2012 18:02pm clerk of the court · in the superior court for the district of columbia civil...
TRANSCRIPT
Filed
D.C. Superior Court 08/20/2012 18:02PM Clerk of the Court
IN THE SUPERIOR COURT FOR THE DISTRICT OF COLUMBIA CIVIL DIVISION
WATTS WATER TECHNOLOGIES, INC.
PLAINTIFF,
v.
SIDLEY AUSTIN LLP,
DEFENDANT.
2012 CA 004847 M
Hon. Gregory E. Jackson
Next Court Date: September 7, 2012, 9:30 a.m.
Event: Initial Scheduling Conference
DEFENDANT SIDLEY AUSTIN LLP'S MOTION TO DISMISS OR, IN THE ALTERNATIVE, FOR JUDGMENT ON THE PLEADINGS
Pursuant to Rule l2(b)(6) and Rule l2(c) of the Rules of Civil Procedure, Sidley Austin
LLP respectfully moves to dismiss with prejudice or, in the alternative, for judgment on the
pleadings, on the grounds set forth in the accompanying Memorandum of Points and Authorities.
RULE 12-I(A) STATEMENT
Defendant's counsel unsuccessfully sought Plaintiff's consent to the relief requested.
Dated: August 20,2012
ORAL HEARING REOUESTED
Respectfully submitted,
WILLIAMS & CONNOLLY LLP
By: /s/ John K. Villa John K. Villa (D.C. Bar No. 220392) Charles Davant IV (D.C. Bar No. 484305) Marcus P. Smith (D.C. Bar No. 996721) 725 Twelfth Street, N.W. Washington, DC 20005 Telephone: (202) 434-5000 Facsimile: (202) 434-5029 E-Mail: [email protected]
[email protected] [email protected]
Counsel for Sidley Austin LLP
IN THE SUPERIOR COURT FOR THE DISTRICT OF COLUMBIA CIVIL DIVISION
WATTS WATER TECHNOLOGIES, INC. 2012 CA 004847 M
PLAINTIFF,
v.
SIDLEY AUSTIN LLP,
DEFENDANT.
Hon. Gregory E. Jackson
Next Court Date: September 7,2012, 9:30 a.m.
Event: Initial Scheduling Conference
DEFENDANT SIDLEY AUSTIN LLP'S MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF ITS MOTION TO DISMISS OR, IN THE ALTERNATIVE, FOR JUDGMENT ON THE PLEADINGS
WILLIAMS & CONNOLLY LLP
John K. Villa (D.C. Bar No. 220392) Charles Davant IV (D.C. Bar No. 484305) Marcus P. Smith (D.C. Bar No. 996721) 725 12th Street, N.W. Washington, DC 20005 (202) 434-5000
Counsel for Sidley Austin LLP
TABLE OF CONTENTS
TABLE OF AUTHORITIES .......................................................................................................... ii
INTRODUCTION ........................................................................................................................... 1
RELEVANT STATUTORY BACKGROUND: THE FCPA. ....................................................... .4
THE COMPLAINT'S ALLEGATIONS ......................................................................................... 5
A. Sidley Is Engaged for Limited Due Diligence at Changsha Valve .......................... 5
B. Watts Creates and Operates a New Chinese Subsidiary .......................................... 7
C. Watts and Its Newly Formed Subsidiary Begin Violating the FCPA More Than Two Years After Sidley's Due Diligence at Changsha Valve ........................ 7
D. Watts' Lawsuit Against Sidley ................................................................................ 9
ARGUMENT ................................................................................................................................. 10
I. LEGAL STANDARDS ..................................................................................................... 10
A. Standard for Dismissal. .......................................................................................... 1 0
B. Standard for Judgment on the Pleadings ................................................................ ll
II. WATTS CANNOT SHIFT TO INNOCENT OUTSIDE COUNSEL THE CONSEQUENCES OF WATTS' ILLEGAL CONDUCT.. .............................................. 11
A. In Pari Delicto Bars Watts' Claims ........................................................................ 12
1. In Pari Delicto ............................................................................................ 12
2. The Complaint Establishes Watts ' Vastly Greater Culpability ................. 13
B. Watts' Wrongdoing Proximately Caused Its Own Alleged Losses ....................... 14
C. Watts' Claims Violate Judicially Recognized Public Policy ................................. 15
D. Contributory Negligence Bars the Negligence Claims (Counts 1 and 3) .............. l7
III. FCPA WORK WAS BEYOND THE SCOPE OF SIDLEY'S ENGAGEMENT.. ........... 18
A. The E-Mails Reflecting Sidley's November 2004 Engagement Agreement Are Properly Considered Given the Procedural Posture of this Case .................... 18
B. Sidley Did Not Agree to Perform FCPA Services for Watts ................................. 19
IV. THE STATUTE OF LIMITATIONS BARS ALL THREE COUNTS ............................. 21
A. The Breach of Contract Claim Is Time-Barred ...................................................... 21
B. The Negligence Claims Are Time-Barred ............................................................. 22
V. COUNTS 2 AND 3 SHOULD BE DISMISSED AS DUPLICATIVE ............................. 24
CONCLUSION .............................................................................................................................. 25
TABLE OF AUTHORITIES
FEDERAL CASES
Alberts v. Tuft (In re Greater Se. Cmty. Hosp. Corp.), 353 B.R. 324 (Bankr. D.D.C. 2006) ........ 12
Allison v. Howard Univ., 209 F. Supp. 2d 55 (D.D.C. 2002) ........................................................ 21
Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) .......................................... 12
Bellis v. Tokio Marine & Fire Ins. Co., No. 93 Civ. 6549 (DAB), 2002 WL 193149 (S.D.N.Y. Feb. 7, 2002) ........................................................................................................... 10
Bradley v. Nat'l Ass'n otSec. Dealers Dispute Resolution, Inc., 433 F.3d 846 (D.C. Cir. 2005) ........................................................................................................................................ 23
Dooley v. United Techs. Corp., 803 F. Supp. 428 (D.D.C. 1992) ................................................... 5
Gary Stancil v. Bradley Investments, LLC (In re Stancil), 473 B.R. 478 (Bankr. D.D.C. 2012) ........................................................................................................................................ 10
Hartz v. Farrugia, No. 06-3164, 2009 WL 901767 (E.D. La., Mar. 31,2009), cert denied, 131 S. Ct. 104 (2010) ............................................................................................................... 20
Havens v. Patton Boggs LLP, No. 05-01454, 2006 WL 1773473 (D.D.C. June 26, 2006), aff'd, 235 F. App'x 750 (D.C. Cir. 2007) ................................................................................ 21
Iacangelo v. Georgetown Univ., 760 F. Supp. 2d 63 (D.D.C. 2011) ............................................. 24
L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419 (2d Cir. 2011) ............................................ 2,19
Meador v. Albanese Law Office, No. 5:08-cv-562, 2010 WL 3807163 (N.D.N.Y. Sept. 23, 2010) .................................................................................................................................. 24
N. Am. Catholic Educ. Programming Found., Inc. v. Womble Carlye Sandridge & Rice, PLLC, 800 F. Supp. 2d 239 (D.D.C. 2011) ............................................................................. 25
Pinter v. Dahl, 486 U.S. 622 (1988) .............................................................................................. 12
USACM Liquidating Trust v. Deloitte & Touche LLP, 764 F. Supp. 2d 1210 (D. Nev. 2011) ........................................................................................................................................ 13
STATE CASES
AmBase Corp. v. Davis Polk & Wardwell, 866 N.E.2d 1033 (N.Y. 2007) ....................... 19,20,21
Biomet Inc. v. Finnegan Henderson LLP, 967 A.2d 662 (D.C. 2009) .......................................... 24
11
Breezevale Ltd. v. Dickinson, 759 A.2d 627 (D.C. 2000), vacated & reh'g granted by 769 A.2d 133, reaffirmed by 783 A.2d 573 (D.C. 2001) (en bane) ................................................ l7
Bussineau v. President & Directors of Georgetown Coli., 518 A.2d 423 (D.C. 1986) ................. 22
Choquette v. Isacojf, 836 N.E.2d 329 (Mass. App. Ct. 2005) ....................................................... 12
Dalo v. Kivitz, 596 A.2d 35 (D.C. 1991) ....................................................................................... 14
Evans v. Cameron, 360 N.W.2d 25 (Wis. 1985) ........................................................................... 13
Exec. Sandwich Shoppe, Inc. v. Carr Realty Corp., 749 A.2d 724 (D.C. 2000) ........................... 10
Ferguson v. Liejf, Cabraser, Heimann & Bernstein, LLP, 69 P.3d 965 (Cal. 2003) ..................... 16
Hicks v. Nunnery, 643 N.W.2d 809 (Wis. ct. App. 2002) ............................................................ 15
In reEstate of Curse en, 890 A.2d 191 (D.C. 2006) ...................................................................... 10
Karma Constr. Co. v. King, 296 A.2d 604 (D.C. 1972) (per curiam) ........................................... 18
Kirschner v. KPMG LLP, 938 N.E.2d 941 (N.Y. 2010) .......................................................... 12,14
Lyons v. Barrazotto, 667 A.2d 314 (D.C. 1995) ............................................................................ 17
Maillardv. Dowdell, 528 So. 2d 512 (Fla. Dist. Ct. App. 1988) ................................................... 20
Massengale v. Pitts, 737 A.2d 1029 (D.C. 1999) .......................................................................... 17
Oparaugo v. Watts, 884 A.2d 63 (D.C. 2005) ................................................................. 2,4,10,19
Paul v. Smith, Gambrell & Russell, 599 S.E.2d 206 (Ga. Ct. App. 2004) .................................... 15
R.D.H. Commc 'ns, Ltd. v. Winston, 700 A.2d 766 (D.C. 1997) .................................................... 23
Spannaus v. Larkin, Hoffman, Daly & Lindgren, Ltd., 368 N.W.2d 395 (Minn. Ct. App. 1985) ........................................................................................................................................ 20
Tri-G, Inc. v. Burke, Bosselman & Weaver, 856 N.E.2d 389 (Ill. 2006) ....................................... 16
Wagnerv. Sellinger, 847 A.2d ll51 (D.C. 2004) .......................................................................... 22
Washkoviakv. Sallie Mae, 900 A.2d 168 (D.C. 2006) ........................................................ 2,10,19
Watson v. Calvert Building & Loan Ass 'n, 45 A. 879 (Md. 1900) ................................................ 20
Whiteheart v. Waller, 681 S.E.2d 419 (N.C. Ct. App. 2009), review denied, 693 S.E.2d 353 (N.C. 2010) ....................................................................................................................... 12
111
Wilson Courts Tenants Ass'n v, 523-525 Mellon St, LLC, 924 A.2d 289 (D.C. 2007) ................ 11
Wingfield v. Peoples Drug Store, 379 A.2d 685 (D.C. 1977) ........................................................ 17
OTHER AUTHORITIES
Richard A. Lord, Williston on Contracts (4th ed. 2012) ......................................................... 19,21
Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice (2012 ed.) .......................................... 23
Restatement of The Law Governing Lawyers (Third) (2000) ....................................................... 19
Foreign Corrupt Practices Act of 1977 CFCPA"),15 U.S.C. §§ 78dd-1 et seq . .................... passim
D.C. Code § 12-301 ................................................................................................................. 21,22
R.Civ.P.7 ..................................................................................................................................... 11
R. Civ. P. 12 ................................................................................................................... 2, 10, 11, 19
IV
INTRODUCTION'
Plaintiff Watts Water Technologies, Inc. ("Watts") is a company that admits violating the
Foreign Corrupt Practices Act ("FCPA") in two respects: (I) by bribing Chinese government
officials at its China subsidiary and (2) by maintaining inaccurate books and records. Watts'
illegal conduct resulted in the Securities and Exchange Commission (SEC) ordering Watts to
disgorge $2.7 million in illegal profits (plus interest) and pay a $200,000 penalty. Watts now
sues its former counsel Sidley Austin LLP ("Sidley"), alleging that Sidley failed to prevent Watts
from breaking the law, and seeking as "damages" the illegal profits and penalties that Watts was
required to disgorge or pay to the federal government. Watts makes this claim even though
Watts never engaged Sidley, and Sidley never agreed, to provide advice on the FCP A.
The legal theory of Watts' complaint is defective. Watts cannot, as a matter oflaw, shift
the consequences of its wrongdoing to Sidley. Allowing Watts' claims to proceed would reward
a wrongdoer and eliminate the deterrent and punitive purposes that the SEC penalty was meant
to serve. It would be contrary to well-established legal rules under which courts do not allow
their processes to be used to benefit wrongdoers. The result Watts seeks would be particularly
egregious because Watts alleges it violated the FCP A for several years and reaped a large
, On July 27, 2012, Sidley filed its Answer, and simultaneously filed for summary judgment. On August 13, 2012, the Court sua sponte denied Sidley's summary judgment motion (without prejudice) as premature, but authorized Sidley to file the instant Motion to Dismiss. We have followed the Court's direction and submitted a motion to dismiss (or, alternatively, for judgment on the pleadings because Sidley has filed its Answer). We believe that the same legal grounds can properly be advanced in the instant Motion because the grounds for dismissal appear on the face of the Complaint or, for one ground, documents relied on therein. It is well-settled that a court may consider documents referenced in the Complaint in ruling on a motion to dismiss or for judgment on the pleadings. See Note 2 infra. In light of the difficult and unusually expensive discovery that lies ahead if this case is not dismissed, see Conclusion, infra, we have raised for the Court's consideration all the legal grounds for dismissing the suit that are readily evident from the Complaint.
I
financial benefit, while Sidley is merely alleged to have been negligent-an allegation Sidley
denies.
A shorthand version of the facts in the Complaint and its attached SEC Cease-and-Desist
Order2 demonstrates why Watts' case against Sidley is, as a matter of law, foreclosed. In
November 2005, Watts formed a new, wholly owned subsidiary in China. In April 2006, Watts'
new subsidiary bought certain assets from the Chinese company Changsha Valve Works
("Changsha Valve") and hired certain Changsha Valve employees. In December 2006, Watts'
new subsidiary adopted an "illegal policy" of bribing Chinese officials in violation of the FCPA,
and inaccurately recording those bribes on Watts' books in violation of the FCP A's accounting
requirements. As the SEC found (based on Watts' own submissions), Watts China's Vice
President of Sales "approved many of the payments ... and knew or should have known that the
payments were improperly recorded on Watts' books." The illegal "payments generated profits
for Watts of more than $2.7 million," plus interest, from 2006 to 2009.
Under the FCP A, Watts had an independent legal duty to refrain from bribing foreign
government officials. See IS U.S.C. § 78dd-1 (2006 & Supp. V 2010). Watts also had an
independent legal duty to "devise and maintain a system of internal accounting controls
sufficient to provide reasonable assurance" that its books and records were accurate. Id. §
78m(b)(2)(A)-(B) (2006). Watts indisputably violated its legal duties. The SEC has found that
Watts could and should have accomplished compliance by conducting basic FCP A training for
its employees in China. Watts sues Sidley to recoup the penalties set forth in the SEC Cease-
2 Documents "referenced in the complaint and ... central to [a plaintifl]'s claim" are properly considered on a Rule 12(b )(6) or 12( c) motion. Oparaugo v. Watts, 884 A.2d 63, 76 n.1O (D.C. 2005); see also Washkoviakv. Sallie Mae, 900 A.2d 168,178 (D.C. 2006);L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011).
2
and-Desist Order, even though Watts never requested that Sidley review Watts' or its
subsidiary's compliance with the FCPA or other United States laws.
Watts' negligence theory against Sidley stems from the fact that Watts had hired Sidley
back in 2004 to conduct specified due diligence tasks-none of which included FCPA
compliance-at the old Changsha Valve, the company that sold assets to Watts in 2006. 3 Watts
alleges that Sidley negligently failed to detect and report that Changsha Valve had bribed
government officials. According to Watts, if Sidley had only reported Changsha Valve's bribery
to Watts in 2004 or 2005, then Watts would not have engaged in bribery at Watts' own
subsidiary from 2006 to 2009, and would have maintained adequate books and records. The
argument is preposterous for many reasons. For one, Watts had knowledge of the so-called
"Kickback Policy" that existed at Changsha Valve long before Watts entered the Changsha
Valve transaction. 4 Just as important, Watts had an independent legal duty, on which it sought
no guidance from Sidley, to conform its conduct with the law after the Changsha Valve
transaction.
This brief is divided into four sections. Part I demonstrates that courts have rejected
claims like Watts' as barred by a number of well-established legal principles. These include (1)
in pari delicto; (2) a lack of proximate causation; (3) a public policy against permitting
wrongdoers to keep ill-gotten gains by shifting blame; and (4) contributory negligence.
3 To the extent this brief makes reference to Sidley's alleged negligence, it is accepting the allegations of the Complaint at face value only for purposes of the legal arguments set forth herein. In fact, Sidley's legal work exceeded professional standards and was in no way negligent.
4Deloitte & Touche Corporate Finance Ltd., which conducted financial due diligence for Watts at Changsha Valve, specifically identified and reported Changsha Valve's so-called "kickback policy" to Watts's law department in writing on November 19, 2004. Watts went ahead with the conduct described in the Complaint despite Deloitte's report.
3
A separate ground for dismissal, as we show in Part II, is that a lawyer is not liable for
failing to perform a duty that he or she did not agree to perform. The Complaint alleges that
"[o]n or around November 11, 2004, Watts instructed Sidley, and Sidley agreed, to conduct legal
due diligence on Watts's behalf with respect to" Changsha Valve. Compl. ~ 38. Watts'
"instruct[ion]" and Sidley's "agree[ment]" occurred via e-mails that fortunately have been
preserved. These e-mails show without question that FCP A review was outside the scope of
Sidley's engagement. The e-mails are "referred to in the complaint and ... central to plaintiff's
claim" for breach of contract (Count 2), so they are properly considered "in connection with [a]
motion to dismiss." E.g., Oparaugo, 884 A.2d at 76 n.l0. We have attached them to this
Motion.
In Part III, we show that the three-year statutes of limitations bar Watts' claims, which
concern alleged breaches in 2004 and 2005, and which Watts as a matter oflaw has known about
since at least December 2006, when Watts allegedly began violating the FCP A.
Finally, in Part IV, we show that Count 2 (breach of contract) and Count 3 (negligent
misrepresentation) must be dismissed under controlling precedent because they are duplicative of
Count 1 (professional negligence).
This lawsuit never should have been brought. The legal theory in Watts' Complaint
offends notions of fair play, justice, and public policy. The Court should dismiss the Complaint
with prejudice or, in the alternative, enter judgment on the pleadings in favor of Sidley.
RELEVANT STATUTORY BACKGROUND: THEFCPA
This case involves a federal statute, the Foreign Corrupt Practices Act of 1977 ("FCPA").
As pertinent here, the FCP A contains two sets of provisions. The anti-bribery provisions,
enforced by the Department of Justice through civil and criminal penalties, make it unlawful for
publicly traded United States corporations to bribe foreign government officials to obtain or
4
retain business. See 15 U.S.C. § 78dd-I-3 (2006). The FCPA also contains accounting
provisions that require publicly traded United States corporations to make and keep books and
records that accurately reflect the company's transactions, and to devise and maintain an
adequate system of internal accounting controls. See id. § 78m(b )(2)-(3). The books and
records and internal control provisions are enforced by the SEC. Payment of a bribe to a foreign
government official violates both the bribery provisions and the books-and-records provisions,
unless, as to the latter, the bribe is properly reflected as such in the company's records. See id.
The FCP A does not apply to Chinese-owned companies doing business in China. See id. § 78dd-
1; Dooley v. United Techs. Corp., 803 F. Supp. 428, 438-39 (D.D.C. 1992).
THE COMPLAINT'S ALLEGATIONS
A. Sidley Is Engaged for Limited Due Diligence at Changsha Valve.
Plaintiff Watts Water Technologies, Inc. ("Watts") is a publicly traded company that
designs, manufactures, and sells water valves in North America, Europe, and Asia. See Compl.
~~ 4, 25. 5 Watts has approximately 70 facilities worldwide, and its annual sales exceed $1
billion. See id. ~ 25. By 2004, Watts had "substantial operations" in China, including
ownership of several corporate subsidiaries. Id. ~ 26. Watts sought to expand its China presence
through a deal with Changsha Valve, a Chinese company. See id. ~~ 28,37.
According to the Complaint, "[o]n or around November 11, 2004, Watts instructed
Sidley, and Sidley agreed, to conduct legal due diligence on Watts's behalf with respect to"
5 For ease of reference, for this Motion only, the term "Watts" will refer both to Plaintiff Watts Water Technologies, Inc. and its affiliate Watts Regulator Co. "Sidley" will refer to Sidley Austin Brown & Wood LLP in connection with events before January 2006 and will refer to Sidley Austin LLP in connection with events after that date.
5
Changsha Valve. Id. ~ 386 Watts' November 2004 "instruct[ion]" and Sidley's "agree[ment]"
occurred via e-mails. On November 12, 2004, a Watts executive e-mailed a Sidley partner in
Shanghai: "We need your participation in a legal due diligence on a target company .... The
scope of the review will be your firm's standard legal due diligence review." Ex. 1 (11112/04 Ho
E-Mail). A few hours later, the Sidley partner (Zhengyu Tang, a Chinese national) responded to
Watts bye-mail: "[W]e have prepared the attached legal DD [due diligence] request/checklist ..
. . " Ex. 2 (DD Checklist). The due diligence checklist that Sidley provided to Watts addressed
various topics: "a detailed list of all assets of the Company," "documentary proof of title to
major assets," "a specific description of the land and buildings currently used by the Company,"
"present or potential environmental pollution," "mortgages and other encumbrances," and
numerous other topics. Ex. 3 (Certified Translation). The checklist made no mention of any due
diligence to be conducted in connection with the FCPA or any other laws of the United States.
See id. The Watts executive responded to Sidley on November 15, 2004: "The checklist looks
fine." Ex. 4 (11115/04 E-Mail Exchange) at 2. These documents define the scope of Sidley's
engagement. 7
6 Watts' November 2004 "instruct[ion]" and Sidley's "agree[ment]" were consistent with a preexisting, June 7, 2002 Sidley engagement letter-which Watts has attached to its Complaint as Exhibit A-that states: "[W]e will advise [Watts] in connection with, and the scope of our engagement and duties to [Watts] shall relate to [Watts]'s [China] operationslinvestments and related matters. Specific aspects of the work may change in the course of implementation of each project depending on the actual circumstances and the [Watts's] needs and instructions."
7 By way of background only, the Sidley due diligence checklist documented that Watts was "planning to purchase the core assets and businesses of Changsha Valve" and to place them in a Watts subsidiary, rather than buying Changsha Valve as an entity. Ex. 3 (Certified Translation) (emphasis added). The contemplated transaction structure was relevant to the scope of Sidley's planned due diligence, as the Sidley Shanghai partner explained to Watts bye-mail at the time:
[W]e would conduct our legal DD [due diligence] based on the assumption of asset/business rather than equity acquisition and would
6
Sidley conducted due diligence at Changsha Valve. See id. ~ 40. Sidley issued a
preliminary due diligence report on November 24, 2004, and an updated due diligence report on
July 20, 2005. See id. ~~ 42-43. Neither addressed FCPA issues, as is plain on their face.
B. Watts Creates and Operates a New Chinese Subsidiary.
In November 2005, Watts formed Watts Valve (Changsha) Co., Ltd. ("CWV") as a
wholly owned subsidiary. See Compl. Ex. D (SEC Order) ~ l. In April 2006, Watts' newly
formed CWV subsidiary acquired Changsha Valve's assets and businesses. See Compl. ~ 57.
Watts China Vice President of Sales Leesen Chang became interim general manager of the new
subsidiary. See Compl. Ex. D (SEC Order) ~ 3.
Watts makes no allegation that it ever retained Sidley to provide advice on Watts' or
CWV's compliance with the FCPA, to investigate possible FCPA violations at Watts or CWV,
or to offer an opinion on Watts' financial reporting or internal controls.
C. Watts and Its Newly Formed Subsidiary Begin Violating the FCPA More Than Two Years After Sidley's Due Diligence at Changsha Valve.
Eight months after the April 2006 transaction with Changsha Valve, Watts' newly
formed CWV subsidiary began committing FCP A violations by making illegal "payments ... to
Chinese government officials." Compl. ~~ 14, 19-20,72-74. An SEC Cease-and-Desist Order,
to which Watts agreed, explains that "[t]he purpose and effect of those payments was to
influence the design institutes to recommend CWV valve products ... and to create design
focus our attention on the following two major issues (in addition to your specific concerns):
1. Whether the assets/business proposed for sale by Changsha Valve are lawfully ... , exclusively ... and cleanly ... owned ... ; and
2. Whether the assets/business proposed for sale by Changsha Valve can be lawfully sold to Watts by Changsha Value without unusual ... difficulties.
Id. (emphasis added).
7
specifications that favored CWV valve products." Compl. Ex. D (SEC Order) ~ 18 "CWV's
improper payments generated profits for Watts of more than $2.7 million." Id. Watts China's
then- Vice President of Sales, Leesen Chang, the interim general manager of CWV, "approved
many of the payments ... and knew or should have known that the payments were improperly
recorded on Watts' books as commissions." Id. ~ 3. Chang also "resist[ed] ... efforts to have
[CWV's December 2006] Sales Policy translated and submitted to Watts' management in the
U.S.," which, according to the SEC Order, "was a cause of Watts' internal control [FCPA]
violations." Id. ~ 12. Watts "failed to conduct adequate FCPA training for its employees in
China until July 2009." I d. ~ 9. Watts "failed to devise and maintain a system of internal
accounting controls sufficient to prevent and detect the payments." Id. ~ 2.
Watts claims that CWV's illegal payments were made pursuant to an "illegal policy" that
previously had been in place at Changsha Valve. Compl. ~ 67. Watts reported to the SEC that
CWV employees chose to "adopt" that old Changsha Valve policy "in December 2006," more
than two years after Sidley was hired to conduct due diligence at Changsha Valve, and more than
a year after CWV was created. See Compl. Ex. D (SEC Order) ~ 11 (illegal policy was "adopted
by CWV in December 2006").
Watts reported its violations to the SEC and DOJ on August 6,2009, "to obtain the
benefits of self-disclosure." Compl. ~~ 73-74. Under the resulting SEC Order, Watts was to
"pay to the United States Treasury disgorgement of $2,755,815" (the amount of Watts' unlawful
profits from "CWV's improper payments"), prejudgment interest on those ill-gotten gains of
8 The factual findings in the SEC Order attached to the Complaint as Exhibit D were "made pursuant to [Watts'] Offers" of Settlement. Compl. Ex. D (SEC Order) at 2 n.l. Watts "consent[ed] to the entry" of the SEC Order. Id. at l. For purposes of this Motion only, Sidley credits Watts' allegations that Watts and its CWV subsidiary violated the FCP A.
8
$820,791, and a civil money penalty of $200,000": a total of $3,776,606. Compl. Ex. D (SEC
Order) ~ 2, at 7.
D. Watts' Lawsnit Against Sidley.
Watts on June 6, 2012 filed this lawsuit against Sidley9 Watts alleges that Sidley'S file
from Changsha Valve due diligence contained a "red flag" in the form of some language at the
bottom of a one-page, Chinese-language document-language Watts now calls a "kickback
policy.,,10 Compl. ~~ 13, 15. Watts goes on to allege that the Chinese lawyers in Sidley'S
Shanghai office should have provided the document to Watts, on the theory that the document
suggests the possibility that Changsha Valve might have violated the FCP A-a foreign law that
did not apply to that Chinese company in any event. See id. ~~ 14-15.
Watts asserts a claim for professional negligence (Count 1). Based on the same facts as
its negligence claim, Watts also asserts claims for breach of contract (Count 2) and negligent
misrepresentation (Count 3). As damages, Watts demands that Sidley pay it:
• $2,755,815, to "recover" the illegal profits generated by "CWV's improper payments" that Watts was required to disgorge to the u.S. Treasury (Compl. ~ 124, Ex. D (SEC Order) ~ 2);
• $820,791 of interest on those ill-gotten gains that Watts was required to disgorge to the U.S. Treasury (see Compl. ~ 124, Ex. D (SEC Order) ~ 2);
• $200,000 for the "civil money penalty" Watts paid to the U.S. Treasury (Compl. ~ 124, Ex. D (SEC Order) ~ 2);
9 Watts filed its Complaint just before the expiration of a tolling agreement the parties had entered on June 23, 201l. The tolling agreement provided "that any statute oflimitations ... that expired prior to [June 23, 2011] shall remain expired."
10 For purposes of this litigation, Watts translates the Chinese word for "rebate" in that document as "kickback," and overlooks the fact that the "kickback policy" says nothing whatsoever about payments to government officials. See Compl. Ex. C. Sidley denies Watts' allegations that this language was a "red flag," and denies Watts' allegation that a Sidley partner agreed with Watts' characterization of it as such. See Answer ~ 77. That issue, however, is not before the Court at this stage, and not necessary to disposition of this Motion.
9
• Watts' legal fees and costs in connection with its FCPA violations (see Compl. ~ 21); and
• "the [unspecified] losses that Watts [allegedly] suffered when it was forced to sell [CWV] at a substantial loss." (id.).
ARGUMENT
I. LEGAL STANDARDS.
A. Standard for Dismissal.
Rule 12(b )(6) requires dismissal when a complaint fails to state a claim upon which relief
can be granted. See Super. ct. R. Civ. P. 12(b). "To survive a motion to dismiss under Rule
12(b )(6), a complaint must [set forth] ... [a] viable legal theory." Gary Stancil v. Bradley
Investments, LLC (In re Stancil), 473 B.R. 478,484 n.11 (Bankr. D.D.C. 2012) (internal
quotation marks omitted). Dismissal "under Rule 12(b )(6) may also be appropriate when a
successful affirmative defense or other bar to relief appears on the face of the complaint." Exec.
Sandwich Shoppe, Inc. v. Carr Realty Corp., 749 A.2d 724, 734 (D.C. 2000). "A dismissal for
failure to state a claim on which relief can be granted is ... ordinarily with prejudice." In re
Estate of Curse en, 890 A.2d 191, 192 n.1 (D.C. 2006). Leave to re-plead should be denied
where "amendment would be futile." Bellis v. Tokio Marine & Fire Ins. Co., No. 93 Civ. 6549
(DAB), 2002 WL 193149 (S.D.N.Y. Feb. 7,2002).
Documents "referenced in the complaint and ... central to [a plaintifl]'s claim" are
properly considered on a Rule 12(b)(6) motion. Oparaugo v. Watts, 884 A.2d 63,76 n.1O (D.C.
2005); see also Washkoviakv. Sallie Mae, 900 A.2d 168,178 (D.C. 2006). Here, dismissal is
warranted because Watts' claims depend on a defective legal theory and because multiple legal
bars appear on the face of the Complaint and in the documents on which Watts' claims depend.
10
B. Standard for Judgment on the Pleadings.
"[A]ny party may move for judgment on the pleadings" at any time "[a]fter the pleadings
are closed." Super. ct. R. Civ. P. 12(c). The pleadings are closed when a defendant files an
answer that asserts no counterclaim or cross-claim. See Super. ct. R. Civ. P. 7(a). Judgment on
the pleadings should be granted where, "on the facts as so admitted [in the pleadings], the
moving party is clearly entitled to judgment." Wilson Courts Tenants Ass'n v. 523-525 Mellon
St., LLC, 924 A.2d 289, 292 (D.C. 2007) (internal quotation marks omitted). Judgment on the
pleadings is appropriate because the facts admitted in the Complaint show that Sidley is clearly
entitled to judgment.
II. WATTS CANNOT SHIFT TO INNOCENT OUTSIDE COUNSEL THE CONSEQUENCES OF WATTS' ILLEGAL CONDUCT.
Watts' claims against Sidley are premised on Watts' allegations that employees of Watts
and its wholly owned CWV subsidiary broke federal law for more than three years, yielding
Watts an illegal, multi-million dollar profit. Watts now seeks to use this Court to recover that
illegal profit, the fruits of its wrongdoing, from former counsel. Watts' request offends justice
and common sense. It also contravenes a number of settled legal principles that deny recovery to
a wrongdoer in these circumstances: (1) in pari delicto; (2) a lack of proximate causation; (3) a
public policy against permitting wrongdoers to keep ill-gotten gains by shifting blame; and (4)
contributory negligence. These principles have long been part of the fabric of the common law,
including in the District of Columbia. While it is not always possible to reach these issues on a
motion to dismiss, the face of Watts' Complaint has set forth facts that make consideration of
these issues appropriate at this stage. Put another way, the relevant factual allegations in the
Complaint establish that Sidley cannot be liable as a matter of law.
II
A. In Pari Delicto Bars Watts' Claims.
1. In Pari Delicto.
The doctrine of in pari delicto "is grounded on two premises: first, that courts should not
lend their good offices to mediating disputes among wrongdoers; and second, that denying
judicial relief to an admitted wrongdoer is an effective means of deterring illegality." Bateman
Eichler. Hill Richards. Inc. v. Berner, 472 U.S. 299, 306 (1985) (footnote omitted). The
doctrine bars a plaintiff's recovery where "the plaintiff bore at least substantially equal
responsibility for his injury, and where the parties' culpability arose out of the same illegal act."
Alberts v. Tuft (In re Greater Se. Cmty. Hasp. Corp.), 353 B.R. 324,362 (Bankr. D.D.C. 2006)
(dismissing legal malpractice case on in pari delicto grounds (quoting Pinter v. Dahl, 486 U.S.
622, 632 (1988))). When applying in pari delicto, the acts of corporate agents are imputed to the
corporation. See id. A corporation is "responsible for the acts of its authorized agents even if
particular acts were unauthorized" because "[t ]he risk of loss from the unauthorized acts of a
dishonest agent falls on the principal that selected the agent." Kirschner v. KPMG LLP, 938
N.E.2d 941,950-51 (N.Y. 2010) (internal quotation marks omitted).
The doctrine of in pari delicto is regularly applied in professional negligence cases,
including in the District of Columbia. See In re Greater Se. Cmty. Hasp., 353 B.R. at 324. In
the professional negligence context, courts repeatedly have held that in pari delicto bars claims
where the plaintiff violated the law and thereafter attempts to recover from its attorneys for
advising the plaintiff to violate the law or for not preventing the plaintiff from violating the
law-conduct far worse than that alleged against Sidley. See Choquette v. Isacojf, 836 N.E.2d
329,335 (Mass. App. Ct. 2005) (even where the attorney urged the client "to perform illegal
acts," the client will not be permitted to "fil[e] suit against the attorney to recover damages
incurred due to being caught" (internal quotation marks omitted)); see also Whiteheart v. Waller,
12
681 S.E.2d 419 (N.C. Ct. App. 2009) (in pari delicto barred plaintiff who knew his actions were
unethical from bringing action for legal malpractice against his former counsel who was charged
with failing to advise him not to send a defamatory letter), review denied, 693 S.E.2d 353 (N.C.
2010); Evans v. Cameron, 360 N. W.2d 25 (Wis. 1985) (in pari delicto applied where plaintiff
followed lawyer's advice to lie under oath because wrongfulness oflying under oath was
apparent); USACM Liquidating Trust v. Deloitte & Touche LLP, 764 F. Supp. 2d 1210 (D. Nev.
2011) (accountants who negligently failed to prevent client's Ponzi scheme could not be liable to
the client under in pari delicto).
If an attorney who knowingly advises his client to break the law (as in Choquette and
Evans) cannot be liable to the law-breaking client, then, afortiori, Sidley cannot be liable here.
2. The Complaint Establishes Watts' Vastly Greater Culpability.
Watts admits it violated the FCP A. See, e.g., Compl. ~ 20 ("Watts self-reported the
violations .... "); see also id. ~~ 14, 19,67,72-74,91, 106, 124; Compl. Ex. D (SEC Order) ~ 1
("This matter concerns violations of the ... FCPA ... by Watts Water Technologies, Inc.").
• Watts' wholly owned subsidiary "made improper payments to" Chinese government officials (Compl. Ex. D (SEC Order) ~ 1).
• "The purpose and effect of those payments was to influence the design institutes to recommend CWV valve products" (Id.).
• "The improper payments were facilitated by a sales incentive policy ... adopted by [Watts'] CWV in December 2006" (Id. ~ ll)-more than a year after Sidley's due diligence had concluded.
• "CWV's improper payments generated profits for Watts of more than $2.7 million" (Id. ~ 2). And
• Watts China's Vice President of Sales "approved many of the payments ... and knew or should have known that the payments were improperly recorded on Watts' books as commissions." Id. ~ 3.
In contrast to Watts' wrongdoing, Sidley is alleged to have been, at worst, negligent. See
Count 1 ("Professional Negligence"). "The justice of the in pari delcito rule is most obvious
13
where a willful wrongdoer is suing someone who is alleged to be merely negligent." Kirschner,
938 N.E.2d at 950-5\. "We are not working here with narrow questions of technical law. We
are applying fundamental concepts of morality and fair dealing .... " Id. at 950 (internal
quotation marks omitted). Given the Complaint's allegations that Watts violated the FCPA, the
Court under in pari delicto should dismiss the Complaint or, in the alternative, enter judgment on
the pleadings for Sidley.
B. Watts' Wrongdoing Proximately Caused Its Own Alleged Losses.
To prevail on its claims, Watts would need to prove a '''substantial and direct causal link'
between the attorney's breach and the injury sustained by the client." Dalo v. Kivitz, 596 A.2d
35,41-42 (D.C. 1991). However, Watts cannot meet this standard.
First, Watts cannot demonstrate a "substantial and direct causal link" between Sidley's
alleged negligence and Watts' loss of its illegal profits: Watts, by definition, was never entitled
to earn illegal profits in the first place. Second, Watts cannot demonstrate a "substantial and
direct causal" link between Sidley's alleged negligence and Watts' other claimed damages,
Watts' legal expenses and its alleged "forced" sale of CWV at a loss. All of Watts' alleged
damages are direct consequences of Watts and CWV employees' decisions to break the law long
after the completion of Sidley 's agreed-upon due diligence at the old Chinese company
Changsha Valve. See, e.g., Compl. Ex. D (SEC Order) ~ 3 (Watts China's Vice President of
Sales "approved many of the payments ... and knew or should have known [they] were
improperly recorded"). Clearly, after Sidley's work was completed, Watts had an independent
legal duty to maintain accurate books and records, to maintain adequate internal controls, and to
prevent corrupt payments to government officials. See 15 U.S.C. §§ 78dd-1 et seq. Watts has
conceded that it failed to discharge that legal duty. See, e.g., Compl. ~~ 14, 19,67,72-74, 91,
106, 124. That is why it was punished. Watts' wholly owned CWV subsidiary did not even exist
14
until after the completion of Sidley's work, and did not "adopt" its "illegal policy" until
"December 2006." Compl. Ex. D (SEC Order) ~ 1l.
Watts effectively has conceded that its losses were proximately caused by CWV
employees' decisions to violate the FCP A from 2006 through 2009 (and Watts' failure to
monitor their conduct), not Sidley's work at Changsha Valve years earlier. Watts is not relieved
of its obligations to comply with the law simply because a law firm allegedly failed to alert it to
another company's past conduct. The Court should dismiss the Complaint, or enter judgment on
the pleadings in Sidley's favor.
C. Watts' Claims Violate Judicially Recognized Public Policy.
Watts seeks to recover from Sidley the penalties that Watts paid to the SEC for violations
of federal law, and thereby seeks this Court's aid in avoiding the consequences of its own
wrongdoing. See Compl. ~ 21. Allowing a proven wrongdoer to use a malpractice action to shift
the consequences of its wrongdoing to counsel would offend public policy and undermine the
very purpose of those legal penalties.
In the context of punitive damages-which involves civil wrongs and not the more
serious violations of a federal criminal statute presented here-courts have not permitted a
torfeasor-plaintiffto shift a punitive damages award to its negligent attorney. A case on point is
Paul v. Smith, Gambrell & Russell, 599 S.E.2d 206, 2ll (Ga. Ct. App. 2004), where the appeals
court reasoned that the plaintiffs were "the active tortfeasor[s ]." Accordingly, "to allow the
plaintiffs to shift [to their former counsel] their tort liability for punitive damages that the
plaintiffs were specifically found by clear and convincing evidence to have caused intentionally
would be contrary to the public policy of Georgia." 599 S.E.2d at 21l. See also Hicks v.
Nunnery, 643 N.W.2d 809, 824 (Wis. Ct. App. 2002) ("[A]s a matter of public policy, persons
who actually commit the criminal offenses for which they are convicted should not be permitted
15
to recover damages for legal malpractice from their former defense attorneys. "). See generally
Restatement (Third) of The Law Governing Lawyers § 53 cmt. h (2000) ("Collecting punitive
damages from the lawyer will neither punish nor deter the original tortfeasor .... "). 11
While the foregoing cases arise in a variety of contexts, they all stand for the rule that
punitive damages awards cannot be shifted to counsel. The Court should apply that rule in the
far more serious circumstances of this case, where shifting the loss is even more offensive.
Violating federal criminal laws is far worse than the civil wrongs for which punitive damages are
assessed. A fortiori, the recovery Watts seeks should be denied. Disgorgement and penalties
imposed by the SEC are designed to punish and deter conduct illegal under federal law, and are
designed to encourage other companies to comply with the FCPA. Watts's other alleged
damages-such as its legal fees to defend against criminal prosecution-also are consequences
of its own wrongdoing. Allowing Watts to recover against its counsel, and thereby avoid the
consequences of its wrongdoing (indeed, to profit from it by recouping its illegal profits), would
be far worse than shifting a punitive damages award from a tortfeasor to its counsel. This Court
should not permit Watts to use the Court's offices to accomplish that perverse and unjust result.
Dismissal or, alternatively, judgment on the pleadings is warranted on this basis as well.
11 See also Ferguson v. Lieff, Cabraser. Heimann & Bernstein. LLP, 69 P.3d 965 (Cal. 2003) (attorney liability inconsistent with the purpose of punitive damages, which is to punish the wrongdoer and deter unlawful conduct; an award would be unjust because the amount of the award would have no relation to the gravity of the attorney's misconduct or his or her wealth); Tri-G. Inc. v. Burke. Bosselman & Weaver, 856 N.E.2d 389, 413 (Ill. 2006) ("[I]mposing liability for lost punitive damages on the negligent attorney would neither punish the culpable tortfeasor nor deter that tortfeasor and others from committing similar wrongful acts in the future. Also, the amount of the award bears no relationship to the gravity of the negligent attorney's misconduct or the attorney's wealth.").
16
D. Contributory Negligence Bars the Negligence Claims (Counts 1 and 3).
The Complaint and its attached SEC Order establish that Watts was at least as negligent
as Sidley is alleged to have been, if not far more so. That is more than enough to bar this suit. If
Watts was even slightly negligent-a conclusion the Complaint makes inescapable-then Watts
is barred from recovery under the doctrine of contributory negligence.
The District of Columbia follows the rule that a plaintiff's contributory negligence
completely bars its recovery where the plaintiff's negligence "was a substantial factor in causing
the alleged damage or injury." Massengale v. Pitts, 737 A.2d 1029, 1031 (D.C. 1999); see also
Breezevale Ltd. v. Dickinson, 759 A.2d 627, 634 (D.C. 2000) ("[c ]ontributory negligence is a
complete bar to recovery" in a legal malpractice suit), vacated & reh'g granted by 769 A.2d 133,
reaffirmed by 783 A.2d 573,575 (D.C. 2001) (en banc); Wingfield v. Peoples Drug Store, 379
A.2d 685,687 (D.C. 1977) (,,[T]he District of Columbia does not recognize different degrees of
contributory negligence. The rule is simply that contributory negligence bars a plaintiff's
recovery."). The Court can rule on contributory negligence as a matter of law where, as here, the
facts are "clear and unambiguous." Lyons v. Barrazotto, 667 A.2d 314,322 (D.C. 1995). In this
case, the facts are not only clear, they appear on the face of the Complaint Watts drafted, and
thus Watts cannot dispute them.
The Complaint and its attachment make clear that Watts' FCP A problems stemmed from
Watts' negligence (or worse), and that its personnel were active participants:
• Watts China's Vice President of Sales "knew or should have known that the payments were improperly recorded" in violation of the FCPA (Compl. Ex. D (SEC Order) ~ 3);
• Watts "failed to conduct adequate FCP A training for its employees in China until July 2009" (id. ~ 9);
• Watts "failed to implement an FCP A compliance and training program commensurate with the extent of its international operations and its ownership of
17
CWV, a subsidiary that sold its products almost exclusively to" state-owned enterprises (id. ~ 22); and
• Watts "failed to devise and maintain a system of internal accounting controls sufficient to prevent and detect the payments" (id. ~ 2).
Watts' claim is barred by contributory negligence if Watts personnel were even slightly
negligent. See, e.g., Karma Constr. Co. v. King, 296 A.2d 604, 605 (D.C. 1972) (per curiam)
(corporate plaintiff's claim barred by its employee's contributory negligence). Watts'
contributory negligence, as established by Watts' own Complaint, warrants dismissal or,
alternatively, judgment on the pleadings for Sidley as to Counts 1 and 3 (Professional
Negligence and Negligent Misrepresentation)12
III. FCPA WORK WAS BEYOND THE SCOPE OF SIDLEY'S ENGAGEMENT.
A. The E-Mai1s Reflecting Sidley's November 2004 Engagement Agreement Are Properly Considered Given the Procedural Posture of this Case.
The Complaint alleges that Sidley breached, by omission, a November 2004
"agree [ment ] to conduct legal due diligence" that "was to include analyzing potential FCP A
violations at Changsha Valve." Compl. ~ 38-39. According to the Complaint, the agreement
came about when "[o]n or around November 11, 2004, Watts instructed Sidley, and Sidley
agreed, to conduct legal due diligence on Watts's behalf with respect to" Changsha Valve. Id. ~
12 The foregoing facts appear on the face of the Complaint and the attached SEC Order. Although Sidley does not seek summary judgment in the instant Motion, summary judgment would be warranted, at the appropriate point as determined by the Court, based on additional undisputed facts establishing the contributory negligence of Watts' then-Assistant General Counsel (now General Counsel). As noted above, Deloitte (hired for financial due diligence) specifically identified and reported Changsha Valve's so-called "kickback policy" to Watts in writing on November 19, 2004. Watts' then-Assistant General Counsel admitted in a June 13, 2005 memo that he had "reviewed the ... draft Financial Due Diligence report dated November 19,2004." In its Complaint, Watts alleges that a reasonably competent lawyer would have considered the "kickback policy" a "red flag." Compl. ~ 15. Crediting that allegation, Watts' Assistant General Counsel was at least as negligent as Sidley is alleged to have been: he allowed Watts to go forward with its conduct despite reading Deloitte's written report.
18
38. An agreement may be formed by multiple documents that reflect the agreement's terms.
See, e.g., 11 Richard A. Lord, Williston on Contracts § 30:26 (4th ed. 2012). Documents
"referenced in the complaint and ... central to [a plaintiff]'s claim" are properly considered on a
Rule 12(b)(6) motion, Oparaugo, 884 A.2d at 76 n.10 (D.C. 2005) (affirming dismissal), or a
Rule 12(c) motion, see L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011)
(district court properly considered "five email exhibits" that were '''integral' to the ... exchange
that [plaintiff] identified as the basis for its Complaint" in granting the defendant's pre-discovery
motion for judgment on the pleadings). The wisdom ofthis rule is especially apparent where, as
here, the plaintiff asserts a claim for breach of contract (see Count II) but fails to attach the
documents that embody the contract. See id.; see also Washkoviak, 900 A.2d at 178. In this
case, the relevant documents, attached hereto, demonstrate that Sidley never agreed to perform
the FCP A services that Watts alleges Sidley omitted to perform in breach of contract.
B. Sidley Did Not Agree to Perform Fep A Services for Watts.
The attorney-client relationship is contractual and consensual, and lawyers are only
required to advise clients on issues within the agreed-upon scope of their engagements. See
Restatement of The Law Governing Lawyers (Third) § 16 cmt. c (2000) ("The lawyer's duties
are ordinarily limited to matters covered by the representation. "); id. at § 50 cmt. d (a lawyer is
not liable for failing to act beyond the scope of representation). For example, in AmBase Corp.
v. Davis Polk & Wardwell, 866 N.E.2d 1033 (N. Y. 2007), a client had hired the law firm Davis
Polk to litigate a tax dispute with the Internal Revenue Service before the Tax Court. During the
Tax Court litigation, Davis Polk had been "provided with a copy of [an] Agreement" that
"provided that [the client] was not primarily liable for the subject taxes in the underlying Tax
Court proceeding-that primary liability rested with" another. 866 N.E.2d at 1036. But Davis
Polk "never fully reviewed the document to determine what effect, if any, it had on the
19
underlying dispute," resulting in various damages to the client. Id. After the client filed a
malpractice action against Davis Polk, New York's highest court affirmed the action's dismissal.
The New York Court of Appeals reasoned: "Davis Polk was retained to litigate the amount of
tax liability, and not to determine whether the tax liability could be allocated to another entity."
Id. at 1037. Whether another entity was liable for the alleged tax shortfall-as suggested by the
document obtained by Davis Polk during its work-"was outside the scope of its representation,"
thus requiring dismissal of the malpractice claim. I d.
Likewise, in the venerable and often-cited Maryland decision Watson v. Calvert Building
& Loan Ass 'n, 45 A. 879, 880 (Md. 1900), the court of appeals held that an attorney hired to
examine the title to real property and prepare a report had no obligation to also report a judgment
and lien on that property. The court reasoned that the attorney had not been hired for general
legal duties but for one specific task. See id. 13
Here, the November 2004 e-mails referenced in the Complaint prove that FCPA review
was outside the scope of Sidley's engagement and thus beyond the scope of the contract that
Sidley allegedly breached by omission. Sidley specifically informed Watts of the planned scope
of its due diligence by providing it with Sidley's "due diligence checklist" before starting work.
See Ex. 2 (DD Checklist); Ex. 3 (Certified Translation). The due diligence checklist made no
mention of any due diligence to be conducted in connection with the FCP A. See id. Watts
13 See also, e.g., Spannaus v. Larkin, Hoffman, Daly & Lindgren, Ltd., 368 N.W.2d 395, 398 (Minn. Ct. App. 1985) (malpractice claim rejected as a matter of law where alleged negligence was outside the scope of the attorney-client relationship); Maillard v. Dowdell, 528 So. 2d 512 (Fla. Dist. ct. App. 1988) (attorney hired to assist in condominium purchase had no duty to research claims against the condominium association ); Hartz v. Farrugia, No. 06-3164, 2009 WL 90l767, at *3 (E.D. La., Mar. 31, 2009) ("The attorney-client relationship is purely contractual and results only from the mutual agreement and understanding of the parties concerned. Such a relationship is based only upon the clear and express agreement of the parties as to the nature of the work to be undertaken by the attorney .... " (internal quotation marks omitted)), certdenied, 131 S. Ct. 104 (2010).
20
agreed in writing to the scope of Sidley's planned due diligence: "The checklist looks fine." Id.
at 2. Watts never requested that Sidley conduct due diligence directed at Changsha Valve's
compliance with the FCPA or any other laws of the United States.
This is an omission case. Sidley is sued for failing to conduct an investigation of FCP A
violations. Lawyers have no duty, however, to address issues outside the boundaries of their
agreed-upon undertakings. See, e.g., Davis Polk, 866 N.E.2d at 1036. FCPA matters were not
within the scope of Sidley's agreed-upon due diligence. The Court therefore should dismiss the
Complaint or enter judgment for Sidley.
IV. THE STATUTE OF LIMITATIONS BARS ALL THREE COUNTS.
A. The Breach of Contract Claim Is Time-Barred.
The statute of limitations for breach of contract is three years. See D.C. Code § 12-
301(7). The limitations period runs from the date the contract is breached. See Havens v. Patton
Boggs LLP, No. 05-01454, 2006 WL 1773473, at *2 (D.D.C. June 26, 2006), aff'd, 235 F. App'x
750 (D.C. Cir. 2007); Allison v. Howard Univ., 209 F. Supp. 2d 55, 59 (D.D.C. 2002). See 31
Richard A. Lord, Williston on Contracts § 79:14 (4th ed. 1990) ("[A] cause of action in contract
accrues at the time of the breach ... irrespective of any knowledge on the part of the plaintiff or
of any actual injury occasioned to him or her." (internal quotation marks omitted)).
The contract here (i.e., Sidley's agreement to conduct due diligence) allegedly was
breached in 2004 and 2005. See Compl. ~ 104. This lawsuit was filed on June 6, 2012-
approximately seven years after the alleged breach. There are no potential tolling doctrines for
alleged contract breaches. The contract claim already was barred long before Watts requested,
and Sidley agreed to, a tolling agreement in June 20 II. Sidley made sure the parties' tolling
agreement expressly provided that "any statute of limitations or statute of repose that expired
21
prior to [June 23, 2011] shall remain expired." The contract claim, therefore, is barred by the
three-year statute of limitations.
B. The Negligence Claims Are Time-Barred.
D.C. Code § 12-301(8) prescribes a three-year statute of limitations for all actions "for
which a limitation is not otherwise specially prescribed .... " Legal malpractice claims fall into
this category, see Wagner v. Sellinger, 847 A.2d 1151, 1154 (D.C. 2004), as do negligent
misrepresentation claims, id. Under the discovery rule employed in D.C., the statute of
limitations begins to run when the plaintiff knows, or by the exercise of reasonable diligence
should know (I) of the injury, (2) its cause in fact and (3) some evidence of wrongdoing. See
Bussineau v. President & Directors of Georgetown Coli., 518 A.2d 423, 425 (D.C. 1986).
The Complaint and its attached SEC Order establish that Watts knew, or should have
known, of its alleged injury, its alleged cause, and Sidley'S alleged negligence no later than
December 2006. Watts' "illegal policy" was "adopted by CWV in December 2006." Compl.
Ex. D (SEC Order) ~ II. As of December 2006, Watts therefore knew or (as found by the SEC)
should have known of the policy. 14 Watts knew that Sidley had not reported the policy to it.
And (crediting Watts' other allegations for purposes of this Motion) Watts knew that it had
overpaid for Changsha Valve's assets. See Compl. ~ 91 ("Watts purchased a company [sic]
whose core business operations were built on an express system of paying kickbacks to
government officials (including design institutes) to obtain or maintain business, which is a
patent FCPA violation."). Because Watts employees knew or should have known of Watts'
14 See, e.g., Compl. Ex. D (SEC Order) ~ 22 (Watts "failed to implement an FCPA compliance ... program commensurate with the extent of its international operations and its ownership of ... a subsidiary that sold its products almost exclusively to" state-owned enterprises"); id. ~ 2 (Watts "failed to devise and maintain a system of internal accounting controls sufficient to prevent and detect the payments").
22
claim no later than December 2006, Watts' negligence claims became barred by the three-year
statute of limitations no later than December 2009, long before Watts belatedly sought a tolling
agreement (in June 2011) or filed its complaint (in June 2012).
Watts may argue that the "continuous representation doctrine" saves its expired
professional negligence claim. This is incorrect. That doctrine tolls the statute of limitations for
professional negligence claims during the attorneys' continued representation of the
client/plaintiff on the same specific matter that gave rise to the claim for malpractice. See R.DH.
Commc 'ns, Ltd. v. Winston, 700 A.2d 766,768 (D.C. 1997); see also Bradley v. Nat'IAss'n of
Sec. Dealers Dispute Resolution, Inc., 433 F.3d 846,850 (D.C. Cir. 2005) (continuous
representation rule no longer applies when "the attorney's representation concerning [a]
particular matter [at] issue is terminated.") (emphasis added) (internal quotation marks omitted);
4 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 23.13, at 498, 511-12 (2012 ed.)
(question is "when the representation of the specific subject matter concluded," and a "general
ongoing relationship on other matters does not suffice").
While Sidley did other legal work for Watts, Watts' claims here all stem from its
allegation that it "hired Sidley ... to perform legal due diligence with respect to the potential
acquisition" ofChangsha Valve's assets and businesses, and Sidley's due diligence gives rise to
Watts' claim. Compl. ~ 10 (emphasis added)15 Sidley's legal due diligence in anticipation of
15 See also, e.g., Compl. ~ 38 ("On or around November 11, 2004, Watts instructed Sidley, and Sidley agreed, to conduct legal due diligence on Watts' behalf with respect to the company."); id. ~ 13 (alleged negligence occurred "[i]n the course of [Sidley's ] legal due diligence."); id. ~ 55 (Sidley's due diligence reports "constituted Sidley's legal advice and counsel to Watts with respect to legal due diligence in preparation for Watts' acquisition of[sic] Changsha Valve."); id. ~ 88 ("in the course of the legal due diligence examination ofChangsha Valve, the applicable standard of care [allegedly] required Sidley to" perform certain tasks); id. ~ 98 (parties' engagement agreement "included Sidley's agreement to conduct legal due diligence for Watts in connection with Watts' assessment of its potential acquisition ofChangsha Valve"); id. ~ 120
23
the Changsha Valve transaction ended in 2005. Indeed, the Acquisition Agreement was signed
"on October 26, 2005." Id. ~ 56. As a matter of law and common sense, Sidley's representation
of Watts on "the specific subject matter" of pre-acquisition due diligence was concluded no later
than the date the Acquisition Agreement was executed. The continuing representation doctrine
therefore cannot have tolled the statute of limitations beyond that date.
The Complaint shows that Watts' claims are time-barred. The Court should dismiss the
Complaint with prejudice or, alternatively, enter judgment on the pleadings.
V. COUNTS 2 AND 3 SHOULD BE DISMISSED AS DUPLICATIVE.
Where breach of contract and negligent misrepresentation claims are premised on the
same facts, and seek identical relief, as a legal malpractice claim, those claims are duplicative
and must be dismissed. See Biomet Inc. v. Finnegan Henderson LLP, 967 A.2d 662, 670 n.4
(D.C. 2009) ("Biomet's attempt to recast its malpractice argument as also breach of contract and
breach offiduciary duty fails"); Iacangelo v. Georgetown Univ., 760 F. Supp. 2d 63,66 (D.D.C.
2011) (courts in malpractice cases must "[ a]s a matter of judicial economy" dismiss duplicative
claims (internal quotation marks omitted)); cf Meador v. Albanese Law Office, No. 5:08-cv-562,
2010 WL 3807163, at *4 (N.D.N.Y. Sept. 23, 2010) ("Where claims of negligence, breach of
contract, breach of fiduciary duty, negligent misrepresentation, or fraudulent misrepresentation
are premised on the same facts and seek identical relief as a claim for legal malpractice, those
claims are duplicative and must be dismissed.").
In this case, the allegations describing the breach of contract claim (Count 2) are
materially identical to the allegations describing the professional negligence claim (Count 1).
Compare Compl. ~~ 85-95, with Compl. ~~ 96-107. Similarly, the allegations supporting the
("Watts was relying on Sidley to provide complete and accurate statements regarding its legal due diligence ... to ... decid[e] to purchase Changsha Valve [sic].").
24
negligent misrepresentation claim (Count 3) are materially identical to the allegations supporting
the legal malpractice claim. Compare Compl. ~~ 85-95, with Compl. ~~ 108-25. All three
counts seek the same relief. Accordingly, the Court should dismiss, or enter judgment in favor
of Sidley on, Counts 2 and 3. See N. Am. Catholic Educ. Programming Found., Inc. v. Womble
Carlye Sandridge & Rice, PLLC, 800 F. Supp. 2d 239,244 (D. D.C. 2011) (dismissing contract
and other duplicative claims upon determining that plaintiff could not demonstrate causation in
its legal malpractice claim).
CONCLUSION
We have placed before the Court all appropriate grounds for dismissal at this time
because this case never should have been brought, and because discovery would present
exceptional challenges and burdens. While Sidley already provided its client file to Watts before
the suit was filed, other discovery would be extraordinarily difficult and extremely expensive
because a large number-perhaps a majority-of the important witnesses are in China, as are
their documents. Watts' claims, if they were legally cognizable, also would involve wide
ranging discovery from Watts, its counsel, its accountants, and possibly federal agencies on the
question of what conduct was the focus of the criminal investigation of Watts and its settlement.
We submit that dispositive legal bars make discovery unnecessary, and that this case would be
dismissed, after discovery, on the same legal grounds advanced here. We urge the Court to reach
these legal issues at this time. The Court should dismiss the Complaint with prejudice or, in the
alternative, enter judgment on the pleadings for defendant Sidley Austin LLP.
25
Dated: August 20,2012
Respectfully submitted,
WILLIAMS & CONNOLLY LLP
By: /s/ John K. Villa John K. Villa (D.C. Bar No. 220392) Charles Davant IV (D.C. Bar No. 484305) Marcus P. Smith (D.C. Bar No. 996721) 725 Twelfth Street, N.W. Washington, DC 20005 Telephone: (202) 434-5000 Facsimile: (202) 434-5029 E-Mail: [email protected]
[email protected] [email protected]
Counsel for Sidley Austin LLP
26
THE SUPERIOR COURT FOR THE DISTRICT OF COLUMBIA CIVIL DIVISION
WATTS WATER TECHNOLOGIES, INC. 2012 CA 004847 M
PLAINTIFF,
Hon. Gregory E. Jackson v.
SIDLEY AUSTIN LLP, Next Court Date: September 7, 2012, 9:30 a.m.
DEFENDANT. Event: Initial Scheduling Conference
[PROPOSED] ORDER
Upon consideration of Defendant Sidley Austin LLP's Motion to Dismiss or, in the
Alternative, for Judgment on the Pleadings, the Opposition thereto, and the entire record in this
matter, it is HEREBY ORDERED this _ day of ________ , 2012, THAT:
THAT:
Defendant's Motion be and hereby is GRANTED; and it is FURTHER ORDERED
the Complaint is DISMISSED WITH PREmDICE; and
the Clerk shall enter mDGMENT ON THE PLEADINGS FOR DEFENDANT.
Hon. Gregory E. Jackson Superior Court Judge
Copies to:
Barry J. Nace, Esq. Christopher T. Nace, Esq. Paulson & Nace, PLLC 1615 New Hampshire Avenue, N.W. Washington, DC 20009
H. Lamar Mixson, Esq. Jason J. Carter, Esq. Bondurant, Mixson & Elmore, LLP 1201 West Peachtree Street, Suite 3900 Atlanta, GA 30309
Counselfor Plaintiff Watts Water Technologies, Inc.
John K. Villa, Esq. Charles Davant IV, Esq. Marcus P. Smith, Esq. Williams & Connolly LLP 725 Twelfth Street, N.W. Washington, DC 20005
Counsel for Defendant Sidley Austin LLP
CERTIFICATE OF SERVICE
I hereby certify that on this August 20, 2012, I caused a true and accurate copy of
Defendant Sidley Austin LLP's Motion to Dismiss or, in the Alternative, for Judgment on the
Pleadings, Memorandum in Support Thereof, Exhibits, and proposed Order to be served on the
following via CaseFileXpress:
Barry J. Nace, Esq. Christopher T. Nace, Esq. Paulson & Nace, PLLC 1615 New Hampshire Avenue, N.W. Washington, DC 20009
/s/ Charles Davant IV Williams & Connolly LLP 725 Twelfth Street, N.W. Washington, DC 20005 [email protected]
Counsel for Defendant Sidley Austin LLP
EXHIBIT 1
EXHIBIT 2
From: Sent:
Tang, Zhengyu [[email protected]] Friday, November 12, 2004 5:55 AM
To: Ho, Sin Leong Cc: Tala, Tony; Wang, Qi; Cheng, Julie Subject: RE: Watts - Legal Due Diligence on Changsha Valve Works for Asset & Business Acquisit' Attachments: Legal DD Checklist for Changsha Acquisition (Nov. 12, 2004)-CHNDOC
«Legal DD Checklist for Changsha Acquisition (Nov. 12, 2004 )-CHN DOC»
Dear SL,
Pursuant to our earlier telephone conference of today, we have prepared the attached legal DD reguest/checklist and faxed the same to Mr. Deng of Changsha Valve. We will follow up with Mr. Deng further on our request before sending
in our team to conduct the legal DD exercise on the ground.
Please let us know if you have any questions or instructions.
Have a good weekend!
Best regards,
Tang Zhengyu
Sidley Austin Brown & Wood Room 2501, Shui On Plaza 333 Middle Huai Hai Road Shanghai 200021 People's Republic of China T: (86-21) 5306 7008 (direct line)
(86-21) 5306 2866 Ext. 218 Mobile: (86) 1350 1848862 F: (86-21) 5306 8966 Email: [email protected]
-----Original Message----From: Tang, Zhengyu Sent: Friday, November 12, 2004 2:57 PM To: 'Ho, Sin Leong' Cc: Tala, Tony; Wang, Qi; Cheng, Julie Subject: RE: Watts - Legal Due Diligence on Changsha Valve Works for Asset & Business Acquisition
Thanks, SL.
Subject to further information about the acquisition scale (transfer price etc.) and to be derived from our legal DD, I would estimate our fees to be in the range of US$ 50,000-100,000.
Please let me know if you have any further questions or instructions atthis stage.
I
Best regards,
Tang Zhengyu
Sidley Austin Brown & Wood Room 2501, Shui On Plaza 333 Middle Huai Hai Road Shanghai 200021 People's Republic of China T: (86-21) 5306 7008 (direct line)
(86-21) 5306 2866 Ext. 218 Mobile: (86) 1350 1848862 F: (86-21) 5306 8966 Email: [email protected]
-----Original Message-----From: Ho, Sin Leong [mailto:[email protected]] Sent: Friday, November 12, 2004 2: 12 PM To: 'Tang, Zhengyu' Cc: Tala, Tony; Wang, Qi; Cheng, Julie Subject: RE: Watts - Legal Due Diligence on Changsha Valve Works for Asset & Business Acquisition
Tang,
The website is www.csvalve.com
The M&A contact person from Deloitte is:
Deloitte
Ada Kwong: Engagement Manager: [email protected] (Tel: 61411606)
Danny Tong: Engagement Partner: [email protected]
Also, I would need a fee estimate for the above work.
Regards,
SL
-----Original Message-----From: Tang, Zhengyu [mailto:[email protected]]
z
Sent: 2004 if: 11 Jj 12 tl 13:22 To: 'Ho, Sin Leong' Cc: Tala, Tony; Wang, Qi; Cheng, Julie Subject: RE: Watts - Legal Due Diligence on Changsha Valve Works for Asset & Business Acquisition
Many thanks, SL.
Please also let me know the website of Changsha Valve Works.
As discussed over the phone earlier today, we will be sending our legal DD checklisVrequest to Mr. Deng late today and sending our legal DD team (including Ms. Wang Oi who has been working on several asset/business acquisition deals in recent months and Ms. Zou Oin) to Changsha as early as next Monday to work with the Deloitte team on the ground. Meanwhile, please let me know the contact information of Deloitte team leader so that we can better coordinate our DD efforts. Thanks.
Best regards,
Tang Zhengyu
Sidley Austin Brown & Wood Room 2501, Shui On Plaza 333 Middle Huai Hai Road Shanghai 200021 People's Republic of China T: (86-21) 5306 7008 (direct line)
(86-21) 5306 2866 Ext. 218 Mobile: (86) 1350 1848862 F: (86-21) 5306 8966 Email: [email protected]
-----Original Message-----From: Ho, Sin Leong [mailto:[email protected]] Sent: Friday, November 12, 2004 11:48 AM To: 'Tang Zhengyu' Cc: Tala, Tony Subject: RE: Legal Due Diligence
Tang,
Please find the address and contact person of ChangSha Valve.
Regards,
3
SL
-----Original Message----from: Ho, Sin Leong Sent: 2004'1" 11 H 12 n 9:49 To: Tang Zhengyu Cc: Tala, Tony Subject: Legal Due Diligence
Hi Tang,
Hope all is well with you.
We need your participation in a legal due diligence on a target company that Tony has discussed with you earlier.
Deloitle M&A group has conducted a Phase I financial due diligence and will proceed with Phase II next week for one week.
The scope of the review will be your firm's standard legal due diligence review.
A pertinent issue identified by Deloitle is ownership as the company is owned collectively by the employees and no records of shareholding existed.
If you could send in your staff by middle next week it'll be ideal so Deloitle's team could share their findings in the field. They will be there till next Friday.
Do contact me on my cell 13821733199 should you need clarifications.
Regards,
SL
4
SIDLEY AUSTIN BROWN & WOOD LLP
ClllCACO ;:;t1Ja~ Suite 25Dl, 25/t, Shlli On Plaza
No.333 Middle Hllai Hai Road, Shanghai 2DDD21, 1'.R.C. SllA"\!CJJAJ ...t~
Ell, l't'1'el: (86)(21) 53lJ6-2366 1~ .!-ax: (86)(21) 53lJ6-8966 C1I\JTI\'A S rtJEL
Wi'VW.SlDLTIY.CO'vl SJ"\!CAT'ORTI ,wTjm~
llO"\fC KO"\fC ~?:!o mJ~T18661:f rounded 1866
WASllJ"\fCTO"\f, D.C. #,~'l!Ill
,"Vriter's Extension NUlllbcr 218
WRITER'S E-ldAIL ADDRESS
~]E¥/::E.
lii1~ IE [lj ~ ~ifi ~~ fiJI
2004if-llfj12El
E!! i! : +867315496586
it< J!: : +867315499125
E!! i?i : +86 21 53062866
+86 21 53067008(l1[~)
it< J!: : +86 21 53068966
~TWatts Regulator Co. ("i'~" Watts" ) tC!-.x;f*i.1>rP~nrtt9:&i/i»8U"'&.ill!.~
Ji::Hj'!&)l1;J (H!j;" !&)l1;JJ.J!i EI" ) ,Jjl;fiJIW~Watts~:fEJiHTJjl;*JJ2175t~g~R~i!!!'o
~±~W~!&)l1;J~Eltt9~fitt,.Jjl;m~$~g~~i!!!'~,Jjl;~~~n~A •
• ~~.~.fi.-~tt9g~~i!!!'.
*i~;l!l; ( §tifi1HUI'l~~ lltli4 ) .R:Jt~4!z14 A. , TiJ~g~fl1J/.itHl'tJ~. , s'H'i'~~~'lil'? iB'1jiHi'J~tJ(a<J~*o ·MliiJE4!z14A.<OClJ'l1J.4!z14A. , lJ!i:WillJl~. ~~. :\lJ!ju, ll1:Jt<OC1ltf.fl*1~;l!l;o jlj;JF-4!z14A.l!l:!i*1~;l!l; , l' f4.r;tjlj1J/.\1')~tJ(<OC1J/. \1')1l't~~a<J iJJ01'. po lJ'l4!z*1~;l!l; , lJ!i cg 1!; :Jt14 A. , :itlJ!i .lrllnfMJt*1~;l!l;.
00 •• m0~.E~.~~*~ •• m~&~*0~.n(~~~.,~ ~ ) ~pJi~il&Ji'ifftt3t~.EP14o
~) •• m0~.E~.~ •• (~~~~.U) ••• illR3t~~.m~ o
~ •• m0~~ ••• &.m~. ~ .~~~~0~~m.«~.~~~~~* ••• ~~.F~m.~.
m •• ~.~~, •• ~.m.«~a*.~~~~~~~,*.m. ~*~ •.•• ~~~~0~.fim.~*~&.il&Ji'ifm3t~.m~o
1
(e) lj!HjHft~j'jjfilf1'fW:~-il'/fiIf1H~'E'iJJjj;~'~)5/, , 'EHi54§}t;AW:~-il' ( 3<D1'f ) E'iJE*~R.~w.nm~~~MAW:~-il'E'iJ.&m~E'iJ.~~;#.
W:~-il' /fi}f 1'f-il')(;J ~ j'jj OJ ff1le:&!J'l-1'f E'iJ 4§J,Yi fXJJ, 'i'X'I'U:if J:,l 'f; ili'i i.ll.S}j 0
W .E1'f~E'iJW:~-il'~~.~WE'iJ~E,~~~~(~~~1'f.rr)E'iJ.
ED {!j: 0
00 •• m-&&.~j'jj~1'f~~j'jj, T •• ~,~~m~E'iJM~.,4§~ ~j'jj, T •• 11I~5J' ~tJ1.~ E'iJE * tAR.~tc. mRE'iJ. ED{!j: & 1'f *4§~ ~j'jj, T • • 1:i'L~5J' ~*J1.~ flll:fXM ~E'iJ i.ll.S}j 0
(h) llH!1ft -&~j'jjE'iJ pg aBM~. , &.~j'jjE'iJ pg aB~lli'!,tJ1.~o (i) 'IN .1ft ~ j'jj qj' *::E 'l!!f am E'iJ Jjj;~'~)5/, 0
00 .'f;ili'i~~a~1'f~1'f*~j'jj~n(~~.)E'iJ4§~aWm~~~OJm
1.3, lllJll
99 Jjj! & , &a ~f¥1± fffoiJ iDJ I~ ~ j'jj 1± 1:.l2J'; 4§ ~ aw ftt~. i.f OJ iiE 1'f ~m Ii J'iij a<t l!.Hj'~.il'IE'iJ ~ j,- 0
00 .'f;ili'i~~~j'jja~~1±.-il'a~.fi.ill;~1'f,ru.~~~ •• ill a~*~~.~~1'f.~,# •• m1'f*~ •• illJjj;~.~E'iJ~~o
00 •• m*~~j'jj*§E'iJ~E~Mo ~) a~f¥1±~~j'jj.fi~~~E.~W~E'l!!f.E'iJ~~.~mo~1'f, •
• mm*~~.~mE'iJm~~~(~~~1'f.rr)E'iJ.~~o ~ a~f¥1±OJn*~~j'jj~~~.~~1'f.*.~E'iJfffoiJ.*~j,-.R.
• aw 'Mi 'l!!f a* 1:. E'iJ :J\: 1t; • .lit ftll ~ j,- ?
~ •• m1'f*~j'jj •• ~ •• •• * •.••• ~ •• ~~E'iJ~Mo
2
00 .~OO~~~~.~B~ •• ff •• ~*~.~~~~~~g~~.~ ~~~.~m*?~~,~ •• mBa.~~ •• m*~.~~.
~) .~OO~~.~~~~~~~~~~.~fi~~~~.m*~m&.B
•• *~~~fi~~fi~.#.~~.~#~G~~.~~~~~~~ ~~~.~fi~~~~.m* •• ~.fi •• ~~.o
~ •• m~~~A~fi*~~ ••• ~@~o (d) lj!HJl1tt~~E9::E§l!~~)(H~@. ( '2),tili@~~±tl!:tJl ) 0
00 .~~~~.~~G~m.~~~*.m.*~~*~*.~* .•• . •••• AM •• *.~ •• ~.m~ •• ~~~~*§~~ •• ~ .~~**~G~.E*§o
(b) ~~.~~IE pgPj-.i9:~ff.£HJL~. :5J>'i:fJL~~ ~f;jjHJL~ ? 1~HJl1tt;ffj$~ ijEaJ'l3'<:14.
~ ~~.~~lEpg~ •• ~*#~.~.~ •• ~~~F**?.m;ffj $~~BjJ3'<:14o
~ ~~.~~IE~~ •• ~*#~~ •• ~~~**?.m;ffj$~~~ 3'<:14.
(e) lj!j':lJl1tt~~~~f'~1tt$fJJ@. ( '2),tili@~~±tl!j:Jl ) 0
00 •• m~~.~~~~5M~5M.&~*~~('2),~aFM .• GM ~) 0
~) .~~.~~G~~*.~ ••• fi~5M.m,#~~.~.
3. .F
00 •• m~~~~.~!~*~±e.F~WE ••. ~) .~OO~~~~~~~.~!~*~±e.F.~~~~~~~.#.
mHtt::E§l!.F~fx..~BjJ , '2),tili.~~~ , f,,"ffjJt~~o
3
~ .~OO~~~.~!.&~.F.~~~~.F,.~ •• fi~~.F W~,fi.FW~m6.~~~~~$n.~ ••• ?~~,.~~. {lII:Jj:)l, IJlg i'l'B n 0
~ .~OO~~~~~.~~.Fffi~a ••• fi~~$~ •• m~~~. ~ .~OO~~~~~.~~.F.~ •• ~~am$n~~ •• m~?~
~,.~~.{lII:~IJlg$n&a.~~~ •• m~ffi.~~~. W ~~~.~~.F~«~.~~~.=E*~~~.?
00 •• m~~!n~ffl~±~~ ••• ~.{lII:~~,~mffi~±~~~W ~ •. oom.±~ft~.±~ffl •• ~~~,#.mffi~m~±~~ffl ~~mF~~.~~,#.~~.~~~.~!~~.
~) •• m~~~am$n •• =EZ~~~~a.ffi~±~~ffl«~±~ *~.miS<.o
~ .~OO~~±~~ ••• ffi.&~ffi~m.(~m±~Wfr*).~B 1>t)~ , #tN.{MI:l~1>tlf.t~sJl.
~ .~OO~~±~ .••• ~.~#~G~~~& •• «~~lli?.m m$~~afl3ti'to
~ .~~±~ .•••• ~#~.~IJlg#~~~.~§~~~.~~G~ ~~%~.~A •• ~~~MM~~.o
W .~~~~~~~.~~~~am~~±~~.~.«~ffl.*~.~
, .«~am~~±~~.~Ij.«~ffl.*~)<p~o (g) lNt1iHjt~~. .1'-~ ~. T Ji ljl..{ULl:JJ' :RtJL~ w".~ffl ~ffi:il'!m ~.~
~~.=E~U~m:il'!m~&m~«Ji~~~.~~.
00 •• m~~§n~ffl~~ •• ljl..,#~~~~~~~~ •• ~m~*~ ~i'Jf~fXo
~) .~~~ •• F~.~#~G~~~ ••• «~~lli?.mm$~~ sJl3ti't.
4
(a) 'IN!ifIi iA 1¥:lit:ll!: S ~lH!,'4fJ tt 0
~) .!ifliiA~~~1¥:lit*ffl~~~~E~.
~ .~1¥:lit.fi.~.*.~~ ••• ~~.,#.m~m~~._.
00 ~~:ll!:s.~ff~B*~ftM.~~.~.~~ .• ~.~«.~~tt * .• @~~ ••• mF«?:ll!:s~~~'.~.~.~~ .• ~.~ «?.m~m~~~%~,~~ftM~~. ~~~ •• ~~~ ••
~) ~~F~~ftM.~~~):ll!:s.W~~· .@.~ ... ~m~~@ J1I\'.'f.Ij; -l'}? l~HJjH!Ufj m ~ iiIS.1l % {if 0
(c) ~ ~ :!lFil'i'EJ: ~j:i1i fiJjl: '8Hl' j?JT ~;g-~ pg a'9 ff~~ = E (r:l!l pg Pi-)~ n 7 ~ * .1,,'l,N3Z lit" OJ 1tffl. $1it1 .j;;r;. ~ ~U;=~t ~ tt* •• ~Ttt**~~ 11.1 is/. •
••• a~m(~~§~OJ.§~~~OJ .• ~.A~.m)?.m ~ma'9iiEaJl%i4o
~ .~OO!ifliiA~~~n.~~:ll!:s~~~ff~§m.A.mF«~fi~,
.EJ:.A.~*§m.mF«~fi~~~~~.fiill?~~, •• m~ **t •.
~ .~OO!ifliiA~~:ll!:s~ff~.B~~.~.§~OJ~.mF«~~.OJ
fl'g~~~~~qT~.1'~~ ?
00 .!ifliiA~~:ll!:s~ff~m.~~~;g-•• ~~*(~~~~~*a~* )~~~~~~*.M~.§;~~, •• m~* •••
~) .!ifliiA~~:ll!:s1¥~ff~m~~*~ •• ~.*M.~~Pi-(r:l!lpgPi-) 1~§ , ~lH1HTPl:)f.x •• ~m~~Pl:)f.x ; :tlD~ , lNttt1:J:t~**t.o
5
~ .~~~~.~~.~~.~~.F~~.~~~~GOO.=E~.§
mf~GOO~~E9:@1* ; :l!D~ , l~f!H~~*;j;j;j6.fo
~ .~~~~.~.~GOO~~~~~(~~~).«,~~$~.~ • ••. * •••• ;~~,.mmm$.;j6.f.
~ .~~~~.~#~~.mfi~.~§.«.fi~*~.~§~~~.
~:I1F~m*~U[1i!~.§? ~D~ , IJlUlwfJt1M!l*i>l,aJl~*t;j6.fo
00 ~*~~.§n.~~5&~~.~n5&~~~. ~n~~.~§~
~~~GOO$.fi*.~ •. aw ••. $~ •• m(~~~*GOO • •. •••• A~. ~I.~n~~~ ••.•••• A~.~I~fi i'~ ) ? l~mf~~*M;j6.f , ~j:li5~~.A1§~~ .. $iScl1191". 5&:ili:~.
OOa1'ifi'./Mlk:. ~iHlI,.o
~) .mm_*. ~ •• «.~~~M.¥~~Efi~~GOO~lk: .• lk:. lk:~ •••• ~~.~M~~~.~~o
~ .~~.~~GOOaW$n •• ~~~~~~Emfi •• ?~~,.m 1~~*;j;j;j6.fo
00 ~~.~ITn7GOO~ ••• ~~.~§.«.fi~*~.~§~~~ .~m~~~?~~,.mm~~~.~~o
~) .~W~~~*§.~E~*~ffi~m*.m_~~W.Q~~~~~
~:I1~o
~ .mm~~~*§.~E~*~ffi~~~~m~.~~,~~@~~~
~9U~~/~:I1F ;
W F~ •• ~~.IT.~~.~.~~ (ii) ~;j6.f1~$~~
(iii) i~1~BR.~iSi. ( ~j:lii'lf~m_i~1itjf~*Jl~ ) (iv) )$~i~1it!:jtl?~iSi.
(v) ~tt.* (~Df~*. 1~~. f~"l:. ~f~.) ~~/~:I1F
~0 I*~~(~~.*. ~.~~)~.~~.~a~~
6
~ .~~.~#~*.n-~~~~~~~~~~.~&.~m:
w *~~Mtt~.n~.~M.*[email protected]~~~M*§~~~U
:lL~~~. ~&.~j:j~ ;
~ ~~~fi~¥~ •• m~~~~.~&.~m;. (iii) *~m:SIoJWattsEiJ;Q~lI*.x§.'lli:ff~~~. ~&.~j:j~o
00 •• m~~~~.m~(~: •• ~).~~ •••• A~~.(.~ ~. ~R§. l!jt~JJte~jljjm ) 0
~) .~~~~~~.~~ ••.•••• A~ ••• ~.A~(~~~. tbR:A~ ) ~U~1F~~~)f$/IDis<'.1*W~)f$I11}iS<.o 3<D~ , lj!H!H~l&~ ~ )f$/ID is<. ~ :II fp 14 0
~ .~~~~.~~ff~A±MM~~~~~ •• ~.mm~.~.M~ q'T •• a'9IlR'lli: 0
~ .~~ff~#~~~ ••••••• A~~~~.a~?~~~~ • •••••• A~.11X5U~~*JjJjjl't:.Ml- ?
00 .~~~~!n~~IAB(~~ill~~I)&mm:I~~~.
~) .~~~~.~~~~~~I~u~~~~,n •• m~~Rffl~~~ ~~~:.Ml-te~*o~~ •••• A~Rffl~~~*,ru.~fi.m-m
~ •• m~~~~~I~I •. ~~5M~.~a.~~~~~,n.m ~W~~r!l~~1*M~liEaJl~14o
~ •• m~~~~~~A.~*~~~~e.~~~~ •• o
~ •• m~~~~I.m~ill~*li~&§n~ill~A~.ffl~WW.o W ~~~~~I~U5W~~~~ID~, •• m-mfi*o
7
(a) liHJHP-: 0 'ill Il"J m ~'lHa iiI Ji Ep {if 0
~) •• ~0'ill~~m.Il"J~~m~W.~&0'illm.m~,*.~0'ill~ =~B.~§~m.ll"J~m~~.~~~m~en~~Il"J. ~~0'illB
.*~m*~ff~&~ .••• mM~*Mm.Il"J~W~~. ~ 0'ill.~.§ff~%~ll"Jm~.~ll"Jft ••• ?.~~mll"J~~~#
o
00 .~U0'illll"Jff*~~~.~~~~~aw.mll"J~s~*,* •• ~ ~ma'9iiEaJl~#o
~) .~U0'ill.~.~.m~~~S~WIl"J~.~~~fiaenIl"JSfi.
~H,.~ff~.=~~~~.,* •• ~~~ •••
00 ~.~§.=.~awenll"J*m?&_*m.~.
~) .~U~.~§.~.-.~.m.~§(a ••. ft~ •• ~ •• ) , *lw~U~JjiH~.~Il~~1i!i\:ftt~" a •• " 9~.m.JJillSo
(e) lW~U ~j:t!laW~~~'f~.JJil IS jji~tGlm.:lLIl"J~.m.:iJ::*II1I~~1t •• • ( §:f~m~~Wll"Jft.~ ) •
SlIl 23714vl 8
EXHIBIT 3
AFFIDAVIT
I, Ryan Smith, hereby that the is, to the bes' of my knowledge and belief, a :rue and accurate translation of the enclcsed document "Due Diligence Checklist for Changsha" from Chinese into Fnali,;h
Ryan Smi:h rpr,,,p'pyfprt Translations,
<:'r,ool N 5,h =Ioor
Washington, DC 20001
Swom to oefore me this oay of ,July, 2012
lisa Chan I ,jt),'Y Pu:)lic, District of Cofumbia
.}<\, {;;l'llmisslon Expires ;/"1/2013
Stamp, ,,,,,,'p,,,
WASHINGTON, DC ]()()Ol i T
nfl'lrI', IN CiTIES WORlDW'DE
BELTING
BRUSSELS
CHICAGO
DALLAS
GENEVA
HONG KONG
LONDON
Writer's Extension Number 218
COl'iTEl'iT OF FAX/E-MAIL
To: Mr. DENG Kaili
SIDLEY AUSTIN BROWN & WOOD LLP Suite 2501, 25iF, Shui On Plaza
No. 333 Middle Huai Hai Road, Shanghai 200021, P.R.C.
Tel, (86)(21) 5306-2866 Fa" (86)(21) 5306-8966
WWWSIDLEYCOM
Founded 1866
LOS ANGELES
NEW YORK
SAN FRANCISCO
SHANGHAI
SINGAPORE
TOKYO
WASHINGTON, D.C.
WRITER'S E-MAIL ADDRESS
zytangCtj!,sidley.com
Sent: TANG ZhengyulWANG Qi Sidley Austin Brown & Wood LLP
Tel: +86 731 5496586 Fax: +86 7315499 125 Tel: +86 2153062866
+862153067008 (Direct line) Fax: +86 21 53068966
Date: November 12,2004 No. of Pages (including this page): 7
Subject: Watts - Changsha Valve Factory Acquisition Project Preliminary Legal Due Diligence Investigation Questionnaire
Greetings!
As Watts Regulator Co. (hereinafter referred to as "Watts") is planning to purchase the core assets and businesses of Changsha Valve Factory (hereinafter referred to as "Acquisition Project"), this firm is hereby retained by Watts to conduct this preliminary legal due diligence investigation.
As attached to this letter, please find the questionnaire of the preliminary legal due diligence investigation for the proposed Acquisition Project, prepared by this firm.
Please prepare relevant materials in detailed and complete form according to this questionnaire, and provide written documentary proof if possible.
In order to comprehensively assess the feasibility of the Acquisition Project, following this preliminary legal due diligence investigation, this firm may carry out further due diligence investigation on your company as needed.
Thank you very much for your assistance. Please contact us at any time if there are any questions.
This fax (including the contents and attachments of the fax) is only sent to the recipient, and may contain confidential information subject to attorney-client confidentiality privilege. Those who are not designated recipients or who receive
this fax in error are not allowed to read, disclose, duplicate, distribute or use this fax. Any delivery of this fax to non-recipients does not constitute waiver of the confidentiality privilege or confidential information. Those who receive
this fax in error shall notify the sender via telephone and immediately destroy this fax.
Best regards,
TANG ZhengyulWANG Qi
Sidley Austin Brown & Wood LLP
Watts - Changsha Valve Factory (hereinafter referred to as the "'Company") Acquisition Project
Preliminary Legal Due Diligence Investigation Questionnaire
* Please note that, unless otherwise specified, "'Company" in this questionnaire refers not only to
Changsha Valve Factory, but also to other companies participating in the Acquisition Project (if ap
plicable).
1. Documents about Basic Information of the Company
1.1 Structure of the Company
(a) Please provide the photocopy of the latest effective business license of the Company and photo·
copies of all govermnental approval document' in relation to the establisliment of the Company
(including reorganization, if any).
(b) Please provide photocopies ofthe latest effective Articles of Association (including all revisions) or
other organization documents of the Company.
(c) Please provide the photocopy of the capital verification report of the Company.
(d) Please confirm in writing whether, among the Company's investors, there are state-owned enter
prises or other entities using or investing state-owned asset,;. If yes, please provide the basic in
formation about such investors in writing as well as photocopies of their business licenses and
various governmental approval documents it holds in relation to investment in the Company.
(e) Please provide basic information about all investors/owners of the Company, including photocopies of business licenses of all institutional investors (if any) or comparable certificates of establishment, and certificates of identities of natural-person investors; and provide a written description in term.'; ofthe various powers and rights that investors/owners may exercise and enjoy with respect
to the Company. (f) Photocopies of the latest effective investor agreements or comparable joint operation and/or co
operation document.:;; (including all revisions). (g) Please provide a structure chart reflecting all subsidiaries, subordinate unit.:;; and branch entities of
the Company, photocopies of the business licenses or registration certificates of all subsidiaries, subordinate units and branch entities, and descriptions of the equity structures of all subsidiaries, subordinate units and branch entities.
(h) Please provide an internal structure chart of the Company, reflecting the internal structure of the Company.
(i) Please provide basic information about the competent department for the industry of the Company.
1.2 Compliance with approval document'
(a) Please confIrm in writing whether there is any non-compliance with various governmental approval document' and permits in relation to the establishment (and reorganization) of the Company, and whether there is any factor impeding the Company in renewing the above-mentioned various governmental approval documents or permits upon the expiration thereof.
1.3 Restructuring
(a) Please confIrm in writing whether the Company is currently undergoing or is planning to undergo restructuring. If yes, please confirm whether such restructuring would affect the Acquisition Project and provide a description of the basic information of such restructuring.
2. Operations ofthe Company
2.1 Basic operating status
(a) Please provide detailed information about the businesses of the Company. (b) Is there any agreement or arrangement about the Company's subcontracting operations or com
parable operations and management? If yes, please provide photocopies of documentary proof (including all revisions) of relevant agreements or arrangement';.
(c) Are there are any commercial factors, risks, changes in government regulatory policies or other factors that may signifIcantly affect the Company and/or the Acquisition Project"
(d) Please provide information about the sales network, sales strategies, sales volumes and sales target'; of the Company.
2.2 Licenses and approvals required for operation
2
(a) Please confirm in writing whether the Company has obtained all the perrints, licenses and approvals
required for conducting the business activities described in the business licen.<;e thereof? If yes,
please provide photocopies of the permits, licenses or approvals that have been obtained.
(b) Please confirm in writing whether there has been any breach of the various permits or approvals
required for the above-mentioned businesses of the Company, or whether there has been any con
duct beyond the approved business scope. Please also confirm if there are any factors that impede
the Company's renewal of various permit'; or approvals required for the above-mentioned busi
nesses of the Company upon expiration thereof.
(c) Please provide a list of trade associations or alliances of which the Company is a member.
(d) Please provide a list of the Company's primary competitors (including names and addresses).
2.3 External cooperation and affiliates
(a) Please confirm whether any investor/owner, affiliates ofinvestors/owners, directors, senior execu
tives or their family members are directly or indirectly owners of or involved in any other businesses
that directly or indirectly compete with the Company's businesses.
(b) Does the Company maintain representative offices, branch entities and subsidiaries domestically
and/or overseas? Please provide corresponding documentary proof.
(c) Does the Company have associated enterprises, joint ventures or cooperative manufacturing rela
tionships with other domestic enterprises? Please provide corresponding documentary proof.
(d) Does the Company have a joint venture or cooperative relationship with other enterprises overseas?
Please provide relevant documentary proof.
(e) Please provide a list of clients and suppliers of the Company (including names and addresses).
2.4 Insurance
(a) Please provide the insurance policies for all insurances that the Company has purchased and related
contract, (including property insurance and liability insurance).
(b) Please confirm if there are any outstanding or pending insurance claims, and explain the reasons.
3. Assets
3.1 Basic information
(a) Please provide a detailed list of all assets of the Company related to the Acquisition Project.
(b) Please confirm in writing the lawful ownership enjoyed by the Company over all assets related to
the Acquisition Project. Please also provide documentary proof of title to major asset.:;;, including
purchase contracts and proofs of payment.
3
(c) Please confirm in writing if the assets involved in the Acquisition Project are state-owned, whether they are subject to appraisal of state-owned assets, and whether the asset appraisal report'; are subject to approval or filing by relevant department" If yes, please specity the fimctional departments.
(d) Please specity in writing the internal permission or approval procedures that must be obtained or conducted for the Company's disposal of the above-mentioned assets.
(e) Please specify in writing if the Company's disposal of the above-mentioned assets is subject to permission or approval procedures of relevant government departments. If yes, please specify the functional departments and the time required to obtain the applicable permission or approval.
(I) Is the right of the Company to dispose of the above-mentioned assets restricted by contracts with third parties"
3.2 Land/buildings
(a) Please provide a specific description of the land and buildings currently used by the Company, including the exact locations, areas, natures and purposes of land. Please also provide photocopies of the relevant land usage certificates and real estate certificates, and please confirm which ofthem are related to the Acquisition Project.
(b) Please provide the contract,; or agreement'; between the Company and government departments or third parties regarding obtaining the usage rights of the land.
(c) Please confirm in writing whether all applicable taxes and fees (including land transfer fees) in relation to the land and buildings have been paid off; please also provide applicable proofs of payment.
(d) Please confirm in writing whether any mortgages and other encumbrances have been placed on the land and buildings. Please also provide corresponding documentary proof.
(e) Please confirm if there are any present or potential environmental pollution or factors presenting risks to human beings or the environment that have negative impacts on the Acquisition Project.
(I) Please confirm if the operations of the Company will be aflected by government land planning or usage requirement';, or if there are any conflict,; with relevant government land planning or usage requirements.
(g) Please provide the lease agreements signed between the Company, its subsidiaries, subordinate entities and branch entities with third parties in relation to leased premises or venues used thereby, as well as photocopies of relevant proofs of title.
3.3 Tangible asset,
(a) Please provide the list of equipment currently used by the Company, and confirm that the Company has legitimate ownership over such equipment.
(b) Please confirm if any mortgages or encumbrances have been placed on these asset,;, and provide corresponding documentary proof.
4
(c) Please confIrm ifthe Company willloanilease any of its asset, to third parties for use; if yes, please
provide related information.
3.4 Inventories
(a) Please confirm if inventories are merchandisable.
(b) Please confirm which appraisal method is employed by the Company for inventories.
(c) Please provide information regarding categorization of inventories into finished products,
semi-finished products and raw materials, and provide corresponding itemized account,;.
3.5 Intellectual property
(a) Does the Company own any legally registered trademark" patent" software copyright, proprietary
technologies, domain names and/or other intellectual property right';? Are there any trademarks,
patents and software copyrights that are currently in the process of application? Please provide
corresponding documentary proof, including registration certificates and proofs of patent fee pay
ment.
(b) Is the registered trademark of the Company's product' (if any) determined to be a "Famous
Trademark" or any other pro forma designation? Please provide corresponding documentary proof.
(c) Has the Company signed any agreement" or any similar arrangement" (including situations such as
being licensed, transferring and licensing, and/or assignment to other parties) with any third parties
(domestic and foreign), including its investors/owners, regarding the licensing of intellectual
property, transfer of trademarks, patents/proprietary technologies or technical cooperation? Please
provide corresponding documentary proof.
(d) Please confirm in writing if the Company has infringed or currently infringes upon any intellectual
property rights of others, or if the Company has had any disputes or litigation with others regarding
infringement of intellectual property rights" If yes, please provide related materials.
(e) Please confirm in writing if the Company has had any actions or non-actions that may lead to the
suspension or possible suspension of the validity of intellectual property owned by or licensed to the
Company"
4. Creditor's rights and liabilities
4.1 Financial arrangement"
(a) Please confIrm if any investors/owners of the Company or other enterprises (including affIliates of
the Company) owe the Company any unpaid liabilities; if yes, please provide related materials.
(b) Please confIrm if the Company has any external (domestic and foreign) liabilities in any form, due
or undue, and bank loans or loans in other forms; if yes, please provide related materials.
5
(c) Please confirm if the Company provides any guarantee for the liabilities of any third party on the strength of it, tangible or intangible asset, and in any other form; if yes, please provide related materials.
(d) Please confirm if the Company holds any external (domestic and foreign) creditor's rights in any form, including receivables or short-termllong-term loans, etc.; if yes, please provide corresponding materials.
(e) Please confirm ifthe Company has any liabilities that significantly impact the Acquisition Project or the performance of contract,; or arrangements related to the Acquisition Project? If yes, please provide related descriptions and materials.
4.2 Arbitration and litigation
(a) In the past two years or at present, have there been or are there any legal proceedings, arbitration, government investigation, disputes or claim.,; (including litigation in relation to any directors, senior executives, employees or former directors, senior executives or employees of the Company) that involve or may involve the Company and that may have an impact on the Acquisition Project? Please provide related materials, including information regarding the parties involved, nature of the disputes, amounts involved, time of trials/resolution, results etc.
(b) Please provide photocopies of any verdicts, rulings, decision..:;;, notices, official documents or settlement agreements that require, restrict or prohibit certain business activities of the Company.
(c) Please confirm if there are any investigations by government department.:;; or representatives thereof into the Company's operation..:;;? If yes, please provide related materials.
5. Major/important contracts
(a) Has the Company concluded any contracts that restrict its involvement in the Acquisition Project or performance of contract.:;; or arrangement.:;; related to the Acquisition Project? If yes, please provide photocopies of the contracts.
(b) Please list all major or important contracts and arrangements, verbal or written, connected with the Company's businesses or operations.
(c) Please provide photocopies of all contract,/arrangements related to the Company's businesses or operations, including but not limited to the following contracts/arrangement.:;;:
(i) Product sales contracts, purchase orders and sales agency agreements (ii) Raw materials supply contract, (iii) Equipment purchase agreements (includnig all major equipment and machnies) (iv) Maintenance agreements for factory facilities and equipment (v) Contracts/arrangements for public utilities (such as water supply, electricity supply, gas
supply and telecommunications); (vi) Contracts for disposal of industrial wastes (nicluding waste water and solid wastes) or
similar documents
(d) Please confirm if there are any of the following contract,;, transactions or arrangements that are not included in the above:
(i) Contracts, transactions or arrangement'; of an unusual nature or that have not been concluded through ordinary commercial channels or not during the normal course of business operations;
(ii) Contracts, transactions or arrangement'; that, fully performed, would cause losses to the Company; or
(iii) Contracts, transactions or arrangement'; with major obligations or duties that should be made known to Watts.
6. Company directors and senior executives
(a) Please provide a list of the members of the Company's decision-making body (e.g.: the Board of Directors) and senior executives (their names, titles, contact information and resumes);
(b) Please confirm in writing if the Company has signed any non-competition clauses/agreements or confidentiality clauses/agreement'; with the directors, senior executives or other principal personnel (including principal technical personnel). If yes, please provide the photocopies of such clauses/ agreements.
(c) Please confirm in writing if there are any people, without the title of directors of the Company, who usually perform the duties of directors upon authorization.
(d) Has there been any verdict or ruling with regard to the Company's directors or senior executives? Have any ofthe directors or senior executives been stripped of certain qualifications under the law?
7, Labor and personnel
(a) Please confirm the number of current employees of the Company (including retirees) and the corresponding structure of the positions.
(b) Please confirm if the Company has signed labor contract, with all employees, and please provide the labor contract text template used by the Company. If a different text is used for senior executives, please provide a separate template.
(c) Please provide a written description of the salaries, social insurance and benefit policies for related employees, and provide documentary proof of social insurance premium payments.
(d) Please provide all of the Company's internal regulations and written materials regarding labor and personnel relationships.
(e) Please provide details regarding the pension plan that the Company makes available for its employees, and the current expense outlays for retirees.
(I) If the Company enters into confidentiality and non-competition agreements with employees, please provide a template.
8, Financial affairs and obligations ofthe Company
(a) Please provide audited annual financial reports of the Company for the most recent three years.
9. Taxation obligations
(a) Please provide photocopies of the Company's tax registration certificate, (b) Please provide details of the taxes payable by the Company and the Company's taxable item" Also
provide the Company's proofs of payment of all taxes from the most recent three years, or documentary proof issued by local tax authorities certitying that the Company has paid taxes under the law and has no out<;tanding, deferred or unpaid taxes.
(c) Does the Company enjoy any form of preferential tax breaks or exemptions" Please provide corresponding documentary proof.
10. Environmental targets
(a) Please conform that the establishment and business operations of the Company comply with the environmental standards mandated by the government, and please provide corresponding documentary proof
(b) Please confirm if the Company has been subject to litigation or penalty from administrative departments owing to environmental issues in the past or present, or if the Company has had any disputes with any third parties; please also provide related materials.
11. Government approval and others
(a) Which government department, must approve the Acqinsition Project" Please describe the approval procedures.
(b) Please confirm which category of foreign investment program the Acquisition Project falls into (encouraged, permitted or restricted); please also confirm if this project can be approved as an "encouraged" foreign investment project.
(c) Please confirm if the local government will grant any concessions or preferential treatment to the Acquisition Project and the foreign-invested company planned for establishment (including preferential tax treatment, etc,),
8
Sill 23714vl
EXHIBIT 4
"'''''JIV'''' FW: Walls Due DilinA"~" on r:hqn""r,,, Valve Works for Asset & Business
Diligellce on Ch,mo:,ha Valve for Asset & Business
Dear
or lC"LHYUl);
if neOeSS8J:Y or desiTabl.o,
as a nOft-COlmpany ont1erpldse
us
Austin Brown &
, Shui On Piaza
JV!!C",HG Huai Hai Road
ShaJlgh:ai 200021 Permlc's Republic of China T: ) 5306 7008
) 5306 2866 Ext 218
1350
F: ) 5306 8966 Email: ;:;)It!lilfl!~(j~L&Qm
Works Asset & Business "~I.LI"'IL"J!!
~~~~~~~~~~w~e~w~fr0U~~I'd like 10 reclue:st you to have a detail WfI1:""Im on the followino due to i:i struoture:
1) Initial set up of the the ~r""Arlnl~iinn structures evolve over critical nAI'inri. of the company, yeers, Propo<\e Sl'JlUlIOn over the finalization the shlsreholdin.a structure current aoemell!. If nec:eSS:Oi
"c;\,u"ml~" I structure \"4"")'" Walts In view of the i;!LiCIVc;,
1) and on Ihe nWrlAl'shin of assols ilaisilitles of company end cDrltlnoolnt liabilities any.
SL