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Sustainability Catalogue

Modern Dairy Merger and Acquisition Management Policy

This policy aims to adapt to Modern Dairy’s external development strategy, systematically manage the M&A process, standardize due diligence and valuation work, effectively prevent investment and integration risks, and strengthen post-investment risk monitoring. The term “M&A” as used in this policy refers to acquisitions, mergers, introductions of strategic partners, and strategic investments conducted by the company in accordance with its overall strategic plan. This includes government cooperative leasing models, joint venture leasing models, equity participation models, and wholly-owned acquisition models.

1. Intention Negotiation

The Finance Department or management, in collaboration with relevant project leaders, will confirm the cooperation intention with the target dairy farm.

2. Information Collection

After confirming the M&A intention, preliminary information on the target entity will be collected and organized to facilitate targeted on-site due diligence. The Finance Department, together with the Engineering Management Department, Operations Dairy Farm or Technical Innovation Department, Human Resources Department, Compliance Department, and Safety & Quality Department, will analyze the collected data and produce a written due diligence report, including an investment return analysis.

A list of bottom-line clauses for the M&A project will be established, clearly identifying risks that would preclude acquisition. This list includes:

  • Target projects lacking environmental protection procedures (no environmental impact assessment, no acceptance inspection, or lacking required discharge permits).
  • Target projects with significant location risks, including those within first or second-level water source protection zones, prohibited farming areas, or those not meeting national or local environmental requirements regarding proximity to residential areas or sensitive points.
  • Target projects with existing environmental violations subject to government penalties and unable to complete rectification within a short timeframe.
  • Target projects where the proportion of employees with occupational diseases exceeds 10% and is greater than 10 individuals. If acquisition is pursued with fewer than 10 affected individuals, arrangements and compensation for these individuals must be addressed and documented in a signed agreement.

3. M&A Project Approval

The Investment Committee is responsible for project approval and review, deciding whether the project should proceed. For projects with significant risks identified in the due diligence report, if acquisition is still considered, the responsibilities and cost allocation for addressing these risks must be clearly defined. The due diligence team will discuss and formulate contract clauses, which will be submitted to the Investment Committee for discussion and decision-making before being incorporated into the equity agreement.

4. Project Teams

The engagement and utilization of professional intermediaries are crucial to project success. For significant M&A projects exceeding RMB 30 million, professional intermediaries should be engaged throughout the process. Therefore, dairy farm M&A projects will involve both intermediary and implementation teams working concurrently, responsible for producing reports and agreement documents. The implementation team will be responsible for selecting appraisal agencies and tax, financial, and legal intermediaries. The Finance Department will be responsible for forming both the appraisal and implementation teams.

5. Project Implementation

  • 5.1 Transaction Negotiation: The implementation team will make reasonable financial projections for the target company’s future performance and analyze its valuation. Relevant leaders from the Group management will determine a preliminary transaction price with the target dairy farm and negotiate other outstanding matters.
  • 5.2 Transaction Revision: Based on the due diligence results, the Finance Department and relevant Group leaders will conduct a final review and determine the final transaction price.
  • 5.3 Equity Agreement: The Compliance Department will select a law firm, which will draft the equity agreement based on the terms agreed upon by all three parties.

6. Asset Valuation

For M&A projects requiring asset valuation, a professional agency should be engaged. The valuation results will serve as the basis for transaction negotiations. During biological asset valuation, the project appraisal team will conduct random inspections of the target farm’s herd. If disease risks are identified, the entire herd must be tested to ensure the valuation accurately reflects any major disease risks.

7. Project Closing

After project approval, all three parties will undertake necessary preparations for closing as stipulated in the equity agreement. An audit of the target dairy farm may be conducted before closing, as needed. Once all closing conditions are met, the three parties will complete the share transfer according to the equity agreement. Project handover includes follow-up items identified in the due diligence report, as well as assets, personnel, and finances.

In accordance with Rule 26.1 of the Code on Takeovers and Mergers (the “Takeovers Code”), when a person or group of persons acting together must make a general offer to buy the remaining shares in a company if:

  • it buys 30% or more of voting shares in the company; or
  • it already holds between 30% and 50% of the voting shares and increases that holding by more than 2% in any 12-month period.

8. Project Termination

If, during the execution of an approved Modern Dairy M&A project, significant financial, legal, or policy risks are discovered, or if there are substantial changes to the transaction conditions, the Group leadership should be promptly informed, and project termination should be considered. Project termination will be confirmed after approval by senior management or the Board of Directors.