate Law.” |
|
|
Notwithstanding the foregoing, the changes above may not change your rights as a shareholder significantly in practice because CNIT has a concentrated ownership structure with a few stockholders each holding more than five percent of CNIT’s common stock. For further details on the security ownership of certain beneficial owners of CNIT, please see the section entitled “Security Ownership of Certain Beneficial Owners and Management.” |
|
|
Additionally, as a foreign private issuer, CNIT BVI will be permitted to follow corporate governance practices in accordance with BVI laws in lieu of certain NASDAQ corporate governance standards. However, we do not intend to initially rely on NASDAQ exemptions or accommodations for foreign private issuers following the merger. Please see the sections entitled “Proposal 4: Approval of the Merger Agreement—Background and Reasons for the Merger.” |
8
SUMMARY
This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. For more information, including a more complete description of the merger, you should read carefully this entire proxy statement/prospectus, including the Annexes. Please also see the section entitled “Where You Can Find More Information.” The Merger Agreement, a copy of which is attached as Annex A to this proxy statement/prospectus, contains the terms and conditions of the merger. The memorandum and articles of association of CNIT BVI will serve purposes substantially similar to the articles of incorporation and bylaws of CNIT. A copy of the memorandum and articles of association of CNIT BVI is attached to this proxy statement/prospectus as Annex B.
Annual Meeting of Stockholders
You can vote at the Annual Meeting if you owned CNIT common stock at the close of business on , 2012, the Record Date. As of , 2012, there were shares of CNIT common stock outstanding and entitled to vote. Adoption of the Merger Agreement requires the affirmative vote of the holders of a majority of the shares of CNIT common stock entitled to vote at the Annual Meeting. As of , 2012, our directors and executive officers and their affiliates owned, in the aggregate, approximately of such shares, representing ownership of approximately % of the outstanding shares of CNIT common stock as of that date. These shares are included in the number of shares entitled to vote at the Annual Meeting.
The Merger Agreement
The Merger Agreement provides for a merger that would result in your shares of CNIT common stock being converted into the right to receive an equal number of ordinary shares in the capital of CNIT BVI, a company incorporated under the laws of the BVI. Under the Merger Agreement, Merger Sub, a wholly owned subsidiary of CNIT BVI, which itself is currently a wholly owned subsidiary of CNIT, will merge with and into CNIT, with CNIT surviving the merger as a wholly owned subsidiary of CNIT BVI.
Parties to the Merger
CNIT is a leading provider of information and display technologies in the PRC. We provide a broad portfolio of software, hardware and fully integrated solutions to customers in a variety of technology sectors including Geographic Information Systems, Digital Public Security Technologies, Digital Hospital Information Systems, education, media, and consumer products. We were founded in 1993 and are headquartered in Shenzhen, China. We are currently subject to SEC and other disclosure obligations in the United States.
Our customers are mostly public sector entities that use our products and services to improve the service quality and management level and efficiency of public security, traffic control, fire control, medical rescue, border control, and surveying and mapping. Our typical customers include some of the most important governmental departments in China, including the Ministry of Public Security, the public security, fire fighting, traffic and police departments of several provinces, the Shenzhen General Station of Exit and Entry Frontier Inspection, and several provincial personnel, urban planning, civil administration, land resource, and mapping and surveying bureaus. Over the past several years, we have diversified our customer base beyond our local reach. In the future, we expect to continually expand our market and product offerings in the public and other sectors, through geographic expansion and enhancement of our technical capabilities.
CNIT BVI is a newly formed company incorporated under the laws of the BVI and currently a wholly owned subsidiary of CNIT. CNIT BVI does not have a significant amount of assets or liabilities and has not engaged in any business since its formation other than activities associated with its anticipated participation in the merger. Following the merger, CNIT BVI, together with its subsidiaries, will own and continue to conduct our business in substantially the same manner as is currently being conducted by CNIT and its subsidiaries.
Merger Sub is a newly formed Nevada corporation and currently a wholly owned subsidiary of CNIT BVI. Merger Sub does not have a significant amount of assets or liabilities and has not engaged in any business since its formation other than activities associated with its anticipated participation in the merger.
The principal executive offices of each of CNIT, CNIT BVI and Merger Sub are located at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China, and the telephone number of each company is (+86) 755 -8370-8333.
9
Background and Reasons for the Merger
In reaching its decision to approve the Merger Agreement and the merger, our Board of Directors identified several potential benefits to our stockholders, which are described below under “Proposal 4: Approval of the Merger Agreement—Background and Reasons for the Merger.” The merger is part of a reorganization of CNIT’s corporate structure that we expect will, among other things, result in a reduction in operational, administrative, legal and accounting costs over the long term. Please also see the section entitled “Risk Factors—Risks Relating to the Merger and Reorganization” below for a description of certain risks associated with the merger and reorganization.
The Merger
Under the Merger Agreement, Merger Sub will merge with and into CNIT. Upon completion of the merger, CNIT BVI and its subsidiaries will own and continue to conduct the business that CNIT and its subsidiaries currently conduct, in substantially the same manner. As a result of the merger, our stockholders will own ordinary shares of CNIT BVI, a company incorporated under the laws of the BVI, rather than common stock in CNIT, a Nevada corporation. As a result of the merger, each outstanding share of CNIT common stock will be converted into the right to receive the same number of ordinary shares of CNIT BVI, which shares will be issued by CNIT BVI in connection with the merger. Our Board of Directors reserves the right to defer or abandon the merger. Please see the section entitled “Risk Factors—Risks Relating to the Merger and Reorganization—Our Board of Directors may choose to defer or abandon the merger.”
The following diagram depicts our organizational structure immediately before and after the merger.
BEFORE
10
AFTER
Conditions to Completion of the Merger
The following conditions must be satisfied or waived, if allowed by law, to complete the merger and reorganization:
| 1. |
the Merger Agreement has been adopted by the requisite vote of stockholders of CNIT; |
| 2. |
none of the parties to the Merger Agreement is subject to any decree, order or injunction that prohibits the consummation of the merger; |
| 3. |
the registration statement of which this proxy statement/prospectus is a part has been declared effective by the SEC and no stop order is in effect; |
| 4. |
the CNIT BVI ordinary shares to be issued pursuant to the merger have been authorized for listing on NASDAQ, subject to official notice of issuance and satisfaction of other standard conditions; |
| 5. |
all material consents and authorizations of, filings or registrations with, and notices to, any governmental or regulatory authority required of CNIT, CNIT BVI or their subsidiaries to consummate the merger have been obtained or made; and |
| 6. |
the representations and warranties of the parties to the Merger Agreement set forth in the Merger Agreement are true and correct in all material respects, and the covenants of the parties set forth in the Merger Agreement (other than those to be performed after the Effective Time) have been performed in all material respects. |
Our Board of Directors currently does not anticipate any circumstances in which it would waive the conditions listed above; however, in the event it determines that a waiver of any such conditions is in the best interests of our stockholders and that such change to the terms of the merger does not make the disclosure provided to our stockholders materially misleading (for example, if a representation in the merger agreement is not true but there is otherwise no harm to CNIT or our stockholders), our Board of Directors will not resolicit shareholder approval of the merger. If a waiver of any condition listed above would make the disclosure provided to our stockholders materially misleading, our Board of Directors will resolicit shareholder approval of the merger. Additionally, our Board of Directors reserves the right to defer or abandon the merger as well for the reasons described under “Risk Factors—Risks Relating to the Merger and Reorganization—Our Board of Directors may choose to defer or abandon the merger.”
11
Regulatory Approvals
The only governmental or regulatory approvals or actions that are required to complete the merger are compliance with U.S. federal and state securities laws, the NASDAQ rules and regulations and Nevada corporate laws.
Rights of Dissenting Stockholders
Under the Nevada Revised Statues, or the NRS, you will not have appraisal rights in connection with the merger.
Ownership in CNIT BVI
The CNIT common stock registered in your name or which you beneficially own through your broker will be converted into the right to receive an equal number of CNIT BVI ordinary shares and such shares will be registered in your name (or your broker’s name, as applicable) in CNIT BVI’s register of members upon completion of the merger, without any further action on your part. Upon completion of the merger, only registered shareholders reflected in CNIT BVI’s register of members will have and be entitled to exercise any voting and other rights with respect to and to receive any dividend and other distributions upon CNIT BVI ordinary shares registered in their respective names. Any attempted transfer of CNIT stock prior to the merger that is not properly documented and reflected in the stock records maintained by CNIT’s transfer agent as of immediately prior to the Effective Time will not be reflected in CNIT BVI’s register of members upon completion of the merger. Registered holders of CNIT BVI’s ordinary shares seeking to transfer CNIT BVI ordinary shares following the merger will be required to provide customary transfer documents required by CNIT BVI’s transfer agent to complete the transfer.
If you hold CNIT common stock in uncertificated book-entry form (for example, if you hold your shares through a broker), at the Effective Time, the CNIT common stock registered in your name or which you beneficially own through your broker will be converted into the right to receive an equal number of CNIT BVI ordinary shares and such shares will be registered in your name (or your broker’s name, as applicable) in book-entry form without any action on your part.
If you hold CNIT common stock in certificated form, you may exchange your CNIT stock certificates for new CNIT BVI share certificates promptly following the merger. We will request that all CNIT stock certificates be returned to CNIT BVI’s transfer agent following the merger. Soon after the closing of the merger, you will be sent a letter of transmittal from our exchange agent. The letter of transmittal will contain instructions explaining the procedure for surrendering your CNIT stock certificates for new CNIT BVI share certificates. YOU SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
Stock Exchange Listing
It is a condition to the completion of the merger that the ordinary shares of CNIT BVI will be authorized for listing on NASDAQ, subject to official notice of issuance and satisfaction of other standard conditions. As such, we expect that as of the Effective Time, the CNIT BVI ordinary shares will be authorized for listing on NASDAQ, and we expect such shares will be traded on the exchange under the symbol “CNIT.”
Accounting Treatment of the Merger
The merger is a legal reorganization with no change in ultimate ownership interest immediately before and after the transaction. Accordingly, all assets and liabilities will be recorded at historical cost, in a manner similar to an exchange between entities under common control.
12
Recommendation and Required Vote
Our Board of Directors has unanimously determined that the reorganization, to be effected by the merger, is advisable and in the best interests of CNIT and our stockholders and, as such, has unanimously approved the merger and the Merger Agreement. The Board of Directors recommends that you vote “FOR” the adoption of the Merger Agreement.
Tax Considerations
United States Federal Income Tax Consequences of the Merger to CNIT and CNIT BVI
We expect that neither CNIT nor CNIT BVI will incur U.S. federal income tax as a result of completion of the merger. Following the merger, CNIT BVI will be subject to U.S. federal income tax on its worldwide income in the same manner as applies to CNIT.
United States Federal Income Taxation of CNIT Stockholders
Taxation of U.S. Holders. The merger should be characterized for U.S. federal income tax purposes as either a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, or the Code, or a transaction qualifying under Section 351 of the Code. In either case, because of U.S. federal income tax rules under Section 7874 of the Code, U.S. holders will not recognize gain or loss for U.S. federal income tax purposes upon receipt of CNIT BVI ordinary shares in exchange for CNIT common stock. The aggregate tax basis in the ordinary shares of CNIT BVI received in the merger will equal each such U.S. holder’s aggregate tax basis in the CNIT common stock surrendered. A U.S. holder’s holding period for the ordinary shares of CNIT BVI that are received in the merger will include such U.S. holder’s holding period for the common stock of CNIT surrendered, provided the surrendered CNIT common stock is held as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment).
Taxation of Non-U.S. Holders. Because of U.S. federal income tax rules under Section 7874 of the Code, the holders of CNIT common stock who are treated as foreign persons for U.S. federal income tax purposes will not recognize taxable gain or loss on their CNIT common stock for U.S. federal income tax purposes.
Please see the section entitled “Taxation” for further information regarding material tax consequences relating to the merger and the ownership and disposition of CNIT BVI ordinary shares.
Risk Factors
There are a number of risks which you should be aware of in considering whether to vote in favor of the proposal to approve the merger, including the following:
-
your rights as a shareholder of CNIT BVI will change relative to your rights as a stockholder of CNIT as a result of the merger and you may not be afforded as many rights as a shareholder of CNIT BVI under applicable laws and the CNIT BVI memorandum and articles of association as you were as a stockholder of CNIT under applicable laws and the CNIT articles of incorporation and bylaws;
-
as a result of different shareholder voting requirements in the BVI relative to Nevada, we may have less flexibility with respect to our ability to amend our constitutional documents and enter into certain business combinations than we now have;
-
as a foreign private issuer, CNIT BVI will not be required to provide its shareholders with the same information as CNIT would if CNIT remained a U.S. public issuer and, as a result, you may not receive as much information about CNIT BVI as you did about CNIT and you may not be afforded the same level of protection as a shareholder of CNIT BVI under applicable laws and the CNIT BVI memorandum and articles of association as you were as a stockholder of CNIT under applicable laws and the CNIT articles of incorporation and bylaws;
-
the enforcement of civil liabilities against CNIT BVI may be more difficult; and
13
-
the expected benefits of the merger and reorganization may not be realized because the achievement of the benefits are subject to factors that we do not control, such as the reactions of third parties with whom we enter into contracts and do business and the reactions of investors and analysts.
The risks are discussed more fully in the section entitled “Risk Factors—Risks Relating to the Merger and Reorganization” following this proxy statement/prospectus summary.
Differences in Corporate Law
The principal attributes of CNIT’s common stock and CNIT BVI’s ordinary shares will be similar. However, there are differences between the rights of stockholders under the NRS and the rights of shareholders under BVI law. In addition, there are differences between the provisions of CNIT’s articles of incorporation and bylaws and CNIT BVI’s memorandum and articles of association, as explained further below in this proxy statement/prospectus. Please see the sections entitled “Risk Factors—Risks Relating to the Merger and Reorganization—Your rights as a stockholder of CNIT will change as a result of the merger and you may not be afforded as many rights as a shareholder of CNIT BVI under applicable laws and the CNIT BVI memorandum and articles of association as you were as a stockholder of CNIT under applicable laws and the CNIT articles of incorporation and bylaws,” “Description of Share Capital of CNIT BVI” and “Differences in Corporate Law.”
Selected Historical Consolidated Financial Data
The selected historical consolidated financial data of CNIT in the table below was derived from CNIT’s audited consolidated financial statements as of and for each of the years in the five year period ended December 31, 2011 and from CNIT’s unaudited condensed consolidated financial statements for the three months ended March 31, 2012 and 2011. This data should be read in conjunction with the audited consolidated financial statements of CNIT, including the notes to the financial statements, and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in CNIT’s Annual Report on Form 10-K for the year ended December 31, 2011, and the unaudited condensed consolidated financial statements of CNIT, including the notes to the financial statements, and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in CNIT’s Quarterly Report on Form 10-Q for the three months ended March 31, 2012, which are incorporated by reference into this proxy statement/prospectus. Please refer to the section in this proxy statement/prospectus entitled “Where You Can Find More Information.” The unaudited condensed consolidated financial statements include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for the fair statement of the financial information set forth in those statements. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods, and the results for the year ended December 31, 2011 and for the three months ended March 31, 2012 are not necessarily indicative of results to be expected for 2012 or for any other period.
We have not included data for CNIT BVI or Merger Sub because they did not conduct business during any of the periods discussed below.
| Three Months Ended | |||||||||||||||||||||
| Years Ended December 31, | March 31, | ||||||||||||||||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | 2011 | 2012 | |||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||
| Statement of Operations Data | |||||||||||||||||||||
| Total revenue | $ | 30,342,709 | $ | 85,301,184 | $ | 100,996,094 | $ | 163,845,597 | $ | 114,535,553 | $ | 26,948,748 | $ | 16,279,989 | |||||||
| Total cost of revenue | 12,373,370 | 46,222,320 | 50,344,427 | 93,282,442 | 70,216,049 | 13,293,908 | 10,498,307 | ||||||||||||||
| Gross profit | 17,969,339 | 39,078,864 | 50,651,667 | 70,563,155 | 44,319,504 | 13,654,840 | 5,781,682 | ||||||||||||||
| Income (loss) from operations | 13,310,477 | 23,882,882 | 32,156,443 | 42,563,452 | 9,527,133 | 8,915,053 | (3,208,605 | ) | |||||||||||||
| Net income (loss) attributable to CNIT | $ | 13,331,452 | $ | 23,786,976 | $ | 30,094,569 | $ | 34,402,004 | $ | 7,909,398 | $ | 8,222,333 | $ | (2,859,798 | ) | ||||||
| Income (loss) per share - basic | $ | 0.34 | $ | 0.51 | $ | 1.24 | $ | 1.33 | $ | 0.30 | $ | 0.31 | $ | (0.11 | ) | ||||||
| Income (loss) per share - diluted | $ | 0.33 | $ | 0.51 | $ | 1.24 | $ | 1.32 | $ | 0.29 | $ | 0.31 | $ | (0.11 | ) | ||||||
| Balance Sheet Data | |||||||||||||||||||||
| Cash and cash equivalents | $ | 19,755,182 | $ | 9,565,252 | $ | 13,478,633 | $ | 18,166,857 | $ | 14,019,634 | $ | 15,680,839 | $ | 7,600,800 | |||||||
| Working capital | $ | 49,201,889 | $ | 59,237,074 | $ | 50,388,605 | $ | 58,822,738 | $ | 61,896,471 | $ | 63,284,216 | $ | 61,784,000 | |||||||
| Total assets | $ | 88,853,795 | $ | 148,468,182 | $ | 250,828,938 | $ | 339,401,724 | $ | 361,792,142 | $ | 352,242,561 | $ | 357,670,958 | |||||||
| Total liabilities | $ | 4,787,196 | $ | 25,463,055 | $ | 82,930,104 | $ | 113,826,030 | $ | 109,252,456 | $ | 115,792,794 | $ | 106,641,022 | |||||||
| Stockholders’ equity | $ | 84,066,599 | $ | 123,005,127 | $ | 167,898,834 | $ | 225,575,694 | $ | 252,539,686 | $ | 236,449,767 | $ | 251,029,936 | |||||||
14
Summary Pro Forma Financial Information
Pro forma condensed consolidated financial statements for CNIT BVI are not presented in this proxy statement/prospectus because there are no significant pro forma adjustments required to be made to the historical consolidated financial statements of CNIT to give effect to the transaction. The transaction will be accounted for as a legal reorganization with no change in ultimate ownership interest immediately before and after the transaction. Please see the section entitled “Proposal 4: Approval of the Merger Agreement—Accounting Treatment of the Merger.”
Reference is made to the consolidated financial statements of CNIT, including the notes to the financial statements, in CNIT’s Annual Report on Form 10-K for the year ended December 31, 2011, which is incorporated by reference into this proxy statement/prospectus. Please refer to the section in this proxy statement/prospectus entitled “Where You Can Find More Information.”
Costs incurred in connection with the merger and reorganization are not expected to be material and will be expensed as incurred.
15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In considering whether to vote in favor of the proposal to adopt the Merger Agreement in connection with the merger, you should consider carefully the following risks or investment considerations, in addition to the other information in this proxy statement/prospectus. In addition, please note that this proxy statement/prospectus contains or incorporates by reference “forward-looking statements” and “forward-looking information” under applicable securities laws. These forward-looking statements include, but are not limited to, statements about the merger and reorganization and our plans, objectives, expectations and intentions with respect to future operations, including the benefits or impact described in this proxy statement/prospectus that we expect to achieve as a result of the merger and reorganization. You can find many of these statements by looking for words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions in this proxy statement/prospectus or in the documents incorporated by reference.
Any forward-looking statements in this proxy statement/prospectus reflect only expectations that are current as of the date of this proxy statement/prospectus or the date of any document incorporated by reference in this document, as the case may be, are not guarantees of performance, and are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are difficult to predict and generally beyond our ability to control. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” below.
Further, these forward-looking statements are based on assumptions with respect to business strategies and decisions that are subject to change. Actual results or performance may differ materially from those we express in our forward-looking statements. Except as may be required by applicable securities laws, we disclaim any obligation or undertaking to disseminate any updates or revisions to our statements, forward-looking or otherwise, to reflect changes in our expectations or any change in events, conditions or circumstances on which any such statements are based.
16
RISK FACTORS
Set forth below, we have identified the factors, among others, that you should consider before making a decision on whether or not to vote in favor of the proposal to adopt the Merger Agreement, and we have identified certain of the risks that could cause our actual plans or results to differ materially from those included in the forward-looking statements contained or incorporated by reference herein. You should consider these risks when deciding how to vote. In addition, you should also review carefully the risks affecting our business generally that could also cause our actual plans or results to differ materially from those included in the forward-looking statements contained or incorporated by reference herein.
Risks Relating to the Merger and Reorganization
Your rights as a stockholder of CNIT will change as a result of the merger and you may not be afforded as many rights as a shareholder of CNIT BVI under applicable laws and the CNIT BVI memorandum and articles of association as you were as a stockholder of CNIT under applicable laws and the CNIT articles of incorporation and bylaws.
The corporate affairs of CNIT BVI are governed by the memorandum and articles of association of CNIT BVI, the BVI Business Companies Act, 2004 (as amended) of the BVI, or the BVI Act, and the common law of the BVI. Although we have attempted to preserve in the memorandum and articles of association of CNIT BVI the same allocation of material rights and powers between the shareholders and our Board of Directors that exists under CNIT’s bylaws and articles of incorporation, because of differences between Nevada law and BVI law and differences between the governing documents of CNIT and CNIT BVI, your rights as a shareholder in CNIT BVI will not be the same as your rights as a stockholder in CNIT. The following are examples of how this is so:
Under the NRS, a stockholder may bring a derivative suit provided the requirements to do so under the NRS have been met. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibility of the directors under BVI law are governed by the BVI Act and 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 has persuasive, but not binding, authority on a court in the BVI. The rights of shareholders and the fiduciary responsibilities of directors under BVI law may not be as clearly established as they would be under statutes or judicial precedent in Nevada. In particular, the BVI has a less developed body of securities laws as compared to the United States, and some states (including Nevada) have more fully developed and judicially interpreted bodies of corporate law.
CNIT BVI, as a BVI company, may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of CNIT BVI being more limited than those of stockholders of CNIT would be. Accordingly, CNIT BVI shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The BVI courts are also unlikely to recognize or enforce against CNIT BVI judgments of courts in the U.S. based on certain liability provisions of U.S. securities law, and to impose liabilities against CNIT BVI, in original actions brought in the BVI, based on certain liability provisions of U.S. securities laws that are penal in nature.
Under the laws of the BVI, there is some statutory law for the protection of minority shareholders under the Act. The principal protection under statutory law is that shareholders may bring an action to enforce a BVI company’s memorandum and articles of association. The BVI Act sets forth the procedure to bring such a claim. Shareholders of a BVI company are entitled to have the affairs of the BVI company conducted in accordance with the general law and the memorandum and articles of association. BVI companies are not obligated to appoint an independent auditor and shareholders are not entitled to receive the audited financial statements of the BVI company.
There are common law rights for the protection of shareholders that may be invoked (such rights have also now been given statutory footing under the BVI Act), largely dependent on English company law, since the common law of the BVI for companies incorporated under the BVI Act 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 memorandum or articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (i) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority, (ii) acts that constitute fraud on the minority where the wrongdoers control the company, (iii) acts that infringe on the personal rights of the shareholders, such as the right to vote, and (iv) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of Nevada.
17
The BVI Act has introduced a series of remedies available to shareholders. Where a company incorporated under the BVI Act conducts some activity which breaches the BVI Act or the company’s memorandum and articles of association, the court can issue a restraining or compliance order. Shareholders can also bring derivative, personal and representative actions under certain circumstances. The traditional English basis for shareholders’ remedies have also been incorporated into the BVI Act – where a shareholders 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, he may now apply to the BVI court for an order on such conduct.
Any shareholders of a company may apply to the 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 BVI Act provides that any shareholders 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% 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 shareholders 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%, or fewer of the issued shares of the company required by the holders of 90%, or more of the shares of the company pursuant to the terms of the BVI Act; and (e) an arrangement, if permitted by the 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 BVI or their individual rights as shareholders as established by the company’s memorandum and articles of association.
For a detailed discussion of these and other material differences, please see the comparison chart of your rights as a common stockholder of CNIT against your rights as an ordinary shareholder of CNIT BVI under the section entitled “Differences in Corporate Law.”
The laws of the BVI may not provide CNIT BVI shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States.
The corporate affairs of CNIT BVI are governed by the memorandum and articles of association of CNIT BVI, the BVI Act and the common law of the BVI. The rights of shareholders to take action against CNIT BVI’s directors, actions by minority shareholders and the fiduciary responsibilities of CNIT BVI’s directors to CNIT BVI under BVI law are to a large extent governed by the common law of the BVI. The common law in the BVI is derived in part from comparatively limited judicial precedent in the BVI and from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the BVI. The rights of CNIT BVI's shareholders and the fiduciary responsibilities of its directors, although clearly established under BVI law, are only partly specifically prescribed in statute and so may be less fully prescribed in statute than they are in certain statutes or judicial precedents in some jurisdictions of the United States. In particular, the BVI has a different body of securities laws relative to the United States. Therefore, CNIT BVI’s shareholders may have more difficulty protecting their interests in the face of actions by CNIT BVI’s management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, shareholders of BVI companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. The BVI courts are also unlikely to impose liability against CNIT BVI, in original actions brought in the BVI, based on certain civil liabilities provisions of U.S. securities laws. Please see the section entitled “Enforceability of Civil Liabilities.”
The expected benefits of the merger and reorganization may not be realized.
We have presented in this proxy statement/prospectus the anticipated benefits of the merger and reorganization. Please see the section entitled “Proposal 4: Approval of the Merger Agreement—Background and Reasons for the Merger.” We cannot be assured that all of the goals of the merger and reorganization will be achievable, and some or all of the anticipated benefits of the merger and reorganization may not occur, particularly as the achievement of the benefits are in many important respects subject to factors that we do not control. These factors would include such things as the reactions of third parties with whom we enter into contracts and do business and the reactions of investors and analysts. In addition, the anticipated reduction of SEC reporting requirements and related expenses may not be achieved in the event of changes to the SEC rules applicable to foreign private issuers or if we fail to qualify as a foreign private issuer. While we expect the merger and reorganization will enable us to reduce our operational, administrative, legal and accounting costs over the long term, these benefits may not be achieved.
18
As a foreign private issuer, CNIT BVI will not be required to provide its shareholders with the same information as CNIT would if CNIT remained a U.S. public issuer and, as a result, you may not receive as much information about CNIT BVI as you did about CNIT and you may not be afforded the same level of protection as a shareholder of CNIT BVI under applicable laws and the CNIT BVI memorandum and articles of association as you were as a stockholder of CNIT under applicable laws and the CNIT articles of incorporation and bylaws.
Following the completion of the merger, CNIT BVI is expected to qualify as a “foreign private issuer” under the rules and regulations of the SEC. CNIT BVI will remain subject to the mandates of the Sarbanes-Oxley Act, and, as long as the CNIT BVI’s ordinary shares are listed on the NASDAQ, the governance and disclosure rules of that stock exchange. However, as a foreign private issuer, CNIT BVI will be exempt from certain rules under the Exchange Act that would otherwise apply if CNIT BVI were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. For example:
-
CNIT BVI may include in its SEC filings financial statements prepared in accordance with U.S. GAAP or with IFRS as issued by the IASB without reconciliation to U.S. GAAP;
-
CNIT BVI will not be required to provide as many Exchange Act reports, or as frequently or as promptly, as U.S. companies with securities registered under the Exchange Act. For example, CNIT BVI will not be required to file current reports on Form 8-K within four business days from the occurrence of specific material events. Instead, CNIT BVI will need to promptly furnish reports on Form 6-K any information that CNIT BVI (a) makes or is required to make public under the laws of the BVI, (b) files or is required to file under the rules of any stock exchange or (iii) otherwise distributes or is required to distribute to its shareholders. Unlike Form 8-K, there is no precise deadline by which Form 6-K must be furnished. In addition, CNIT BVI will not be required to file its annual report on Form 10-K, which may be due as soon as 60 days after its fiscal year end. As a foreign private issuer, CNIT BVI will be required to file an annual report on Form 20-F within four months after its fiscal year end;
-
CNIT BVI will not be required to provide the same level of disclosure on certain issues, such as executive compensation;
-
CNIT BVI will not be required to conduct advisory votes on executive compensation;
-
CNIT BVI will be exempt from filing quarterly reports under the Exchange Act with the SEC;
-
CNIT BVI will not be subject to the requirement to comply with Regulation FD, which imposes certain restrictions on the selected disclosure of material information;
-
CNIT BVI will not be required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
-
CNIT BVI will not be required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
CNIT BVI expects to take advantage of these exemptions if the merger is effected. Accordingly, after the completion of the merger, if you hold CNIT BVI securities, you may receive less information about CNIT BVI and its business than you currently receive with respect to CNIT and be afforded less protection under the U.S. federal securities laws than you are entitled to currently. However, consistent with our policy of seeking input from, and engaging in discussions with, our stockholders, on executive compensation matters, CNIT BVI intends to provide disclosure relating to its executive compensation philosophy, policies and practices and conduct an advisory vote on executive compensation once every year after the merger is effected. However, CNIT BVI expects to review this practice after the next such advisory vote and may at that time or in the future determine to conduct such advisory votes more or less frequently or to not conduct them at all.
19
If CNIT BVI fails to qualify as a foreign private issuer upon completion of the merger, or loses its status as a foreign private issuer at some future time, CNIT BVI would be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not incur as a foreign private issuer.
Following completion of the merger, CNIT BVI is expected to qualify as a “foreign private issuer” under the rules and regulations of the SEC. As a foreign private issuer, CNIT BVI will be exempt from certain rules under the Exchange Act that would otherwise apply if CNIT BVI were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. Please see “—As a foreign private issuer, CNIT BVI will not be required to provide its shareholders with the same information as CNIT would if CNIT remained a U.S. public issuer and, as a result, you may not receive as much information about CNIT BVI as you did about CNIT and you may not be afforded the same level of protection as a shareholder of CNIT BVI under applicable laws and the CNIT BVI memorandum and articles of association as you were as a stockholder of CNIT under applicable laws and the CNIT articles of incorporation and bylaws.” While CNIT BVI is expected to qualify as a foreign private issuer following the completion of the merger, if CNIT BVI fails to qualify as a foreign private issuer upon completion of the merger, or loses its status as a foreign private issuer at some future time, CNIT BVI will be required to comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not incur as a foreign private issuer.
If we prepare our financial statements in accordance with IFRS following the merger, there may be a significant effect on our reported financial results.
The SEC permits foreign private issuers to file financial statements in accordance with IFRS as issued by the IASB. At any time in the future, as a foreign private issuer, we may decide to prepare our financial statements in accordance with IFRS as issued by the IASB. The application by us of different accounting standards, a change in the rules of IFRS as issued by the IASB, or in the SEC’s acceptance of such rules, could have a significant effect on our reported financial results. Additionally, U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. IFRS may also be subject to interpretation by some or all of these entities.. A change in these principles or interpretations could have a significant effect on our reported financial results.
Changes in domestic and foreign laws, including tax law changes, could adversely affect CNIT BVI, its subsidiaries and its shareholders, and our effective tax rate may increase whether we effect the merger or not.
Changes in tax laws, regulations or treaties or the interpretation or enforcement thereof, in both or either of the U.S. or BVI, could adversely affect the tax consequences of the merger to CNIT BVI and its shareholders and/or our effective tax rates (whether associated with the merger or otherwise). While the merger is not anticipated to have any material impact on our effective tax rate, there is uncertainty regarding the tax policies of the jurisdictions where we operate, and our effective tax rate may increase and any such increase may be material.
The enforcement of civil liabilities against CNIT BVI may be more difficult.
After the merger, all of our executive officers and a majority of our directors will reside outside of the United States. As a result, it may be more difficult to serve legal process within the United States upon any of these persons and it may also be difficult to enforce, both in and outside of the United States, judgments you may obtain in the U.S. courts against these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. Because CNIT BVI is a BVI company, investors could also experience more difficulty enforcing judgments obtained against CNIT BVI in U.S. courts than would currently be the case for U.S. judgments obtained against CNIT. In addition, it may be more difficult (or impossible) to bring some types of claims against CNIT BVI in BVI courts than it would be to bring similar claims against a U.S. company in a U.S. court. Please see the section entitled “Enforceability of Civil Liabilities.”
20
The market for CNIT BVI shares may differ from the market for CNIT shares.
Although it is anticipated that the CNIT BVI ordinary shares will be authorized for listing on NASDAQ under the symbol “CNIT,” as a company incorporated under the laws of the BVI, shares of CNIT BVI may appeal to different institutional investors, or impact the level of investment by current investors who may prefer or be required by internal guidelines to invest in companies that are incorporated in the United States. Accordingly, the reorganization may impact our institutional investor base, or the level of their respective investments in our securities, and may result in a change in the market prices, trading volume and volatility of the CNIT BVI shares from those of CNIT shares.
Our Board of Directors may choose to defer or abandon the merger.
Completion of the merger may be deferred or abandoned, at any time, by action of our Board of Directors, whether before or after the Annual Meeting. While we currently expect the merger to take place promptly after the proposal to adopt the merger agreement is approved at the Annual Meeting, our Board of Directors may defer completion either before or for a significant time after the Annual Meeting or may abandon the merger because of, among other reasons, changes in existing or proposed laws, our determination that the merger would involve tax or other risks that outweigh their benefits, our determination that the level of expected benefits associated with the merger would otherwise be reduced, a dispute with the taxation authorities over the merger (or certain aspects thereof), an unexpected increase in the cost to complete the merger or any other determination by our Board of Directors that the merger would not be in the best interests of CNIT or its stockholders or that the merger would have material adverse consequences to CNIT or its stockholders.
Risks Relating to our Business
If the trading price of CNIT’s common stock, or CNIT BVI’s ordinary shares following the merger, fails to comply with the continued listing requirements of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares and make obtaining future debt or equity financing more difficult for us.
Companies listed on NASDAQ are subject to delisting for, among other things, failure to maintain a minimum closing bid price per share of $1.00 for 30 consecutive business days. On December 23, 2011, we received a letter from NASDAQ indicating that for the last 30 consecutive business days, the bid price of CNIT’s common stock closed below the minimum $1.00 per share requirement pursuant to NASDAQ Listing Rule 5450(a)(1) for continued inclusion on The NASDAQ Global Select Market. In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we had an initial grace period of 180 calendar days, or until June 20, 2012, to regain compliance with the minimum bid price requirement. On March 2, 2012, we effected a one-for-two reverse stock split in order to increase the price of our common stock sufficiently to regain compliance with NASDAQ’s minimum bid price requirement. On March 19, 2012, we were notified by NASDAQ that we had regained compliance with the minimum bid price requirement. We cannot be sure that our share price will continue to comply with the requirements for continued listing of CNIT’s common stock, or CNIT BVI’s ordinary shares following the merger, on The NASDAQ Global Select Market in the future. If our shares lose their status on The NASDAQ Global Select Market and we are not successful in obtaining a listing on The NASDAQ Capital Market, our shares would likely trade in the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our shares are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our shares, further limiting the liquidity of our shares. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares. Such delisting from The NASDAQ Global Select Market and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
Unfavorable economic conditions may affect the level of technology spending by our customers which could cause the demand for our products and services to decrease.
The revenue growth and profitability of our business depend on the overall demand for software products and related services, particularly within the private sector. Our strategy involves a sale of our products and services primarily to customers in the private sector, so our business depends on the overall economy and the economic and business conditions within this market. The current stock market decline and the global economic slowdown may affect the demand for our software products and related services and decrease technology spending of many of our customers and potential customers. These events could have a material effect on us in the future, including, without limitation, on our future revenue and earnings.
21
Our quarterly operating results are difficult to predict and could fall below investor expectations or estimates by securities research analysts, which may cause the trading price of our common stock to decline.
Our revenues and operating results can vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control, such as variations in the volume of business from customers resulting from changes in our customers’ operations, the business decisions of our customers regarding the use of our products and services, delays or difficulties in expanding our operational facilities and infrastructure, changes to our pricing structure or that of our competitors, inaccurate estimates of resources and time required to complete ongoing projects and currency fluctuations. As many of our employees take long vacations during the Chinese New Year in the first quarter, our revenues in that quarter are relatively low compared to the other quarters. Moreover, our results may vary depending on our customers’ business needs and spending patterns. Due to the annual budget cycles of most of our customers, we may not be able to estimate accurately the demand for our products and services beyond the immediate calendar year, which could adversely affect our business planning and may have a material adverse effect on our business, results of operations and financial condition. In addition, the volume of work performed for specific customers is likely to vary from year to year. Thus, a major customer in one year may not provide the same amount or percentage of our revenues in any subsequent year.
These fluctuations are likely to continue in the future and operating results for any period may not be indicative of our performance in any future period. If our operating results for any quarterly period fall below investor expectations or estimates by securities research analysts, the trading price of our common stock may decline.
We face risks once a business is acquired and the acquired companies may not perform to our expectations, either of which may adversely affect our results of operations.
We face risks when we acquire other businesses. These risks include:
-
difficulties in the integration of acquired operations and retention of personnel,
-
unforeseen or hidden liabilities,
-
tax, regulatory and accounting issues, and
-
inability to generate sufficient revenues to offset acquisition costs.
Acquired companies may not perform to our expectations for various reasons, including the loss of key personnel or, as a result, key customers, and our strategic focus may change. As a result, we may not realize the benefits we anticipated. If we fail to integrate acquired businesses or realize the expected benefits, we may lose the return on the investment in these acquisitions, incur transaction costs and our results of operations could be materially and adversely affected as a result.
If we are unable to raise additional financing or identify suitable merger or acquisition targets, we may be unable to implement our long-term business plan, develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis.
Our long-term business plan includes the identification of suitable targets for horizontal or vertical mergers or acquisitions, so as to enhance overall productivity and to benefit from economies of scale. Due to the current global financial crisis, we may not be able to obtain adequate levels of additional financing, whether through equity financing, debt financing or other sources. To raise funds, we may need to issue new equities or bonds which could result in additional dilution to our shareholders, and additional financings could result in significant dilution to our earnings per share or the issuance of securities with rights superior to our current outstanding securities or contain covenants that would restrict our operations and strategy. In addition, we may grant registration rights to investors purchasing our equity or debt securities in the future. If we are unable to raise additional financing, we may be unable to implement our long-term business plan, develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis, if at all. In addition, a lack of additional financing could force us to substantially curtail or cease operations.
We also may not be able to identify merger or acquisition targets or, after a merger or acquisition, may not be able to integrate the target’s business or operations successfully with ours. Such failure to execute our long-term business plan likely will negatively impact our results of operations.
22
We generally do not have exclusive or long-term agreements with our customers and we may lose their engagement if they are not satisfied with our products and services or for other reasons.
We generally do not have exclusive or long-term agreements with our customers. As a result, we must rely on the quality of our products and services, industry reputation and favorable pricing to attract and retain customers. There is no assurance, however, that we will be able to maintain our relationships with current and/or future customers. Our customers may elect to terminate their relationships with us if they are not satisfied with our services. If a substantial number of our customers choose not to continue to purchase products and services time from us, it would have a material adverse effect on our business and results of operations.
If we are unable to develop competitive new products and service offerings our future results of operations could be adversely affected.
Our future revenue stream depends to a large degree on our ability to utilize our technology in a way that will allow us to offer new types of software applications and services to a broader client base. We will be required to make investments in research and development in order to continue to develop new software applications and related service offerings, enhance our existing software applications and related service offerings and achieve market acceptance of our software applications and service offerings. We may incur problems in the future in innovating and introducing new software applications and service offerings. Our development-stage software applications may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we are unable to successfully define, develop and introduce competitive new software applications, and enhance existing software applications, our future results of operations would be adversely affected. Development schedules for software applications are difficult to predict. The timely availability of new applications and their acceptance by customers are important to our future success. A delay in the development of new applications could have a significant impact on its results of operations.
If we are unable to keep pace with the rapid technological changes in our industry, demand for our products and services could decline which would adversely affect our revenue.
Our industry is characterized by extremely rapid technological change, evolving industry standards and changing customer demands. These conditions require continuous expenditures on product research and development to enhance existing products, create new products and avoid product obsolescence. We believe that the timely development of new products and continuing enhancements to existing products is essential to maintain our competitive position in the marketplace. Our future success depends in part upon customer and market acceptance of our products and initiatives, which is uncertain. Any failure to achieve increased acceptance of these and other new product offerings could have a material adverse effect on our business and results of operations.
Our software products may contain defects or errors, which could decrease sales, injure our reputation or delay shipments of our products.
The software products that we develop are complex and must meet the stringent technical requirements of our customers. In addition, to keep pace with the rapid technological change in our industry and to avoid the obsolescence of our software products, we must quickly develop new products and enhancements to existing products. Because of this complexity and rapid development cycle, we cannot assure that our software products are free of errors, especially in newly released software products and new versions of existing software products. If our software is not free of errors, this could result in litigation, fewer sales, increased product returns, damage to our reputation and an increase in service and warranty costs, which would adversely affect our business.
Our technology may become obsolete which could materially adversely affect our ability to sell our products and services.
If our technology, products and services become obsolete, our business operations would be materially adversely affected. The market in which we compete is characterized by rapid technological change, evolving industry standards, introductions of new products, and changes in customer demands that can render existing products obsolete and unmarketable. Our current products will require continuous upgrading or our technology will become obsolete. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database, and networking platforms and by developing and introducing enhancements to our existing products and new products on a timely basis that keep pace with technological developments, evolving industry standards, and changing customer requirements. Research and development expenses were $4,483,754, $3,016,693 and $2,705,669 for the years ended December 31, 2011, 2010 and 2009, respectively.
23
We face the risk of systems interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion of customer trust.
The satisfactory performance, reliability and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. We may experience temporary service interruptions for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, computer bugs or viruses or hardware failures. We may not be able to correct a problem in a timely manner. Any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer confidence in our services and result in negative publicity that could cause us to lose customer accounts or fail to obtain new accounts. Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, or impaired quality and speed of transaction processing. We are not certain that we will be able to project the rate or timing of increases, if any, in the use of our services to permit us to upgrade and expand our systems effectively or to integrate smoothly any newly developed or purchased modules with our existing systems.
If we are not able to adequately secure and protect our patent, trademark and other proprietary rights our business may be materially affected.
Under our Amended and Restated Management Services Agreement, or the MSA, among our subsidiary Information Security Technology (China) Co., Ltd., or IST, our variable interest entity, iASPEC Software Co., Ltd., or iASPEC, and Mr. Jiang Huai Lin, our Chairman and Chief Executive Officer, we license 30 copyrighted software applications from iASPEC on an exclusive basis. To protect the intellectual property underlying these applications and our other intellectual property, we rely on a combination of copyright, trademark, and trade secret laws. We also rely on non-disclosure agreements and other confidentiality procedures and contractual provisions to protect our intellectual property rights. Some of these technologies, other than the iASPEC copyrighted software applications, are very important to our business and are not protected by copyrights or patents. It may be possible for unauthorized third parties to copy or reverse engineer our products, or otherwise obtain and use information that we regard as proprietary. Further, third parties could challenge the scope or enforceability of our copyrights. In certain foreign countries, including China where we operate, the laws do not protect our proprietary rights to the same extent as the laws of the United States. Any misappropriation of our intellectual property could have a material adverse effect on our business and results of operations, and we cannot assure you that the measures we take to protect our proprietary rights are adequate.
Claims that we infringe the proprietary rights of third parties could result in significant expenses or restrictions on our ability to sell our products and services.
Third parties may claim that our products or services infringe their proprietary rights. Any infringement claim, with or without merit, would be time-consuming and expensive to litigate or settle and could divert our management’s attention from our core business. In the event of a successful infringement claim against us, we may have to pay significant damages, incur substantial legal fees, develop costly non-infringing technology, or enter into license agreements that require us to pay substantial royalties and that may not be available on terms acceptable to us, if at all.
A significant portion of our sales are derived from a limited number of customers, and results from operations could be adversely affected and stockholder value harmed if we lose any of these customers.
Historically, a significant portion of our revenues have been derived from a limited number of customers. For the years ended December 31, 2011, 2010 and 2009, 17%, 17% and 25% of our revenues, respectively, were derived from our five largest customers. The loss of any of these significant customers would adversely affect our revenues and stockholder value.
The digital security, geographic, and hospital information systems markets in China are highly competitive, and we may fail to compete successfully, thereby resulting in loss of customers and decline in our revenues.
The digital security, geographic, and hospital information systems markets in China are intensely competitive and are characterized by frequent technological changes, evolving industry standards and changing customer demands. We have competition from multiple domestic competitors in each segment. Increased competition may result in price reductions, reduced margins and inability to gain or hold market share.
24
We have limited insurance coverage for our operations in China.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited insurance products. We have determined that the risks of disruption or liability from our business, the loss or damage to our property, including our facilities, equipment and office furniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption, litigation or property insurance coverage for our operations in China except for insurance on some company owned vehicles. Any uninsured occurrence of loss or damage to property, or litigation or business disruption may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating results.
We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.
Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including Jiang Huai Lin, our Chairman and Chief Executive Officer, Daniel K. Lee, our Chief Financial Officer, Zhi Qiang Zhao, our Chief Operating Officer, Yi Fu Liu, our Chief Marketing Officer, and Zhi Xiong Huang, our Chief Technology Officer. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our operations. If we lose a key employee or if a key employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior management could significantly deplete our institutional knowledge held by our existing senior management team. We depend on the skills and abilities of these key employees in managing the technical, marketing and sales aspects of our business, any part of which could be harmed by further turnover.
We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have the operating effectiveness of our internal controls attested to by our independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules requiring public companies to include a report of management on their internal controls over financial reporting in their annual reports on Form 10-K and Form 20-F. In addition, SOX 404 requires the independent registered public accounting firm auditing a company’s financial statements to also attest to and report on the operating effectiveness of such company’s internal controls, except where the registrant is a non-accelerated filer or smaller reporting company. A report of our management and an attestation report of our independent registered public accounting firm is included under Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2011.
Following the merger, CNIT BVI will continue to be subject to the requiments of SOX 404. We can provide no assurance that we will comply with all of the requirements imposed thereby. There can be no assurance that we will receive a positive attestation from our independent registered public accountants. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent registered public accountants with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.
Our holding company structure may limit the payment of dividends.
We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.
Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any dividends.
25
After-tax profits/losses with respect to the payment of dividends out of accumulated profits and the annual appropriation of after-tax profits as calculated pursuant to PRC accounting standards and regulations do not result in significant differences as compared to after-tax earnings as presented in our financial statements. However, there are certain differences between PRC accounting standards and regulations and U.S. GAAP, arising from different treatment of items such as amortization of intangible assets and change in fair value of contingent consideration rising from business combinations.
Risks Relating to our Commercial Relationship with iASPEC
Mr. Lin’s association with iASPEC could pose a conflict of interest which may result in iASPEC decisions that are adverse to our business.
Mr. Jiang Huai Lin, our Chairman and Chief Executive Officer and the beneficial owner of 45.3% of our common stock, also beneficially owns 100% of the equity interests in iASPEC, from whom we derived 47.1%, 39.1% and 48.6% of our revenue in the fiscal years ended December 31, 2011, 2010 and 2009, respectively, pursuant to existing commercial arrangements. As a result, conflicts of interest may arise from time to time and these conflicts may result in management decisions that could negatively affect our operations and potentially result in the loss of opportunities.
If iASPEC or its shareholders violate our contractual arrangements with it, our business could be disrupted and we may have to resort to litigation to enforce our rights which may be time consuming and expensive.
Our operations are currently dependent upon our commercial relationship with iASPEC. During the fiscal years ended December 31, 2011, 2010 and 2009, we derived 47.1%, 39.1% and 48.6% of our revenues, respectively, from the provision of services to iASPEC customers. A significant portion of these revenues have not yet been collected. Amounts owed by iASPEC under the MSA for each quarter will be due and payable no later than the last day of the month following the end of each such quarter. Our contractual arrangements may not be as effective as direct ownership, if iASPEC or its shareholders are unwilling or unable to perform their obligations under our commercial arrangements with it, including payment of revenues under the MSA as they become due each quarter, we will not be able to conduct our operations in the manner currently planned. In addition, iASPEC may seek to renew these agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with substantial ability to control iASPEC, we may not succeed in enforcing our rights under them. If we are unable to renew these agreements on favorable terms, or to enter into similar agreements with other parties, our business may not be able to operate or expand, and our operating expenses may significantly increase.
Uncertainties in the PRC legal system may impede our ability to enforce the commercial agreements that we have entered into with iASPEC or any arbitral award thereunder and any inability to enforce these agreements could materially and adversely affect our business and operation.
While disputes under the MSA and the option agreement with iASPEC are subject to binding arbitration before the Shenzhen Branch of the China International Economic and Trade Arbitration Commission, or CIETAC, in accordance with CIETAC Arbitration Rules, the agreements are governed by PRC law and an arbitration award may be challenged in accordance with PRC law. For example, a claim that the enforcement of an award in our favor will be detrimental to the public interest, or that an issue does not fall within the scope of the arbitration would require us to engage in administrative and judicial proceedings to defend an award. China’s legal system is a civil law system based on written statutes and unlike common law systems, it is a system in which decided legal cases have little value as precedent. As a result, China’s administrative and judicial authorities have significant discretion in interpreting and implementing statutory and contractual terms, and it may be more difficult to evaluate the outcome of administrative and judicial proceedings and the level of legal protection available than in more developed legal systems. These uncertainties may impede our ability to enforce the terms of the MSA, the option agreement and the other contracts that we may enter into with iASPEC. Any inability to enforce the MSA and option agreement or an award thereunder could materially and adversely affect our business and operation.
26
If iASPEC fails to comply with the confidentiality requirements of certain of its customer contracts, then iASPEC could be subject to sanctions and could lose its business license which in turn would significantly disrupt or shut down our operations.
The business and operations of iASPEC, the owner and licensor to us of the copyrighted software applications and other intellectual property that are essential to the operation of our business, is subject to Chinese contractual obligations and laws and regulations that restrict its use of security information and other information that it obtains from its customers in the public security sector. For some of its contracts with government agencies, iASPEC has agreed to keep confidential all technical and commercial secrets obtained during the performance of services under the contract. iASPEC or its shareholders could violate these contractual obligations and laws and regulations by inadvertently or intentionally disclosing confidential information or by otherwise failing to operate its business in a manner that complies with these contractual and legal obligations. A violation of these agreements could result in the significant disruption or shut down of our business or adversely affect our reputation in the market. If iASPEC or its shareholders violate these contractual and legal obligations, we may have to resort to litigation to enforce our rights under our contractual obligations with iASPEC. This litigation could result in the disruption of our business, diversion of our resources and the incurrence of substantial costs.
All of the share capital of iASPEC is held by our major shareholder, who may cause these agreements to be amended in a manner that is adverse to us.
Our major shareholder, Mr. Jiang Huai Lin, owns and controls iASPEC. As a result, Mr. Lin may be able to cause our commercial arrangements with iASPEC to be amended in a manner that will be adverse to our company, or may be able to cause these agreements not to be renewed, even if their renewal would be beneficial for us. Although we have entered into an agreement that prevents the amendment of these agreements without the approval of the members of our Board other than Mr. Lin, we can provide no assurances that these agreements will not be amended in the future to contain terms that might differ from the terms that are currently in place. These differences may be adverse to our interests.
Our arrangements with iASPEC and its shareholders may be subject to a transfer pricing adjustment by the PRC tax authorities which could have an adverse effect on our income and expenses.
We could face material and adverse tax consequences if the PRC tax authorities determine that our contracts with iASPEC and its shareholders were not entered into based on arm’s length negotiations. Although our contractual arrangements are similar to other companies conducting similar operations in China, if the PRC tax authorities determine that these contracts were not entered into on an arm’s length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.
The exercise of our option to purchase part or all of the equity interests in or assets of iASPEC under the option agreement might be subject to approval by the PRC government, and our failure to obtain this approval may impair our ability to substantially control iASPEC and could result in actions by iASPEC that conflict with our interests.
Our option agreement with iASPEC gives our Chinese operating subsidiary, IST, the option to purchase all or part of the equity interests in or assets of iASPEC, however, the option may not be exercised by IST if the exercise would violate any applicable laws and regulations in China or cause any license or permit held by, and necessary for the operation of iASPEC, to be cancelled or invalidated. Under the laws of China, if a foreign entity, through a foreign investment company that it invests in, acquires a domestic related company, China’s regulations regarding mergers and acquisitions would technically apply to the transaction. Application of these regulations requires an examination and approval of the transaction by China’s Ministry of Commerce, or MOFCOM, or its local counterparts. Also, an appraisal of the equity or assets to be acquired is mandatory. However, Guangdong Jin Di Law Firm Sichuan Office, our local PRC counsel has advised us that Shenzhen and other local counterparts of MOFCOM hold the view that such a transaction would not require their approval. Therefore, we do not believe at this time that an approval and an appraisal are required for IST to exercise its option to acquire iASPEC in Shenzhen. In light of the different views on this issue, however, it is possible that the central MOFCOM office in Beijing will issue a standardized opinion imposing the approval and appraisal requirement. If we are not able to purchase the equity or assets of iASPEC, then we will lose a substantial portion of our ability to control iASPEC and our ability to ensure that iASPEC will act in our interests.
27
Our right to elect a majority of the members on iASPEC’s Board of Directors and other provisions of the MSA may be viewed by iASPEC’s customers as a change in control of iASPEC, which could subject iASPEC to sanctions and loss of its business license, which in turn would significantly disrupt or possibly terminate our operations.
Our commercial arrangement with iASPEC gives us the right to designate two Chinese citizens to serve as senior managers of iASPEC, serve on iASPEC’s Board of Directors and assist in managing the business and operations of iASPEC. In addition, iASPEC will require the affirmative vote of the majority of the our Board of Directors, as well as at least one non-insider director, for completing certain material actions with respect to iASPEC, including, but not limited to: (a) the nomination, appointment, election or replacement of any board members; (b) the distribution of any dividend or profits; (c) any merger, division, change of corporate form, dissolution or liquidation; (d) any reimbursement of net losses or other payments or transfers of funds from IST to iASPEC; (e) the formation or disposition of a subsidiary or the acquisition or disposition of any interest in any other entity; and (f) the encumbrance of any assets under any lien not in the ordinary course of business. However, fulfillment of certain Police-use Geographic Information Systems, or PGIS, contracts with PRC Government customers is restricted to entities, such as iASPEC, that possess the necessary PRC government licenses and approvals, and any change in control may be viewed under PRC law as creating a new entity. If iASPEC’s government customers view these MSA provisions as a change in control of iASPEC or as evidence of iASPEC’s failure to operate its business in a manner that complies with its contractual obligations or with related laws and regulations. Such a perception could result in the cancellation or invalidation of iASPEC’s licenses and permits. A loss by iASPEC of its licenses and permits could result in the significant disruption or possible termination of our business or adversely affect our reputation in the market.
Risks Relating to Doing Business in China
Changes in China’s political or economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some of the things that could have this effect are:
-
level of government involvement in the economy;
-
control of foreign exchange;
-
methods of allocating resources;
-
balance of payments position;
-
international trade restrictions; and
-
international conflict.
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. For example, state-owned enterprises still constitute a large portion of the Chinese economy, and weak corporate governance and the lack of a flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy was similar to those of the OECD member countries.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign invested entities established in the PRC, or FIEs. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and most of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiary.
28
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
The enforcement of the PRC labor contract law may materially increase our costs and decrease our net income.
China adopted a new Labor Contract Law, effective on January 1, 2008, and issued its implementation rules, effective on September 18, 2008. The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among others, minimum wages, severance payment and non-fixed-term employment contracts, time limits for probation periods, as well as the duration and the times that an employee can be placed on a fixed-term employment contract. Due to the limited period of effectiveness of the Labor Contract Law and its implementation rules and regulations, and the lack of clarity with respect to their implementation and potential penalties and fines, it is uncertain how they will impact our current employment policies and practices. In particular, compliance with the Labor Contract Law and its implementation rules and regulations may increase our operating expenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules and regulations may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, and could result in a material decrease in our profitability.
If we fail to obtain or maintain all licenses and approvals required to operate our businesses in the PRC, our business and operations may be adversely affected.
Fulfillment of certain PGIS contracts with PRC government customers is restricted to entities possessing the necessary government licenses and approvals which our subsidiary IST does not have. We currently perform PGIS contracts through iASPEC, which possesses the requisite licenses and approvals, pursuant to our MSA with iASPEC, whereby iASPEC exclusively engages IST as its subcontractor to provide iASPEC with outsourcing services (to the extent that those services do not violate any special governmental permits held by iASPEC and do not involve the improper transfer of any sensitive confidential governmental or other data). If the PRC government determines that we are operating without the requisite licenses we may become subject to administrative penalties or an order to discontinue our business operations, both of which could have a material adverse effect on our business and results of operations.
29
Future inflation in China may inhibit our ability to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8% . These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
Restrictions on currency exchange may limit our ability to receive and use our sales effectively.
The majority of our sales will be settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
Substantially all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
30
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
The PRC State Administration of Foreign Exchange, or SAFE, has promulgated several regulations, including the Notice Concerning Foreign Exchange Controls on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, effective on November 1, 2005, and Operating Procedures on Foreign Exchange Administration for Domestic Residents Engaging in Financing and Round-trip Investment via Offshore Special Purpose Vehicles, or Circular 19, effective on July 1, 2011. These regulations and rules require PRC residents and corporate entities to register with, and obtain approval from, provincial SAFE branches in connection with their direct or indirect offshore investment activities. Under Circular 75 and related rules, a PRC resident who makes, or has previously made, a direct or indirect investment in an offshore company is required to register that investment. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update the previously filed registration with the relevant provincial SAFE branch to reflect any material change with respect to the offshore company’s roundtrip investment, capital variation, merger, division, long-term equity or debt investment or creation of any security interest.
We have asked our stockholders who are PRC residents as defined in Circular 75 and related rules to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 75 and related rules. Moreover, because of uncertainty over how Circular 75 and related rules will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 and related rules by our PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75 and related rules. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75 and related rules, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.
On August 9, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 and was amended in 2009. This regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the regulation is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.
The regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to MOFCOM and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulation also prohibits a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.
31
Our existing contractual arrangements with iASPEC and its shareholders may be subject to national security review by MOFCOM, and the failure to receive the national security review could have a material adverse effect on our business and operating results.
In August 2011, MOFCOM promulgated the Rules of Ministry of Commerce on Implementation of Security Review System of Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the Security Review Rules, to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or Circular 6. The Security Review Rules became effective on September 1, 2011. Under the Security Review Rules, a national security review is required for certain mergers and acquisitions by foreign investors raising concerns regarding national defense and security. Foreign investors are prohibited from circumventing the national security review requirements by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. The application and interpretation of the Security Review Rules remain unclear. Based on our understanding of the Security Review Rules, we do not need to submit our existing contractual arrangements with iASPEC and its shareholders to the MOFCOM for national security review because, among other reasons, (i) we gained de facto control over iASPEC in 2007 prior to the effectiveness of Circular 6 and the Security Review Rules; and (ii) there are currently no explicit provisions or official interpretations indicating that our current businesses fall within the scope of national security review. Although we have no plan to submit our existing contractual arrangements with iASPEC and its shareholders to MOFCOM for national security review, the relevant PRC government agencies, such as MOFCOM, may reach a different conclusion. If MOFCOM or another PRC regulatory agency subsequently determines that we need to submit our existing contractual arrangements with iASPEC and its shareholders for national security review by interpretation, clarification or amendment of the Security Review Rules or by any new rules, regulations or directives promulgated, we may face sanctions by MOFCOM or another PRC regulatory agency. These sanctions may include revoking the business or operating licenses of our PRC subsidiary, IST, or iASPEC and its subsidiaries, discontinuing or restricting our operations in China, confiscating our income or the income of iASPEC, and taking other regulatory or enforcement actions, such as levying fines, that could be harmful to our business. Any of these sanctions could cause significant disruption to our business operations.
The Security Review Rules may make it more difficult for us to make future acquisitions or dispositions of our business operations or assets in China.
The Security Review Rules, effective as of September 1, 2011, provides that when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the national security review by MOFCOM, the principle of substance-over-form should be applied and foreign investors are prohibited from circumventing the national security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. If the business of any target company that we plan to acquire falls within the scope subject to national security review, we may not be able to successfully acquire such company by equity or asset acquisition, capital increase or even through any contractual arrangement.
Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.
On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
32
We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2012 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.
We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on NonResident Enterprises’ Share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.
The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For example, while the term “indirectly transfer” is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.
33
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of that fact.
We file reports with the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of the China Securities Regulatory Commission or any other PRC regulatory authority. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
Risks Relating to the Market for our Shares
If we were delisted from NASDAQ, we may become subject to the trading complications experienced by “Penny Stocks” in the over-the-counter market.
Delisting from NASDAQ may cause our shares to become the SEC’s “penny stock” rules. The SEC generally defines a penny stock as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. One such exemption is to be listed on NASDAQ. The market price of our common stock is currently less than $5.00 per share. Therefore, were we to be delisted from NASDAQ, our common stock may become subject to the SEC’s “penny stock” rules. These rules require, among other things, that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document, (ii) disclosure of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons in the transaction and (iv) monthly account statements showing the market values of our securities held in the customer’s accounts. A broker would be required to provide the bid and offer quotations and compensation information before effecting the transaction. This information must be contained on the customer’s confirmation. Generally, brokers are less willing to effect transactions in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for stockholders to purchase or sell our common stock. Because the broker, not us, prepares this information, we would not be able to assure that such information is accurate, complete or current.
34
Our stock price is, and CNIT BVI’s share price may be, highly volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of our common stock is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:
-
our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
-
changes in financial estimates by us or by any securities analysts who might cover our stock;
-
speculation about our business in the press or the investment community;
-
significant developments relating to our relationships with our customers or suppliers;
-
stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the our industries;
-
customer demand for our products;
-
investor perceptions of the our industry in general and our company in particular;
-
the operating and stock performance of comparable companies;
-
general economic conditions and trends;
-
major catastrophic events;
-
announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
-
changes in accounting standards, policies, guidance, interpretation or principles;
-
loss of external funding sources;
-
sales of our common stock, including sales by our directors, officers or significant stockholders; and
-
additions or departures of key personnel.
Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our shares. Accordingly, investors must be prepared to rely on sales of their shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our shares. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
35
BUSINESS
For information regarding the business of CNIT, please see CNIT’s annual, quarterly and current reports filed with the SEC and incorporated herein by reference.
CNIT BVI does not have any operations or assets. Accordingly, a separate discussion of its business is not included in this proxy statement/prospectus.
MARKET FOR OUR COMMON STOCK; DIVIDENDS
Market Information
CNIT’s common stock is traded on NASDAQ under the symbol “CNIT.” CNIT BVI’s ordinary shares are not publicly traded. The following table sets forth the high and low sales prices per share of CNIT’s common stock for the periods indicated. The closing price per share of CNIT’s common stock was $0.98 on June 20, 2012, the last trading date immediately preceding public announcement of the proposed merger. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
| Market Prices(1) | ||||||
| High | Low | |||||
| Year Ended December 31, 2012 | ||||||
| 1st Quarter | $ | 1.60 | $ | 0.60 | ||
| 2nd Quarter (through June 20, 2012) | 1.65 | 0.82 | ||||
| Year Ended December 31, 2011 | ||||||
| 1st Quarter | $ | 10.62 | $ | 5.06 | ||
| 2nd Quarter | 6.02 | 2.80 | ||||
| 3rd Quarter | 5.70 | 1.84 | ||||
| 4th Quarter | 2.30 | 1.24 | ||||
| Year Ended December 31, 2010 | ||||||
| 1st Quarter | $ | 13.60 | $ | 9.04 | ||
| 2nd Quarter | 14.88 | 9.26 | ||||
| 3rd Quarter | 11.96 | 8.92 | ||||
| 4th Quarter | 13.56 | 9.62 | ||||
| (1) |
The above table sets forth the range of high and low market prices per share of our common stock as reported by Yahoo! Finance for the periods indicated. Prices have been adjusted to reflect the one-for-two reverse stock split effected on March 1, 2012. |
Dividend Policy
To date, CNIT has not paid any cash dividends on its common stock. As a BVI company, CNIT BVI may only declare and pay dividends if the directors of CNIT BVI are satisfied, on reasonable grounds, that immediately after the distribution (i) the value of CNIT BVI’s assets will exceed its liabilities and (ii) CNIT BVI will be able to pay its debts as they fall due. We currently anticipate that CNIT BVI will retain any available funds to finance the growth and operation of its business and we do not anticipate paying any cash dividends in the foreseeable future. Additionally, our cash held in foreign countries may be subject to certain control limitations or repatriation requirements, limiting our ability to use this cash to pay dividends.
36
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following sets forth information about our directors and executive officers:
| NAME | AGE | POSITION |
| Jiang Huai Lin | 42 | Chairman of the Board, Chief Executive Officer and President |
| Daniel K. Lee | 40 | Chief Financial Officer |
| Zhi Xiong Huang | 42 | Chief Technology Officer |
| Yi Fu Liu | 38 | Chief Marketing Officer |
| Zhi Qiang Zhao | 40 | Director and Chief Operating Officer |
| Yun Sen Huang | 65 | Director |
| Qiang Lin | 65 | Director |
| Remington C.H. Hu | 44 | Director |
Mr. Jiang Huai Lin. Mr. Lin has been a member of our Board of Directors since September 6, 2006 and he became our Chief Executive Officer and President on October 3, 2006. Mr. Lin has also served as the Chairman and Chief Executive Officer of our subsidiary, IST, since its incorporation in January 2006. During the period from September 2000 to June 2004, Mr. Lin served as the President and Chief Executive Officer of Hong Kong United Development Group, a consolidated enterprise engaging in investment, high technology and education. Before that, during the period from February 1995 through August 2000, Mr. Lin was a Director and the General Manager of Fujian Wild Wolf Electronics Limited, a company engaged in the business of manufacturing electrical consumer products. Mr. Lin holds a Master’s degree in Software Engineering from Wuhan University and a Bachelor’s degree in Industrial Accounting from Xiamen University.
Mr. Daniel K. Lee. Mr. Lee has been our Chief Financial Officer since December 12, 2011. Prior to joining us, he served as a senior investment advisor with PINE Capital, LLC since May 2010. Prior to that, he was chief financial officer of Nutrastar International Inc. (OTCBB: NUIN) from November 2009 to May 2010. Previously, Mr. Lee served as managing partner of CVC Group, a financial and corporate consulting firm to Chinese companies, from December 2007 until November 2009. Earlier in his career, Mr. Lee was senior China equity analyst at Roth Capital Partners, an investment banking firm, from August 2006 to November 2007. From 1999 to 2006, Mr. Lee was an international strategic consultant and a senior financial analyst with the consulting companies SCA International and Zini & Associates. He had previously worked as an equity research analyst with Punk, Ziegel & Co. from 1997 to 1999, and prior to that had worked as a capital market analyst with Morgan Stanley & Co. from 1993 to 1997. Mr. Lee is a Chartered Financial Analyst and a Certified Public Accountant. He received an M.S. Accountancy from the Zicklin School of Business, Baruch College and a B.S. Economics with concentrations in Finance and Multinational Management from The Wharton School of University of Pennsylvania.
Mr. Zhi Xiong Huang. Mr. Huang has been our Chief Technology Officer since September 1, 2008. Prior to that, he served as our Chief Operating Officer from May 10, 2007 and as a member of our Board of Directors from November 28, 2006. Mr. Huang also serves as the President of Shenzhen Zhongtian Technology Development Company Ltd., iASPEC’s subsidiary, since January 2010, and as the Vice-President of IST since its incorporation in January 2006. Since September 2002, he has also been a Vice President of iASPEC, where he supervises iASPEC’s research and development activities and consults on various types of sophisticated, technical issues. Between July 2001 and March 2002, Mr. Huang served as the General Manager of product development of Shenzhen Runsheng Information Systems Company Ltd. and was responsible for overseeing general operations. He holds a B.S. in computer science from Hehai University in China and has over fifteen years’ experience in information systems. Mr. Huang is currently a Director of the Shenzhen Computer Association and is an Expert with the Shenzhen Expert Association, a nonprofit organization.
Mr. Yi Fu Liu. Mr. Liu has been our Chief Marketing Officer since November 2009, when he resigned from the position of Chief Operating Officer. Mr. Liu also served as the President of iASPEC’s subsidiary Wuda Geoinformatics Co., Ltd. since January 2009. Mr. Liu has over ten years’ experience in corporate operations, strategy management and market development. Mr. Liu has served as Deputy General Manager of iASPEC since August 2002, and has been the General Manager of iASPEC since November 2006. Prior to that, Mr. Liu served, from August 1997 to July 2002, as a Senior Sales Manager for Shenzhen Jingpinjia Electronics Company Ltd. Mr. Liu holds a Bachelor’s degree in Electronics Engineering from Zhejiang University.
37
Mr. Zhi Qiang Zhao. Mr. Zhao has been our Chief Operating Officer since November 2009, when he resigned from the position as Chief Administrative Officer. Mr. Zhao has also served as member of our Board of Directors since September 1, 2008. In addition, Mr. Zhao has served as the General Manager of Huipu Electronics (Shenzhen) Company Ltd., a CNIT subsidiary, since July 2011. Mr. Zhao has extensive experience in corporate administration and human resources management. Mr. Zhao has served as iASPEC’s Human Resource Manager since April 2005, and as its Deputy General Manager since July 2006. Prior to that, Mr. Zhao served, from March 2003 to March 2005, as Supervisor of Human Resources for Foxconn Technology Group. Mr. Zhao holds a Bachelor’s degree in Mechanical and Electrical Engineering from Inner Mongolia University.
Mr. Yun Sen Huang. Mr. Huang has been a member of our Board of Directors since August 10, 2007. Mr. Huang has been a Professor in the School of Information Engineering at Shenzhen University since September 1984. He has been involved in many computer application projects, and has received many awards, including a First Grade Award of Technology Advancement from Sichuan Province, a Second Grade Award of Technology Advancement from Guangdong Province, and a Third Grade Award of Technology Advancement from the Chemical Ministry. Mr. Huang has published eight books in the field of Networks and Multimedia Applications. In addition, Mr. Huang was a founder of the International Software Development (Shenzhen) Co., Ltd, a co-partnership company incorporated by IBM, East Asia Bank, and Shenzhen SDC Company, and its Chairman between 2001-2006. Currently, Mr. Huang is a Director of the Shenzhen Computer Academy, a Vice Director of the Guangdong Province Computer Academy, as well as Executive Director of the China University Computer Basic Education Committee. Mr. Huang holds a Bachelor’s Degree of Electronics Engineering from Tsinghua University. There is no relationship between Mr. Huang and our Chief Operating Officer, Zhi Xiong Huang.
Mr. Qiang Lin. Mr. Lin has been a member of our Board of Directors since August 10, 2007. Mr. Lin has been a Professor in the School of Information Engineering at Shenzhen University since September 2002. From July 1997 to September 2002, Mr. Lin served as the Director of Computer Science and Technology Department at Shenzhen University. Mr. Lin has been engaged in teaching and research in the Computer Applications field for many years. Presently, he is a postgraduate advisor and teacher and focuses his research in the fields of Computer Networks, Information Systems, Databases, and ERP systems. Mr. Lin has published many research papers in China’s Computer Science. He is also the editor-in-chief of Electrical Business Foundation. Mr. Lin has significant research experience in information systems, electronic business, logistics, and image disposal and has successfully developed many computer application systems as a project principal. He has been awarded with a First Grade Award of Software Development from the Chinese Chemical Ministry and a Third Grade Award of Science and Technology Development by Guangdong Province. Mr. Lin holds a Master Degree of Computing Mathematics from Zhongshan University. There is no relationship between Mr. Lin and our Chief Executive Officer, Jiang Huai Lin.
Mr. Remington C.H. Hu. Mr. Hu has been a member of our Board of Directors since October 30, 2009. He is a seasoned executive with more than 16 years of experience in corporate finance and investment management, and is currently the founder and CEO of Tomorrow Capital Limited, a financial advisory firm. Prior to founding Tomorrow Capital Limited, Mr. Hu served from February 2008 to July 2009, as Chief Financial Officer of Yucheng Technologies Limited, a Nasdaq listed top IT solutions and BPO company servicing China’s banking industry, and from August 2004 to August 2007, as China Representative for CVM Capital Partners, LLC, Taiwan’s largest VC affiliated with Taiwan’s largest private equity investment group. Earlier in his career, Mr. Hu founded and served from June 1999 to June 2002, as Chief Financial Officer of eSoon Communications International Corp., a software start-up focusing on the then fast-growing CRM/CTI market served from August 1996 to May 1999, as Vice President of Crimson Asia Capital Holdings, Ltd., formerly Asia’s largest venture capital firm backed by Taiwan’s Chinatrust Financial Group. He began his career at Citibank, NA, as an Assistant Vice President in the Taipei and Hong Kong. Mr. Hu holds a Master’s Degree in Business Administration from the Wharton Business School and a Bachelor’s Degree in Computer Science and Information Engineering from the National Chiao Tung University.
Family Relationships
There are no family relationships among our directors or officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
-
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
38
-
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
-
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
-
been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
-
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
-
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Transactions with Related Persons, Promoters and Certain Control Persons—Transactions with Related Persons,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and beneficial owners of more than 10% of a registered class of our equity securities to file with the SEC statements of ownership and changes in ownership. The same persons are required to furnish us with copies of all Section 16(a) forms they file. Except as set forth below and in our previous reports filed with the SEC, we believe that all of our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities complied with the applicable filing requirements during fiscal year 2011 or prior fiscal years.
During fiscal year 2011, a Form 4 was filed late to report one transaction by each of Mr. Jiang Huai Lin, our Chairman, CEO and President, Ms. Jackie You Kazmerzak, our former Chief Financial Officer, Mr. Zhi Xiong Huang, our Chief Technology Officer, Mr. Yi Fu Liu, our Chief Marketing Officer, and Mr. Zhiqiang Zhao, our Director and Chief Operating Officer, due to administrative oversight. A Form 3 required to be filed by Mr. Remington Hu, our Director, prior to fiscal year 2011 was not filed until after the end of fiscal year 2011 due to administrative oversight. In making these statements, we have relied upon examination of the copies of all Section 16(a) forms provided to us and the written representations of our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities.
39
CORPORATE GOVERNANCE
Our current corporate governance practices and policies are designed to promote stockholder value and we are committed to the highest standards of corporate ethics and diligent compliance with financial accounting and reporting rules. Our Board provides independent leadership in the exercise of its responsibilities. Our management oversees a system of internal controls and compliance with corporate policies and applicable laws and regulations, and our employees operate in a climate of responsibility, candor and integrity.
Corporate Governance Guidelines
We and our Board are committed to high standards of corporate governance as an important component in building and maintaining stockholder value. To this end, we regularly review our corporate governance policies and practices to ensure that they are consistent with the high standards of other companies. We also closely monitor guidance issued or proposed by the SEC and the provisions of the Sarbanes-Oxley Act, as well as the emerging best practices of other companies. The current corporate governance guidelines are available on our website at www.chinacnit.com. Printed copies of our corporate governance guidelines may be obtained, without charge, by contacting the Corporate Secretary, China Information Technology, Inc., 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China.
The Board and Committees of the Board
CNIT is governed by a Board of Directors that currently consists of five members: Messrs. Jiang Huai Lin, Zhi Qiang Zhao, Yun Sen Huang, Qiang Lin, and Remington C.H. Hu. Our “independent” directors, within the meaning of the NASDAQ Marketplace Rules, are Messrs. Yun Sen Huang, Qiang Lin, and Remington C.H. Hu. All actions of the Board of Directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
The Board has established three standing committees: the Audit Committee, the Compensation Committee and the Governance and Nominating Committee. Each of the Audit Committee, Compensation Committee and Governance and Nominating Committee are comprised entirely of independent directors. From time to time, the Board may establish other committees. The Board has adopted a written charter for each of the Committees which are available on the corporate governance page of our website at www.chinacnit.com. Printed copies of these charters may be obtained, without charge, by contacting by contacting the Corporate Secretary, China Information Technology, Inc., 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China .
Audit Committee and Audit Committee Financial Expert
Our Audit Committee is currently composed of three members: Messrs. Yun Sen Huang, Qiang Lin, and Remington C.H. Hu. Our Board of Directors determined that each member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and is an “independent” director within the meaning of the NASDAQ Marketplace Rules. Each Audit Committee member also meets NASDAQ’s financial literacy requirements. Mr. Hu serves as Chair of the Audit Committee.
Our Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our Audit Committee is responsible for, among other things:
-
selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors;
-
reviewing with our independent auditors any audit problems or difficulties and management’s response;
-
reviewing and approving all proposed related-party transactions;
-
discussing the annual audited financial statements with management and our independent auditors;
-
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal control deficiencies;
-
annually reviewing and reassessing the adequacy of our Audit Committee charter;
40
-
meeting separately and periodically with management and our internal and independent auditors;
-
reporting regularly to the full Board of Directors; and
-
such other matters that are specifically delegated to our Audit Committee by our Board of Directors from time to time.
Our Board of Directors has determined that Mr. Hu is the “audit committee financial expert” as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC and also meets NASDAQ’s financial sophistication requirements.
Compensation Committee
Our Compensation Committee is currently composed of three members: Messrs. Yun Sen Huang, Qiang Lin, and Remington C.H. Hu, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Huang serves as Chair of the Compensation Committee.
Our Compensation Committee assists the Board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Our Chief Executive Officer may not be present at any committee meeting during which his compensation is deliberated.
The Compensation Committee is responsible for, among other things:
-
approving and overseeing the compensation package for our executive officers;
-
reviewing and making recommendations to the Board with respect to the compensation of our directors;
-
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on this evaluation; and
-
reviewing periodically and making recommendations to the Board regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
Governance and Nominating Committee
Our Governance and Nominating Committee is currently composed of three members: Messrs. Yun Sen Huang, Qiang Lin, and Remington C.H. Hu, each of whom is “independent” within the meaning of the NASDAQ Marketplace Rules. Mr. Lin serves as Chair of the Governance and Nominating Committee.
The Governance and Nominating Committee assists the Board in identifying individuals qualified to become our directors and in determining the composition of the Board and its committees.
The Governance and Nominating Committee is responsible for, among other things:
-
identifying and recommending to the Board nominees for election or re-election to the Board, or for appointment to fill any vacancy;
-
reviewing annually with the Board the current composition of the Board in light of the characteristics of independence, age, skills, experience and availability of service to us;
-
identifying and recommending to the Board the directors to serve as members of the Board’s committees; and
-
monitoring compliance with our code of ethics.
The procedures by which stockholders may recommend nominees have not changed materially since last year’s proxy statement.
41
Governance Structure
The Board believes the interests of all stockholders are best served at the present time through a leadership model with a combined Chairman/CEO position. However, the Board retains authority to separate the positions of Chairman and CEO at any time. The current CEO possesses an in-depth knowledge of CNIT, its integrated operations, the evolving public security industry in China, and the array of challenges to be faced, gained through over 22 years of successful experience. The Board believes that these experiences and other insights put the CEO in the best position to provide broad leadership for the Board as it considers strategy and as it exercises its fiduciary responsibilities to its stockholders.
Further, the Board has demonstrated its commitment and ability to provide independent oversight of management. A majority of the Board is comprised of independent directors, and 100% of the Audit Committee, Compensation Committee, and Governance and Nominating committees are independent. Each independent director has access to the CEO and other executives on request, may call meetings of the independent directors, and may request agenda topics to be added or dealt with in more detail at meetings of the full Board or an appropriate Board committee.
We encourage our stockholders to learn more about our governance practices at our website, www.chinacnit.com.
The Board’s Role in Risk Oversight
The Board oversees that our assets are properly safeguarded, that the appropriate financial and other controls are maintained, and that our business is conducted wisely and in compliance with applicable laws and regulations and proper governance. Included in these responsibilities is the Board of Directors’ oversight of the various risks facing us. In this regard, the Board seeks to understand and oversee critical business risks. The Board does not view risk in isolation. Risks are considered in virtually every business decision and as part of our business strategy. The Board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for us to be competitive on a global basis and to achieve its objectives.
While the Board oversees risk management, our management is charged with managing risk. We have robust internal processes and a strong internal control environment to identify and manage risks and to communicate with the Board. The Board and the Audit Committee monitor and evaluate the effectiveness of the internal controls and the risk management program at least annually. Management communicates routinely with the Board, Board Committees and individual directors on the significant risks identified and how they are being managed. Directors are free to, and indeed often do, communicate directly with senior management.
The Board implements its risk oversight function both as a whole and through Committees. Much of the work is delegated to various Committees, which meet regularly and report back to the full Board. All Committees play significant roles in carrying out the risk oversight function. In particular:
-
The Audit Committee oversees risks related to our financial statements, the financial reporting process, accounting and legal matters. The Audit Committee oversees the internal audit function and our ethics programs, including the codes of ethics The Audit Committee members meet separately with representatives of the independent auditing firm.
-
The Compensation Committee evaluates the risks and rewards associated with our compensation philosophy and programs. The Compensation Committee reviews and approves compensation programs with features that mitigate risk without diminishing the incentive nature of the compensation. Management discusses with the Compensation Committee the procedures that have been put in place to identify and mitigate potential risks in compensation.
Independent Directors
Our Board has determined that the majority of the Board is comprised of “independent directors” within the meaning of applicable NASDAQ Marketplace Rules and Section 301 of the Sarbanes-Oxley Act. Our independent directors are Messrs. Yun Sen Huang, Qiang Lin, and Remington C.H. Hu.
42
Board, Committee and Annual Meeting Attendance
During fiscal year 2011, the Board held four meetings and acted by written consent ten times. Our Audit Committee, Compensation Committee and Governance and Nominating Committee met or acted by written consent two, one and one times, respectively. In addition, our non-management directors, all of which are independent directors, meet in executive session following Board meetings. Each director attended at least 75% of all Board and applicable committee meetings.
Our directors are expected to attend Board meetings as frequently as necessary to properly discharge their responsibilities and to spend the time needed to prepare for each such meeting. We encourage our directors to attend annual stockholder meetings, but we do not have a formal policy requiring them to do so
Code of Ethics
Our Code of Ethics conforms to the rules and regulations of NASDAQ. The Code of Ethics applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer, and addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code.
A copy of the Code of Ethics has been filed as Exhibit 14 to our Annual Report on Form 10-K filed on March 31, 2008. Our Code of Ethics is also posted on the corporate governance page of our website at www.chinacnit.com. During the fiscal year ended December 31, 2011, there were no waivers of our Code of Ethics.
Stockholder Communication with the Board
Stockholders may communicate with the Board, including non-management directors, by sending a letter to our Board of Directors, c/o Corporate Secretary, China Information Technology, Inc., 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China, for submission to the Board or Committee or to any specific director to whom the correspondence is directed. Stockholders communicating through this means should include with the correspondence evidence, such as documentation from a brokerage firm, that the sender is a current record or beneficial stockholder.
All communications received as set forth above will be opened by the Corporate Secretary or her designee for the sole purpose of determining whether the contents contain a message to one or more of our directors. Any contents that are not advertising materials, promotions of a product or service, patently offensive materials or matters deemed, using reasonable judgment, inappropriate for the Board will be forwarded promptly to the chairman of the Board, the appropriate committee or the specific director, as applicable.
43
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board is comprised of three non-employee Directors, each of whom has been determined by the Board to be “independent” under the meaning of Rule 10A-3(b)(1) under the Exchange Act. The Board has determined, based upon an interview of Mr. Remington C.H. Hu and a review of Mr. Hu’s responses to a questionnaire designed to elicit information regarding his experience in accounting and financial matters, that Mr. Hu shall be designated as an “Audit Committee financial expert” within the meaning of Item 401(e) of SEC Regulation S-K, as Mr. Hu has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in his financial sophistication. The Audit Committee assists the Board’s oversight of the integrity of our financial reports, compliance with legal and regulatory requirements, the qualifications and independence of our independent registered public accounting firm, the audit process, and internal controls. The Audit Committee operates pursuant to a written charter adopted by the Board. The Audit Committee is responsible for overseeing the corporate accounting and financing reporting practices, recommending the selection of our registered public accounting firm, reviewing the extent of non-audit services to be performed by the auditors, and reviewing the disclosures made in our periodic financial reports. The Audit Committee also reviews and recommends to the Board that the audited financial statements be included in our Annual Report on Form 10-K.
Following the end of the fiscal year ended December 31, 2011, the Audit Committee (1) reviewed and discussed the audited financial statements for the fiscal year ended December 31, 2011 with management; (2) discussed with the independent auditors the matters required to be discussed by Public Company Accounting Oversight Board (United States) Audit Standard AU Section 380 “Communication with Audit Committees” and Rule 2-07 of SEC Regulation S-X; and (3) received the written disclosures and the letter from the independent accountants required the Public Company Accounting Oversight Board and has discussed with the independent accountant its independence.
Based on the review and discussions referred to above, the Audit Committee had recommended to the Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for filing with the SEC.
/s/ The Audit Committee
Remington C.H. Hu
Yun Sen Huang
Qiang Lin
44
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Compensation Philosophy
Our executive compensation philosophy is to align the interests of executive management with stockholder interests and with our business strategy and success through an integrated executive compensation program that considers short-term performance, the achievement of long-term strategic goals and growth in total stockholder value. The key elements of our executive compensation philosophy are competitive base salary, annual incentive opportunities and equity participation. Our aggregate compensation package is designed to attract and retain individuals critical to our long-term success, to motivate these persons to perform at their highest levels, and to reward exceptional performance.
The compensation of our executive officers is determined by the Compensation Committee, except that the entire Board makes the final determination as to the compensation of our Chief Executive Officer. The Chief Executive Officer reviews and revises compensation proposals prepared by Human Resources and presents his recommendations to the Compensation Committee for the Committee’s ultimate review and approval. The Chief Executive Officer does not participate in Compensation Committee meetings and is not involved in decisions relating to his own compensation.
Elements of Compensation
We pay each of our named executive officers a base annual salary. Bonuses and equity incentives may also be provided to supplement base salary. The criteria for determining each of these components of compensation is described below. We do not provide retirement benefits and only minimal perquisites except as described below.
Base Salary
Base salary levels for executive officers are set forth in their individual employment agreements, and are reflected in the Summary Compensation Table below. The Compensation Committee considered the total compensation paid by other biopharmaceutical companies in Shenzhen, China to persons holding equivalent positions in setting base salary levels. However, the Compensation Committee did not conduct a peer group compensation analysis or target any particular compensation level in establishing the base salaries for named executive officers.
The Compensation Committee believes that any increases in base salary should be based upon a favorable evaluation of individual performance relative to individual goals, the functioning of the executive’s team within the corporate structure, success in furthering corporate strategy and goals, individual management skills and responsibilities, demonstrated loyalty, and our commitment to attract and retain executives. We expect that our Compensation Committee will reward superior individual and company performance with commensurate cash and other compensation. The Compensation Committee did not increase base salary during fiscal year 2011. Salary will next be reviewed when the Compensation Committee deems appropriate, but the Compensation Committee will not review salary more frequently than on an annual basis.
Bonuses
Executives are eligible to receive a discretionary bonus pursuant to the terms of their respective employment agreements. However, in fiscal 2011 we did not set any performance targets and no discretionary bonuses were paid. If our Compensation Committee determines to do so in the future, bonuses may be paid on an ad hoc basis to recognize superior performance. If the Compensation Committee determines to provide bonus compensation as a regular part of our executive compensation package, it will establish performance goals for each of the executive officers and maximum bonuses that may be earned upon attainment of such performance goals. Some of the components of our key performance appraisal index that we may use to consider in establishing these performance goals include the following: cash flow (accounts receivable, inventory, accounts payable); sales (revenue, accounts receivables collection, gross profit, customer credit management and goods delivery management); costs and expenses (financial costs, manufacturing costs, general and administrative expenses, sales and marketing expenses, research and development costs); and capital expenditures.
Equity Incentives
Prior to June 13, 2012, named executive officers were eligible for equity awards in the form of stock options, stock appreciation rights, performance units, restricted stock, restricted stock units and performance shares under the China
45
Information Technology, Inc. 2007 Equity Incentive Plan, or the Plan. Equity awards were granted at the discretion of the Compensation Committee. The size of an award to any individual, including named executive officers, depended in part on individual performance, including the components of our key performance appraisal index described above and any other indicators of the impact that such employee’s productivity may have on stockholder value over time. Other factors include salary level and competitive data. In addition, in determining the awards granted to each named executive officer, the Compensation Committee considered the future benefits potentially available to the named executive officers from existing awards. As of June 13, 2012, the Plan terminated in accordance with its terms. Currently, we do not have a program, plan or practice to provide equity incentives to named executive officers or other employees.
We have no program, plan or practice of granting equity awards that coincide with the release by us of material non-public information.
Retirement Benefits
Currently, we do not provide any company-sponsored retirement benefits or deferred compensation programs to any employee, including the named executive officers (other than a mandatory state pension scheme in which all of our employees in China participate) because it is not customary to provide such benefits and programs in China.
Perquisites
Historically, we have provided our named executive officers with minimal perquisites and other personal benefits that we believe are reasonable, such as company car-related benefits. We do not view perquisites as a significant element of compensation, but do believe they can be useful in attracting, motivating and retaining the executive talent for which we compete.
Summary Compensation Table — Fiscal Years Ended December 31, 2011, 2010 and 2009
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000. All information below this table gives retroactive effect to our one-for-two reverse stock split effected on March 1, 2012.
| Stock | ||||
| Salary(1) | Awards(2) | Total | ||
| Name and Principal Position | Year | ($) | ($) | ($) |
| Jiang Huai Lin, | 2011 | 114,280 | - | - |
| Chairman, Chief Executive Officer and President (3) | 2010 | 110,760 | 114,500 | 225,260 |
| 2009 | 58,644 | 119,000 | 117,644 | |
| Daniel K. Lee, | 2011 | 4,127 | - | 4,127 |
| Chief Financial Officer (4) | 2010 | - | - | - |
| 2009 | - | - | - | |
| Jackie You Kazmerzak, | 2011 | 25,000 | - | - |
| former Chief Financial Officer (5) | 2010 | 50,000 | 137,400 | 187,400 |
| 2009 | 12,500 | 119,000 | 131,500 | |
| Zhi Qiang Zhao, | 2011 | 80,000 | - | - |
| Chief Operating Officer and former Interim Chief | 2010 | 77,520 | 45,800 | 123,320 |
| Financial Officer (6) | 2009 | 52,780 | 59,500 | 112,280 |
| Zhi Xiong Huang, | 2011 | 79,440 | - | - |
| Chief Technology Officer (7) | 2010 | 76,980 | 36,640 | 113,620 |
| 2009 | 43,983 | 59,500 | 103,483 | |
| Yi Fu Liu, | 2011 | 95,238 | - | - |
| Chief Marketing Officer (8) | 2010 | 92,304 | 45,800 | 138,104 |
| 2009 | 61,576 | 59,500 | 121,076 |
46
Narrative Disclosure to Summary Compensation Table
| (1) |
The amounts reported in this table have been converted from RMB to U.S. dollars based on the average conversion rate between the U.S. dollar and RMB for the applicable fiscal year, or $1.00 to RMB 6.30 (fiscal year 2011 exchange rate), $1.00 to RMB 6.50 (fiscal year 2010 exchange rate), and $1.00 to RMB 6.82 (fiscal year 2009 exchange rate). |
| (2) |
The amounts represented in the stock award column reflect the compensation expense recognized by CNIT in fiscal years 2009, 2010 and 2011 determined pursuant to Statement of Financial Accounting Standards, or SFAS, No. 123 (Revised 2004), “Share-Based Payment,” as superseded by SFAS No. 168 “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162,” as superseded by The FASB Accounting Standards CodificationTM, or ASC, now included in ASC Topic 718, and no forfeitures are assumed. The value of each restricted stock award was derived by multiplying the closing market price on the date of the grant of the award by the number of shares included in the award. Also see “Grants of Plan- Based Awards” for more detail regarding equity grants to named executive officers in fiscal year 2011. |
| (3) |
Mr. Lin became our Chairman on September 6, 2006 and on October 3, 2006 he became our President and Chief Executive Officer. Prior to that, Mr. Lin was (and continues to be) the Chairman and Chief Executive Officer of our subsidiary, IST. The annual, long term and other compensation shown in this table include the amount Mr. Lin received from IST during the applicable periods. In 2011, Mr. Lin earned RMB 50,000 per month (approximately $7, 936) for his services as our Chief Executive Officer and as IST’s Chief Executive Officer and RMB 10,000 (approximately $1,587) per month as the Chairman of our Board of Directors. Mr. Lin earned RMB 50,000 per month (approximately $7,690) for his services as our Chief Executive Officer and as IST’s Chief Executive Officer and RMB 10,000 (approximately $1,540) per month as the Chairman of our Board of Directors during 2010, and earned RMB 28,330 per month (approximately $4,154) as Chief Executive Officer and RMB 5,000 (approximately $733) as the Chairman of our Board of Directors during 2009. In addition, Mr. Lin was granted 10,000 and 12,500 shares of common stock in 2010 and 2011 as compensation for his service in 2009 and 2010, respectively. |
| (4) |
Mr. Lee became our Chief Financial Officer on December 12, 2011. Mr. Lee earned RMB 26,000 (approximately $4,127) as compensation for his services during 2011. Under his employment agreement, he is entitled to RMB 500,000 per year as compensation. |
| (5) |
Ms. Kazmerzak served as our Chief Financial Officer from August 17, 2009 until May 30, 2011. Ms. Kazmerzak earned $5,000 per month for her services as our Chief Financial Officer in 2011, and earned $4,167 per month for her service as our Chief Financial Officer during 2010 and 2009. In addition, Ms. Kazmerzak was granted 10,000 and 15,000 shares of common stock in 2010 and 2011, respectively, as compensation for her service in 2009 and 2010, respectively. |
| (6) |
Mr. Zhao has served as a Director since September 2008 and as our Chief Operating Officer since November 2009, when he resigned from the position of Chief Administrative Officer. He also served as our Interim Chief Financial Officer from August 5, 2011 until December 12, 2011. In addition, Mr. Zhao served as the General Manager of the Company’s subsidiary Huipu Electronics (Shenzhen) Co., Ltd., since July 2011, as Human Resource Manager of iASPEC since April 2005 and as Deputy General Manager of iASPEC since July 2006. In 2011, Mr. Zhao earned RMB 37,000 per month (approximately $5,873) for his service as Chief Operating Officer and President of Huipu Electronics (Shenzhen) Co., Ltd., and RMB 5,000 (approximately $794) as a Director. Mr. Zhao earned RMB 37,000 per month (approximately $5,690) for his service as Chief Operating Officer and RMB 5,000 (approximately $770) as a Director during 2010. Mr. Zhao earned RMB 30,000 per month (approximately $4,400) for his services as our Chief Administrative Officer during 2009. Mr. Zhao was also granted 5,000 shares of common stock in each of 2010 and 2011 as compensation for his service in each of 2009 and 2010. |
| (7) |
Mr. Huang has served as our Chief Technology Officer since September 1, 2008. Mr. Huang has also served as the President of Shenzhen Zhongtian Technology Development Company Ltd., iASPEC’s subsidiary, since January 2010. Mr. Huang earned RMB 41,700 (approximately $6,620) and RMB 41,700 (approximately $6,415) per month during 2011 and 2010 respectively as our Chief Technology Officer and as President of Shenzhen Zhongtian Technology Development Company Ltd. Mr. Huang earned RMB 25,000 per month (approximately $3,668) as our Chief Technology Officer and as IST’s Vice President during 2009. Mr. Huang was also granted 5,000 and 4,000 shares of common stock in 2010 and 2011, respectively, as compensation for his service in 2009 and 2010, respectively. |
47
| (8) |
Mr. Liu resigned from the position of Chief Operating Officer and was appointed as Chief Marketing Officer in November 2009. Mr. Liu also has served as the President of Wuda Geoinformatics Co., Ltd. since January 2009. Mr. Liu earned RMB 50,000 (approximately $7,936) and RMB 50,000 (approximately $7,692) per month during 2011 and 2010 respectively for his service as Chief Marketing Officer and the President of Wuda Geoinformatics Co., Ltd. Mr. Liu earned RMB 35,000 per month (approximately $5,131) for his services as our Chief Operating Officer during 2009. Mr. Liu was also granted 5,000 shares of common stock in each of 2010 and 2011 as compensation for his service in 2009 and 2010, respectively. |
Grants of Plan-Based Awards
The following table sets forth information regarding equity grants under the Plan to named executive officers during the fiscal year ended December 31, 2011. These equity grants were awarded for services performed during the fiscal year ended December 31, 2010. All information in this table gives retroactive effect to our one-for-two reverse stock split effected on March 1, 2012.
| All other stock | |||
| awards: Number | Grant date fair | ||
| of shares of stock | value of stock and | ||
| or units | option awards | ||
|
Name |
Grant Date |
(#) | ($) |
|
Jiang Huai Lin |
February 8, 2011 |
12,500 | 9.16 |
|
Jackie You Kazmerzak |
February 8, 2011 |
15,000 | 9.16 |
|
Zhi Qiang Zhao |
February 8, 2011 |
5,000 | 9.16 |
|
Zhi Xiong Huang |
February 8, 2011 |
4,000 | 9.16 |
|
Yi Fu Liu |
February 8, 2011 |
5,000 | 9.16 |
Outstanding Equity Awards at Fiscal Year End
None of our named executive officers had unexercised stock option awards or unvested stock awards as of December 31, 2011.
Option Exercises and Stock Vested
None of our named executive officers exercised options during the year ended December 31, 2011. The following table sets forth information regarding stock vested for each of our named executive officers on an aggregated basis during the fiscal year ended December 31, 2011. All information in this table gives retroactive effect to our one-for-two reverse stock split effected on March 1, 2012.
|
STOCK AWARDS |
||
| Number of | ||
| shares acquired | Value realized on | |
| on vesting | vesting | |
|
Name |
(#) | ($) |
|
Jiang Huai Lin |
12,500 | 114,500 |
|
Jackie You Kazmerzak |
15,000 | 137,400 |
|
Zhi Qiang Zhao |
5,000 | 45,800 |
|
Zhi Xiong Huang |
4,000 | 36,640 |
|
Yi Fu Liu |
5,000 | 45,800 |
Pension Benefits
No named executive officer received or held pension benefits during the fiscal year ended December 31, 2011.
Nonqualified Deferred Compensation
No nonqualified deferred compensation was offered or issued to any named executive officer during the fiscal year ended December 31, 2011.
48
Potential Payments upon Termination or Change in Control
Our named executive officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.
Compensation of Directors
The following table sets forth the total compensation earned by our directors during fiscal year ended December 31, 2011:
| Fees earned or | ||
| paid in cash | Total | |
| Name | ($) | ($) |
| Jiang Huai Lin | 19,044 | 19,044 |
| Zhi Qiang Zhao | 9,522 | 9,522 |
| Qiang Lin | 5,714 | 5,714 |
| Yun Sen Huang | 5,714 | 5,714 |
| Remington C.H. Hu | 18,000 | 18,000 |
Narrative to Director Compensation Table
Mr. Jiang Huai Lin earns RMB 10,000 per month (approximately $1,587) for his services as the Chairman of our Board of Directors and Mr. Zhao earns RMB 5,000 per month (approximately $794) for his services as a member of our Board of Directors.
Our independent directors, Messrs Yun Sen Huang, Qiang Lin and Remington C.H. Hu, have all entered into our form of independent director agreement. Under the terms of their agreements, Mr. Yun Sen Huang earns RMB 3,000 per month (approximately $476), Mr. Qiang Lin earns RMB 3,000 per month (approximately $476), and Mr. Hu earns $1,500 per month as compensation for their services as independent directors.
All of our directors are reimbursed for pre-approved reasonable business-related expenses incurred in good faith in the performance of their duties for our Company.
Compensation Committee Interlocks and Insider Participation
Messrs. Yun Sen Huang, Qiang Lin and Remington C.H. Hu served on the Compensation Committee during the fiscal year ended December 31, 2011. None of them was an employee, an officer, or former officer of CNIT. No member of the Compensation Committee had any relationship with us requiring disclosure under Item 404 of Regulation S-K during the fiscal year ended December 31, 2011. None of our executive officers has served on the Board of Directors or compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served on our Board or Compensation Committee.
49
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement/prospectus.
/s/ The Compensation Committee
Yun Sen Huang
Qiang Lin
Remington C.H. Hu
50
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our common stock as of June 19, 2012 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of CNIT, 21st Floor, Everbright Bank Building, Zhuzilin, Shenzhen 518040, China. All information in and below this table gives retroactive effect to our one-for-two reverse stock split effected on March 1, 2012.
| Amount and | ||||
| Nature of | Percent | |||
|
Name and Address of Beneficial |
|
|
Beneficial | of |
|
Owner |
Office, If Any |
Title of Class |
Ownership(1) | Class(2) |
| Officers and Directors | ||||
|
Jiang Huai Lin |
Chairman, CEO and President |
Common Stock |
12,222,577 | 45.3% |
|
Daniel K. Lee |
Chief Financial Officer |
Common Stock |
0 | * |
|
Zhi Xiong Huang |
Chief Technology Officer |
Common Stock |
9,000 | * |
|
Yi Fu Liu |
Chief Marketing Officer |
Common Stock |
17,500 | * |
|
Zhi Qiang Zhao |
Director, Chief Operating Officer |
Common Stock |
17,500 | * |
|
Yun Sen Huang |
Director |
Common Stock |
0 | * |
|
Qiang Lin |
Director |
Common Stock |
0 | * |
|
Remington Hu |
Director |
Common Stock |
0 | * |
|
All officers and directors as a group |
|
Common Stock |
12,266,577 | 45.4% |
|
(8 persons named above) |
|
|||
| 5% Security Holders | ||||
|
Jiang Huai Lin |
Common Stock |
12,222,577 | 45.3% | |
|
Adam Benowitz (3) |
|
Common Stock |
1,737,035 | 6.4% |
|
20 West 55th Street, 5th Fl. |
||||
|
New York, NY 10019 |
||||
|
Sansar Capital Asia Pte. Ltd. (4) |
Common Stock |
1,617,326 | 6.0% | |
|
16 Raffles Quay #40-02 |
|
|||
|
Hong Leong Building |
|
|||
|
Singapore, Singapore 048581 |
||||
|
Sansar Capital Management, L.L.C. (4) |
Common Stock |
1,617,326 | 6.0% | |
|
16 Raffles Quay #40-02 |
|
|||
|
Hong Leong Building |
|
|||
|
Singapore, Singapore 048581 |
|
|||
|
Sanjay Motwani (4) |
Common Stock |
1,617,326 | 6.0% | |
|
16 Raffles Quay #40-02 |
||||
|
Hong Leong Building |
||||
|
Singapore, Singapore 048581 |
|
|||
|
Fosun International Limited (5) |
Common Stock |
2,614,212 | 9.7% | |
|
Room 808, ICBC Tower |
|
|||
|
3 Garden Road, Central |
|
|||
|
Hong Kong, China |
|
|||
|
Guo Guangchang (5) |
Common Stock |
2,614,212 | 9.7% | |
|
Room 808, ICBC Tower |
|
|||
|
3 Garden Road, Central |
||||
|
Hong Kong, China |
||||
| * Less than 1% | ||||
| (1) |
Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our common stock. |
51
| (2) |
As of June 19, 2012, a total of 27,007,608 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner above, any securities that are exercisable or convertible within 60 days have been included in the denominator. |
| (3) |
Includes 700,000 shares of our common stock held by Vision Opportunity Master Fund, Ltd., a Cayman Islands company, and 1,037,035 shares of our common stock held by Vision Opportunity China LP, a limited partnership organized under the laws of Guernsey. Mr. Benowitz exercises investment discretion and control over these shares and may be deemed to be the beneficial owner thereof. |
| (4) |
All of the shares of common stock beneficially owned by Sansar Capital Management, L.L.C. and Sansar Capital Asia Pte. Ltd. are directly held by a fund to which Sansar Capital Management, L.L.C. and Sansar Capital Asia Pte. Ltd. act as investment advisors. Sanjay Motwani is the managing member of Sansar Family I, L.L.C., which is the managing member of Sansar Capital Management, L.L.C. Sansar Capital Asia L.P. is the sole shareholder of Sansar Capital Asia Pte. Ltd. and Sansar International L.L.C. is the general partner of Sansar Capital Asia, L.P. Sanjay Motwani is the managing member of Sansar International L.L.C. |
| (5) |
Fosun International Limited is a majority-owned subsidiary of Fosun Holdings Limited, which in turn is a wholly-owned subsidiary of Fosun International Holdings Ltd.. Fosun International Holdings Ltd. is controlled by Mr. Guo Guangchang, who is also the Executive Director and Chairman of the Board of Fosun International Limited. |
There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of CNIT.
52
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS
AND CERTAIN
CONTROL PERSONS
Transactions with Related Persons
The following includes a summary of transactions since the beginning of the 2010 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds $120,000 and in which any related person had or will have a direct or indirect material interest (other than compensation described above under the heading “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions. Share information included in this section gives retroactive effect to our one-for-two reverse stock split effected on March 1, 2012.
-
Approximately 8% of Xiamen Yili Geo Information Technology Co., Ltd., or Yili, is owned by Wuda Geoinformatics Co., Ltd., or Geo, iASPEC’s subsidiary. As December 31, 2010, December 31, 2011, and March 31, 2012, Yili had an outstanding balance due to Geo of $137,289, $22,823 and $239,569, respectively, consisting of accounts receivable from sales.
-
Shenzhen Kewen Information Technology Co., Ltd., or Kewen, is a private company owned by Mr. Qi Danfeng, who is Chief Executive Officer of Shenzhen Zhongtian Technology Development Company Ltd., or Zhongtian, iASPEC’s subsidiary. Prior to our purchase of Zhongtian, Kewen routinely purchased software from Zhongtian and at December 31, 2010 and 2011, accounts receivable from Kewen was $193,587 and zero, respectively. Amounts earned from Yili and Kewen during the years ended December 31, 2010 and 2011 and the three months ended March 31, 2011 and 2012 were as follows:
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||
| 2010 | 2011 | 2011 | 2012 | |||||||||
| Revenue | $ | 630,975 | $ | 14,334 | $ | 14,079 | $ | 248,908 | ||||
| Cost of sales | (247,892 | ) | - | - | (147,821 | ) | ||||||
| Gross profit | $ | 383,083 | $ | 14,334 | $ | 14,079 | $ | 101,087 | ||||
-
Shenzhen Information Security Investment and Development Co., Ltd., or ISID, was a company under the control of Mr. Lin and a balance of $697,820 due to ISID represented advances from ISID to us as of December 31, 2010. These advances are non-interest bearing and due on demand. As Mr Lin transferred control of ISID to a non- affiliated third party during the year 2011, ISID was not our related company as of December 31, 2011.
-
Approximately 9% of Wuhan Geo Navigation and Communication Technology Co., Ltd., or Geo Navigation, is owned by Geo. Geo Navigation has made non-interest bearing cash advances to Geo, and at December 31, 2010, December 31, 2011 and March 31, 2012, a balance of $596,046, $593,617 and $621,835, respectively, remained outstanding. We intend to repay this balance as soon as practicable.
-
On January 7, 2010, Mr. Jiang Huai Lin, our Chairman, Chief Executive Officer and President, consummated a secondary offering to certain accredited investors of 800,000 shares of our common stock owned by him, for an aggregate purchase price of $9.84 million, or $12.30 per share. The secondary offering was consummated concurrently with our closing of a primary offering of our securities on the same date. Mr. Lin paid his pro rata share of the offering costs and we did not receive any proceeds from the secondary offering of Mr. Lin’s shares.
-
On January 14, 2010, Mr. Lin loaned a total of $5 million to us from the proceeds of the sale of his shares for use for general corporate purposes and working capital. In consideration of the loan from Mr. Lin, our Board of Directors approved the issuance and delivery of a one-year, non-interest bearing, convertible promissory note to Mr. Lin, in the principal amount of $5 million. The note was due and payable on January 14, 2011, and was convertible into shares of our common stock at a conversion price of $11.76 per share (the per share closing price on the trading day prior to the delivery date of the note). On March 25, 2010, Mr. Lin surrendered the note and we issued a replacement note, in the principal amount of $6,000,000, to reflect the principal amount of the original note as well as an additional loan of $1,000,000 made to us on March 25, 2010. The new additional loan of $1,000,000 was repaid on April 7, 2010. The new note omitted the conversion feature that was contained in the original note and was non-interest bearing. The maturity date of the new note was March 5, 2012 and we were permitted to prepay all or any part of the amounts outstanding under this note at any time before the maturity date without the express written consent of Mr. Lin. In accounting for the new note, we accrued an interest expense at an interest rate of 5% per annum, which is the market interest rate for USD denominated 2-year loans in China. The imputed interest for the year ended December 31, 2010 was $187,500 and was recognized as capital contribution by the shareholder. On August 16, 2011, we and Mr. Lin agreed to an amended and restated promissory note to replace the note that was issued on March 25, 2010. Under the note issued on March 25, 2010, the loan was not permitted to be repaid by conversion of the loan balance into shares of common stock. Pursuant to the amended and restated note, the loan balance could be repaid by conversion of the balance into shares of common stock at a conversion price of $5.40 per share. On August 16, 2011, Mr. Lin exercised this conversion right, and therefore agreed to receive a total of 925,926 shares of common stock in lieu of cash repayment under the amended and restated note.
53
-
Rental expenses from renting buildings and offices from Mr. Lin during the years ended December 31, 2010 and 2011, and during the three months ended March 31, 2011 and 2012, were $110,795 and $248,653, and $57,000 and $68,000, respectively.
Except as set forth in our discussion above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Policies and Procedures Relating to Transactions with Related Persons
Our current written policies and procedures for review, approval or ratification of relationships or transactions with related persons are set forth in our Code of Ethics, our Audit Committee Charter and our Governance and Nominating Committee Charter.
Our Board of Directors monitors and manages potential conflicts of interest of management and the Board and assumes other responsibilities as may be required from time to time. As permitted under our bylaw, the Board has delegated some of these responsibilities to the Board’s Audit Committee and Governance and Nominating Committee. Our Audit Committee Charter provides that the Audit Committee is responsible for establishing procedures for the approval of and approve our entry into any and all related party transactions between us and any executive officer or director that would potentially require disclosure pursuant to Item 404 of Regulation S-K. The Audit Committee Charter also mandates that the Audit Committee must approve our entry into any such related party transaction. Our Governance and Nominating Committee Charter provides that the Governance and Nominating Committee is responsible for reviewing and assessing the adequacy of our Code of Ethics and other internal policies and guidelines and monitor whether the principles described therein are being incorporated into our culture and business practices.
Our Code of Ethics provides a number of specific procedures, requirements, and prohibitions relating to related party transactions. It prohibits directors, officers and employees from accepting simultaneous employment with a supplier, customer, developer, or competitor, or from taking part in any activity that enhances or supports a competitor’s position. All directors, officers and employees must disclose to us any interest that may conflict with us. A director, officer and employee may accept a position as a director of another company only if he or she obtains approval from the Board of Directors; the other company does not compete with us; and any compensation received in this capacity is commensurate with its responsibilities.
Our Code of Ethics generally requires our directors, officers, and employees to avoid conducting our business with a relative or significant other, or with a business in which a relative or significant other is associated in any significant manner. Where a director, officer or employee believes that such a transaction is unavoidable, he or she must fully disclose it to our Chief Executive Officer. If the Chief Executive Officer deems it material, the Governance and Nominating Committee must review and provide advance written approval for such transactions. The Board subsequently reassigned part of this responsibility to the Audit Committee pursuant to the Audit Committee Charter. The most significant related party transactions, especially those involving our directors or executive officers, must be reviewed and approved in writing in advance by our Board of Directors. The Board also delegated part of this function to the Audit Committee under the Audit Committee Charter, as explained above. We must report all such material related party transactions under applicable accounting rules, federal securities laws, SEC rules and regulations, and securities market rules. Any dealings with a related party must be conducted in such a way that no preferential treatment is given.
In addition, our Code of Ethics discourages the employment of relatives and significant others in positions or assignments within the same department and prohibits the employment of such persons in positions that have influence (e.g., an auditing or control relationship, or a supervisor/subordinate relationship). Our Human Resources department is primarily responsible for administering this aspect of our related party transactions policy. If any covered relationship develops or exists between two employees, the senior employee must advise his or her supervisor. We may separate the employees either by reassignment or termination, if necessary.
54
Our Code of Ethics permits waivers of the above policies and procedures as to directors or executive officers only if they are approved in writing by the Board of Directors and promptly disclosed. Any waiver with respect to any employee, agent or contractor must be approved in writing by the Company. Under its Charter, our Governance and Nominating Committee is also responsible for reviewing requests for any waivers and recommending to the Board whether a particular request should be granted.
Any type of related party transaction not expressly covered by the above policies and procedures is subject to the review and approval of our Board of Directors.
There were no related party transactions since the beginning of the 2010 fiscal year for which our policies and procedures did not require review, approval or ratification, or where our policies and procedures were not followed.
55
PROPOSAL 1: ELECTION OF DIRECTORS
The Board is responsible for establishing broad corporate policies and monitoring our overall performance. It selects our executive officers, delegates authority for the conduct of our day-to-day operations to those officers, and monitors their performance. Members of the Board keep themselves informed of our business by participating in Board and Committee meetings, by reviewing analyses and reports, and through discussions with the Chairman and other officers.
See “Corporate Governance—The Board and Committees of the Board—Governance and Nominating Committee” above for a discussion of the process for selecting directors.
There are currently five directors serving on the Board. At the Annual Meeting, five directors will be elected. The individuals who have been nominated for election to the Board at the Annual Meeting are listed in the table below. Each of the nominees is a current director.
If, as a result of circumstances not now known or foreseen, any of the nominees is unavailable to serve as a nominee for director at the time of the Annual Meeting, the holders of the proxies solicited by this proxy statement/prospectus may vote those proxies either (i) for the election of a substitute nominee who will be designated by the proxy holders or by the present Board or (ii) for the balance of the nominees, leaving a vacancy. Alternatively, the size of the Board may be reduced accordingly. The Board has no reason to believe that any of the nominees will be unwilling or unable to serve, if elected as a director. The five nominees for election as directors are uncontested. In uncontested elections, directors are elected by plurality of the votes cast at the Annual Meeting. Proxies submitted on the accompanying proxy card will be voted for the election of the nominees listed below, unless the proxy card is marked otherwise.
The Board of Directors recommends a vote FOR the election of the nominees listed below.
Director Nominees
The names, the positions and the ages as of the Record Date of the individuals who are our nominees for election as directors are:
| Name | Age | Position with the Company | Term as Director |
| Jiang Huai Lin | 42 | Chairman, Chief Executive Officer and President | September 6, 2006 – Present |
| Zhi Qiang Zhao | 40 | Director and Chief Operating Officer | September 1, 2008 – Present |
| Yun Sen Huang | 65 | Director | August 10, 2007 – Present |
| Qiang Lin | 65 | Director | August 10, 2007 – Present |
| Remington C.H. Hu | 44 | Director | October 30, 2009 – Present |
For information as to the shares of the common stock held by each nominee, see “Security Ownership of Certain Beneficial Owners and Management” above. See “Directors and Executive Officers” above for biographical summaries for each of our director nominees.
All directors will hold office for the terms indicated, or until their earlier death, resignation, removal or disqualification, and until their respective successors are duly elected and qualified. There are no arrangements or understandings between any of the nominees, directors or executive officers and any other person pursuant to which any of our nominees, directors or executive officers have been selected for their respective positions. No nominee, member of the Board of Directors or executive officer is related to any other nominee, member of the Board of Directors or executive officer.
Director Qualifications - General
Directors are responsible for overseeing our business consistent with their fiduciary duty to shareowners. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on our Board of Directors that are applicable to all Directors and that there are other skills and experience that should be represented on the Board as a whole but not necessarily by each Director. The Board and the Governance and Nominating Committee of the Board consider the qualifications of Directors and Director candidates individually and in the broader context of the Board’s overall composition and our current and future needs.
56
Qualifications for All Directors
In its assessment of each potential candidate, including those recommended by shareowners, the Governance and Nominating Committee considers the nominee’s judgment, integrity, experience, independence, understanding of our business or other related industries and such other factors the Governance and Nominating Committee determines are pertinent in light of the current needs of the Board. The Governance and Nominating Committee also takes into account the ability of a Director to devote the time and effort necessary to fulfill his or her responsibilities to us.
The Board and the Governance and Nominating Committee require that each Director be a recognized person of high integrity with a proven record of success in his or her field. Each Director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all Directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.
The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.
Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole
The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the Board as a whole, in light of our current needs and business priorities. We are a NASDAQ listed company that offers products and services in the information technology industry in China. Therefore, the Board believes that a diversity of professional experiences in the information technology industry, specific knowledge of key geographic growth areas, and knowledge of U.S. capital markets and of U.S. accounting and financial reporting standards should be represented on the Board. In addition, the market in which we compete is characterized by rapid technological change, evolving industry standards, introductions of new products, and changes in customer demands that can render existing products obsolete and unmarketable. Our future success depends upon our ability to address the increasingly sophisticated needs of our customers by supporting existing and emerging hardware, software, database, and networking platforms and by developing and introducing enhancements to our existing products and new products on a timely basis that keep pace with technological developments, evolving industry standards, and changing customer requirements, through strong focus on research and development. Therefore, the Board believes that academic and professional experience in research and development in the information technology industry should also be represented on the Board.
Summary of Qualifications of Nominees for Director
Set forth below is a narrative disclosure that summarizes some of the specific qualifications, attributes, skills and experiences of our directors. For more detailed information, please refer to the biographical information for each director set forth above.
Mr. Jiang Huai Lin. Mr. Lin is the co-founder of CNIT. He served as Chairman and Chief Executive Officer of our oldest subsidiary, IST, since its incorporation in January 2006, and is also the co-founder and sole stockholder of iASPEC. He has prior experience with an enterprise engaged in investment in high technology and consumer electronics. Mr. Lin contributes invaluable long-term knowledge of our business and operations and knowledge of the information technology industry in China.
Mr. Zhi Qiang Zhao. Mr. Zhao has 6 years’ experience as Administrative and Human Resources Director of iASPEC. He also has prior experience as Human Resources Supervisor for another technology company, Foxconn Technology Group. Mr. Zao’s experience in corporate operations and integrations, strategy planning and human resources management provides invaluable operational perspective to the Board.
Mr. Yun Sen Huang. Mr. Huang has served as a Professor at Shenzhen University’s School of Information Engineering since September 1984 and is the recipient of many industry accolades, including First Grade Award of Technology Advancement from Sichuan province, Second Grade Award of Technology Advancement from Guangdong province, and Third Grade Award of Technology Advancement from the Chemical Ministry. He has published eight books in the field of Networks and Multimedia Applications. He was a co-founder and Chairman from 2001 – 2006 of the International Software Development (Shenzhen) Co., Ltd., a co-partnership company incorporated by IBM, East Asia Bank and the Shenzhen SDC Company. Mr. Huang’s experiences provides invaluable industry research and development perspective to the Board.
57
Mr. Qiang Lin. Mr. Lin has served as a Professor at Shenzhen University’s School of Information Engineering since September 2002 and is a Director of its Computer Science and Technology Department. He has been engaged in teaching and research in the Computer Applications for many years and currently focuses his research in the fields of Computer Networks, Information Systems, Database, and ERP systems. He serves as editor in chief of Electrical Business Foundation, an industry publication, and has published many research papers regarding computer science in China. He has done significant research experience in information systems, electronic business, logistics, and image disposal and successful development of many computer application systems as a project principal. He holds Master’s Degree of Computing Mathematics from Zhongshan University and has been the recipient of many industry accolades, including a First Grade Award of Software Development from the Chinese Chemical Ministry and a Third Grade Award of Science and Technology Development by Guangdong province. Mr. Lin’s experiences provides invaluable industry research and development perspective to the Board.
Mr. Remington C.H. Hu. Mr. Hu has more than 17 years of experience in corporate finance and investment management. He is the founder and CEO of Tomorrow Capital Limited, a financial advisory firm, and is the former CFO of Yucheng Technologies Limited, a Nasdaq listed, IT solutions company servicing China’s banking industry, former CFO of eSoon Communications International Corp., a software start-up focusing on the CRM/CTI market, former VP of Crimson Asia Capital Holdings, Ltd., formerly Asia’s largest venture capital firm backed by Taiwan’s Chinatrust Financial Group and former Assistant VP for Citibank, NA in Taipei and Hong Kong. He also served as China Representative for CVM Capital Partners, LLC, Taiwan’s largest VC affiliated with Taiwan’s largest private equity investment group. Mr Hu holds an MBA from the Wharton Business School and a BA, Computer Science and Information Engineering from the National Chiao Tung University. Mr. Hu’s experience in global capital markets and his educational background provides invaluable diversity and perspective to the Board.
..
58
PROPOSAL 2: RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Audit Committee has selected GHP Horwath, P.C. to serve as the independent registered public accounting firm of CNIT for the fiscal year ending December 31, 2012. GHP Horwath, P.C. was CNIT’s independent registered public accounting firm for the fiscal year ended December 31, 2011.
We are asking our stockholders to ratify the selection of GHP Horwath, P.C. as our independent registered public accounting firm. Although ratification is not required by our bylaws or otherwise, the Board is submitting the selection of GHP Horwath, P.C. to our stockholders for ratification as a matter of good corporate practice. In the event our stockholders fail to ratify the appointment, the Audit Committee may reconsider this appointment.
We have been advised by GHP Horwath, P.C. that neither the firm nor any of its associates had any relationship with CNIT other than the usual relationship that exists between independent registered public accounting firms and their clients during the last fiscal year. Representatives of GHP Horwath, P.C. are expected to attend the Annual Meeting with the opportunity to make a statement and/or respond to appropriate questions from shareholders present at the Annual Meeting.
Independent Registered Public Accounting Firm’s
Fees
The following is a summary of the fees billed to CNIT for professional services rendered for the fiscal years ended December 31, 2011 and 2010:
| Year Ended December 31, | ||||||
| 2011 | 2010 | |||||
| Audit Fees | $ | 569,874 | $ | 526,633 | ||
| Audit-Related Fees | - | - | ||||
| Tax Fees | 25,000 | 20,000 | ||||
| All Other Fees | - | - | ||||
| TOTAL | $ | 594,874 | $ | 546,633 | ||
“Audit Fees” consisted of fees billed for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K and 10-Q for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
“Audit-Related Fees” consisted of fees billed for assurance and related services by the principal accountant that were reasonably related to the performance of the audit or review of our financial statements and are not reported under the paragraph captioned “Audit Fees” above.
“Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax returns preparation.
“All Other Fees” consisted of fees billed for products and services provided by the principal accountant, other than the services reported above.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit service performed by GHP Horwath, P.C. for our financial statements as of and for the year ended December 31, 2011.
The Board of Directors recommends a vote FOR ratification of
the selection of GHP Horwath, P.C. as CNIT’s
independent registered public
accounting firm for the fiscal year ending December 31, 2012.
59
PROPOSAL 3: ADVISORY VOTE ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 enables our stockholders to vote to approve, on an advisory (nonbinding) basis, the compensation of our named executive officers as disclosed in this proxy statement/prospectus in accordance with the SEC’s rules.
Our executive compensation programs are designed to attract, motivate, and retain our named executive officers, who are critical to our success. Under these programs, our named executive officers are rewarded for the achievement of specific annual, long-term and strategic goals, business unit goals, corporate goals, and the realization of increased stockholder value.
Our Compensation Committee continually reviews the compensation programs for our named executive officers to ensure they achieve the desired goals of aligning our executive compensation structure with our stockholders’ interests and current market practices. We are asking our stockholders to indicate their support for our named executive officer compensation as described in this proxy statement/prospectus. This proposal, commonly known as a “say-on-pay” proposal, gives our stockholders the opportunity to express their views on our named executive officers’ compensation. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in this proxy statement. Accordingly, we will ask our stockholders to vote for the approval of the compensation of the named executive officers, as disclosed in this proxy statement/prospectus pursuant to the compensation disclosure rules of the SEC.
The say-on-pay vote is advisory, and therefore not binding on CNIT, the Compensation Committee or our Board. Our Board and our Compensation Committee value the opinions of our stockholders and to the extent there is any significant vote against the named executive officer compensation as disclosed in this proxy statement/prospectus, they will consider our stockholders’ concerns and the Compensation Committee will evaluate whether any actions are necessary to address those concerns.
The Board of Directors recommends a vote FOR the approval of the compensation of our named executive officers,
as disclosed in this proxy statement/prospectus pursuant to the compensation disclosure rules of the SEC.
60
PROPOSAL 4: APPROVAL OF THE MERGER AGREEMENT
The following includes a brief summary of the material provisions of the Merger Agreement, a copy of which is attached as Annex A and incorporated by reference into this proxy statement/prospectus. We encourage you to read the Merger Agreement in its entirety for a more complete description of the merger. In the event of any discrepancy between the terms of the Merger Agreement and the following summary, the Merger Agreement will control.
Introduction
The Merger Agreement you are being asked to adopt at the Annual Meeting provides for a merger that would result in your shares of CNIT common stock being converted into the right to receive an equal number of ordinary shares in the capital of CNIT BVI, a company incorporated under the laws of the BVI. Under the Merger Agreement, Merger Sub, a wholly owned subsidiary of CNIT BVI, which itself is currently a wholly owned subsidiary of CNIT, will merge with and into CNIT, with CNIT surviving the merger as a wholly owned subsidiary of CNIT BVI. If the Merger Agreement is adopted by the stockholders, we anticipate that the merger will become effective at 4:30 p.m., Eastern Time, on , 2012. Following the merger, CNIT BVI, together with its subsidiaries, will own and continue to conduct our business in substantially the same manner as is currently being conducted by CNIT and its subsidiaries. Immediately following the merger, you will own an interest in CNIT BVI, which will be managed by the same Board of Directors and executive officers that managed CNIT immediately prior to the merger. Additionally, the consolidated assets and employees of CNIT BVI will be the same as those of CNIT immediately prior to the merger.
The Parties to the Merger
CNIT is a leading provider of information and display technologies in the PRC. We provide a broad portfolio of software, hardware and fully integrated solutions to customers in a variety of technology sectors including Geographic Information Systems, Digital Public Security Technologies, Digital Hospital Information Systems, education, media, and consumer products. We were founded in 1993 and are headquartered in Shenzhen, China. We are currently subject to SEC and other disclosure obligations in the United States.
Our customers are mostly public sector entities that use our products and services to improve the service quality and management level and efficiency of public security, traffic control, fire control, medical rescue, border control, and surveying and mapping. Our typical customers include some of the most important governmental departments in China, including the Ministry of Public Security, the public security, fire fighting, traffic and police departments of several provinces, the Shenzhen General Station of Exit and Entry Frontier Inspection, and several provincial personnel, urban planning, civil administration, land resource, and mapping and surveying bureaus. Over the past several years, we have diversified our customer base beyond our local reach. In the future, we expect to continually expand our market and product offerings in the public and other sectors, through geographic expansion and enhancement of our technical capabilities.
CNIT BVI is a newly formed company incorporated under the laws of the BVI and currently a wholly owned subsidiary of CNIT. CNIT BVI does not have a significant amount of assets or liabilities and has not engaged in any business since its formation other than activities associated with its anticipated participation in the merger. Following the merger, CNIT BVI, together with its subsidiaries, will own and continue to conduct our business in substantially the same manner as is currently being conducted by CNIT and its subsidiaries.
Merger Sub is a newly formed Nevada corporation and currently a wholly owned subsidiary of CNIT BVI. Merger Sub does not have a significant amount of assets or liabilities and has not engaged in any business since its formation other than activities associated with its anticipated participation in the merger.
The principal executive offices of each of CNIT, CNIT BVI and Merger Sub are located at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong 518040, China, and the telephone number of each company is (+86) 755 -8370-8333.
Background and Reasons for the Merger
We believe the merger, which would change our place of incorporation from the United States to the BVI, would be in the best interests of our stockholders and would allow us to reduce operational, administrative, legal and accounting costs over the long term.
61
We currently have very limited operations in the United States and we believe there is no particular business reason to remain a company incorporated, and to maintain key corporate functions, in the United States. We believe that by reincorporating to a jurisdiction outside the United States, we will be able to qualify as a “foreign private issuer” under the rules and regulations of the SEC and thereby reduce our operational, administrative, legal and accounting costs. We have chosen to reorganize under the laws of the BVI because of its political and economic stability, effective judicial system, absence of exchange control or currency restrictions and availability of professional and support services. We could have selected a different jurisdiction outside of the United States, but we believe many non-Chinese companies operating in China are incorporated in the BVI and as a result many of our current and potential strategic partners have substantial experience doing business with BVI companies and corporate structures. We also believe that being incorporated in the BVI could provide us with additional flexibility to pursue listings on international stock exchanges, such as the Hong Kong Stock Exchange, should we desire to do so in the future.
As noted, following the completion of the merger, CNIT BVI is expected to qualify as a “foreign private issuer” under the rules and regulations of the SEC and we expect that the reduced reporting obligations associated with being a foreign private issuer will reduce operational, administrative, legal and accounting costs in the long term. CNIT BVI will remain subject to the mandates of the Sarbanes-Oxley Act, and, as long as CNIT BVI’s ordinary shares are listed on NASDAQ, the governance and disclosure rules of that stock exchange. However, as a foreign private issuer, CNIT BVI will be exempt from certain rules under the Exchange Act that would otherwise apply if CNIT BVI were a company incorporated in the United States or did not meet the other conditions to qualify as a foreign private issuer. For example:
-
CNIT BVI may include in its SEC filings financial statements prepared in accordance with U.S. GAAP or with IFRS as issued by the IASB without reconciliation to U.S. GAAP;
-
CNIT BVI will not be required to provide as many Exchange Act reports, or as frequently or as promptly, as U.S. companies with securities registered under the Exchange Act. For example, CNIT BVI will not be required to file current reports on Form 8-K within four business days from the occurrence of specific material events. Instead, CNIT BVI will need to promptly furnish reports on Form 6-K any information that CNIT BVI (a) makes or is required to make public under the laws of the BVI, (b) files or is required to file under the rules of any stock exchange or (iii) otherwise distributes or is required to distribute to its shareholders. Unlike Form 8-K, there is no precise deadline by which Form 6-K must be furnished. In addition, CNIT BVI will not be required to file its annual report on Form 10-K, which may be due as soon as 60 days after its fiscal year end. As a foreign private issuer, CNIT BVI will be required to file an annual report on Form 20-F within four months after its fiscal year end;
-
CNIT BVI will not be required to provide the same level of disclosure on certain issues, such as executive compensation;
-
CNIT BVI will not be required to conduct advisory votes on executive compensation;
-
CNIT BVI will be exempt from filing quarterly reports under the Exchange Act with the SEC;
-
CNIT BVI will not be subject to the requirement to comply with Regulation FD, which imposes certain restrictions on the selected disclosure of material information;
-
CNIT BVI will not be required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
-
CNIT BVI will not be required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
CNIT BVI expects to take advantage of these exemptions if the merger is effected. Accordingly, after the completion of the merger, if you hold CNIT BVI securities, you may receive less information about CNIT BVI and its business than you currently receive with respect to CNIT and be afforded less protection under the U.S. federal securities laws than you are entitled to currently. However, consistent with our policy of seeking input from, and engaging in discussions with, our stockholders, on executive compensation matters, CNIT BVI intends to provide disclosure relating to its executive compensation philosophy, policies and practices and conduct an advisory vote on executive compensation once every year after the merger is effected. However, CNIT BVI expects to review this practice after the next such advisory vote and may at that time or in the future determine to conduct such advisory votes more or less frequently or to not conduct them at all.
62
Additionally, as a foreign private issuer, CNIT BVI will be permitted to follow corporate governance practices in accordance with BVI laws in lieu of certain NASDAQ corporate governance standards, such as the following NASDAQ corporate governance standards requiring that:
-
the majority of the Board of Directors be comprised of independent directors;
-
executive compensation be determined by independent directors or a committee of independent directors;
-
director nominees be selected, or recommended for selection by the Board of Directors, by independent directors or a committee of independent directors;
-
an audit committee be comprised of at least three members, each of whom is an independent director and one of whom has finance and accounting experience; and
-
all related party transactions be reviewed by the audit committee or another independent body of the Board of Directors.
Maples and Calder, our BVI counsel, has advised us that there are no comparable BVI laws related to the above corporate governance standards. Notwithstanding the foregoing, we do not intend to initially rely on NASDAQ exemptions or accommodations for foreign private issuers following the merger.
We believe the merger and the related reorganization will enhance stockholder value. However, we cannot predict what impact, if any, the merger and reorganization will have in the long term in light of the fact that the achievement of our objectives depends on many things, including, among other things, future laws and regulations, as well as the development of our business.
For a discussion of the risk factors associated with the merger and reorganization, please see the section entitled “Risk Factors—Risks Relating to the Merger and Reorganization.”
Disadvantages of Reorganizing in the BVI
There are certain disadvantages that accompany reorganizing in the BVI, including:
-
the BVI has a different body of securities laws and corporate laws as compared to the United States and may provide significantly less protection to investors;
-
BVI companies may not have standing to sue before the federal courts of the United States; and
-
CNIT BVI’s constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between it and our officers, directors and shareholders be arbitrated.
CNIT BVI’s corporate affairs are governed by its memorandum and articles of association, by the BVI Act and by the common law of the BVI. The rights of shareholders to take action against CNIT BVI’s directors, actions by minority shareholders and the fiduciary responsibilities of CNIT BVI’s directors to CNIT BVI under BVI law are to a large extent governed by the common law of the BVI. The common law in the BVI is derived in part from comparatively limited judicial precedent in the BVI and from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the BVI. The rights of CNIT BVI’s shareholders and the fiduciary responsibilities of its directors, although clearly established under BVI law, are not specifically prescribed in statute or a particular document in the same way that they are in certain statutes or judicial precedents in some jurisdictions of the United States. In particular, the BVI has a different body of securities laws relative to the United States. Therefore, CNIT BVI’s shareholders may have more difficulty protecting their interests in the face of actions by CNIT BVI’s management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, shareholders of BVI companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. The BVI courts are also unlikely to impose liability against CNIT BVI, in original actions brought in the BVI, based on certain civil liabilities provisions of U.S. securities laws. Please see the section entitled “Enforceability of Civil Liabilities.” Please see also the risk factors above under the heading “Risk Factors—Risks Relating to the Merger and Reorganization.”
63
Additionally, most of our operations are conducted in the PRC, and a significant portion of our assets are located in the PRC. After the merger, a majority of CNIT BVI’s directors and all of its executive officers will continue to reside outside of the United States, and all or a substantial portion of such persons’ assets are or may be located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon CNIT BVI or such persons, or to enforce against them in courts of the United States, BVI or PRC, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
For a discussion of the enforceability of civil liabilities following the merger and reorganization, please see the section entitled “Enforceability of Civil Liabilities.”
The Merger
The steps that have been taken to date, and that will be taken, to complete the merger are:
-
CNIT has formed CNIT BVI, with CNIT holding one ordinary share issued by CNIT BVI.
-
CNIT BVI, in turn, has formed Merger Sub and holds 100 shares of common stock of Merger Sub.
-
Following the Annual Meeting, provided we have obtained the requisite stockholder approval, (i) Merger Sub will merge with and into CNIT, with CNIT surviving, and (ii) the 100 shares of common stock of Merger Sub held by CNIT BVI will be converted into 100 shares of common stock of CNIT, as the surviving corporation in the merger. All outstanding shares of CNIT common stock will be converted into the right to receive an equal number of ordinary shares of CNIT BVI, which shares will be issued by CNIT BVI as part of the merger.
-
CNIT BVI will repurchase the one ordinary share issued to CNIT prior to the merger.
-
As a result, CNIT will, upon completion of the merger, become a wholly owned subsidiary of CNIT BVI.
The following diagram depicts our organizational structure immediately before and after the merger.
BEFORE
64
At the Effective Time, CNIT BVI will adopt and assume the obligations of CNIT under or with respect to certain contracts or agreements as described in the Merger Agreement. The contracts and agreements will become the obligations of CNIT BVI and will be performed in the same manner and without interruption until the same are amended or otherwise lawfully altered or terminated.
The Merger Agreement may be amended, modified or supplemented at any time before or after it is adopted by the stockholders of CNIT. However, after adoption by the stockholders, no amendment, modification or supplement may be made or effected that requires further approval by CNIT stockholders without obtaining that approval.
Possible Abandonment
Pursuant to the Merger Agreement, the Board of Directors of CNIT may exercise its discretion to terminate the Merger Agreement, and therefore abandon the merger, at any time prior to the Effective Time, including after the adoption of the Merger Agreement by CNIT's stockholders. Please see the section entitled “Risk Factors—Risks Relating to the Merger and Reorganization—Our Board of Directors may choose to defer or abandon the merger.”
Additional Agreements
CNIT BVI expects to enter into indemnification agreements with those directors, executive officers and other officers and employees (including officers and employees of its subsidiaries) who currently have indemnification agreements with CNIT. The CNIT BVI indemnification agreements will be substantially similar to CNIT’s existing indemnification agreements and will generally require that CNIT BVI indemnify and hold an indemnitee harmless to the fullest extent permitted by law for liabilities arising out of the indemnitee’s current or past association with CNIT BVI, any subsidiary of CNIT BVI or another entity where he or she is or was serving at CNIT BVI’s request as a director or officer or in a similar capacity that involves services with respect to any employee benefit plan.
65
The indemnification agreements also provide for the advancement of defense expenses by CNIT BVI. Please also see the section entitled “Differences in Corporate Law—Indemnification of Directors and Officers” for a description of indemnification of directors and officers under BVI law and CNIT BVI’s memorandum and articles of association.
In addition, as part of the merger, CNIT BVI will assume CNIT’s agreements with its executive employees as provided in the Merger Agreement, all of the foregoing as may be amended immediately prior to the Effective Time. Although the merger will constitute a change in control for purposes of the foregoing agreements with CNIT’s executive officers, we will not incur any obligation as a result of the merger under the terms of the agreements since CNIT BVI will assume the agreements and any such obligation will be waived in connection with the merger, if applicable.
Conditions to Completion of the Merger
The following conditions must be satisfied or waived, if allowed by law, to complete the merger and reorganization:
| 1. |
the Merger Agreement has been adopted by the requisite vote of stockholders of CNIT; |
| 2. |
none of the parties to the Merger Agreement is subject to any decree, order or injunction that prohibits the consummation of the merger; |
| 3. |
the registration statement of which this proxy statement/prospectus is a part has been declared effective by the SEC and no stop order is in effect; |
| 4. |
the CNIT BVI ordinary shares to be issued pursuant to the merger have been authorized for listing on NASDAQ, subject to official notice of issuance and satisfaction of other standard conditions; |
| 5. |
all material consents and authorizations of, filings or registrations with, and notices to, any governmental or regulatory authority required of CNIT, CNIT BVI or their subsidiaries to consummate the merger have been obtained or made; and |
| 6. |
the representations and warranties of the parties to the Merger Agreement set forth in the Merger Agreement are true and correct in all material respects, and the covenants of the parties set forth in the Merger Agreement (other than those to be performed after the Effective Time) have been performed in all material respects. |
Our Board of Directors currently does not anticipate any circumstances in which it would waive the conditions listed above; however, in the event it determines that a waiver of any such conditions is in the best interests of CNIT and our stockholders and that such change to the terms of the merger does not make the disclosure provided to our stockholders materially misleading (for example, if a representation in the merger agreement is not true but there is otherwise no harm to CNIT or our stockholders), our Board of Directors will not resolicit shareholder approval of the merger. If a waiver of any condition listed above would make the disclosure provided to our stockholders materially misleading, our Board of Directors will resolicit shareholder approval of the merger. Additionally, our Board of Directors reserves the right to defer or abandon the merger as well for the reasons described under “Risk Factors—Risks Relating to the Merger and Reorganization—Our Board of Directors may choose to defer or abandon the merger.”
Effective Time
Provided that we have obtained the requisite stockholder approval at the Annual Meeting, we anticipate that the merger will become effective at 4:30 p.m., Eastern Time, on , 2012. Our Board of Directors will have the right, however, to defer or abandon the merger at any time if it concludes that completion of the merger would not be in the best interests of CNIT or our stockholders.
Management of CNIT BVI
Immediately prior to the Effective Time, the directors and officers of CNIT at such time will be elected or appointed as the directors and officers of CNIT BVI (to the extent the directors and officers of CNIT BVI and CNIT are not already identical), each such person to have the same office(s) with CNIT BVI (and the same committee memberships in the case of directors) as he or she held with CNIT, with the directors to serve until the earlier of the next meeting of the CNIT BVI shareholders at which an election of directors is required or until their successors are elected or appointed (or their earlier death, disability or retirement).
66
Regulatory Approvals
The only governmental or regulatory approvals or actions that are required to complete the merger are compliance with U.S. federal and state securities laws, NASDAQ rules and regulations and Nevada corporate law (including the filing of articles of merger with the Secretary of State of the State of Nevada).
Rights of Dissenting Stockholders
Under the NRS, you will not have appraisal rights in connection with the merger because, among other reasons, the CNIT BVI shares you receive in the merger will be listed on NASDAQ.
Ownership in CNIT BVI
The CNIT common stock registered in your name or which you beneficially own through your broker will be converted into the right to receive an equal number of CNIT BVI ordinary shares and such shares will be registered in your name (or your broker’s name, as applicable) in CNIT BVI’s register of members upon completion of the merger, without any further action on your part. Upon completion of the merger, only registered shareholders reflected in CNIT BVI’s register of members will have and be entitled to exercise any voting and other rights with respect to and to receive any dividend and other distributions upon CNIT BVI ordinary shares registered in their respective names. Any attempted transfer of CNIT stock prior to the merger that is not properly documented and reflected in the stock records maintained by CNIT’s transfer agent as of immediately prior to the Effective Time will not be reflected in CNIT BVI’s register of members upon completion of the merger. Registered holders of CNIT BVI’s ordinary shares seeking to transfer CNIT BVI ordinary shares following the merger will be required to provide customary transfer documents required by CNIT BVI’s transfer agent to complete the transfer.
If you hold CNIT common stock in uncertificated book-entry form (for example, if you hold your shares through a broker), at the Effective Time, the CNIT common stock registered in your name or which you beneficially own through your broker will be converted into the right to receive an equal number of CNIT BVI ordinary shares and such shares will be registered in your name (or your broker’s name, as applicable) in the register of members of CNIT BVI without any action on your part.
If you hold CNIT common stock in certificated form, you may exchange your CNIT stock certificates for new CNIT BVI share certificates promptly following the merger. We will request that all CNIT stock certificates be returned to CNIT BVI’s transfer agent following the merger. Soon after the closing of the merger, you will be sent a letter of transmittal from our exchange agent. It is expected that, prior to the Effective Time, Island Stock Transfer will be appointed as our exchange agent for the merger. The letter of transmittal will contain instructions explaining the procedure for surrendering your CNIT stock certificates for new CNIT BVI share certificates. YOU SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
CNIT’s current transfer agent is Island Stock Transfer, which will continue to serve as the transfer agent for CNIT BVI’s ordinary shares after the Effective Time.
Stock Exchange Listing
CNIT’s common stock is currently listed on NASDAQ under the symbol “CNIT.” There is currently no established public trading market for CNIT BVI’s ordinary shares. However, it is a condition to the completion of the merger that the shares of CNIT BVI will be authorized for listing on NASDAQ, subject to official notice of issuance and satisfaction of other standard conditions. As such, we expect that as of the Effective Time, CNIT BVI’s ordinary shares will be authorized for listing on NASDAQ, and we expect such shares will be traded on the exchange under the symbol “CNIT.”
It is anticipated that CNIT BVI will qualify as a foreign private issuer in the U.S. following the merger. As a foreign private issuer, CNIT BVI will be permitted to follow corporate governance practices in accordance with BVI laws in lieu of certain NASDAQ corporate governance standards. However, we do not intend to initially rely on NASDAQ exemptions or accommodations for foreign private issuers following the merger.
67
Accounting Treatment of the Merger
The merger will be accounted for as a legal reorganization with no change in ultimate ownership interest immediately before and after the transaction. Accordingly, all assets and liabilities will be recorded at historical cost as an exchange between entities under common control. Please see the section entitled “Summary—Summary Pro Forma Financial Information.”
Recommendation and Required Vote
The affirmative vote of the holders of a majority of the outstanding shares of CNIT’s common stock entitled to vote at the Annual Meeting is required to approve the proposal to adopt the Merger Agreement. Our Board of Directors believes that the merger, to be effected by the Merger Agreement, is advisable and in the best interests of CNIT and our stockholders.
ACCORDINGLY, OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT.
68
TAXATION
The following discussion of the material BVI, PRC and United States federal income tax consequences is based upon laws and relevant interpretations thereof effective as of the date of this proxy statement/prospectus, all of which are subject to change, possibly with retroactive effect. This discussion does not deal with all possible tax consequences relating to the merger or otherwise, such as the tax consequences under state and local and tax laws, and is not intended to be, nor should it be construed as, legal or tax advice to any particular shareholder. To the extent that the discussion relates to matters of BVI tax law, it is the opinion of Maples and Calder, our BVI counsel. To the extent that the discussion relates to matters of PRC tax law, it is the opinion of Guangdong Jin Di Law Firm Sichuan Office, our PRC counsel. To the extent that the discussion relates to matters of United States federal income tax law, and subject to the qualifications, assumptions and limitations set forth herein, it is the opinion of Pillsbury Winthrop Shaw Pittman LLP, our United States counsel, as to the material United States federal income tax consequences to United States Holders described herein of the merger and ownership of CNIT BVI’s ordinary shares. We recommend that you consult your own tax advisors with respect to the consequences of merger and the acquisition, ownership and disposition of CNIT BVI’s ordinary shares.
BVI Taxation
The BVI does not impose a withholding tax on dividends paid by CNIT BVI to holders of its ordinary shares, nor does the BVI levy any capital gains or income taxes on CNIT BVI. Further, a holder of CNIT BVI’s ordinary shares who is not a resident of the BVI is exempt from the BVI income tax on dividends paid with respect to the ordinary shares. Holders of ordinary shares are not subject to the BVI income tax on gains realized on the sale or disposition of the ordinary shares.
No stamp duties or other similar taxes or charges are payable under the laws of the BVI in respect of the execution or delivery of any of the documents relating the proposed merger or the performance or enforcement of any of them.
CNIT BVI’s ordinary shares are not subject to transfer taxes, stamp duties or similar charges in the BVI. However, as a company incorporated under the BVI Act, we are required to pay the BVI government an annual license fee based on the number of shares we are authorized to issue.
There is no income tax treaty or convention currently in effect between the United States and the BVI.
PRC Taxation
We are a holding company incorporated in the BVI, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation rules, both of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax rate of 25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s jurisdiction of incorporation and China to reduce such rate.
Under the Arrangement between the Mainland and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend withholding tax rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. Under the aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong Kong holding companies may be subject to a withholding tax at the rate of 5% if they are not considered to be a PRC “resident enterprise” as described below. However, if the Hong Kong holdings companies are not considered to be the “beneficial owner” of such dividends under the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties promulgated by the State Administration of Taxation on October 27, 2009 (and not a PRC “resident enterprise”), such dividends would be subject to the withholding tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a significant impact on the amount of dividends to be received by CNIT BVI and ultimately by shareholders.
According to the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a person who has the right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner” may be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit company is not a “beneficial owner.” The term “conduit company” refers to a company which is usually established for purposes of dodging or reducing taxes, and transferring or accumulating profits. Such a company is only registered in the country of domicile to satisfy the organizational form as required by law, but it does not engage in such substantial business operations as manufacturing, distribution and management. As our Hong Kong holding companies are controlling companies and are not engaged in substantial business operations, they could be considered as conduit companies by tax authorities and we do not expect them to be a beneficial owner.
69
In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.”
It remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
United States Taxation
Material United States Federal Income Tax Consequences Relating to the Merger and the Ownership and Disposition of CNIT BVI Ordinary Shares
The following is a summary of material U.S. federal income tax consequences of the merger and of the ownership and disposition of CNIT BVI ordinary shares after the merger, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the provisions of the Code, Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income consequences different from those set forth below. We have not sought any ruling from the IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it address the U.S. federal income tax consequences to persons who are subject to special rules under U.S. federal income tax law, including:
-
banks, insurance companies or other financial institutions;
-
persons subject to the alternative minimum tax;
-
tax-exempt organizations;
-
controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid United States federal income tax;
-
certain former citizens or long-term residents of the United States;
-
dealers in securities or currencies;
-
traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
-
persons that own, or are deemed to own, more than five percent of our capital stock;
-
holders who acquired our stock as compensation or pursuant to the exercise of a stock option;
-
persons who hold our common stock as a position in a hedging transaction, “straddle,” or other risk reduction transaction; or
-
persons who do not hold our common stock as a capital asset (within the meaning of Section 1221 of the Code).
This discussion assumes that Section 7874 of the Code continues to apply to treat CNIT BVI as a U.S. corporation for all purposes under the Code. If, for some reason (e.g., future repeal of Section 7874 of the Code), CNIT BVI were no longer treated as a U.S. corporation under the Code, the U.S. federal income tax consequences described herein could be materially and adversely affected. In addition, this discussion does not address any foreign, state, or local laws or U.S. federal estate and gift tax laws.
70
For purposes of this discussion, a U.S. holder is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States (or treated as such under applicable U.S. tax laws), any state thereof, or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) it has a valid election in effect under applicable law and regulations to be treated as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder that is neither a U.S. holder nor a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
In the case of a partnership or entity classified as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. Partners of partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition of CNIT BVI ordinary shares.
Tax Consequences of the Merger to CNIT and CNIT BVI
Pursuant to Section 7874 of the Code, CNIT BVI will be treated as a U.S. corporation for all purposes under the Code because (i) after the merger, CNIT BVI will not have substantial business activities in the BVI and (ii) the former holders of the CNIT common stock will hold, by reason of owning shares of CNIT common stock, at least 80% or more of the CNIT BVI ordinary shares. Because CNIT BVI will be treated as a U.S. corporation for all purposes under the Code, CNIT BVI will not be treated as a “passive foreign investment company,” as such rules apply only to non-U.S. corporations for U.S. federal income tax purposes.
We expect that neither CNIT nor CNIT BVI will incur U.S. federal income tax as a result of completion of the merger. Following the merger, CNIT BVI will be subject to U.S. federal income tax on its worldwide income in the same manner as applies to CNIT.
Tax Consequences of the Merger to U.S. Holders and Reporting Requirements
U.S. holders will not recognize gain or loss for U.S. federal income tax purposes upon receipt of CNIT BVI ordinary shares in exchange for CNIT common stock. The aggregate tax basis in the ordinary shares of CNIT BVI received in the merger will equal each such U.S. holder’s aggregate tax basis in the CNIT common stock surrendered. A U.S. holder’s holding period for the ordinary shares of CNIT BVI that are received in the merger will include such U.S. holder’s holding period for the common stock of CNIT surrendered.
U.S. holders who owned at least 5% of CNIT’s outstanding stock who receive CNIT BVI ordinary shares as a result of the merger will be required to file with such U.S. holders’ U.S. federal income tax returns for the year in which the merger takes place a statement setting forth certain facts relating to the merger. Such statements must include the U.S. holders’ tax basis in, and fair market value of, the CNIT common stock surrendered in the merger.
U.S. holders should note that the state and local income tax consequences of the merger depend on the tax laws of the relevant jurisdiction. It is possible that the merger may be taxable under the tax laws of some states or localities. U.S. holders are urged to consult their own tax advisors as to specific tax consequences to them of the merger in light of their particular circumstances, including the applicability and effect of any state, local, or foreign tax laws and of changes in applicable tax laws.
Tax Consequences of the Ownership and Disposition of CNIT BVI Ordinary Shares to U.S. Holders
Distributions
CNIT BVI does not currently anticipate paying distributions on its ordinary shares. In the event that distributions are paid, however, the gross amount of such distributions will be included in the gross income of the U.S. holder as dividend income on the date of receipt to the extent that the distribution is paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such dividends will be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. Dividends received by non-corporate U.S. holders, including individuals, may be subject to reduced rates of taxation under current law. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on dividends paid by us. However, the foreign tax credit rules are complex, and their application in connection with Section 7874 of the Code and the Agreement Between the Government of the United States of America and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC Tax Treaty, is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
71
To the extent that dividends paid on CNIT BVI ordinary shares exceed current and accumulated earnings and profits, the distributions will be treated first as a tax-free return of tax basis on the CNIT BVI ordinary shares, and to the extent that the amount of the distribution exceeds tax basis, the excess will be treated as gain from the disposition of those CNIT BVI ordinary shares.
Sale or Other Disposition
U.S. holders of CNIT BVI ordinary shares will recognize taxable gain or loss on any sale, exchange, or other taxable disposition of ordinary shares equal to the difference between the amount realized for the CNIT BVI ordinary shares and the U.S. holder’s tax basis in the ordinary shares. This gain or loss generally will be capital gain or loss. Under current law, non-corporate U.S. holders, including individuals, are eligible for reduced tax rates if the CNIT BVI ordinary shares have been held for more than one year. A U.S. holder’s holding period for CNIT BVI ordinary shares will include such U.S. holder’s holding period for the ordinary shares of CNIT surrendered in the merger. The deductibility of capital losses is subject to limitations. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on gain from the sale or other disposition of CNIT BVI ordinary shares. However, the foreign tax credit rules are complex, and their application in connection with Section 7874 of the Code and the U.S.-PRC Tax Treaty is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
Unearned Income Medicare Contribution
Recent legislation requires certain U.S. holders who are individuals, trusts or estates to pay an additional 3.8% Medicare tax on, among other things, dividends on and capital gains from the sale or other disposition of shares of stock for taxable years beginning after December 31, 2012. U.S. holders should consult their own advisors regarding the effect, if any, of this legislation on their ownership and disposition of CNIT BVI ordinary shares.
Tax Consequences of the Merger to Non-U.S. Holders
The receipt of CNIT BVI ordinary shares in exchange for CNIT common stock will not be a taxable transaction to non-U.S. holders for U.S. federal income tax purposes.
Tax Consequences of the Ownership and Disposition of CNIT BVI Ordinary Shares to Non-U.S. Holders
Distributions
CNIT BVI does not currently anticipate paying distributions on its ordinary shares. In the event that distributions are paid, however, such distributions will constitute dividends for U.S. tax purposes to the extent paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent that dividends paid on CNIT BVI ordinary shares exceed current and accumulated earnings and profits, the distributions will be treated first as a tax-free return of tax basis on the CNIT BVI ordinary shares, and to the extent that the amount of the distribution exceeds tax basis, the excess will be treated as gain from the disposition of those CNIT BVI ordinary shares.
Any dividends paid to a non-U.S. holder by CNIT BVI are treated as income derived from sources within the United States and generally will be subject to U.S. federal income tax withholding at a rate of 30% of the gross amount of the dividends, or at a lower rate provided by an applicable income tax treaty if non-U.S. holders provide proper certification of eligibility for the lower rate (usually on IRS Form W-8BEN). Dividends received by a non-U.S. holder that are effectively connected with such holder's conduct of a U.S. trade or business (and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the non-U.S. holder in the U.S.) are exempt from such withholding tax, provided that applicable certification requirements are satisfied. In such case, however, non-U.S. holders will be subject to U.S. federal income tax on such dividends, net of certain deductions, at the rates applicable to U.S. persons. In addition, corporate non-U.S. holders may be subject to an additional branch profits tax equal to 30% or such lower rate as may be specified by an applicable tax treaty on dividends received that are effectively connected with the conduct of a trade or business in the United States.
72
If non-U.S. holders are eligible for a reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, such non-U.S. holders may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Sale or Other Disposition
Any gain realized upon the sale or other disposition of CNIT BVI ordinary shares generally will not be subject to U.S. federal income tax unless:
-
the gain is effectively connected with the conduct of a trade or business in the United States, and, if an income tax treaty applies, is attributable to a permanent establishment maintained by such holder in the U.S.;
-
the holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition, and certain other conditions are met; or
-
CNIT BVI is or has been a “U.S. real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period during which the holder has held CNIT BVI ordinary shares.
Non-U.S. holders whose gain is described in the first bullet point above will be subject to U.S. federal income tax on the gain derived from the sale, net of certain deductions, at the rates applicable to U.S. persons. Corporate non-U.S. holders whose gain is described in the first bullet point above may also be subject to the branch profits tax described above at a 30% rate or lower rate provided by an applicable income tax treaty. Individual non-U.S. holders described in the second bullet point above will be subject to a flat 30% U.S. federal income tax rate on the gain derived from the sale, which may be offset by U.S.-source capital losses, even though such non-U.S. holders are not considered to be residents of the United States.
A corporation will be a USRPHC if the fair market value of its U.S. real property interests equals or exceeds 50 percent of the aggregate of its real property interests (U.S. and non-U.S.) and its assets used or held for use in a trade or business. Because we do not currently own significant U.S. real property, we believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as the CNIT BVI ordinary shares are regularly traded on an established securities market, such ordinary shares will be treated as U.S. real property interests only if you actually or constructively hold more than 5% of such regularly traded ordinary shares at any time during the applicable period that is specified in the Code.
Backup Withholding and Information Reporting
Payments of dividends or of proceeds on the disposition of stock made to a holder of CNIT BVI ordinary shares may be subject to information reporting and backup withholding at a current rate of 28% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other appropriate withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S. status on a Form W-8BEN or another appropriate version of IRS Form W-8. Payments of dividends to holders must generally be reported annually to the IRS, along with the name and address of the holder and the amount of tax withheld, if any. A similar report is sent to the holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in the holder’s country of residence.
Backup withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.
73
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”), when applicable, will impose a U.S. federal withholding tax of 30% on certain “withholdable payments” (generally certain U.S.-source income, including dividends, and the gross proceeds from the sale or other disposition of assets producing such income) to foreign financial institutions and other non-U.S. entities that fail to comply with certain certification and information reporting requirements. The obligation to withhold under FATCA is currently expected to apply to, among other items, (i) U.S.-source dividend income that is paid on or after January 1, 2014 and (ii) to gross proceeds from the disposition of property that can produce U.S.-source dividends paid on or after January 1, 2015. Non-U.S. holders should consult their tax advisors concerning application of FATCA to the CNIT BVI ordinary shares in their particular circumstances.
74
DESCRIPTION OF SHARE CAPITAL OF CNIT BVI
The following description of the material terms of CNIT BVI’s shares following the merger includes a summary of specified provisions of the memorandum and articles of association of CNIT BVI that will be in effect upon completion of the merger. This description is qualified by reference to the memorandum and articles of association of CNIT BVI, a copy of which is attached as Annex B to this proxy statement/prospectus and incorporated herein by reference. You are encouraged to read the relevant provisions of BVI law as they relate to the following summary.
Authorized Share Capital
CNIT BVI is authorized to issue 100,000,000 ordinary shares of a nominal or par value of US$0.01 each. The ordinary shares may be issued from time to time at the discretion of the Board of Directors without shareholder approval. The Board of Directors of CNIT BVI is authorized to issue these shares in different classes and series and, with respect to each class or series, to determine the designations, powers, preferences, privileges and other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers and rights associated with the ordinary shares, at such times and on such other terms as they think proper.
As of the close of business on ,2012, CNIT BVI had one ordinary share outstanding. If the merger is completed, CNIT BVI will issue approximately ordinary shares in the merger and the one ordinary share outstanding prior to the merger will be repurchased.
The rights, privileges, restrictions or conditions attaching to a class of shares may not be modified other than with the approval of the holders of such class, voting separately as a class. Please also see the subsections entitled “—Changes to Rights of a Class or Series” and “—Voting” below.
Register of Members
Under BVI law, a share in a BVI company is duly issued only when the name of the shareholder is entered in the register of members of a company, and the register of members is by statute regarded as prima facie evidence of the shareholders of a company. A person becomes a shareholder of a BVI company, and is therefore able to benefit from the rights attaching to such shares, only on the date that such person is entered on the register of members. Upon completion of the merger, CNIT BVI will immediately update the register of members to record and give effect to the issue of shares by CNIT BVI to CNIT stockholders. Once the register of members of CNIT BVI has been updated, the shareholders recorded in the register of members shall be deemed to have legal title to the shares set against their name. No consents or approvals are required by BVI law from any governmental authorities or agencies or other official bodies in the BVI in connection with updating the register of members of CNIT BVI.
Voting
Holders of CNIT BVI ordinary shares are entitled to receive notice of any meeting of shareholders and to one vote for each share held of record on all matters at all meetings of shareholders, except at a meeting where holders of a particular class or series of shares are entitled to vote separately. CNIT BVI’s ordinary shareholders have no cumulative voting rights. CNIT BVI’s shareholders take action by a majority of votes cast, unless otherwise provided by the BVI Act or CNIT BVI’s memorandum and articles of association.
Under the CNIT BVI’s memorandum and articles of association, some matters, such as changing CNIT BVI’s name, altering or adding to the memorandum of association or reducing the number of shares which CNIT BVI is authorized to issue require the approval of shareholders by a resolution that is either (a) passed by a majority of shareholders as, being entitled to do so, vote in person or by proxy at a general meeting or (b) that is signed by a majority of the shareholders entitled to vote on that resolution.
Changes to Rights of a Class or Series
Under CNIT BVI’s memorandum and articles of association, if at any time the shares which CNIT BVI is authorized to issue are divided into different classes of shares, the rights attaching to any class may only be changed by a consent in writing of the holders of a majority of the issued shares of that class or with the sanction of a resolution passed by the holders of at least a majority of the shares of the class present in person or by proxy at a separate general meeting of the holders of the shares of the class. At such a separate general meeting, the quorum shall be at least one person holding or representing by proxy a majority of the issued shares of the class. Any holder of shares of the class present in person or by proxy at such meeting may demand a poll.
75
Quorum for General Meetings
No business of CNIT BVI can be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business. A quorum of shareholders is present at a meeting of CNIT BVI shareholders regardless of the number of persons actually present at the meeting if the holders of a majority of all voting shares of CNIT BVI in issue and entitled to vote at the meeting are present in person or represented by proxy.
Special Meetings of Shareholders
An extraordinary general meeting of CNIT BVI may be called only by CNIT BVI’s Board of Directors or one or more shareholders in the aggregate entitled to cast not less than 10% the votes at the meeting.
Dividend Rights
CNIT BVI’s Board of Directors may, from time to time, declare dividends on the shares issued and authorize payment of the dividends out of CNIT BVI’s lawfully available funds. For information regarding CNIT BVI’s expected future dividend payments, please see the section entitled “Market for our Common Stock; Dividends—Dividend Policy.”
Rights Upon Liquidation
Upon the winding up of CNIT BVI, after creditors of the corporation have been paid in full, the assets shall be distributed to, or the losses shall be borne by the shareholders of CNIT BVI in proportion to the par value of the shares held by them at the commencement of the winding up (up to the amount paid in shares by each shareholder, respectively).
No Liability for Further Calls or Assessments
The CNIT BVI ordinary shares to be issued in the merger will be duly and validly issued, fully paid and non-assessable.
No Preemptive Rights
CNIT BVI shareholders have no preemptive rights to subscribe for or purchase any additional securities issued by CNIT BVI.
Redemption of Ordinary Shares
CNIT BVI may (i) issue shares on terms that they are to be redeemed or are liable to be redeemed at the option of CNIT BVI or the shareholder on such terms and in such manner as the Board of Directors of CNIT BVI may, before the issue of the shares, determine; (ii) purchase its own shares, including any redeemable shares, in accordance with the articles of association; or (iii) make a payment in respect of the redemption or purchase of its own shares otherwise than out of profits or the proceeds of a fresh issue of shares.
Restrictions on Transfer
CNIT BVI’s share register is determinative of membership in CNIT BVI. A written instrument of transfer is required under the BVI Act in order to register on CNIT BVI’s register of members any transfer of shares. The articles of association of CNIT BVI further provide that such written instrument of transfer must be signed by the transferor and contain the name and address of the transferee. The articles of association of CNIT BVI also provide that the Board of Directors of CNIT BVI may resolve to refuse or delay the registration of the transfer for reasons that shall be specified in the resolution, but where the Board passes such a resolution, CNIT BVI must notify the transferor and the transferee.
Transfer Agent
The transfer agent and registrar for CNIT BVI’s ordinary shares is expected to be Island Stock Transfer.
76
Anti-Takeover Provisions
Neither CNIT nor CNIT BVI has a shareholder rights plan.
There are material differences between the NRS and the BVI Act that have the effect of reducing the anti-takeover provisions applicable with respect to CNIT BVI. In addition, the BVI Act does not contain comparable provisions to the NRS with respect to business combinations and acquisitions of controlling interests.. Please see the sections entitled “Differences in Corporate Law—Interested Shareholder Transactions” and “Differences in Corporate Law—Acquisition of Controlling Interest.” You should consider these differences in anti-takeover provisions in evaluating the merger.
77
DIFFERENCES IN CORPORATE LAW
Your rights as a stockholder of CNIT are governed by the NRS and CNIT’s articles of incorporation and bylaws. After the merger, you will become a shareholder of CNIT BVI and your rights will be governed by the BVI Act and CNIT BVI’s memorandum and articles of association.
The principal attributes of CNIT’s common stock and CNIT BVI ordinary shares are similar. However, there are differences between your rights under the NRS and under the BVI Act. In addition, there are differences between CNIT’s articles of incorporation and bylaws and CNIT BVI’s memorandum and articles of association. The following discussion is a summary of the material differences in your rights that would result from the merger. As such, this summary does not cover all the differences between the BVI Act and the NRS affecting corporations and their shareholders or all of the differences between CNIT’s articles of incorporation and bylaws and CNIT BVI’s memorandum and articles of association. While we believe this summary is accurate in all material respects, the following descriptions are qualified in their entirety by reference to the complete text of the relevant provisions of the BVI Act, the NRS, CNIT’s articles of incorporation and bylaws and CNIT BVI’s memorandum and articles of association. A copy of CNIT BVI’s memorandum and articles of association that will become effective upon consummation of the merger is attached to this proxy statement/prospectus as Annex B. For information as to how you can obtain a copy of CNIT’s articles of incorporation and bylaws, please see the section entitled “Where You Can Find More Information.” We encourage you to read the laws and documents referenced above.
| Nevada | BVI | |
| General Meetings of Shareholders |
It is common practice in Nevada that the date and time of the annual meeting of stockholders is typically set forth in a company’s bylaws unless the Board of Directors decides to change the date and time of the annual meeting. The Board of Directors also determines the place of such meeting either within or without of the State of Nevada or may determine that such meeting shall not be held at any place and instead be held by means of remote communication. |
Under the BVI Act, there is no requirement for an annual meeting of shareholders. Under the articles of association of CNIT BVI, we are required to hold an annual meeting of shareholders at the time designated by the Board of Directors. Our annual shareholders’ meetings may be held in such place within or outside the BVI as our Board of Directors considers appropriate. |
|
Under CNIT’s bylaws, our Board of Directors shall call a shareholders’ meeting if requested in writing to do so by shareholders entitled to exercise at least 10% of the voting rights in respect of the matter for which the meeting is being requested. |
Our Board of Directors shall call a shareholders’ meeting if requested in writing to do so by shareholders entitled to exercise at least 10% of the voting rights in respect of the matter for which the meeting is being requested. | |
|
Under CNIT’s bylaws, annual meetings of the stockholders are held on the date designated by the Board of Directors. CNIT’s bylaws and Nevada law provide that written notice of the place, date and time of all meetings of shareholders shall be given not less than 10 nor more than 60 days before the date on which the meeting is to be held. CNIT’s bylaws provide that at any meeting of stockholders, the holders of a majority of all of the shares of stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes. |
Our Board of Directors shall give not less than 10 days and not more than 60 days prior written notice of a shareholders’ meeting to those persons whose names on, either (a) the date the notice is given or (b) on a date fixed by the directors as the record date (which must be a date that is not less than 10 days nor more than 60 days prior to the meeting), appear as members in our register of members and are entitled to vote at the meeting. The articles of association of CNIT BVI provide that a meeting of members is duly constituted if, at the commencement of the meeting, there are members present in person or by proxy representing not less than a majority of the votes of the shares or class or series of shares entitled to vote on resolutions of members to be considered at the meeting. |
78
| Nevada | BVI | |
| Calling a Shareholders’ Meeting |
Under Nevada law, special meetings of the stockholders of a corporation may be called by the entire Board of Directors, any two directors or the president unless the articles of incorporation or the bylaws of the corporation provide otherwise. Under CNIT’s bylaws, special meetings may be called for any purpose (said purpose to be stated in the notice) by or at the direction of the Chief Executive Officer, the President or the Board or upon the request of shareholders holding 10% of the voting shares of CNIT. Shareholders shall receive not less than 10 days nor more than 60 days’ notice of the place, date and time of the special meeting. |
Under the BVI Act, subject to any limitations in the memorandum and articles of association, meetings of shareholders of a company may be convened by the directors or (subject to any provision in the memorandum or articles of association for a lesser percentage) upon the written request of members holding not less than 30% of the votes of the outstanding voting shares. In the case of CNIT BVI, the articles of association
provide that the directors shall convene a meeting of shareholders upon
the written request of shareholders holding 10% or more of the outstanding
voting shares of CNIT BVI; provided that shareholders shall receive not
less than 10 days nor more than 60 days’ notice of the meeting. |
|
Voting Rights |
Under Nevada law, unless the company’s articles of
incorporation provide otherwise, each shareholder is entitled to one vote
for each share of capital stock held by the shareholder. |
Under BVI law, except as otherwise provided in the memorandum or articles of association, all shares vote as one class and each whole share has one vote. |
|
Under CNIT’s articles of incorporation, as amended, each
share of common stock is entitled to one vote. |
Under the memorandum of association of CNIT BVI, each ordinary share is entitled to one vote. | |
|
Pursuant to the NRS, provided there is a quorum present,
all votes by the shareholders (except for the election of directors as
described below) shall be determined by the vote of the majority of the
shares entitled to vote, and except as otherwise required by law, all
matters shall be determined by a majority of the votes cast. |
Generally, our articles of association provide that a simple majority of the votes of the shares entitled to vote is required to approve matters at meetings. For further discussion of the voting rights of CNIT BVI shareholders, see, “Description of Share Capital of CNIT BVI—Voting.” | |
|
Action by Written Consent |
Under Nevada law and CNIT’s bylaws, stockholders may take any action required or permitted to be taken at a stockholders’ meeting without a meeting if a written consent thereto is consented to in writing by stockholders holding at least a majority of the voting power; provided that if a different proportion of voting power is required under Nevada law for such an action at a meeting, then that proportion of written consents is required. |
Under the BVI Act and articles of association of CNIT BVI, an action that may be taken by shareholders at a meeting may also be taken by a resolution of shareholders consented to in writing without the need for any notice. An action that may be taken by the directors or a committee of directors may also be taken by a resolution of directors or a committee of directors consented to in writing by all directors or all members of the committee as the case may be, without the need for any notice. |
79
| Nevada | BVI | |
|
Rights Upon a Liquidation or Dissolution |
Under Nevada law, unless otherwise provided in the
articles of incorporation, a liquidation, dissolution or winding-up of a
corporation, including the sale of all of a corporation’s property and
assets, must be approved by the Board of Directors, recommended to the
stockholders and then approved by the affirmative vote of holders of a
majority of the outstanding shares entitled to vote. In the event of a
liquidation, dissolution or winding-up, the stockholders are entitled to
share ratably according to the number of shares held by them in all
remaining assets available for distribution to the holders of common stock
after payment, or the provision for payment of all of the corporation’s
obligations and liabilities, and subject to the prior rights of any
holders of preferred stock then outstanding. |
Under the BVI Act and CNIT BVI’s articles of association, CNIT BVI may be dissolved, liquidated or wound up by the vote of holders of not less than a simple majority of its shares voting at a meeting or by the written resolution of shareholders holding a simple majority of the issued shares of CNIT BVI. |
|
Dissenters’ or Appraisal Rights |
With respect to mergers and business combination transactions, under Nevada law, registered holders of shares of any class or series have the right, in certain circumstances, to dissent from a merger of the corporation by demanding payment in cash for the shares equal to the fair value (excluding any appreciation or depreciation as a consequence, or in expectation, of the transaction) of such shares, at a fair value determined by agreement between the dissenting stockholder(s) and the corporation, or if an agreement cannot be reached and an action is timely brought by the corporation, then the court may utilize the services of an appraiser to recommend a decision as to the fair value of such shares. Nevada law further provides that dissenters’ rights or appraisal rights are not available in a merger to holders of shares of any class or series listed on a U.S. based national securities exchange or held of record by more than 2,000 shareholders, unless the articles of incorporation of the corporation issuing the shares provide otherwise; or the holders of the class or series of stock are required under the plan of merger or exchange to accept for their shares anything except cash, owner’s interests or owners interests and cash in lieu of fractional owner’s interests of (a) the surviving or acquiring entity, (b) any other entity which at the effective date of the plan of merger or exchange were either listed on a national securities exchange or held of record by at least 2,000 shareholders or (c) some combination of the above. In addition, dissenters’ rights are not available to any holders of shares of the surviving domestic corporation if the plan of merger did not require the vote of the stockholders of the surviving corporation. |
A shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) and a consolidation. A shareholder properly exercising his dissent rights is entitled to payment in cash of the fair value of his shares. A shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on the merger or consolidation, unless notice of the meeting was not given to the shareholder. If the merger or consolidation is approved by the shareholders, the company must within 20 days give notice of this fact to each shareholder who gave written objection, and to each shareholder who did not receive notice of the meeting. Such shareholders then have 20 days to give their written election in the form specified by the BVI Act to dissent from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder. Upon giving notice of his election to dissent, a shareholder ceases to have any rights of a shareholder except the right to be paid the fair value of his shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding the dissent. |
80
| Nevada | BVI | |
|
|
Within seven days of the later of the delivery of the
notice of election to dissent and the effective date of the merger or
consolidation, the company must make a written offer to each dissenting
shareholder to purchase his shares at a specified price that the company
determines to be their fair value. The company and the shareholder then
have 30 days to agree upon the price. If the company and a shareholder
fail to agree on the price within the 30 days, then the company and the
shareholder shall each designate an appraiser and these two appraisers
shall designate a third appraiser. These three appraisers shall fix the
fair value of the shares as of the close of business on the day before the
shareholders approved the transaction without taking into account any
change in value as a result of the transaction. | |
|
Under BVI law, shareholders are not entitled to
dissenters’ rights in relation to a liquidation. | ||
| Rights of Non-resident or Foreign Shareholders |
There are no limitations under Nevada law that restrict the rights of non-resident or foreign stockholders from holding stock in a Nevada corporation or exercising voting rights in connection therewith. |
There are no limitations imposed by our memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed. |
| Sources and Payment of Dividends |
Under Nevada law, the Board of Directors, subject to any restrictions in the corporation’s articles of incorporation, may declare and make distributions (including the payment of a dividend) generally out of: (1) operating surplus of the corporation, which is defined as net assets less statutory capital; or (2) if no operating surplus exists, out of the net profits of the corporation for the fiscal year in which the dividend is declared and/or the preceding fiscal year; subject to criteria set forth in the NRS; provided, however, the Board of Directors may not make distributions to its stockholders if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business; or, except as set forth in the articles of incorporation, the corporation’s total assets would be less than the sum of its total liabilities plus that amount needed if the corporation were dissolved at the time of distribution to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. |
Under the BVI Act and the articles of association of CNIT BVI, the directors may, by a resolution of directors, authorize a distribution by CNIT BVI to shareholders at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that immediately after the distribution, the value of CNIT BVI’s assets exceeds its liabilities and CNIT BVI is able to pay its debts as they fall due. |
81
| Nevada | BVI | |
| Rights of Purchase and Redemption |
Under Nevada law, if provided in the articles of incorporation or in a Board resolution, a corporation may purchase, redeem and dispose of its own shares, except that it may not purchase or redeem these shares subject to restrictions on the declaration and making of distributions as set forth above. If a corporation redeems its stock, immediately following any such redemption, the corporation must have outstanding one or more series, or one or more classes, which shares together must have full voting power and together are entitled to receive the net assets of the corporation upon dissolution of the corporation. However, at any time, a corporation may purchase or
redeem any of its shares that are redeemable pursuant to the articles of
incorporation or by a Board resolution which are entitled upon any
distribution of assets to a preference over another class of its stock if
these shares will be retired upon acquisition or redemption, thereby
reducing the capital stock of the corporation. |
Under the BVI Act and the articles of association of CNIT BVI, the directors may, subject to a resolution of shareholders (including the written consent of all the shareholders whose shares are to be purchased, redeemed or otherwise acquired), purchase, redeem or otherwise acquire any of our own shares for such consideration as they consider fit, and either cancel or hold such shares as treasury shares. The directors may dispose of any shares held as treasury shares on such terms and conditions as they may from time to time determine. Shares may be purchased or otherwise acquired in exchange for newly issued shares. |
| Preemptive Rights |
Under Nevada law, a stockholder is not entitled to preemptive rights to subscribe for additional issues of stock or any security convertible into stock of the corporation unless they are specifically granted in the articles of incorporation. Such preemptive rights are not specifically granted in CNIT’s articles of incorporation, as amended. |
The articles of association of CNIT BVI do not contain
specific preemptive rights. The BVI Act prescribes preemptive rights in
respect of the shares of an international company incorporated under the
BVI International Business Companies Act and automatically re-registered
as a business company pursuant to the BVI Act, which preemptive rights do
not apply to CNIT BVI as its memorandum and articles of association did
not expressly provide that those provisions would apply. |
| Amendment of Organizational Instruments |
Under Nevada law, unless the articles of incorporation requires a greater vote, an amendment to the articles of incorporation requires: (1) the Board of Directors must adopt a resolution setting forth the amendment proposed and submit the resolution to the stockholders entitled to vote on the amendment at a special meeting or the next annual meeting; (2) the affirmative vote by stockholders having at least a majority of the voting power entitled to vote thereon, and (3) if the amendment would adversely affect the rights or change any preference of any class or series of outstanding shares, then in addition to the affirmative vote otherwise required, the affirmative vote of a majority of the voting power of each class that is adversely affected by the amendment entitled to vote thereon as a class. |
The memorandum of association of CNIT BVI provides that CNIT BVI may only amend its memorandum of association by a majority of the total voting power of shareholders, and that if any proposed amendment would adversely alter or change any preference or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote, in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of each class or series adversely affected by the amendment regardless of limitations or restrictions on the voting power thereof. The memorandum of association provides that the articles of association may be amended by resolution of the directors or members (except that certain specified provisions of the articles of association may only be amended by resolution of the members). |
| 82 |
| Nevada | BVI | |
|
Under Nevada law, stockholders may adopt the bylaws and, in the absence of doing so or in the absence of reserving the right of doing so to the stockholders, the Board of Directors may adopt, amend or repeal any bylaw, including any bylaw adopted by the stockholders. The articles of incorporation may grant the authority to adopt, amend or repeal bylaws exclusively to the directors of the corporation. The bylaws of CNIT provide that the bylaws can be altered, amended or repealed by the Board of Directors. |
| |
| Stock Class Rights |
Under Nevada law, any change to the rights of holders of shares or any series of preferred shares of a company would require an amendment to the company’s articles of incorporation unless such right is specifically denied in the company’s articles of incorporation. Nevada law provides that the holders of shares of a class or series shall be entitled to vote as a class upon a proposed amendment if the amendment would adversely alter or change any preference or any relative or other right given to the class or series. |
The memorandum of association of CNIT BVI provides that if at any time the authorized shares are divided into different classes or series of shares, the rights attached to any class or series (unless otherwise provided by the terms of issue of the shares of that class or series) may, whether or not our company is being wound up, only be varied with the approval of the holders of not less than a majority of the issued shares of that class and of the holders of a majority of the issued shares of any other class or series of shares which may be affected by such variation. |
| Shareholders’ Votes on Certain Transactions |
Generally, under Nevada law, unless the articles of incorporation provides for the vote of a larger portion of the stock held by the stockholders, completion of a liquidation, consolidation, sale, lease or exchange of all of a corporation’s assets or a dissolution requires: (1) the approval by the Board of Directors and recommendation to the stockholders; and (2) stockholder approval of a majority of the votes of the outstanding stock of a corporation entitled to vote on the matter. |
Under the BVI Act, subject to any limitations or provisions to the contrary in its memorandum and articles of association, approval by a resolution of shareholders is required for: (1) any sale, transfer, lease, exchange or other disposition, other than a mortgage charge or other encumbrance or the enforcement thereof, of more than 50% of the assets of a company incorporated under the BVI Act, if not made in the usual or regular course of business carried on by that company; (2) a plan of merger or consolidation; and (3) a plan for the liquidation, winding-up and dissolution of a company. However, with respect to (1) above, the requirement has been disapplied under the articles of association of CNIT BVI which instead stipulates that any sale, transfer, lease exchange or other disposition, other than a mortgage, charge or encumbrance or the enforcement thereof, of all or substantially all the assets of CNIT BVI (other than pursuant to certain trust arrangements), if not made in the usual or regular course of business carried on by CNIT BVI shall require approval by a resolution of shareholders. |
83
| Nevada | BVI | |
|
In the articles of association of CNIT BVI, a resolution of shareholders is defined as a resolution passed by the holders of a majority of in excess of fifty (50) percent of the votes of those members (or their duly appointed proxies) entitled to vote and voting on the resolution either at a meeting of members, or by way of a written resolution if so consented by the holders of a majority of in excess of fifty (50) percent of the votes of those members entitled to vote on the resolution, in either case in accordance with the provisions of the articles, except that instead of a majority in excess of 50%, the required number is a plurality of votes for an election of a director, and instead is two-thirds (2/3) for the removal of a director from office. | ||
|
Rights of Inspection |
Nevada law allows any stockholder of record for at least six months preceding the demand to inspect, or any person holding, or authorized by those holding, at least 5% of all of the corporation’s outstanding shares, upon five days written demand, may inspect and make copies during usual business hours, in person or by an agent or attorney, of the following: (1) the corporation’s stock ledger, including a list of its stockholders and their stock holdings; (2) a copy of the corporation’s articles of incorporation, and amendments thereto, certified by the Secretary of State of Nevada; and (3) a copy of the corporation’s bylaws, and amendments thereto, certified by an officer of the corporation. In addition, Nevada law allows any stockholder of record who owns, or has been authorized by the holders of, at least 15% of the outstanding shares of the corporation, upon at least five days’ written demand, to inspect, during usual business hours, the books of account and all financial records of the corporation, to make copies of records, and to conduct an audit of such records. |
Under the BVI Act, a member of a business company may, on giving written notice to a company, inspect the company’s memorandum and articles, the register of shareholders, the register of directors and the minutes of meetings and resolutions of shareholders and of those classes of shareholders of which he is a member. In addition, CNIT BVI’s articles of association allow any shareholder of record who owns at least 15% of the outstanding shares of CNIT BVI, upon at least five days’ written demand, to inspect, during usual business hours, the books of account and all financial records of CNIT BVI, to make copies of records, and to conduct an audit of such records at their own cost. |
|
Standard of Conduct for Directors |
Nevada law does not set forth extensive provisions describing the standard of conduct of a director. Directors are required to exercise their powers in good faith and with a view to the interests of the corporation. The scope of the fiduciary duties of directors is determined by the courts of the State of Nevada when presented with the issue, and often with reference to decisions by the courts of the State of Delaware. In general, directors have a duty to act without self-interest, on a well- informed basis and in a manner they reasonably believe to be in the interest of the corporation. |
Under the BVI Act, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our 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 to CNIT BVI, our directors must ensure compliance with our memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached. |
84
|
Nevada |
BVI | |
|
Size of the Board of Directors |
Under Nevada law, the Board of Directors must have at
least one director who is a natural person of at least 18 years of age and
who does not need to be a U.S. citizen. CNIT’s Board of Directors
currently consists of five directors. The number of directors is
established from time to time by resolution of the Board of Directors. |
Under the BVI Act, a company must have at least one director. |
|
Classification of the Board of Directors |
Under Nevada law, the articles of incorporation or bylaws
may provide for the classification of the Board of Directors in order to
stagger the terms of the directors. The term “classified board” generally
means the specification of selected board seats for a term of more than
one year (but not more than three years), with different classes of board
seats coming up for election each year. CNIT’s bylaws do not provide for
the classification of its Board of Directors, but rather provides for the
election of all of CNIT’s directors at each annual meeting. |
The directors of CNIT BVI are not divided into classes. Each director shall hold office for the term ending on the termination of the next annual meeting of shareholders or such other date as was agreed under the terms upon which he or she was appointed or until his or her earier death, disqualification, resignation or removal. |
|
Election of Directors |
As provided in CNIT’s bylaws, directors are currently elected at an annual meeting of stockholders at which a quorum is present, in person or by proxy, by a plurality vote and hold office until his or her successor is chosen. |
CNIT BVI’s articles of association provide that where the
number of directors proposed for election is greater than the number of
directors to be elected, the persons receiving the most votes (up to the
number of directors to be elected) shall be elected as directors, and an
absolute majority of the votes cast shall not be a prerequisite to the
election of such directors. Otherwise, a majority of votes cast for a
director shall be required to elect or reelect the director. |
|
Removal of Directors |
Nevada law provides that a director may be removed with or without cause by the holders of not less than two-thirds of the voting power of the shares entitled to vote at an election of directors, except that: (1) members of a classified Board of Directors may be removed by a vote of the holders of that class or series, unless the articles of incorporation provides otherwise; and (2) directors may not be removed in certain situations in the case of a corporation having cumulative voting except with the vote of stockholders owning sufficient shares to prevent the director’s election to office at the time of removal. |
The articles of association of CNIT BVI provides that a director may be removed from office with or without cause by a resolution of shareholders. |
85
| Nevada | BVI | |
|
CNIT does not have a classified board and does not have
cumulative voting. |
||
|
Vacancies on the Board of Directors |
Under Nevada law, unless otherwise provided in the
articles of incorporation, the following vacancies may be filled by a vote
of a majority of the directors then in office, even though less than a
quorum: (1) vacancies on the Board of Directors; and (2) newly created
directorships resulting from an increase in the authorized number of
directors. A director elected to fill a vacancy or a newly created
directorship will hold office until the next annual election by the
stockholders and until his or her successor has been elected and qualified
or until his or her earlier, death, resignation or removal. |
The articles of association of CNIT BVI provide that the directors may at any time appoint any person to be a director to fill a vacancy or as an addition to the Board. Any director appointed by the Board as an addition to the existing Board shall hold office only until the next following annual general meeting of CNIT BVI and shall then be eligible for re-election. |
|
Board Quorum and Vote Requirements |
Pursuant to CNIT’s bylaws, at any meeting of CNIT’s Board
of Directors, the presence of a majority of the whole Board of Directors
constitutes a quorum for the transaction of business. The act of the
majority of the directors present at a meeting at which a quorum is
present constitutes an act of the Board of Directors. |
CNIT BVI’s articles of association is consistent with the bylaws of CNIT with respect to the Board quorum and vote requirements. |
|
Place of Directors Meetings |
Pursuant to CNIT’s bylaws, all meetings of CNIT’s Board
of Directors may be held within or outside of the State of Nevada, as may
be fixed from time to time by the Board of Directors. |
CNIT BVI’s articles of association provide that the directors of our company shall meet at such times and in such manner and places within or outside the BVI as they may determine to be necessary or desirable. |
|
Liability of Directors and Officers |
Except as specifically provided in the NRS, or if the articles of incorporation or an amendment thereto provide for greater individual liability, a director or officer is not individually liable to the corporation or its stockholders for any damages as a result of any act or failure to act in his capacity as a director or officer unless it is proven that: (1) the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer; and (2) the breach of those duties involved intentional misconduct, fraud or a knowing violation of law. |
Under BVI law, a director of a company incorporated under the BVI Act, in performing his functions is entitled to rely on the register of members which the BVI Act requires the company to keep, the books of accounts and records kept in accordance with the BVI Act and financial statements and other information prepared, and on expert advice given by an employee of the company or an expert whom the director believes to be competent and reliable. The articles of association of CNIT BVI provide that officers and directors shall not be personally liable to the Company for damages for any breach of fiduciary duty as a director or officer, except for intentional or knowing misconduct or violations of the BVI Act that expressly provides for liability of directors or officers notwithstanding any provision in the memorandum and articles of association to the contrary. |
86
| Nevada | BVI | |
| Indemnification of Directors and Officers |
Nevada law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding if the person: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. CNIT’s artices of incorporation and bylaws provide generally that CNIT shall indemnify, to the fullest extent authorized by the NRS, each director and officer, as well as persons serving at the request of our company as a director, officer, employee or agent of another coporation or of a partnership, joint venture, trust or other enterprise, against all expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by that person. |
BVI law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the BVI courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Under CNIT BVI’s memorandum and articles of association, subject to the BVI Act, CNIT BVI may and shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of CNIT BVI (excluding the auditors), or who is or was serving at the request of CNIT BVI as a director or officer of another company, partnership, joint venture, trust or other enterprise (referred to herein as an “Indemnified Person”). Each such Indemnified Person shall be indemnified out of the assets of CNIT BVI against any liability, action, proceeding, claim, demand, judgments, fines, costs, damages or expenses, including legal expenses, whatsoever which they or any of them may reasonably incur as a result of any act or failure to act in carrying out their functions other than such liability (if any) that they may incur by reason of their own actual fraud or willful default. In addition, to be entitled to indemnification, an Indemnified Person must not have acted in such a manner as to have incurred the liability by virtue of having committed actual fraud or willful default but no person shall be found to have committed actual fraud or willful default unless or until a court of competent jurisdiction shall have made a finding to that effect. |
|
CNIT BVI may purchase and maintain insurance for the benefit of any director or other officer of CNIT BVI against any liability which, by virtue of any rule of law, would otherwise attach to such person in respect of any negligence, default, breach of duty or breach of trust of which such person may be guilty in relation to CNIT BVI. CNIT BVI will purchase and maintain insurance for its directors and officers as permitted by BVI law. |
87
| Nevada | BVI | |
|
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for its directors, officers or persons controlling it under the foregoing provisions, CNIT BVI has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law. | ||
|
Shareholder Derivative and Class Action Suits |
Under Nevada law, a stockholder may bring a derivative action on behalf of CNIT to enforce the rights of CNIT. An individual also may commence a lawsuit separately or bring a class action suit on behalf of such individual and other similarly situated stockholders where the requirements for maintaining a class action under Nevada law have been met. A person may generally institute and maintain such suits only if such person was a stockholder at the time of the transaction which is the subject of the derivative suit or became a stockholder by operation of law from one who was a shareholder at the time of the transaction. Nevada law also requires that the derivative plaintiff must make a demand on the Board of Directors to assert the claim or take suitable actions, and the demand to be refused by the board, before the suit may be prosecuted by the derivative plaintiff, unless such demand would be futile (and if futile, the derivative plaintiff must make clear the reasons why such demand would be futile). |
We are not aware of any reported class action having been brought in a BVI court, however, reported derivative actions have been brought. The High Court of the BVI may, on the application of a shareholder of a company, grant leave to that shareholder to bring proceedings in the name and on behalf of that company, or intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company. In determining whether to grant leave, the High Court of the BVI must take into account (1) whether the shareholder is acting in good faith; (2) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters; (3) whether the proceedings are likely to succeed; (4) the costs of the proceedings in relation to the relief likely to be obtained; and (5) whether an alternative remedy to the derivative claim is available. |
|
Leave to bring or intervene in proceedings may be granted only if the High Court of the BVI is satisfied that (1) the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or (2) it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole. | ||
|
Anti-takeover Measures |
Under Nevada law, directors generally have a duty to act without self-interest, on a well- informed basis and in a manner they reasonably believe to be in the interests of the corporation and its stockholders. Nevertheless, a Nevada court will generally apply a policy of judicial deference to Board of Directors decisions to adopt anti-takeover measures in order to resist a change, or potential change, of control in the face of a potential takeover where the directors are able to show that: (1) they had reasonable grounds for believing that there was a threat to corporate policy and effectiveness from an acquisition proposal; and (2) the Board of Directors action taken to impede the exercise of stockholders rights was reasonable in relation to the threat posed. |
Under BVI law, the directors of a business company must exercise their powers in good faith for a proper purpose and in the best interests of the company as a whole. It is important for a determination to be made that it is possible for a reasonable Board of Directors, in good faith, to reach the conclusion that an anti-takeover measure which has the potential to discriminate against a minority of the members is nonetheless for the benefit of the company as a whole. It is likely that the courts would consider whether the Board of Directors had any ulterior motive in implementing anti-takeover proposals and whether particular shareholders had been singled out in any discriminatory way. |
88
| Nevada | BVI | |
|
Transactions with Directors |
The NRS provides that no contract or transaction between a corporation and one or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the common or interested director or officer is present at, or participates in, the meeting of the Board or committee of the Board which authorizes the contract or transaction, or signs a written consent authorizing the contract or transaction, or solely because any such director’s or officer’s votes are counted for such purpose, if: (a) the material facts as to the director’s or officer’s relationship or financial interest as to the contract or transaction are disclosed or are known to the Board of Directors or a committee of the Board, and the Board or committee of the Board in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors may be less than a quorum; (b) the material facts as to the director’s or officer’s relationship or financial interest as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is approved in good faith by the vote of the stockholders holding a majority of the voting power; or (c) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board or the stockholders. |
Under the BVI Act, a director of a business company is not required to disclose an interest if: (a) the transaction or proposed transaction is between the director and the company; and (b) the transaction or proposed transaction is or is to be entered into in the ordinary course of the company’s business and on usual terms and conditions. A disclosure to the Board to the effect that a director is a shareholder, director, officer or trustee of another named company or other person and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure, be entered into with that company or person, is a sufficient disclosure of interest in relation to that transaction. It should be noted, however, that a disclosure is not made to the Board unless it is made or brought to the attention of every director on the Board. |
|
Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee of the Board which authorizes the contract or transaction. |
89
| Nevada | BVI | |
| Interested Shareholder Transactions |
The NRS provide generally that a Nevada corporation is
prohibited from engaging in mergers, dispositions of 5% or more of the
aggregate value of its assets or the disposition of assets representing
10% or more of the earning power or net income of the corporation, certain
issuances of stock and other transactions (“business combinations”) with a
person that owns 10% or more of the voting power of the outstanding voting
shares of the corporation (an “interested shareholder”) for a period of
three years after the interested stockholder first held 10% or more of the
voting power of the outstanding shares. These restrictions on transactions
involving an interested stockholder do not apply to (a) a combination
approved by the board of directors before that person first became an
interested stockholder, (b) a combination with an interested shareholder
that resulted in that person becoming an interested stockholder that was
approved by the board of directors before that person became aninterested
stockholder, or (c) a combination that was approved, no earlier than three
years after the date that person first became an interested stockholder,
by the affirmative vote of holders of at least a majority of the voting
power (other than stock owned by the interested shareholder) at a meeting
called for that purpose. |
Although BVI law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders. |
|
CNIT’s articles of incorporation contain a provision
expressly electing not to be governed by these provisions of the NRS. |
||
|
Acquisition of Controlling Interest |
The provisions of NRS 78.378 to 78.3793 apply to the
acquisition of controlling interests in an issuing corporation unless the articles of incorporation provide otherwise. NRS 78.3799 defines
“issuing corporation” as any corporation organized in Nevada which has 200
or more stockholders or record, at least 100 of whom have addresses in the
state of Nevada appearing on the stock ledger and does business in the
State of Nevada directly or through an affiliated corporation. |
There are no equivalent statutory provisions in the BVI. |
|
The provisions relating to acquisition of a controlling interest in an issuing corporation provide that the acquiring person may deliver an offeror’s statement and require that a special meeting of stockholders be called to determine whether such acquiring person shall be entitled to full voting rights of his shares. Such voting rights will not be provided unless the acquiring person and |
90
| Nevada | BVI | |
|
those acting in association with the acquiring person are
conferred by resolution of the stockholders holding a majority of the
voting power of the corporation and of any adversely affected class or
series of outstanding shares, excluding shares as to which any interested
stockholder exercises voting rights. Further, if the offeror’s statement
is not delivered in the manner prescribed or if such acquiring person is
not granted full voting rights by the stockholders, the issuing
corporation shall call for redemption of such shares of the acquiring
person. If the acquiring person’s shares are given full voting rights,
shareholders voting against such voting rights will have dissenters’
rights and are entitled to fair value for their shares. |
||
|
CNIT’s articles of incorporation contain a provision
expressly electing not to be governed by these provisions of the NRS. |
||
|
Corporate Transactions |
Generally, under the NRS, approval of mergers and consolidations and sales, leases or exchanges of all of the property or assets of a corporation requires the affirmative vote of the holders of a majority of the outstanding shares entitled to vote. |
Under the laws of the BVI, two or more companies may
merge or consolidate in accordance with Section 170 of the BVI Act. A
merger means the merging of two or more constituent companies into one of
the constituent companies, and a consolidation means the uniting of two or
more constituent companies into a new company. In order to merge or
consolidate, thedirectors of each constituent company must approve a
written plan of merger or consolidation which must be authorized by a
resolution of shareholders. |
|
While a director may vote on the plan even if he has a
financial interest in the plan, in order for the resolution to be valid,
the material facts of the interest and the director’s relationship to any
party to the transaction must be disclosed and the resolution approved (1)
without counting the vote or consent of any interested director, or (2) by
the unanimous vote or consent of all disinterested directors if the votes
or consents of all disinterested directors is insufficient to approve a
resolution of directors. | ||
|
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as |
| 91 |
|
Nevada |
BVI | |
|
a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation. | ||
|
The shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may receive debt obligations or other securities of the surviving or consolidated company, or other assets, or a combination thereof. Further, some or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind of asset. As such, not all the shares of a class or series must receive the same kind of consideration. | ||
|
After the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the BVI. | ||
|
A shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) and a consolidation. A shareholder properly exercising his dissent rights is entitled to payment in cash of the fair value of his shares. |
92
ENFORCEABILITY OF CIVIL LIABILITIES
CNIT BVI was incorporated under the laws of the BVI because of certain benefits associated with being a BVI company, such as political and economic stability, an effective judicial system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the BVI has a less developed body of securities laws as compared to the United States and provides protections for investors to a significantly lesser extent. In addition, BVI companies may not have standing to sue before the federal courts of the United States.
Additionally, most of our operations are conducted in the PRC, and a significant portion of our assets are located in the PRC. In addition, after the merger a majority of CNIT BVI’s directors and all of its executive officers will continue to reside in the PRC, and all or a substantial portion of their assets are located in the PRC. As a result, it may be difficult for you to effect service of process within the United States upon CNIT BVI or such persons, or to enforce against them in courts of the United States, BVI or PRC, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. CNIT BVI has appointed Corporation Service Company as its agent to receive service of process with respect to any action brought against it in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against it in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.
Maples and Calder, our counsel as to BVI law, and Guangdong Jin Di Law Firm Sichuan Office, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the BVI or the PRC would, respectively, (1) recognize or enforce judgments of United States courts obtained against CNIT BVI or its directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the BVI or the PRC against CNIT BVI or its directors or officers predicated upon the securities laws of the United States or any state in the United States. Maples and Calder and Guangdong Jin Di Law Firm Sichuan Office have further advised us that there are no treaties with respect to enforceability of civil liabilities, nor is there reciprocity practice, between the BVI and the PRC.
Maples and Calder has further advised us that any final and conclusive monetary judgment obtained against CNIT BVI in United States state or federal courts, for a definite sum, may be treated by the courts of the BVI as a cause of action in itself so that no retrial of the issues would be necessary provided that in respect of the U.S. judgment:
| 1. |
The U.S. court issuing the judgment had jurisdiction in the matter and CNIT BVI either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process; |
| 2. |
The judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of CNIT BVI; |
| 3. |
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; |
| 4. |
Recognition or enforcement of the judgment in the British Virgin Islands would not be contrary to public policy; and |
| 5. |
The proceedings pursuant to which judgment was obtained were not contrary to natural justice. |
Guangdong Jin Di Law Firm Sichuan Office has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. Guangdong Jin Di Law Firm Sichuan Office has advised us further that under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. As there existed no treaty or other form of reciprocity between the PRC and the United States governing the recognition of judgments as of the date of this proxy statement/prospectus, including those predicated upon the liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts.
93
LEGAL MATTERS
Pillsbury Winthrop Shaw Pittman LLP has advised us in connection with certain U.S. legal matters with respect to the merger and has rendered an opinion to us regarding the material U.S. federal income tax consequences of the merger described in the section entitled “Taxation—United States Taxation.” Maples and Calder has advised us in connection with certain BVI legal matters with respect to the merger, including legal matters with respect to CNIT BVI shares. Guangdong Jin Di Law Firm Sichuan Office has advised us in connection with certain PRC legal matters with respect to the merger.
EXPERTS
The consolidated financial statements of CNIT as of December 31, 2011 and for the year then ended, and for the year ended December 31, 2009, and management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2011 (which is included in Management’s Report on Internal Control over Financial Reporting), have been incorporated in this proxy statement/prospectus by reference herein in reliance upon the reports of GHP Horwath, P.C., independent registered public accounting firm, given on the authority of such firm as experts in auditing and accounting.
The consolidated financial statements of CNIT as of December 31, 2010 and for the year then ended, have been incorporated in this proxy statement/prospectus by reference herein in reliance upon the report of BDO Limited, independent registered public accounting firm, given on the authority of such firm as experts in auditing and accounting.
94
WHERE YOU CAN FIND MORE INFORMATION
CNIT is subject to the reporting requirements of the Exchange Act and in accordance therewith files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. CNIT’s SEC filings also are available to the public from commercial document retrieval services and at the SEC’s website at www.sec.gov.
CNIT BVI has filed a registration statement on Form F-4 with the SEC to register the issuance of its ordinary shares in connection with the merger. This proxy statement/prospectus is a part of that registration statement and constitutes a prospectus of CNIT BVI in addition to being the proxy statement of CNIT for the Annual Meeting.
In addition to the information set forth in this proxy statement/prospectus, SEC rules allow CNIT and CNIT BVI to “incorporate by reference” information into this proxy statement/prospectus, which means that CNIT can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this proxy statement/prospectus, except for any information therein that is superseded by information set forth in this proxy statement/prospectus. This proxy statement/prospectus incorporates by reference the documents set forth below that CNIT previously filed with the SEC. These documents contain important information about CNIT.
| 1. |
Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 7, 2012; |
| 2. |
Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 4, 2012; |
| 3. |
Current Reports on Form 8-K (in each case, other than information and exhibits “furnished” to and not “filed” with the SEC in accordance with SEC rules and regulations) filed with the SEC on March 2, 2012, March 7, 2012 and May 4, 2012; and |
| 4. |
The description of CNIT’s common stock of CNIT as set forth in CNIT’s Registration Statement on Form 8-A, filed with the SEC on May 22, 2008. |
We are also incorporating by reference all additional documents that we file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act between the date of this proxy statement/prospectus and the date of the Annual Meeting.
If you are a stockholder of record or beneficial owner, we may already have sent you some of the documents incorporated by reference, but you can obtain any of them from us or the SEC. Stockholders of record, beneficial owners, and any other person to whom a proxy statement/prospectus is delivered, may obtain without charge a copy of documents that we incorporate by reference into this proxy statement/prospectus (including exhibits, but only if specifically requested) by requesting them by telephone at (+86) 755 -8370-8333 or in writing at the following address:
China Information Technology, Inc.
21st Floor, Everbright Bank Building
Zhuzilin, Futian District
Shenzhen, Guangdong 518040
People’s Republic of China
Attention: Corporate Secretary
If you would like to request documents from us, please do so by
, 2012, to assure that you will receive
them before the Annual Meeting.
You should rely only on the information contained or incorporated by reference into this proxy statement/prospectus to consider and vote upon the adoption of the Merger Agreement. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement/prospectus. The date of this proxy statement/prospectus can be found on the first page. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than that date, and neither the mailing of this proxy statement/prospectus to stockholders nor the issuance of CNIT BVI shares in the merger shall create any implication to the contrary.
95
OTHER MATTERS
To the knowledge of CNIT, no action is to be taken on any matter not specifically referred to in this proxy statement/prospectus at the Annual Meeting. If any other matters properly come before the Annual Meeting, it is the intention of the persons named in the enclosed proxy to vote the shares they represent as the Board of Directors of CNIT may recommend.
BY ORDER OF THE BOARD OF DIRECTORS,
_____________________________
Jiang Huai Lin
Chairman and CEO
Dated: , 2012
96
ANNEX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this “Agreement”) is entered into as of June 20, 2012, by and among China Information Technology, Inc., a corporation incorporated under the laws of the State of Nevada (“CNIT”), China Information Technology, Inc., a company incorporated under the laws of the British Virgin Islands and a wholly-owned subsidiary of CNIT (“CNIT BVI”), and China Information Mergerco Inc., a corporation incorporated under the laws of the State of Nevada and a wholly-owned subsidiary of CNIT BVI (“Merger Sub”).
RECITALS
A. The Boards of Directors of each of CNIT, CNIT BVI and Merger Sub have unanimously determined that it is advisable and in the best interests of their respective shareholders to reorganize so that CNIT BVI will become the parent of CNIT as a result of the merger of Merger Sub with and into CNIT (the “Merger”).
B. The respective Boards of Directors of CNIT, CNIT BVI and Merger Sub have each unanimously approved the Merger, this Agreement and, to the extent applicable, the other transactions described herein, pursuant to which CNIT will be the surviving corporation of the Merger and will become a wholly-owned subsidiary of CNIT BVI, all upon the terms and subject to the conditions set forth in this Agreement, and whereby each issued share of the common stock, par value US$0.01 per share, of CNIT (“CNIT Common Stock”) shall be converted into the right to receive one ordinary share, par value US$0.01 per share, of CNIT BVI (“CNIT BVI Ordinary Shares”).
C. The Merger requires, among other things, the adoption of this Agreement by the affirmative vote of the holders of a majority of the issued and outstanding shares of CNIT Common Stock.
D. The parties intend that the Merger qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and that this Agreement shall be, and is hereby, adopted as a “plan of reorganization” for purposes of Section 368(a) of the Code or, alternatively, that the Merger be treated for United States federal income tax purposes as a contribution of shares of CNIT to CNIT BVI by stockholders of CNIT qualifying as a tax-free exchange within the meaning of Section 351 of the Code.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and of the covenants and agreements contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement, and in accordance with the Nevada Revised Statutes (the “NRS”), at the Effective Time (as defined in Section 1.2), Merger Sub shall be merged with and into CNIT in accordance with this Agreement, and the separate corporate existence of Merger Sub shall thereupon cease. Pursuant to and simultaneously upon the consummation of the Merger at the Effective Time, in accordance with the NRS, (a) CNIT shall continue as the surviving corporation in the Merger (sometimes hereinafter referred to as the “Surviving Corporation”), becoming a wholly-owned subsidiary of CNIT BVI, (b) the corporate identity, existence, powers, rights and immunities of CNIT as the Surviving Corporation shall continue unimpaired by the Merger, and (c) CNIT shall succeed to and shall possess all the assets, properties, rights, privileges, powers, franchises, immunities and purposes, and be subject to all the debts, liabilities, obligations, restrictions and duties of Merger Sub, all without further act or deed.
1.2 Filing Articles of Merger; Effective Time. As soon as practicable following the satisfaction or, to the extent permitted by applicable law, waiver of the conditions set forth in Article V, if this Agreement shall not have been terminated prior thereto as provided in Section 7.1, Merger Sub and CNIT shall cause articles of merger (the “Articles of Merger”) meeting the requirements of NRS 92A.200 to be properly executed and filed in accordance with such section and otherwise make all other filings or recordings as required by the NRS in connection with the Merger. The Merger shall become effective at the time designated in the Articles of Merger as the effective time of the Merger (the “Effective Time”).
A-1
ARTICLE II
SURVIVING CORPORATION;
EFFECT OF MERGER ON CHARTER DOCUMENTS
AND DIRECTORS AND OFFICERS
2.1 Name of Surviving Corporation. The name of the Surviving Corporation shall be “China Information Technology, Inc.”
2.2 Articles of Incorporation of Surviving Corporation. From and after the Effective Time, the Articles of Incorporation of CNIT in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation, and shall continue in full force and effect until amended in accordance with the provisions provided therein or the applicable provisions of the NRS.
2.3 Bylaws of Surviving Corporation. From and after the Effective Time, the Bylaws of CNIT in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, and shall continue in full force and effect until amended in accordance with the provisions provided therein or the applicable provisions of the NRS.
2.4 Directors and Officers of Surviving Corporation. From and after the Effective Time, the directors and officers of Merger Sub immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation, each such director or officer to serve in such capacity until his or her earlier death, resignation or removal or until his or her successor is duly elected or appointed.
2.5 Constitutional Documents of CNIT BVI. The Memorandum and Articles of Association of CNIT BVI in effect immediately prior to the Effective Time shall continue to be the Memorandum and Articles of Association of CNIT BVI until amended in accordance with the provisions provided therein or under the laws of the British Virgin Islands.
2.6 Directors and Officers of CNIT BVI. Immediately prior to the Effective Time, CNIT, in its capacity as the sole shareholder of CNIT BVI, agrees to take or cause to be taken all such actions as are necessary to cause those persons serving as the directors and officers of CNIT immediately prior to the Effective Time to be elected or appointed as the directors and officers of CNIT BVI (to the extent the officers and directors of CNIT BVI and CNIT are not already identical), each such person to have the same office(s) with CNIT BVI (and the same committee memberships in the case of directors) as he or she held with CNIT, with the directors to serve until the earlier of the next meeting of the CNIT BVI shareholders at which an election of directors is required or until their successors are elected or appointed (or their earlier death, disability or retirement).
ARTICLE III
EFFECT OF MERGER ON CAPITAL STOCK;
EXCHANGE OF SHARES
3.1 Effect on Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of either CNIT nor CNIT BVI:
(a) Each issued and outstanding share of CNIT Common Stock shall be converted into the right to receive one validly issued, fully paid and nonassessable CNIT BVI Ordinary Share, and CNIT BVI shall issue to each holder of such right that number of CNIT BVI Ordinary Shares to which each such holder is entitled.
(b) The 100 issued and outstanding shares of common stock, par value US$0.01 per share, of Merger Sub held by CNIT BVI shall be converted into 100 validly issued, fully-paid and nonassessable shares of common stock, par value US$0.01 per share, of the Surviving Corporation.
(c) CNIT BVI will repurchase the one CNIT BVI Ordinary Share that was held by CNIT prior to the Merger at a purchase price of US$0.01.
3.2 Exchange of CNIT BVI Shares.
(a) At the Effective Time, each outstanding share of CNIT Common Stock held in uncertificated, book entry form will be exchanged for one CNIT BVI Ordinary Share pursuant to Section 3.1(a) above without further act or deed by the holder thereof, and record of such ownership shall be kept in uncertificated, book entry form by CNIT BVI’s transfer agent, Island Stock Transfer.
A-2
(b) At the Effective Time, each outstanding share of CNIT Common Stock held in certificated form will be converted into the right to receive one CNIT BVI Ordinary Share pursuant to Section 3.1(a) above without further act or deed by the holder thereof, and the holder thereof will cease to be, and will have no rights as, a stockholder of CNIT. Following the consummation of the Merger, CNIT’s exchange agent will send a letter of transmittal to each such holder, explaining the procedure for surrendering such holder’s CNIT stock certificates in exchange for share certificates representing CNIT BVI Ordinary Shares.
(c) At the Effective Time, holders of CNIT Common Stock will cease to be, and will have no rights as, stockholders of CNIT, other than the right to receive: (i) any dividend or other distribution with a record date prior to the Effective Time that may have been declared or made by CNIT on such shares of CNIT Common Stock in accordance with the terms of this Agreement or prior to the date of this Agreement and that remain unpaid at the Effective Time and (ii) the CNIT BVI Ordinary Shares pursuant to Section 3.1(a) . After the Effective Time, there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of CNIT Common Stock that were outstanding immediately prior to the Effective Time. Upon and after the Effective Time, registered shareholders in CNIT BVI’s register of members will have and be entitled to exercise any voting and other rights with respect to and to receive any dividend and other distributions upon CNIT BVI Ordinary Shares registered in their respective names.
3.3 No Dissenters’ Rights. There are no dissenters’ rights or appraisal rights available to holders of CNIT Common Stock under the NRS in connection with the Merger.
ARTICLE IV
ASSUMPTION OF CONTRACTS
4.1 Assumption. At the Effective Time, the obligations of CNIT under or with respect to contracts or agreements listed on Annex A (collectively, the “Assumed Contracts”) shall become the lawful obligations of CNIT BVI and shall be performed in the same manner and without interruption until the same are amended or otherwise lawfully altered or terminated. Effective at the Effective Time, CNIT BVI hereby expressly adopts and assumes all obligations of CNIT under the Assumed Contracts.
4.2 Other Actions. Such amendments or other actions that are deemed necessary or appropriate by CNIT and CNIT BVI to effect the Merger, including to facilitate the assumption by CNIT BVI of the Assumed Contracts, and any other amendments or actions that CNIT and CNIT BVI shall deem advisable, shall be adopted and entered into with respect to the Assumed Contracts and any other change in control arrangements between CNIT and its executive officers and key employees.
ARTICLE V
CONDITIONS PRECEDENT
The respective obligations of each party to effect the Merger are subject to the satisfaction or waiver of the following conditions:
5.1 Stockholder Approval. This Agreement shall have been adopted and approved by the affirmative vote of holders of a majority of the issued and outstanding shares of CNIT Common Stock entitled to vote thereon at the record date for such actions as set by the Board of Directors of CNIT.
5.2 No Prohibition. None of the parties hereto shall be subject to any decree, order or injunction of any court of competent jurisdiction, whether in the United States, the British Virgin Islands or any other country, that prohibits the consummation of the Merger.
5.3 Effective Registration Statement. CNIT BVI shall have filed a registration statement on Form F-4 with the Securities and Exchange Commission in connection with the offer and issuance of the CNIT BVI Ordinary Shares to be issued pursuant to the Merger, which registration statement shall have become effective under the Securities Act of 1933, as amended, and no stop order with respect thereto shall be in effect.
A-3
5.4 NASDAQ Listing. The CNIT BVI Ordinary Shares to be issued pursuant to the Merger shall have been authorized for listing on the NASDAQ Global Select Market, subject to official notice of issuance and satisfaction of other standard conditions.
5.5 Consents and Authorizations. Other than the filing of the Articles of Merger provided for under Section 1.2, all material consents and authorizations of, filings or registrations with, and notices to, any governmental or regulatory authority required of CNIT, CNIT BVI or any of their respective subsidiaries to consummate the Merger and the other transactions contemplated hereby, including, without limitation, any filings required under (a) applicable United States state securities and “Blue Sky” laws and (b) applicable British Virgin Islands securities laws, shall have been obtained or made.
ARTICLE VI
COVENANTS
6.1 Rule 16b-3 Approval. CNIT, CNIT BVI and Merger Sub shall take all such steps as may reasonably be required to cause the transactions contemplated by Section 3.1 and any other dispositions of CNIT equity securities (including derivative securities) or acquisitions of CNIT BVI equity securities (including derivative securities) in connection with this Agreement by each individual who (a) is a director or officer of CNIT or (b) at the Effective Time, is or will become a director or officer of CNIT BVI, to be exempt under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended.
6.2 CNIT BVI Vote. Prior to the date of the meeting of stockholders of CNIT to consider and vote upon the adoption of this Agreement, CNIT BVI, in its capacity as sole stockholder of Merger Sub, shall adopt this Agreement and approve the Merger.
6.3 Further Assurances. Each party hereto shall use its reasonable best efforts, to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary and reasonably appropriate to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions provided for herein.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time, whether before or after approval by the stockholders of CNIT, by action of the Board of Directors of CNIT.
7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of CNIT, CNIT BVI or Merger Sub.
7.3 Amendment. This Agreement may be amended by the parties hereto at any time before or after any required approval or adoption by the stockholders of CNIT of this Agreement or matters presented in connection with this Agreement; provided, however, that after any such approval or adoption, there shall be made no amendment requiring further approval or adoption by such stockholders under applicable law until such further approval is obtained. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.
7.4 Waiver. At any time prior to the Effective Time, the parties may waive compliance with any of the agreements or covenants contained in this Agreement, or may waive any of the conditions to consummation of the Merger contained in this Agreement. Any agreement on the part of a party to any such waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, except for the provisions of Article IV, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. The provisions of Article IV may be enforced only by the specifically intended beneficiaries thereof.
A-4
8.2 Entire Agreement. This Agreement and any documents delivered by the parties in connection herewith constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto.
8.3 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to its rules of conflict of laws.
8.4 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all of the parties hereto.
8.5 Headings. Headings of the Articles and Sections of this Agreement are for the convenience of the parties only and shall be given no substantive or interpretative effect whatsoever.
8.6 Severability. If any provision of this Agreement is determined by any court or arbitrator of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such provision will be enforced to the maximum extent possible given the intent of the parties hereto. If such clause or provision cannot be so enforced, such provision shall be stricken from this Agreement and the remainder of this Agreement shall be enforced as if such invalid, illegal or unenforceable clause or provision had (to the extent not enforceable) never been contained in this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-5
IN WITNESS WHEREOF, this Agreement and Plan of Merger and Reorganization has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first written above.
CHINA INFORMATION TECHNOLOGY, INC.
a Nevada corporation
By: /s/ Jiang Huai Lin
Name: Jiang Huai Lin
Title: Chief Executive Officer
CHINA INFORMATION TECHNOLOGY, INC.
a British Virgin Islands company
By: /s/ Jiang Huai Lin
Name: Jiang Huai Lin
Title: Chief Executive Officer
CHINA INFORMATION MERGERCO INC.
a Nevada corporation
By: /s/ Jiang Huai Lin
Name: Jiang Huai Lin
Title: Chief Executive Officer
A-6
ANNEX B
British Virgin Islands
The BVI Business Companies Act
(No. 16 of 2004)
Memorandum and Articles of Association
of
China Information Technology, Inc.
Incorporated this 18th day of June 2012
Maples Corporate Services (BVI) Limited
Kingston Chambers
PO Box 173
Road Town, Tortola
British Virgin Islands
B-1
TERRITORY OF THE BRITISH VIRGIN ISLANDS
THE BVI BUSINESS COMPANIES ACT, 2004
MEMORANDUM OF ASSOCIATION
OF
CHINA INFORMATION TECHNOLOGY, INC.
| 1 |
Company Name |
|
| 1.1 |
The name of the Company is China Information Technology, Inc. |
|
| 1.2 |
The members may from time to time change the Company's name by Resolution of Members. The directors shall give notice of such resolution to the registered agent of the Company, for the registered agent to file an application for change of name with the Registrar, and any such change will take effect from the date of the certificate of change of name issued by the Registrar. |
|
| 1.3 |
A change of name of the Company shall constitute an amendment of the Memorandum and Articles and in the event of a resolution being passed to change the name of the Company, the provisions below in respect of amendments to the Memorandum and Articles must be complied with. |
|
| 2 |
Company Limited by Shares, Liability of Members |
|
| 2.1 |
The Company is a company limited by shares. |
|
| 2.2 |
The liability of each member is limited to: |
|
| (a) |
the amount from time to time unpaid on that member's shares; |
|
| (b) |
any liability expressly provided for in the Memorandum or the Articles; and |
|
| (c) |
any liability to repay a distribution pursuant to section 58(1) of the Act. |
|
B-2
| 3 |
Registered Office |
|
| 3.1 |
The first registered office of the Company will be situated at Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands. |
|
| 3.2 |
The directors or members may from time to time change the Company's registered office by Resolution of Directors or Resolution of Members, provided that the Company's registered office shall at all times be the office of the registered agent. The directors shall give notice of such resolution to the registered agent of the Company, for the registered agent to file with the Registrar a notice of change of registered office, and any such change of registered office will take effect from the date of the registration by the Registrar of such notice. |
|
| 4 |
Registered Agent |
|
| 4.1 |
The first registered agent of the Company will be Maples Corporate Services (BVI) Limited of Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands. |
|
| 4.2 |
The directors or members may from time to time change the Company's registered agent by Resolution of Directors or Resolution of Members. The directors shall give notice of such resolution to the registered agent of the Company (meaning the existing registered agent), for the registered agent to file with the Registrar a notice of change of registered agent, and any such change of registered agent will take effect from the date of the registration by the Registrar of such notice. |
|
| 4.3 |
If the existing registered agent does not file such notice on instruction by the directors, the directors shall procure that a notice of change of registered agent is filed with the Registrar by a legal practitioner in the British Virgin Islands acting on behalf of the Company, and any such change of registered agent will take effect from the date of the registration by the Registrar of such notice. |
|
| 5 |
General Objects and Powers |
|
| 5.1 |
Subject to the following provisions of this Memorandum, the objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Act or any other law of the British Virgin Islands. |
|
| 5.2 |
Without limiting the foregoing, the powers of the Company include the power to do the following: |
|
| (a) |
grant options over unissued shares in the Company and treasury shares; |
|
| (b) |
issue securities that are convertible into shares; |
|
| (c) |
give financial assistance to any person in connection with the acquisition of the Company's own shares; |
|
B-3
| (d) |
issue debt obligations of every kind and grant options, warrants and rights to acquire debt obligations; |
|
| (e) |
guarantee a liability or obligation of any person and secure any of its obligations by mortgage, pledge or other charge, of any of its assets for that purpose; and |
|
| (f) |
protect the assets of the Company for the benefit of the Company, its creditors and its members and, at the discretion of the directors, for any person having a direct or indirect interest in the Company. |
|
| 6 |
Maximum Number of Authorised Shares |
|
| 6.1 |
The Company is authorised to issue a maximum of 100,000,000 ordinary shares of one class each such share having a par value of US$0.01. |
|
| 6.2 |
The members may from time to time by Resolution of Members increase the maximum number of shares the Company is authorised to issue, by amendment to the Memorandum in accordance with the provisions below. |
|
| 7 |
Rights Conferred by Shares |
|
| 7.1 |
Each share in the Company confers on the holder: |
|
| (a) |
the right to one vote on any Resolution of Members; |
|
| (b) |
the right to an equal share in any dividend paid by the Company in accordance with the Act; and |
|
| (c) |
the right to an equal share in the distribution of the surplus assets of the Company. |
|
| 8 |
Registered Shares Only |
|
|
Shares in the Company may only be issued as registered shares and the Company is not authorised to issue bearer shares. Registered shares may not be exchanged for bearer shares or converted to bearer shares. |
||
| 9 |
Amendments to the Memorandum and Articles |
|
| 9.1 |
Subject to the provisions of the Act and the provisions of this Clause 9: |
|
| (a) |
the members may from time to time amend the Memorandum or Articles by Resolution of Members; and |
|
B-4
| (b) |
the directors from time to time amend the Articles (but not the Memorandum) by Resolution of Directors. |
|
| 9.2 |
The directors shall not have the power to amend the Articles: |
|
| (a) |
to restrict the rights or powers of the members to amend the Memorandum or Articles; |
|
| (b) |
to change the percentage of members required to pass a resolution to amend the Memorandum or Articles; |
|
| (c) |
to change the manner prescribed in the Articles for the election of directors to hold office; |
|
| (d) |
where to do so would involve amending the provisions of Articles 17.3 or 23.9; and |
|
| (e) |
in circumstances where the Memorandum or Articles may only be amended by the members. |
|
| 9.3 |
A change of registered office or registered agent shall not constitute an amendment of the Memorandum or Articles. |
|
| 9.4 |
If at any time: |
|
| (a) |
the Company is authorised to issue shares of more than one class or series; and |
|
| (b) |
an amendment to the Memorandum or Articles the effect of which would be to vary the rights of the holders of a class of shares or series of shares or alter or change any preference or any relative or other right given to any class or series of shares of the Company then in issue, |
|
|
then in addition to the requirements of Clause 9.1, such a proposed amendment to the Memorandum or Articles shall also require (whether or not the Company is being wound up) approval by Resolution of Class Members (where the Resolution of Class Members is a resolution of the holders of the class or series of shares of the Company the rights given to which would be so varied or otherwise affected as aforesaid by the proposed amendment). However, this Clause 9.4 shall not apply if it is otherwise provided by the terms of issue of the shares of that class or series. |
||
| 9.5 |
The rights conferred upon the holders of the shares of any class issued with preferred or other rights (for the purpose of this Clause 9.5, any such shares of any class being referred to herein as "Preferred Shares") shall not, unless otherwise expressly provided by the terms of issue of the Preferred Shares, be deemed to be varied by the creation or issue of further shares: |
|
| (a) |
ranking pari passu with the Preferred Shares; or |
|
B-5
| (b) |
which in all respects do not rank ahead of the Preferred Shares and which would not confer on the holders of such further shares any rights which are superior to the rights conferred upon the holders of the Preferred Shares. | |
| 9.6 |
The directors shall give notice of such resolutions passed pursuant to Clauses 9.1 and 9.4 to the registered agent of the Company, for the registered agent to file with the Registrar a notice of the amendment to the Memorandum or Articles, or a restated memorandum and articles of association incorporating the amendment(s) made, and any such amendment(s) to the Memorandum or Articles will take effect from the date of the registration by the Registrar of the notice of amendment or restated memorandum and articles of association incorporating the amendment(s) made. | |
| 9.7 |
A change of registered office or registered agent shall not constitute an amendment of the Memorandum or Articles. | |
| 10 |
Definitions and Interpretation | |
| 10.1 |
In this memorandum of association and the attached articles of association: | |
| "Act" |
means the BVI Business Companies Act, 2004; |
|
| |
| "Articles" |
means the Company's articles of association as attached to this Memorandum, and "Article" shall be construed accordingly; |
|
| |
| "Chairman of the Board" |
has the meaning ascribed to that term in Article 19.8; |
|
| |
| "Memorandum" |
means this, the Company's memorandum of association; |
|
| |
| "Registrar" |
means the Registrar of Corporate Affairs appointed under the Act; |
|
| |
| "Resolution of Directors" |
means a resolution of the directors passed either at a meeting of directors, or by way of a Written Resolution, in either case in accordance with the provisions of the Articles; |
|
| |
| "Resolution of Members" |
means a resolution passed by the holders of a majority of in excess of fifty (50) percent of the votes of those members (or their duly appointed proxies) entitled to vote and voting on the resolution either at a meeting of members, or by way of a Written Resolution, in either case in accordance with the provisions of the Articles; |
|
| |
| "Resolution of Class Members" |
means, in respect of each class of shares of the Company or series of shares of the Company that is or may at any time be in issue in the Company, a resolution passed by the holders of a majority of in excess of fifty (50) percent of the votes of those members in that class or series (or their duly appointed proxies) entitled to vote and voting on the resolution either at a meeting of members, or by way of a Written Class Resolution, in either case in accordance with the provisions of the Articles; |
B-6
|
"Securities Act " |
means the Securities Act of 1933 of the United States of America (as amended); |
|
| |
|
"Written Resolution" |
means a resolution of members or directors (as applicable) consented to in writing or by telex, telegram, cable or other written electronic communication, without the need for any notice. A Written Resolution may consist of several documents, including written electronic communications, in like form each signed or assented to by one or more members or directors (as applicable). A Written Resolution of directors shall be passed if so consented by all of those directors entitled to vote on the resolution. A Written Resolution of members shall be passed if so consented by the holders of a majority of in excess of fifty (50) percent of the votes of those members entitled to vote on the resolution; and |
|
| |
|
"Written Class Resolution" |
means, in respect of each class of shares of the Company or series of shares of the Company that is or may at any time be in issue in the Company, a resolution of the members of that class of shares or series of shares consented to in writing or by telex, telegram, cable or other written electronic communication, without the need for any notice. A Written Class Resolution may consist of several documents, including written electronic communications, in like form each signed or assented to by one or more members. |
| 10.2 |
In the Memorandum and Articles: | |
| (a) |
words and expressions defined in the Act shall have the same meaning and, unless otherwise required by the context, the singular shall include the plural and vice versa, the masculine shall include the feminine and the neuter and references to persons shall include corporations and all entities capable of having a legal existence; | |
B-7
| (b) |
reference to a provision of law is a reference to that provision as extended, applied, amended or re-enacted and includes any subordinate legislation; |
|
| (c) |
the headings are for convenience only and shall not affect the construction of the Memorandum or Articles; |
|
| (d) |
reference to a thing being "written" or "in writing" includes all forms of writing, including all electronic records which satisfy the requirements of the Electronic Transactions Act, 2001; |
|
| (e) |
reference to a thing being "signed" or to a person's "signature" shall include reference to an electronic signature which satisfies the requirements of the Electronic Transactions Act, 2001, and reference to the Company's "seal" shall include reference to an electronic seal which satisfies the requirements of the Electronic Transactions Act, 2001. |
We, Maples Corporate Services (BVI) Limited of Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands in our capacity as registered agent for the Company hereby apply to the Registrar for the incorporation of the Company this 18th day of June 2012.
Incorporator
/s/ Richard May
Richard May
Authorised Signatory
Maples Corporate Services (BVI) Limited
B-8
TERRITORY OF THE BRITISH VIRGIN ISLANDS
THE BVI BUSINESS COMPANIES ACT, 2004
ARTICLES OF ASSOCIATION
OF
CHINA INFORMATION TECHNOLOGY, INC.
| 1 |
Share Certificates |
|
| 1.1 |
Every person whose name is entered as a member in the Company's register of members, being the holder of registered shares, shall without payment (except where otherwise noted) be entitled to a share certificate in the following circumstances: |
|
| (a) |
on the issuance of such shares to such member; |
|
| (b) |
on the transfer of such shares to such member; |
|
| (c) |
on a re-designation or conversion of such shares with the effect that the certificate previously issued no longer properly describes such shares; and |
|
| (d) |
at the discretion of the directors (who may levy a reasonable charge), on notice to the Company of a change of name of the member. |
|
| 1.2 |
Such certificate shall be signed by a director or under the common seal of the Company (which the registered agent of the Company is authorised to affix to such certificate) with or without the signature of any director or officer of the Company specifying the share or shares held and the par value thereof (if any), provided that in respect of shares held jointly by several persons, the Company shall not be bound to issue more than one certificate and delivery of a certificate for a share to one of several joint holders shall be sufficient delivery to all. |
|
| 1.3 |
If a certificate is worn out or lost it may, subject to the prior written consent of any mortgagee or chargee whose interest has been noted on the Company's register of members, be renewed on production of the worn out certificate, or on satisfactory proof of its loss together with such indemnity as the directors may reasonably require. Any member receiving a share certificate shall indemnify and hold the Company and its officers harmless from any loss or liability which it or they may incur by reason of wrongful or fraudulent use or representation made by any person by virtue of the possession of such a certificate. |
|
B-9
| 2 |
Issue of Shares |
|
| 2.1 |
Subject to the provisions of these Articles, the unissued shares of the Company (whether forming part of the original or any increased authorised shares) shall be at the disposal of the directors who may offer, allot, grant options over or otherwise dispose of them to such persons at such times and for such consideration, being not less than the par value (if any) of the shares being disposed of, and upon such terms and conditions as the directors may determine. Such consideration may take any form acceptable to the directors, including money, a promissory note, or other written obligation to contribute money or property, real property, personal property (including goodwill and know-how), services rendered or a contract for future services. Before issuing shares for a consideration other than money, the directors shall pass a Resolution of Directors stating: |
|
| (a) |
the amount to be credited for the issue of the shares; |
|
| (b) |
their determination of the reasonable present cash value of the non-money consideration for the issue; and |
|
| (c) |
that, in their opinion, the present cash value of the non-money consideration for the issue is not less than the amount to be credited for the issue of the shares. |
|
| 2.2 |
Subject to the provisions of the Act in this regard, shares may be issued on the terms that they are redeemable, or at the option of the Company be liable to be redeemed on such terms and in such manner as the directors before or at the time of the issue of such shares may determine. |
|
| 2.3 |
The Company may issue bonus shares, partly paid shares and nil paid shares. |
|
| 2.4 |
The directors may redeem any share issued by the Company at a premium. |
|
| 2.5 |
Except as required by the Act, and notwithstanding that a share certificate may refer to a member holding shares "as trustee" or similar expression, no person shall be recognised by the Company as holding any share upon any trust, and the Company shall not be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share or (except as provided by these Articles or by the Act) any other rights in respect of any share except any absolute right to the entirety thereof by the registered holder. |
|
B-10
| 3 |
Forfeiture of Shares |
|
| 3.1 |
The Company may, at any time after the due date for payment, serve on a member who has not paid in full for shares registered in the name of that member, a written notice of call ("Notice of Call") specifying a date for payment to be made. The Notice of Call shall name a further date not earlier than the expiration of 14 days from the date of service of the Notice of Call on or before which the payment required by the Notice of Call is to be made and shall contain a statement that in the event of non-payment at or before the time named in the Notice of Call the shares, or any of them, in respect of which payment is not made will be liable to be forfeited. |
|
| 3.2 |
Where a written Notice of Call has been issued under the foregoing Article and the requirements of the Notice of Call have not been complied with, the directors may, at any time before tender of payment, forfeit and cancel the shares to which the Notice of Call relates. The Company is under no obligation to refund any moneys to the member whose shares have been cancelled pursuant to this Article and that member shall be discharged from any further obligation to the Company. |
|
| 4 |
Transfer of Shares |
|
| 4.1 |
Registered shares in the Company shall be transferred by a written instrument of transfer signed by the transferor and containing the name and address of the transferee. The instrument of transfer shall also be signed by the transferee if registration as a holder of the shares imposes a liability to the Company on the transferee. The instrument of transfer of a registered share shall be sent to the Company for registration. |
|
| 4.2 |
Subject to the Memorandum, these Articles and to section 54(5) of the Act, the Company shall, on receipt of an instrument of transfer, enter the name of the transferee of the share in the Company's register of members unless the directors resolve to refuse or delay the registration of the transfer for reasons that shall be specified in the resolution. Where the directors pass such a resolution, the Company shall send to the transferor and the transferee a notice of the refusal or delay. Notwithstanding anything contained in the Memorandum or Articles, the directors shall not decline to register any transfer of shares, nor may they suspend registration thereof where such transfer is: |
|
| (a) |
to any mortgagee or chargee whose interest has been noted on the Company's register of members; |
|
| (b) |
by any such mortgagee or chargee, pursuant to the power of sale under its security; or |
|
| (c) |
by any such mortgagee or chargee in accordance with the terms of the relevant security document. |
|
| 4.3 |
The transfer of a registered share is effective when the name of the transferee is entered in the Company's register of members |
|
| 4.4 |
In all offerings of securities pursuant to Regulation S of the Securities Act, the Company shall require that its share transfer agent (to the extent that the Company has appointed a share transfer agent) refuse to register any transfer of securities not made in accordance with the provisions of Regulation S of the Securities Act, pursuant to registration under the Securities Act or an available exemption thereunder. |
|
B-11
| 5 |
Mortgages of Shares and Charges over Shares |
|
| 5.1 |
Members may mortgage or create a charge or other form of security over their shares. |
|
| 5.2 |
The directors shall, at the written request of a member who has mortgaged or created a charge over his shares, enter in the Company's register of members: |
|
| (a) |
a statement that such shares are mortgaged or charged; |
|
| (b) |
the name of the mortgagee or chargee (where such information has been stated by the member); and |
|
| (c) |
the date on which the statement and name are entered in the Company's register of members. |
|
| 6 |
Transmission of Shares |
|
| 6.1 |
Subject to sections 52(2) and 53 of the Act, the executor or administrator of a deceased member, the guardian of an incompetent member or the trustee of a bankrupt member shall be the only person recognised by the Company as having any title to his share, save that and only in the event of death, incompetence or bankruptcy of any member or members as a consequence of which the Company no longer has any directors or members, then upon the production of any documentation which is reasonable evidence of the applicant being entitled to: |
|
| (a) |
a grant of probate of the deceased's will, or grant of letters of administration of the deceased's estate, or confirmation of the appointment as executor or administrator (as the case may be, or analogous position in the relevant jurisdiction), of a deceased member's estate; |
|
| (b) |
the appointment of a guardian (or analogous position in the relevant jurisdiction) of an incompetent member; |
|
| (c) |
the appointment as trustee (or analogous position in the relevant jurisdiction) of a bankrupt member; or |
|
| (d) |
upon production of any other reasonable evidence of the applicant's beneficial ownership of, or entitlement to the shares, |
|
|
to the Company's registered agent in the British Virgin Islands together with (if so requested by the registered agent) a notarised copy of the share certificate(s) of the deceased, incompetent or bankrupt member, an indemnity in favour of the registered agent and/or appropriate legal advice in respect of any document issued by a foreign court, then the administrator, executor, guardian or trustee in bankruptcy (as the case may be) notwithstanding that their name has not been entered in the Company's register of members, may by written resolution of the applicant, endorsed with written approval by the registered agent, be appointed a director and/or entered in the Company's register of members as the legal and/or beneficial owner of the shares. |
||
B-12
| 6.2 |
Without limiting the foregoing, the production to the Company of any document which is reasonable evidence of: |
|
| (a) |
a grant of probate of the will, or grant of letters of administration of the estate, or confirmation of the appointment as executor (or analogous position in the relevant jurisdiction), of a deceased member; |
|
| (b) |
the appointment of a guardian (or analogous position in the relevant jurisdiction) of an incompetent member; |
|
| (c) |
the trustee (or analogous position in the relevant jurisdiction) of a bankrupt member; or |
|
| (d) |
the applicant's legal and/or beneficial ownership of the shares, |
|
|
shall be accepted by the Company even if the deceased, incompetent member or bankrupt member is resident and/or domiciled outside the British Virgin Islands if the document is issued by a foreign court which had competent jurisdiction in the matter. For the purposes of establishing whether or not a foreign court had competent jurisdiction in such a matter the directors may obtain appropriate legal advice. The directors may also require an indemnity to be given by the executor, administrator, guardian, trustee in bankruptcy or the applicant. |
||
| 6.3 |
Any person becoming entitled by operation of law or otherwise to a share or shares in consequence of the death, incompetence or bankruptcy of any member may be registered as a member upon such evidence being produced as may reasonably be required by the directors. An application by any such person to be registered as a member shall for all purposes be deemed to be a transfer of shares of the deceased, incompetent or bankrupt member and the directors shall treat it as such. |
|
| 6.4 |
Any person who has become entitled to a share or shares in consequence of the death, incompetence or bankruptcy of any member may, instead of being registered himself, request in writing that some person to be named by him be registered as the transferee of such share or shares and such request shall likewise be treated as if it were a transfer. |
|
| 6.5 |
What amounts to incompetence on the part of a person is a matter to be determined by the court having regard to all the relevant evidence and the circumstances of the case. |
|
B-13
| 7 |
Acquisition of Own Shares |
|
| 7.1 |
The directors may, on behalf of the Company, subject to the written consent of all the members whose shares are to be purchased, redeemed or otherwise acquired, purchase, redeem or otherwise acquire any of the Company's own shares for such consideration as the directors consider fit, and either cancel or hold such shares as treasury shares. Shares may be purchased or otherwise acquired in exchange for newly issued shares in the Company. |
|
| 7.2 |
The directors shall not, unless permitted pursuant to the Act, purchase, redeem or otherwise acquire any of the Company's own shares unless immediately after such purchase, redemption or other acquisition: |
|
| (a) |
the value of the Company's assets exceeds its liabilities; and |
|
| (b) |
the Company is able to pay its debts as they fall due. |
|
| 7.3 |
Sections 60 and 61 of the Act shall not apply to the Company. |
|
| 8 |
Treasury Shares |
|
| 8.1 |
Shares may only be held as treasury shares by the Company to the extent that the number of treasury shares does not exceed 50% of the shares of that class previously issued by the Company, excluding shares that have been cancelled. |
|
| 8.2 |
The directors may dispose of any shares held as treasury shares on such terms and conditions as they may from time to time determine. |
|
| 9 |
Notice of Meetings of Members |
|
| 9.1 |
The directors may convene meetings of the members at such times and in such manner and places (within or outside the British Virgin Islands) as the directors consider necessary or desirable, and they shall convene such a meeting upon the written request of members entitled to exercise at least ten (10) percent of the voting rights in respect of the matter for which the meeting is requested. |
|
| 9.2 |
With respect to determining the record date (the "Record Date") for the purpose of determining the persons entitled to notice of or to vote at a meeting of members, the Record Date: |
|
| (a) |
may be fixed by the directors in advance as a date not less than ten (10) days nor more than sixty (60) days prior to such meeting; or |
|
| (b) |
in the absence of any action by the directors, the date upon which the notice of the meeting is given shall be the Record Date. |
|
B-14
|
Section 83(2) of the Act shall not apply to the Company. |
||
| 9.3 |
Not less than ten (10) days' notice (nor more than sixty (60) days' notice) specifying at least the place, the day and the hour of the meeting and general nature of the business to be conducted shall be given in the manner hereinafter mentioned to such persons whose names on the Record Date appear as members in the Company's register of members and are entitled to vote at the meeting or to receive notice of the meeting. |
|
| 9.4 |
The inadvertent failure of the directors to give notice of a meeting to a member or the fact that a member has not received a notice that has been properly given, shall not invalidate the meeting. |
|
| 10 |
Proceedings at Meetings of Members |
|
| 10.1 |
No business shall be transacted at any meeting of members unless a quorum of members is present at the time when the meeting proceeds to business. A quorum shall consist of the holder or holders present in person or by proxy entitled to exercise at least a majority of the voting rights of the shares of each class or series of shares entitled to vote as a class or series thereon and the same proportion of the votes of the remaining shares entitled to vote thereon. For the avoidance of doubt, the members present at a duly convened meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough members to leave less than a quorum. |
|
| 10.2 |
A member shall be deemed to be present at a meeting of members if: |
|
| (a) |
he or his proxy participates by telephone or other electronic means; and |
|
| (b) |
all members and proxies participating in the meeting are able to hear each other. |
|
| 10.3 |
If, within half an hour from the time appointed for the meeting, a quorum is not present, the meeting shall be: |
|
| (a) |
dissolved; or |
|
| (b) |
those members present and entitled to vote (in person or by proxy) may resolve to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. If the adjournment is for more than 30 days, or if after adjournment a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to the persons who appear as members in the Company's register of members on the Record Date and are entitled to notice of or to vote at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. |
|
| 10.4 |
A member may attend a meeting of members personally or be represented by a proxy who may speak and vote on behalf of the member. |
|
B-15
| 10.5 |
The instrument appointing a proxy shall be produced at the place appointed for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote. An instrument appointing a proxy shall be in such form as the Chairman of the meeting shall accept as properly evidencing the wishes of the member appointing the proxy, but must be in writing under the hand of the appointer unless the appointer is a corporation or other form of legal entity (other than one or more individuals holding as joint owner) in which case the instrument appointing a proxy shall be in writing under the hand of an individual duly authorised by such corporation or legal entity to execute the same. |
|
| 10.6 |
At every meeting the members present shall choose someone of their number to be the chairman (the "Chairman"). If the members are unable to choose a Chairman for any reason, then the person representing the greatest number of voting shares present at the meeting shall preside as Chairman. |
|
| 10.7 |
The Chairman may, with the consent of the meeting, adjourn any meeting from time to time, and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. |
|
| 10.8 |
At any meeting a resolution put to the vote of the meeting shall be decided on a voice vote or show of hands by the holders of a majority of in excess of fifty (50) percent of the votes of those members (or their duly appointed proxies) entitled to vote and voting on the resolution, unless a poll is (before or on the declaration of the result of the voice vote or show of hands) demanded: |
|
| (a) |
by the Chairman; or |
|
| (b) |
by any member present in person or by proxy and holding not less than one tenth of the total voting shares issued and having the right to vote on such resolution. |
|
| 10.9 |
Unless a poll be so demanded, a declaration by the Chairman that a resolution has, on voice vote or a show of hands been carried, and an entry to that effect in the book containing the minutes of the proceedings of the Company, shall be sufficient evidence of the fact, without proof of the number or proportion of the votes recorded in favour of or against such resolution. |
|
| 10.10 |
If a poll is duly demanded it shall be taken in such manner as the Chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand for a poll may be withdrawn, at the discretion of the Chairman. |
|
| 10.11 |
On a poll, every holder of a voting share present in person or by proxy shall have one vote for every voting share of which he is the holder which confers the right to a vote on the resolution. |
|
| 10.12 |
In the case of an equality of votes, whether on a voice vote or show of hands or on a poll, the Chairman of the meeting at which the voice vote or show of hands takes place, or at which the poll is demanded, shall not be entitled to a second or casting vote. |
|
| 10.13 |
Subject to the Memorandum or these Articles, an action that may be taken by members at a meeting of members may also be taken by Written Resolution. |
|
B-16
| 10.14 |
If a committee is appointed for any member who is of unsound mind, that member may vote by such committee. |
|
| 10.15 |
The register of members (or a copy of the register of members) shall be kept on file at the registered office of the Company for a period of ten days prior to any meeting of the members and shall be subject to inspection by any member at any time during usual business hours. The register of members (or a copy of the register of members) shall be produced and kept open at the time and place of the meeting during the whole time thereof, and shall be subject to the inspection of any member who may be present. |
|
| 11 |
Annual Meeting of Members |
|
|
An annual meeting of the members shall be held during each calendar year. The notice convening the meeting shall specify that it is the annual meeting of the members. |
||
| 12 |
Jointly Held Shares |
|
| 12.1 |
Where shares are registered in the names of joint owners: |
|
| (a) |
each registered owner may be present in person or by proxy at a meeting of members and may speak as a member; |
|
| (b) |
if only one of them is present in person or by proxy, he may vote on behalf of all of them; and |
|
| (c) |
if two or more are present in person or by proxy, they must vote as one. If more than one joint owner votes in person or by proxy at any meeting of members or by Written Resolution, the vote of the joint owner whose name appears first among such voting joint holders in the Company's register of members shall alone be counted. |
|
| 13 |
Corporations Acting by Representatives at Meetings |
|
|
Any corporation or other form of corporate legal entity which is a member may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the members or any class of members, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were an individual member. |
||
| 14 |
Appointment, Removal, Number and Remuneration of Directors |
|
| 14.1 |
The first registered agent of the Company shall appoint one or more persons as the first director or directors of the Company. At the first meeting of the directors or on the first occasion on which the first director or directors approve a Written Resolution of the directors (provided this is not after the first meeting of the directors) the directors may by Resolution of Directors elect any number of additional directors as it or they may determine up to the maximum number of directors (if any) set pursuant to Article 14.11. Thereafter, the directors shall be elected in accordance with Articles 14.2 to 14.3. |
|
B-17
| 14.2 |
Only persons who are proposed or nominated in accordance with this Article shall be eligible for election as directors. Any member or the Board may propose any person for election as a director. Where any person, other than a director retiring at the meeting or a person proposed for re-election or election as a director by the Board, is to be proposed for election as a director, notice must be given to the Company of the intention to propose him and of his willingness to serve as a director. Such notice must be given not later than 10 days following the earlier of the date on which notice of the general meeting was posted to the Members or the date on which public disclosure of the date of the next general meeting was made. |
|
| 14.3 |
Where the number of persons validly proposed for re-election or election as a director is greater than the number of directors to be elected, the persons receiving the most votes (up to the number of directors to be elected) shall be elected as directors, and an absolute majority of the votes cast shall not be a prerequisite to the election of such directors. |
|
| 14.4 |
Notwithstanding the requirements of Articles 14.2 and 14.3, the directors may by Resolution of Directors appoint any person as a director of the Company: |
|
| (a) |
to fill a vacancy arising by reason of the matters referred to at 14.5(a) to (d) below; or |
|
| (b) |
as an additional director of the Company (provided that the number of directors shall not exceed the maximum number of directors (if any) that is permitted by any Resolution of Directors from time to time passed pursuant to Article 14.11 and for the avoidance of doubt this Article 14.4(b) shall not restrict the directors from passing a new Resolution of Directors pursuant to Article 14.11 increasing the maximum number of directors), |
|
|
provided always that the term of office of any such director shall be until the following next annual meeting of the members (at which meeting, for the avoidance of doubt, any such director shall be eligible to be reappointed by the members) unless otherwise agreed by Resolution of Members. |
||
| 14.5 |
Each director shall hold office until the earlier of: |
|
| (a) |
his disqualification to act as a director under section 111 of the Act (on which his office as director shall be automatically terminated if he has not resigned in accordance with section 115(2) of the Act); |
|
| (b) |
his death; |
|
| (c) |
his resignation; |
|
| (d) |
the effective date of his removal by Resolution of Directors or Resolution of Members; or |
|
B-18
| (e) |
the termination of the next annual meeting of the members following the appointment of the directors unless: |
||
| (i) |
otherwise agreed under the terms upon which the director was appointed; or |
||
| (ii) |
the director is re-elected at the aforementioned annual meeting of the members (and for the avoidance of doubt, the directors shall be eligible for re-election at each such general meeting). |
||
| 14.6 |
Any director which is a body corporate may appoint any person its duly authorised representative for the purpose of representing it at meetings of the Board or with respect to unanimous written consents. |
||
| 14.7 |
A person shall not be appointed as a director unless he has consented in writing to be a director. |
||
| 14.8 |
The following are disqualified for appointment as a director: |
||
| (a) |
an individual who is under 18 years of age; |
||
| (b) |
a person who is a disqualified person within the meaning of section 260(4) of the Insolvency Act, 2003; |
||
| (c) |
a person who is a restricted person within the meaning of section 409 of the Insolvency Act, 2003; and |
||
| (d) |
an undischarged bankrupt. |
||
| 14.9 |
A director shall not require a share qualification, but nevertheless shall be entitled to attend and speak at any meeting of the directors and meeting of the members and at any separate meeting of the holders of any class of shares in the Company. |
||
| 14.10 |
The directors may be removed by Resolution of Directors or Resolution of Members and Sections 114(2) and 114(3) of the Act shall not apply to the Company. |
||
| 14.11 |
Subject to the requirement that the number of directors shall not be less than one, the directors may by Resolution of Directors from time to time determine the maximum number of directors. No decrease in the number of directors which the Company is authorised (by Resolution of Directors) to have from time to time shall have the effect of shortening the term of any incumbent director. |
||
| 14.12 |
The remuneration of directors (whether by way of salary, commission, participation in profits or otherwise) in respect of services rendered or to be rendered in any capacity to the Company (including to any company in which the Company may be interested) shall be fixed by Resolution of Directors or Resolution of Members. The directors may also be paid such travelling, hotel and other expenses properly incurred by them in attending and returning from meetings of the directors, or any committee of the directors or meetings of the members, or in connection with the business of the Company as shall be approved by Resolution of Directors or Resolution of Members. |
||
B-19
| 15 |
Alternate and Reserve Directors |
||
| 15.1 |
A director, by written instrument deposited at the registered office, may from time to time appoint another director or another person to be his alternate. Every such alternate shall be entitled to be given notice of meetings and Written Resolutions of the directors and to attend and vote as a director at any such meeting at which the director appointing him is not personally present and generally at such meeting to have and exercise all the powers, rights, duties and authorities of the director appointing him, and to sign as a director any Written Resolution which is not signed by the director appointing him. Every such alternate shall be deemed to be an officer of the Company and shall not be deemed to be an agent of the director appointing him. Unless stated otherwise in the notice of the appointment of the alternate, if undue delay or difficulty would be occasioned by giving notice to a director of a resolution of which his approval is sought in accordance with these Articles his alternate (if any) shall be entitled to signify approval of the same on behalf of that director. The remuneration of an alternate shall be payable out of the remuneration payable to the director appointing him, as agreed between such alternate and the director appointing him. A director, by writing under his hand deposited at the registered office, may at any time vary or revoke the appointment of an alternate appointed by him. If a director shall die or cease to hold the office of director, the appointment of his alternate shall thereupon cease and terminate. |
||
| 15.2 |
Where the Company has only one member with voting rights who is an individual and that member is also the sole director (the "sole member/director"), that sole member/director may, by instrument in writing, nominate a person who is not disqualified from being a director under section 111(1) of the Act as a reserve director of the Company to act in the place of the sole director in the event of his death. A person shall not be nominated as a reserve director unless he has consented in writing to be nominated as a reserve director. The nomination of a person as a reserve director of the Company ceases to have effect if: |
||
| (a) |
before the death of the sole member/director who nominated him: |
||
| (i) |
he resigns as reserve director; or |
||
| (ii) |
the sole member/director revokes the nomination in writing; or |
||
| (b) |
the sole member/director who nominated him ceases to be the sole member/director for any reason other than his death. |
||
| 16 |
Duties of Directors and Conflicts of Interests |
||
| 16.1 |
A director, in exercising his powers or performing his duties, shall act honestly and in good faith and in what the director believes to be in the best interests of the Company. |
||
B-20
| 16.2 |
Notwithstanding the foregoing Article, if the Company is a wholly-owned subsidiary, a director may, when exercising powers or performing duties as a director, act in a manner which he believes is in the best interests of that Company’s holding company (as defined in the Act) even though it may not be in the best interests of the Company. |
|
| 16.3 |
A director shall exercise his powers as a director for a proper purpose and shall not act, or agree to the Company acting, in a manner that contravenes the Act or the Memorandum or Articles. |
|
| 16.4 |
A director, when exercising powers or performing duties as a director, shall exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation: |
|
| (a) |
the nature of the Company; |
|
| (b) |
the nature of the decision; and |
|
| (c) |
the position of the director and the nature of the responsibilities undertaken by him. |
|
| 16.5 |
A director, when exercising his powers or performing his duties as a director, is entitled to rely upon the register of members and upon books, records, financial statements and other information prepared or supplied, and on professional or expert advice given, by: |
|
| (a) |
an employee of the Company whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned; |
|
| (b) |
a professional adviser or expert in relation to matters which the director believes on reasonable grounds to be within the person’s professional or expert competence; and |
|
| (c) |
any other director, or committee of directors upon which the director did not serve, in relation to matters within the director’s or committee’s designated authority, |
|
|
provided that the director: (i) acts in good faith; (ii) makes proper inquiry where the need for the inquiry is indicated by the circumstances; and (iii) has no knowledge that his reliance on the register of members or the books, records, financial statements and other information or expert advice is not warranted. |
||
| 16.6 |
A director may hold any other office or position of profit under the Company (except that of auditor) in conjunction with his office of director, and may act in a professional capacity to the Company on such terms as to remuneration and otherwise as the directors shall approve. |
|
B-21
| 16.7 |
A director may be or become a director or officer of, or otherwise be interested in any company promoted by the Company, or in which the Company may be interested, as a member or otherwise and no such director shall be accountable for any remuneration or other benefits received by him as director or officer or from his interest in such other company. The directors may also exercise the voting powers conferred by the shares in any other company held or owned by the Company in such manner in all respects as they think fit, including the exercise thereof in favour of any resolutions appointing them, or of their number, directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company. A director may vote in favour of the exercise of such voting rights in the manner aforesaid notwithstanding that he may be, or be about to become, a director or officer of such other company, and as such in any other manner is, or may be, interested in the exercise of such voting rights in the manner aforesaid. |
||
| 16.8 |
No director shall be disqualified by his office from contracting with the Company either as a buyer, seller or otherwise, nor shall any such contract or arrangement entered into by or on behalf of the Company in which any director shall be in any way interested be voided, nor shall any director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement, by reason of such director holding that office or by reason of the fiduciary relationship thereby established, provided such director shall, immediately after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose such interest to the board. For the purposes of this Article: |
||
| (a) |
a director is not required to make such a disclosure if: |
||
| (i) |
the transaction or proposed transaction is between the director and the Company; and |
||
| (ii) |
the transaction or proposed transaction is or is to be entered into in the ordinary course of the Company's business and on usual terms and conditions; |
||
| (b) |
a disclosure to the board to the effect that a director is a member, director, officer or trustee of another named company or other person and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure, be entered into with that company or person, is a sufficient disclosure of interest in relation to that transaction. Such a disclosure is not made to the board unless it is made or brought to the attention of every director on the board; and |
||
| (c) |
subject to section 125(1) of the Act, the failure by a director to comply with this Article does not affect the validity of a transaction entered into by the director or the Company. |
||
| 16.9 |
A director who is interested in a transaction entered into or to be entered into by the Company may: |
||
| (a) |
vote on a matter relating to the transaction; |
||
| (b) |
attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and |
||
| (c) |
sign a document on behalf of the Company, or do any other thing in his capacity as a director, that relates to the transaction. |
||
B-22
| 17 |
Powers of Directors |
|
| 17.1 |
The business of the Company shall be managed by the directors who may pay all expenses incurred preliminary to and in connection with the formation and registration of the Company, and may exercise all such powers of the Company necessary for managing and for directing and supervising, the business and affairs of the Company as are not by the Act or by the Memorandum or these Articles required to be exercised by the members, subject to any delegation of such powers as may be authorised by these Articles and permitted by the Act and to such requirements as may be prescribed by Resolution of Members, but no requirement made by Resolution of Members shall prevail if it be inconsistent with these Articles nor shall such requirement invalidate any prior act of the directors which would have been valid if such requirement had not been made. |
|
| 17.2 |
If the number of directors shall have been fixed at two or more persons and by reason of vacancies having occurred in the board there shall be only one continuing director, he shall be authorised to act alone only for the purpose of appointing another director. |
|
| 17.3 |
Section 175 of the Act shall not apply to the Company. However, any sale, transfer, lease exchange or other disposition, other than a mortgage, charge or other encumbrance or the enforcement thereof, of all or substantially all of the assets of the company (other than a transfer pursuant to a power of the kind described in section 28(3) of the Act), if not made in the usual or regular course of the business carried on by the Company, shall require approval by Resolution of Members. |
|
| 18 |
Delegation by the Board to Directors, Committees, Officers, Attorneys and Agents |
|
| 18.1 |
The board may entrust to and confer upon any director or officer any of the powers exercisable by it upon such terms and conditions and with such restrictions as it thinks fit, and either collaterally with, or to the exclusion of, its own powers, and may from time to time revoke, withdraw, alter or vary all or any of such powers. Subject to the provisions of section 110 of the Act, the directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit. Any committees so formed shall in the exercise of powers so delegated conform to any regulations that may be imposed on it by the directors or the provisions of the Act. |
|
| 18.2 |
The directors have no power to delegate the following powers to a committee of directors: |
|
| (a) |
to amend the Memorandum or Articles; |
|
| (b) |
to designate committees of directors; |
|
| (c) |
to delegate powers to a committee of directors; (This and the preceding sub-Article do not prevent a committee of directors, where authorised by the directors, from appointing a sub- committee and delegating powers exercisable by the committee to the sub-committee); |
|
| (d) |
to appoint or remove directors; |
|
B-23
| (e) |
to appoint or remove an agent; |
|
| (f) |
to approve a plan or merger, consolidation or arrangement; |
|
| (g) |
to make a declaration of solvency for the purposes of section 198(1)(a) of the Act or approve a liquidation plan; or |
|
| (h) |
to make a determination under section 57(1) of the Act that the Company will, immediately after a proposed distribution, satisfy the solvency test. |
|
| 18.3 |
Where the directors delegate their powers to a committee of directors, they remain responsible for the exercise of that power by the committee, unless they believed on reasonable grounds that at all times before the exercise of the power that the committee would exercise the power in conformity with the duties imposed on directors by the Act. |
|
| 18.4 |
The directors may, by Resolution of Directors, appoint officers of the Company at the first meeting of directors after each annual meeting of members, and at such times as shall be considered necessary or expedient. The officers shall perform such duties as shall be prescribed at the time of their appointment subject to any modifications in such duties as may be prescribed by the directors thereafter. |
|
| 18.5 |
Any person may hold more than one office and no officer need be a director or member. The officers shall remain in office until removed from office by the directors, whether or not a successor is appointed. |
|
| 18.6 |
Any officer who is a body corporate may appoint any person as its duly authorised representative for the purpose of representing it and of transacting any of the business of the officers. |
|
| 18.7 |
The directors may from time to time by power of attorney appoint any company, firm or person or body of persons to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under these Articles) and for such period and subject to such conditions as the directors think fit. |
|
| 18.8 |
The directors may appoint any person, including a person who is a director, to be an agent of the Company. An agent of the Company has such powers and authority of the directors, including the power and authority to affix the common seal of the Company, as are set forth in the Resolution of Directors appointing the agent, except that no agent has any power or authority with respect to the following: |
|
| (a) |
to amend the Memorandum or Articles; |
|
| (b) |
to change the registered office or registered agent; |
|
| (c) |
to designate committees of directors; |
|
B-24
| (d) |
to delegate powers to a committee of directors; |
|
| (e) |
to appoint or remove directors; |
|
| (f) |
to appoint or remove an agent; |
|
| (g) |
to fix emoluments of directors; |
|
| (h) |
to approve a plan of merger, consolidation or arrangement; |
|
| (i) |
to make a declaration of solvency for the purposes of section 198(1)(a) of the Act or to approve a liquidation plan; |
|
| (j) |
to make a determination under section 57(1) of the Act that the Company will, immediately after a proposed distribution, satisfy the solvency test as stipulated in section 56 of the Act; or |
|
| (k) |
to authorise the Company to continue as a company incorporated under the laws of a jurisdiction outside the British Virgin Islands. |
|
| 18.9 |
Where the directors appoint any person to be an agent of the Company, they may authorise the agent to appoint one or more substitutes or delegates to exercise some or all of the powers conferred on the agent by the Company. |
|
| 18.10 |
The directors may at any time remove an agent and may revoke or vary a power conferred on him. |
|
| 19 |
Proceedings of Directors |
|
| 19.1 |
The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings as they think fit. The meetings of the board and any committee thereof shall be held at such place or places (within or outside the British Virgin Islands) as the directors shall decide. |
|
| 19.2 |
The directors may resolve to hold regular meetings at fixed times and locations (as such times and locations are determined by the directors) and subject to the directors so resolving to hold regular meetings as aforesaid, no further notice of such regular meetings must be given to the directors. |
|
| 19.3 |
Meetings of the directors may also be convened at any time by the Chairman of the Board or the director who is designated as the "Chief Executive Officer" (if any) or by the director who is designated as "President" (if any) on oral or written notice to each other director, given either personally, by telephone, by telegram or by mail, given at least forty-eight hours prior to the time of the meeting. Any such meeting of the directors shall be called by the Chief Executive Officer (if any), President (if any) or the Secretary (if any) in like manner and on like notice on the written request of at least two directors. Except as may be otherwise expressly provided by law, the Memorandum or these Articles, neither the business to be transacted at, nor the purpose of, any meeting of the directors needs to be specified in a notice or waiver of notice. |
|
B-25
| 19.4 |
The inadvertent failure to give notice of a meeting to a director, or the fact that a director has not received the notice, shall not invalidate the meeting. |
|
| 19.5 |
Any director who is a body corporate may appoint any person its duly authorised representative for the purpose of representing it at meetings of the directors and of transacting any of the business of the directors. |
|
| 19.6 |
A meeting of the directors is duly constituted for all purposes if at the commencement of the meeting there are present in person or by alternate not less than a majority of the total number of directors. |
|
| 19.7 |
If within half an hour from the time appointed for the meeting a quorum is not present, the meeting shall be dissolved. |
|
| 19.8 |
A director shall be deemed to be present at a meeting of the board if: |
|
| (a) |
he or his alternate participates by telephone or other electronic means; and |
|
| (b) |
all directors and alternates participating in the meeting are able to hear each other. |
|
| 19.9 |
The directors may elect a chairman (the "Chairman of the Board") of their meeting and determine the period for which he is to hold office. If no such Chairman of the Board is elected, or if at any meeting the Chairman of the Board is not present at the time appointed for holding the meeting, the directors present may choose one of their number to be Chairman of the Board for the meeting. If the directors are unable to choose a Chairman of the Board, for any reason, then the longest serving director present at the meeting shall preside as the Chairman of the Board. |
|
| 19.10 |
Questions arising at any meeting of directors shall be decided by a majority of votes. In case of an equality in votes the Chairman of the Board shall have a second or casting vote. |
|
| 19.11 |
A resolution approved by a majority of the directors for the time being entitled to receive notice of a meeting of the directors or of a committee of the directors and taking the form of a Written Resolution shall be as valid and effectual as if it had been passed at a meeting of the directors or of such committee duly convened and held, without the need for any notice. |
|
| 19.12 |
If the Company shall have only one director, the foregoing provisions for meetings of the directors shall not apply but such sole director shall have full power to represent and act for the Company in all matters and in lieu of minutes of a meeting shall record in writing and sign a note of memorandum of all matters requiring a Resolution of Directors. Such note or memorandum shall constitute sufficient evidence of such resolution for all purposes. |
|
B-26
| 19.13 |
Notwithstanding any other requirement of the Memorandum or Articles, immediately following each annual meeting of the members, there shall be held at the same place as the annual meeting of the members as aforesaid, a meeting of the directors (and there shall be no requirement for any further notice of that meeting of the directors to be provided to the directors). The requirement under this Article 19.13 may only be disapplied where the directors (being the directors in office immediately after the annual meeting of the members as aforesaid) unanimously resolve to change such time or place of such meeting of the directors. |
| 20 |
Indemnification and Insurance |
| 20.1 |
Subject to the provisions of the Act, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Company (which for the avoidance of doubt, shall not include auditors of the Company), or who is or was serving at the request of the Company as a director or officer of another company, partnership, joint venture, trust or other enterprise (each an "Indemnified Person") shall be indemnified out of the assets of the Company against any liability, action, proceeding, claim, demand, judgments, fines, costs, damages or expenses, including legal expenses, whatsoever which they or any of them may reasonably incur as a result of any act or failure to act in carrying out their functions other than such liability (if any) that they may incur by reason of their own actual fraud or wilful default. No Indemnified Person shall be liable to the Company for any loss or damage incurred by the Company as a result (whether direct or indirect) of the carrying out of their functions unless that liability arises through the actual fraud or wilful default of such Indemnified Person. No person shall be found to have committed actual fraud or wilful default under this Article unless or until a court of competent jurisdiction shall have made a finding to that effect. |
| 20.2 |
The Company shall advance to each Indemnified Person reasonable attorneys' fees and other costs and expenses incurred in connection with the defence of any action, suit, proceeding or investigation involving such Indemnified Person for which indemnity will or could be sought. In connection with any advance of any expenses hereunder, the Indemnified Person shall execute an undertaking to repay the advanced amount to the Company if it shall be determined by final judgment or other final adjudication that such Indemnified Person was not entitled to indemnification pursuant to this Article. If it shall be determined by a final judgment or other final adjudication that such Indemnified Person was not entitled to indemnification with respect to such judgment, costs or expenses, then such party shall not be indemnified with respect to such judgment, costs or expenses and any advancement shall be returned to the Company (without interest) by the Indemnified Person. |
| 20.3 |
No Indemnified Person shall be personally liable to the Company for damages for any breach of fiduciary duty as a director or officer; provided, however, that the foregoing provision shall not eliminate or limit the liability of a director or officer for: |
|
(a) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, |
B-27
| (b) |
for the violation of any provision of the Act, as amended from time to time, that expressly provides for liability of directors or officers notwithstanding any provision herein to the contrary. |
|
|
For the avoidance of doubt, any amendment (including any deletion) of this Article 20.3 by the members of the Company shall be prospective only, and shall not adversely affect any limitation of the personal liability of an Indemnified Person for acts or omissions prior to such amendment (or deletion). |
||
| 20.4 |
The directors, on behalf of the Company, may purchase and maintain insurance for the benefit of any director or other officer of the Company against any liability which, by virtue of any rule of law, would otherwise attach to such person in respect of any negligence, default, breach of duty or breach of trust of which such person may be guilty in relation to the Company. |
|
| 21 |
Company Seal and Entry into Contracts and Deeds |
|
| 21.1 |
The directors shall provide for the safe custody of the common seal of the Company. The common seal when affixed to any instrument (save for a share certificate in accordance with these Articles) shall be witnessed by a director or officer of the Company or any other person so authorised from time to time by the directors. |
|
| 21.2 |
A contract may be entered into by the Company as follows: |
|
| (a) |
a contract that, if entered into by an individual, would be required by law to be in writing and under seal, may be entered into by or on behalf of the Company in writing under the common seal of the Company, or executed by or on behalf of the Company by a director or an authorised agent of the Company, and may be varied or discharged in the same manner; |
|
| (b) |
a contract that, if entered into by an individual, would be required by law to be in writing and signed, may be entered into by or on behalf of the Company in writing and signed by a person acting under the express or implied authority of the company, and may be varied or discharged in the same manner; and |
|
| (c) |
a contract that, if entered into by an individual, would be valid although entered into orally, and not reduced to writing, may be entered into orally by or on behalf of the Company by a person acting under the express or implied authority of the Company, and may be varied or discharged in the same manner. |
|
| 21.3 |
Notwithstanding the foregoing Article, an instrument is validly executed by the Company as a deed, or an instrument under seal, if it is either: |
|
| (a) |
sealed with the common seal of the Company and witnessed by a director and/or such other person who is authorised by the Memorandum or Articles to witness the application of the common seal of the Company; or |
|
| (b) |
expressed to be, or is expressed to be executed as, or otherwise makes clear on its face that it is intended to be, a deed and it is signed by a director and/or by a person acting under the express or implied authority of the Company. |
|
B-28
| 22 |
Distributions |
|
| 22.1 |
Subject to the provisions of the Act, the directors may, by Resolution of Directors, authorise a distribution by the Company at a time, and of an amount, and to any members they think fit if they are satisfied, on reasonable grounds that, immediately after the distribution, the value of the Company's assets will exceed the Company's liabilities and the Company is able to pay its debts as they fall due. |
|
| 22.2 |
No distribution shall be paid on those shares which are held by the Company as treasury shares at the date of declaration of the distribution. |
|
| 22.3 |
The directors may, before recommending any distribution, set aside out of the profits of the Company such sums as they think proper as a reserve or reserves which shall, at their discretion, either be employed in the business of the Company or be invested in such investments as the directors may from time to time think fit. |
|
| 22.4 |
If several persons are registered as joint holders of any share, any of them may give effectual receipt for any distribution or other monies payable on or in respect of the share. |
|
| 22.5 |
Notice of any distribution that may have been declared shall be given to each member in manner hereinafter mentioned and all distributions unclaimed for three years after having been declared may be forfeited by the directors for the benefit of the Company. |
|
| 22.6 |
No distribution shall bear interest against the Company. |
|
| 23 |
Company Records |
|
| 23.1 |
The Company shall keep records that: |
|
| (a) |
are sufficient to show and explain the Company's transactions; and |
|
| (b) |
will, at any time, enable the financial position of the Company to be determined with reasonable accuracy. |
|
| 23.2 |
The Company shall keep the following records at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the directors may determine: |
|
| (a) |
minutes of all meetings and all resolutions of members and of classes of members; and |
|
| (b) |
minutes of all meetings and all resolutions of directors and committees of directors. |
|
B-29
| 23.3 |
Where any such records are kept at a place other than at the office of the Company’s registered agent, the Company shall provide the registered agent with a written record of the physical address of the place or places at which the records are kept. Where the place at which any such records is changed, the Company shall provide the registered agent with the physical address of the new location of the records within fourteen days of the change of location. |
|
| 23.4 |
The Company shall keep a register to be known as a register of directors containing the names and addresses of the persons who are directors, the date on which each person whose name is entered in the register was appointed as a director, the date on which each person named as a director ceased to be a director, and such other information as may be prescribed from time to time by law. |
|
| 23.5 |
The Company shall maintain an accurate and complete register of members showing the full names and addresses of all persons holding registered shares in the Company, the number of each class and series of registered shares held by such person, the date on which the name of each member was entered in the register of members and where applicable, the date such person ceased to hold any registered shares in the Company. |
|
| 23.6 |
The Company shall keep the following at the office of its registered agent: |
|
| (a) |
the Memorandum and Articles; |
|
| (b) |
the register of members maintained in accordance with these Articles or a copy of the register of members; |
|
| (c) |
the register of directors maintained in accordance with these Articles or a copy of the register of directors; |
|
| (d) |
copies of all notices and other documents filed by the Company in the previous ten years; |
|
| (e) |
a copy of the register of charges kept by the Company pursuant to section 162(1) of the Act; and |
|
| (f) |
an imprint of the common seal. |
|
| 23.7 |
Where the Company keeps a copy of the register of members or the register of directors at the office of its registered agent, it shall: |
|
| (a) |
within 15 days of any change in the register, notify the registered agent, in writing, of the change; and |
|
| (b) |
provide the registered agent with a written record of the physical address of the place or places at which the original register of members or the original register of directors is kept. |
|
B-30
| (c) |
Where the place at which the original register of members or the original register of directors is changed, the Company shall provide the registered agent with the physical address of the new location of the records within 14 days of the change of location. |
|
| 23.8 |
The records, documents and registers required by these Articles shall be open to the inspection of the directors at all times. |
|
| 23.9 |
The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions the records, documents and registers of the Company or any of them shall be open to the inspection of members not being directors, and no member (not being a director) shall have any right to inspect any records, documents or registers of the Company except: |
|
| (a) |
as conferred by the Act; and |
|
| (b) |
that any member who owns at least 15% of the outstanding shares of the Company, upon at least five days’ written demand, may inspect, during usual business hours, the books of account and all financial records of the Company, to make copies of records, and to conduct an audit of such records at the member’s own cost. |
|
| 24 |
Audit |
|
| 24.1 |
The directors may by a Resolution of Directors call for the accounts of the Company to be examined by an auditor or auditors to be appointed by them at such remuneration as may from time to time be agreed. |
|
| 24.2 |
The auditor may be a member but no director or officer of the Company shall be eligible during his continuance in office. |
|
| 24.3 |
Every auditor of the Company shall have a right of access at all times to the books of account of the Company, and shall be entitled to require from the officers of the Company such information and explanations as he thinks necessary for the performance of his duties. |
|
| 24.4 |
The report of the auditor shall be annexed to the accounts upon which he reports, and the auditor shall be entitled to receive notice of, and to attend, any meeting at which the Company's audited profit and loss account and/or balance sheet is to be presented. |
|
| 25 |
Notices |
|
| 25.1 |
Any notice, information or written statement required to be given to members shall be served by mail (air-mail service if available) addressed to each member at the address shown in the Company's register of members. |
|
| 25.2 |
All notices directed to be given to the members shall, with respect to any registered shares to which persons are jointly entitled, be given to whichever of such persons is named first in the Company's register of members, and notice so given shall be sufficient notice to all the holders of such shares. |
|
B-31
| 25.3 |
Any notice, if served by post, shall be deemed to have been served within ten days of posting, and in proving such service it shall be sufficient to prove that the letter containing the notice was properly addressed and mailed with the postage prepaid. |
| 26 |
Continuation |
|
The Company may, by a Resolution of Directors or by a Resolution of Members, continue as a company incorporated under the laws of a jurisdiction outside the British Virgin Islands in the manner provided under those laws. |
|
| 27 |
Winding Up |
| 27.1 |
The Company may be voluntarily liquidated under Part XII of the Act if it has no liabilities and it is able to pay its debts as they become due. A liquidator may, subject to the terms of the Act, be appointed by a Resolution of Directors or by a Resolution of Members. |
| 27.2 |
If the Company shall be wound up, the liquidator may divide amongst the members in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purpose set such value as he deems fair upon any such property to be divided as aforesaid and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may vest the whole or any part of such assets in trustees upon such trust for the benefit of the contributors as the liquidator shall think fit, but so that no member shall be compelled to accept any shares or other securities whereon there is any liability. |
We, Maples Corporate Services (BVI) Limited of Kingston Chambers, PO Box 173, Road Town, Tortola, British Virgin Islands in our capacity as registered agent for the Company hereby apply to the Registrar for the incorporation of the Company this 18th day of June 2012.
Incorporator
/s/ Richard May
Richard May
Authorised Signatory
Maples Corporate Services (BVI) Limited
B-32
Ordinary Shares
______________________
PROSPECTUS
______________________
, 2012
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
BVI law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the BVI courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Our memorandum and articles of association require indemnification of our directors, officers and liquidators against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such persons in connection with actions, suits or proceedings to which they are a party or are threatened to be made a party by reason of their acting as our directors, officers or liquidators. To be entitled to indemnification, these persons must have acted honestly, in good faith and in the best interest or not opposed to the interest of our company, and must have had no reasonable cause to believe their conduct was unlawful.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
The information required by this item is set forth on the exhibit index that follows the signature page of this registration statement.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or the notes thereto.
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
| (i) |
to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; |
| (ii) |
to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
| (iii) | to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
II-1
(4) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(5) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(7) (i) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means, and (ii) to arrange or provide for a facility in the United States for the purpose of responding to such requests. The undertaking in subparagraph (i) above includes information contained in documents filed subsequent to the effective date of this registration statement through the date of responding to the request.
(8) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Shenzhen, China, on June 21, 2012.
CHINA INFORMATION TECHNOLOGY, INC.
By: /s/ Jiang Huai Lin
Name: Jiang Huai Lin
Title:
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Jiang Huai Lin and Daniel K. Lee, and each or any of them, his or her true and lawful attorney in fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to sign any registration statement for the same offering covered by this registration statement that is to be effective on filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/Jiang Huai Lin | Chairman, Chief Executive Officer and President (Principal Executive Officer) | June 21, 2012 | ||
| Jiang Huai Lin | ||||
| /s/Daniel K. Lee | Chief Financial Officer (Principal Financial and Accounting Officer) | June 21, 2012 | ||
| Daniel K. Lee | ||||
| /s/Zhi Qiang Zhao | Director and Chief Operating Officer | June 21, 2012 | ||
| Zhi Qiang Zhao | ||||
| /s/Yun Sen Huang | Director | June 21, 2012 | ||
| Yun Sen Huang | ||||
| /s/Qiang Lin | Director | June 21, 2012 | ||
| Qiang Lin | ||||
| /s/Remington C.H. Hu | Director | June 21, 2012 | ||
| Remington C.H. Hu | ||||
| /s/Kate Ledyard | Authorized U.S. Representative | June 21, 2012 | ||
| Kate Ledyard, Manager | ||||
| on behalf of Law | ||||
| Debenture Corporate | ||||
| Services Inc. |
EXHIBIT INDEX
| Exhibit No. | Description | |
| 2.1 |
Agreement and Plan of Merger and Reorganization by and among China Information Technology, Inc., the registrant and China Information Mergerco Inc., dated June 20, 2012 (included as Annex A to the proxy statement/prospectus) | |
| 3.1 |
Memorandum and Articles of Association of the registrant (included as Annex B to the proxy statement/prospectus) | |
| 4.1 | ||
| 5.1 | ||
| 8.1 | ||
| 10.1 | ||
| 10.2 | ||
| 21 | ||
| 23.1 | ||
| 23.2 | ||
| 23.3 | ||
| 23.4 |
Consent of Pillsbury Winthrop Shaw Pittman LLP (included in Exhibit 8.1) | |
| 23.5 | ||
| 24.1 |
Power of Attorney (included in the signature page of this registration statement) | |
| 99.1 |