10:43 SMIC<00981> - Announcement (3) Principal activities of the Company The principal activities of the Company are the provision of integrated circuit (IC) manufacturing at 0.35-micron to 0.13-micron and finer line technologies to customers worldwide. Reasons for the Continuing Connected Transactions The Company recognizes the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks. The Company desires to attract and retain the services of highly qualified individuals to serve the Company and, in part, in order to induce such individuals to continue to provide services to the Company, the Company wishes to provide for the indemnification and advancing of expenses to its directors as permitted by law and the Listing Rules. Listing Rules implications Under Rule 14A.11(1) of the Listing Rules, a director or chief executive officer of the Company is considered a connected person of the Company. The entering into of the New Agreement by the Company with any of its existing and future directors and chief executive officers would constitute a connected transaction under the Listing Rules, accordingly, it is subject to the disclosure requirements and the approval of Independent Shareholders (as defined below) under the Listing Rules. The Company will seek the approval of the Independent Shareholders (as defined below) of the New Agreement and the Annual Cap in relation to the Continuing Connected Transactions on the following conditions: (a) The Annual Cap will not exceed US$20,000,000 (approximately HK$156,000,000) provided that the Company liability to indemnify a particular director or chief executive officer shall not exceed the amount payable to such director or chief executive officer under the D&O Insurance. (b) (i) The Continuing Connected Transactions will be entered into in the usual and ordinary course of businesses of the Company and either (A) on normal commercial terms or (B) if there is no available comparison, on terms no less favourable to the Company than terms available to independent third parties; and (ii) The Continuing Connected Transactions will be entered into in accordance with the New Agreement and on terms that are fair and reasonable and in the interests of the shareholders of the Company as a whole. (c) Brief details of the Continuing Connected Transactions will be disclosed in each of the Company's successive annual report (except for the next annual report to be issued on 6 April 2005 as it will be issued before the Company obtains Independent Shareholders' approval for the Continuing Connected Transactions), each accompanied with a statement of opinion of the independent non-executive Directors in such manner as referred to in paragraph (d) below. (d) The independent non-executive Directors will review annually the Continuing Connected Transactions, and they will confirm in the Company's annual report for the financial year in question that such Continuing Connected Transactions under their review were conducted in the manner as stated in paragraphs (a) and (b) above. (e) The auditors of the Company will review annually the Continuing Connected Transactions, and confirm in a letter to the Board (a copy of which letter will be provided to the Stock Exchange at least 10 business days prior to the bulk printing of the annual report of the Company) in respect of each relevant period, during which the Continuing Connected Transactions were conducted, stating that: (i) the Continuing Connected Transactions have been approved by the Board; (ii) the Continuing Connected Transactions have been entered into in accordance with the terms of the New Agreement; and (iii) the Continuing Connected Transactions have not exceeded the Annual Cap, and where for whatever reasons, if the auditors of the Company decline to accept the engagement or are unable to provide the auditors' letter, the Board will contact the Listing Division of the Stock Exchange immediately. Under the Indemnification Agreement payments of each claim will be reviewed by any competent person or body consisting of a member or members of the Board or any other person or body appointed by the Company's board of directors (``Board'') who is not a party to the particular claim for which the indemnitee is seeking indemnification or Independent Legal Counsel (as defined below) appointed or approved by the Directors in accordance with the Indemnification Agreement (an ``Independent Reviewing Party'') to ensure such claim is permitted under applicable laws, including Cayman Islands law. The Board will ensure the appointed Independent Reviewing Party will have the necessary professional knowledge to review each claim. ``Independent Legal Counsel'' shall mean an attorney or firm of attorneys, selected in accordance with the provisions of the Indemnification Agreement, who shall not have otherwise performed services for the Company or party seeking indemnification within the last three years (other than with respect to matters concerning the rights of the party seeking indemnification under the Indemnification Agreement, or of other indemnities under similar indemnity agreements). Under the terms of the Indemnification Agreement, a party will not be selected as the Independent Reviewing Party with respect to a claim if there exist any conflict of interests between the Company and such party with respect to such claim. If the indemnitee is a Director, such Director shall abstain from voting on the resolution in respect of the appointment of the Independent Reviewing Party. After reviewing the claim, the appointed Independent Reviewing Party will make a determination (in the form of a written opinion, in any case in which Independent Legal Counsel is involved) to the Company as to whether and to what extent the Applicable Claims would be permitted under applicable law. For the year ended 31 December 2004, no payment was made to any of the Company's directors under the Indemnification Agreement. In order to reflect the new requirements under Rules 14A.35 of the Listing Rules to set a term of no longer than 3 years and a maximum aggregate annual value for each connected transaction (as defined under the Listing Rules) (the ``Requirements''), the Company proposes to amend the form of Indemnification Agreement (the ``New Agreement'') so as to comply with the Requirements and to enter into identical New Agreements with each of its existing and future directors and chief executive officers. The New Agreement will supersede any Indemnification Agreement which the Company has previously entered into with any existing directors. Principal terms of the New Agreement The terms of the New Agreement are the same as the Indemnification Agreement, except that the New Agreement will be subject to a term of three years and an Annual Cap (as defined and described below). The Company proposes to enter into identical New Agreements with each of its existing and future directors and chief executive officers. The proposed New Agreement will take effect upon execution by the relevant existing or future director or chief executive officer for a term of three years commencing on the date of the Independent Shareholders' (as defined below) approval of the Continuing Connected Transactions. The Company's articles of association (``Articles'') permit the appointment of directors so that the total number of directors (exclusive of alternate directors) shall not at any time exceed the number fixed in accordance with the Articles. Under the Articles, the number of directors shall be nine or such other number as shall be fixed by the board of directors from time to time. The Company proposes to set for the New Agreement a maximum aggregate annual value (``Annual Cap'') of US$20,000,000 (approximately HK$156,000,000), provided that the Company's liability to indemnify a particular director or chief executive officer shall not exceed the amount payable in respect of such director or chief executive officer under the directors' and officers' liability insurance (``D&O Insurance'') which the Company may obtain for its directors and officers. The Annual Cap was determined by reference to the limit of liability under the D&O Insurance which the Company has obtained for its directors and officers. The current limit of liability under the D&O Insurance is US$20,000,000 (approximately HK$156,000,000) per annum for claims against the Company's directors and officers. It is intended that any payment made by the Company to a particular director or chief executive officer under the New Agreement for an Applicable Claim in respect of an Indemnifiable Event will be covered by the D&O Insurance. If the D&O Insurance does not cover any amount for any particular Applicable Claim in respect of any Indemnifiable Event, the Company will not be liable to make up for that amount which is not covered by the D&O Insurance. In the event that the limit of liability under the D&O Insurance exceeds US$20,000,000 per annum for claims against the Company's directors and officers, the Company will re-comply with the Listing Rules, in particular, it will make a further announcement and seek independent shareholders' approval of the new maximum aggregate annual value of the New Agreement.