Motivation For Having A Legal Due Diligence In China
What is legal due diligence? There are numerous kinds of due diligence, for instance financial due diligence undertaken by accountants to check a company’s profits, debts, solvency, financial reporting and tax status. Additionally there is corporate due diligence focusing on a company’s incorporation and board. Investigatory due diligence, that is considering things such as the personal connections of management, is yet another area to consider particularly in the framework of China. Legal due diligence however concentrates on whether or not a company is complying with local and international laws and how the compliance or non-compliance will affect your investment. Performing legal due diligence includes looking into a company’s possession of property both physical and intellectual, contracts as well as other agreements, litigation that it has carried out or which has been went after against it, as well as overlapping with other types of due diligence in the aspects of business licencing, finances, tax, and management. Legal due diligence if properly carried out will also show what kind of company you are coping with. Are they highly litigious? Have they been prosecuted by government authorities? Or have they outsourced all of their functions and don’t actually deliver anything?
Why undertake legal due diligence? If you are considering a transfer to China, be it entering into a cross-border joint venture, merger or acquisition, participating local management, or new international franchisees, partners or investors, it is recommended to know as much as possible before investing. Not actively taking part in thorough investigation can lead to nasty surprises on the track. Performing due diligence is greater than just a search for regardless of whether your preferred company is currently complying with China’s legal requirements. If done properly, legal due diligence will put your investment into industry framework and show you precisely what kind of business you are working with. By selecting professionals to carry out legal due diligence, you can in turn steer clear of excessive risks and confidently tap into the rapidly growing market that is China.
How do you begin it? What areas should you concentrate on? The process of legal due diligence is basically a process of accumulating information and being able to determine what it tells you and how it fits together. That having been said, understanding what to look for, which things to ask, and where to go are often less than straightforward, specifically in China. One thing to do when executing legal due diligence is to consult a professional, typically an expert law firm, and explain to them what you are about to do, for example are you investing in a joint venture, buying a company outright, or establishing a franchise. This will help a firm know very well what they need to look for and which laws must be complied with. Then the process will generally move to requesting documents, such as articles of association and business licences, from the company itself as well as China’s regulatory bodies and courts.
Go Local: Undertaking legal due diligence in China may have the same basic goal as in any other country, that is to understand and assess the investment risk you are planning to take, nonetheless the techniques differ. Most of the Western world has fairly centralised and open documentation of the legal particulars of registered companies, in China on the other hand you will find much is still done at a provincial level. Therefore the next essential step is to visit the province, and site of the company you are making an investment in. It may sound ridiculous but an important part of legal due diligence is verifying that the company you plan to contract with actually exists; some western investors have been caught out in the past purchasing non-existent companies. This will also give you a chance to see how the business operates on the ground and speak to management and employees. As stated you will also need to visit local authorities such as the local Estate Bureau to verify the land rights you are being sold, and the local Administration of Industry and Commerce (AIC) to evaluate the company’s incorporation documents and business licence. In the case of legal due diligence a trip to the local court will also be essential. Important Areas: Legal due diligence will cover many of the elements of financial and corporate due diligence as well as some discrete elements of its own such as intellectual property and the search for past, present, and even pending and future litigation. The following are the main areas to think about when undertaking legal due diligence.
Real Property: In China a company will have either ‘granted’, being full ownership, or ‘allocated’, the right to use the land for a particular time and purpose, land rights. These land rights obviously have different values, thus verifying exactly what type of land rights you are getting as part of your deal is vital for checking that the price has not been inflated. It is also essential to determine if there are any restrictions on a company’s land use. This can be done at the local Estate Bureau by looking for the company’s land control certificate/s. It should also be noted that in some rural areas land rights are held by a ‘village collective’, and the head of the collective needs to sign their approval before any move can occur. Also in relation to real property, check the environmental regulations for the region in which the business is situated.
Have fixed fee legal due diligence reports prepared by our lawyers. Visit website for due diligence files.
