Perfect World (PWRD) Reports Results of Internal Investigation; Says Didn't Overpay Zhizhu

Perfect World Co., Ltd. (Nasdaq: PWRD) announced the findings of the Audit Committee based on the results of an internal investigation. On January 10, 2012, Perfect World announced that its independent Audit Committee planned to thoroughly review the anonymous allegations posted on certain Chinese language websites on or around January 8, 2012 and would engage independent legal counsel to assist with the review.

The following is a summary of the major findings of the investigation generally keyed to the Allegations:

• Perfect World did not overpay for Zhizhu advertising services or equity. While Perfect World's CEO, Mr. Michael Yufeng Chi provided interest free personal loans to shareholders of Beijing Zhizhu Network Technology Co., Ltd. ("Zhizhu") to assist Zhizhu between 2008 and 2010, which caused Zhizhu to be a related party to Perfect World prior to Perfect World's investment in Zhizhu, the Audit Committee did not find any evidence to suggest that Perfect World overpaid for any services provided by Zhizhu or Perfect World's investment in 20% of the equity interest in Zhizhu.
  
  
• No evidence suggests any member of Mr. Chi's family received any monetary benefit, improper or otherwise, from Perfect World's office building renovation project. The Audit Committee did not uncover any evidence that Mr. Chi's family was connected to the contractors retained by Perfect World for the office building renovation project. Additionally, the contractor vetting process by Perfect World was reasonable, including evaluations by independent third parties.
  
  
• The divestiture of the film and television business was properly conducted and the price was reasonable and fair. Mr. Chi provided proper disclosure of his intentions to acquire the film and television business and conducted himself in accordance with the requirements by the special committee consisted of independent members of the Company's board of directors for purposes of reviewing and approving the divestiture of the film and television business. The sale price was determined in a fair and reasonable manner, including a valuation and a fairness opinion by a reputable third-party expert.
  
  
• No evidence suggests that Mr. Chi improperly evaded taxes. Based on a review of Mr. Chi's tax returns and bank account statements, the Audit Committee has determined that Mr. Chi disclosed the past sales of Perfect World shares and paid taxes thereon.

The Audit Committee believes that the investigation, which used a team of independent professionals and involved the review of documents and interviews of various Perfect World personnel and third parties, has been extensive, thorough, and complete.

Recommendations While the Allegations largely proved to be inaccurate, the Audit Committee recognized that certain aspects of Perfect World's corporate governance procedures could be improved. As a result, the Audit Committee recommended to the Board of Directors of Perfect World that the following measures be taken by the Company:

• Perfect World should include complete disclosure of the transactions involving Zhizhu and/or its shareholders on one hand and Perfect World and/or Mr. Chi on the other hand, in the Company's next annual report on Form 20-F.
  
  
• Perfect World's disinterested board members should formally waive any actual or potential conflicts of interest regarding transactions involving Zhizhu.
  
  
• Perfect World should consider engaging a reputable Sarbanes-Oxley Act consultant to review the Company's implementation of internal control policies and procedures relating to the identification, evaluation and monitoring of related party transactions, and provide any necessary training to the Company's personnel overseeing internal control and reporting functions in these areas.

The Board of Directors has accepted the Audit Committee's recommendations.

Recent DevelopmentTo the Company's knowledge, a civil case entitled Li Hong v. Perfect World Co., Ltd., et al., Case No. 12-Cv-3741, was filed on May 10, 2012 in the United States District Court for the Southern District of New York against the Company and Mr. Michael Yufeng Chi alleging, among other things, federal securities law violations arising from alleged lack of disclosure relating to the transactions with Zhizhu Network and the sale of the Company's film and television business to a company majority owned by Mr. Chi referenced above. The plaintiff is seeking compensatory damages and injunctive relief in the complaint filed in the court. Neither the Company nor Mr. Chi has been served. The Company will vigorously defend itself if the lawsuit is initiated.

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