Incorporation: In this field, legal due diligence will overlap with corporate due diligence, yet it’s essential from a legal viewpoint to know that a company has been appropriately incorporated and registered. Documents to think about are the company’s articles of association, documentation appointing the board and management, as well as any shareholder agreements that might be set up. This data should be accessible from the local AIC. It is also important to check that a business has all the licenses necessary to carry out its current functions, and to check that the extent of these licenses will handle any new procedures that might be performed along with foreign investment. Business licenses in China need frequent renewal so the expiry date of licenses should also be examined. Lastly, the name on the license should be that of the person you are working with, if it not figure out why. Also verify the registered capital amount of the company as this will influence its limited liability status.

Contracts: Legal due diligence will look into all of the current contracts a company has. This will consist of any loans, supply contracts, sales and distribution contracts, and any licence agreements for IP or technology or machinery that a company has. It is critical to check employee contracts, not simply those of management, to see that tax and proper wages are being paid. Check if the company you are planning to spend money on actually employs their workers or if it is completed by a labour agency which will in turn need to be inspected to determine if it legit. Financial statements: These will obviously also need to be looked at by an accounting firm throughout financial due diligence, however it is also an vital component of legal due diligence to verify conformity with China’s Corporations Act. While financial reporting is not as transparent in China as it is in Australia the financial statements of a company can usually be obtained from the local AIC if they are not forthcoming from the company itself. The basic thing to check is that the books are not misleading, the company is not buying and selling while insolvent, and that tax regulations are being complied with.

Litigation: As outlined above checking to see whether or not the target company has any legal liabilities, for example infringing another’s intellectual property, is an important component of legal due diligence. However being equally important is understanding if the company has previously had any suits brought against it and what the outcome was. If a company has previously been punished by the Ministry of Commerce, China’s corporate regulatory body, then investment may not be the wisest idea as no government favours will tend to be coming. It is being able to see this bigger picture which makes legal due diligence by professionals the smartest plan of action to take if wealth building in China. Debts and other liabilities: Obviously it is significant with regards to risk management to find out what debts and liabilities a Chinese company has both short and long term. This includes loans, ongoing contracts, and of course any pending and future litigation.

Document List: The following is a non-exhaustive list of the kinds of documents we consider will be looked at when conducting legal due diligence: Land ownership certificates, IP ownership and licence agreements, Articles of association, Documents appointing the board, Business licences, Loan agreements, Current contracts- including sales, sub-contracts, licence agreements for any machinery or technology, Employment contracts, Financial statements (‘the books’), Any other debts, lastly Past and present legal claims brought against the company, and any which the company has brought itself. Should I hire a professional? Investing in China can be extremely profitable, or extremely difficult, a large portion of the difference arises from proper research of which thorough legal due diligence is a large part. It is critical to take into account not only the obvious areas where legal compliance is important including business licencing and land rights, but to delve deeper and examine a company’s past, especially litigation. Selecting professionals is the way to make certain that the information you discover is precise, and put together to see the whole picture of a company, thus staying away from even the less than evident dangers.

Have fixed fee legal due diligence reports prepared by our lawyers. Visit website for due diligence files.

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.

While venture capitalists are escalating efforts to carry out Western-type due diligence, the availability and accuracy and reliability of information is still problematic. Regulations in China don’t require the same degree of public information be given to the government or any other regulatory bodies as happens in the West. Many cognitive institutions promote the tight management of data and knowledge in China [Boisot and Child, 1988] and [Boisot and Child, 1996] . Under the central planning system, bureaucrats and business owners management information is crucial to understanding the market and local regulatory environment carefully, allotting it carefully in order to achieve favors and other appreciated items [Boisot and Child, 1988] and [Boisot and Child, 1996] . As one venture capitalist defined: It is common to spend three to six months more on due diligence [in China], compared with comparable deals in the West. Specifically you must know what sort of connections the entrepreneur has, both with the government and other agencies. These may characterize important assets for the firm. Consequently venture capitalists must be ready to make greater efforts in China in comparison to the West to be able to locate and aggregate a larger range of information in completing due diligence.

Major areas to look at in due diligence: legal research of the bureaucratic steps necessary to rent specific land, building certificates, entire operational costs of the rent, environmental regulations, license life span checking, pre-entry tax advisory, taxes of owners, stamp duty tax, tax incentives, special incentives, import/export duties exemptions (if any), tariff rebate program for your goods, rules and regulations for foreign buyers in certain trade. Usually, the process will carry on the following (we define a comprehensive due diligence process, other less rigorous dealings will warrant lesser investigations/steps where appropriate): a. A Memorandum of Understanding or Letter of Intent detailing the main heads of agreement that’ll be signed among Chinese party and foreign party, often along with a formal appendix with specific agreements relating to the due diligence activity including an exclusivity agreement and confidentiality agreement; b. Party will serve the counter-party with a due diligence document request list, setting out various documents/certificates which are required from company; c. Report on the returned documents, and analysis of issues.

Request of further documentation based on the findings. d. Independent verification through the following sources: i) Conduct interviews with administration; ii) Review registrations with local Administration of Industry and Commerce, and also other applicable government filings; iii) Site survey; iv) Geographical audit. This could be specifically appropriate for the sale which you are executing, with the factory?s potential ecological impacts; v) Verification with banks; and vi) Employment of investigative/valuation agencies, where necessary. B. Information reviewed: Like other jurisdictions, there are particular aspects of the business which must be evaluated. We set out the parts of particular importance below: 1) Corporate organization: a. Corporate structure; and b. Corporate approvals by applicable government organizations. Note: Corporate structures are extremely dissimilar to that of other countries, as a result, it is significant to know the fundamentals of Chinese corporate law to be able to recognize the implications of findings. 2. 2) Land: a. Land use rights; b. Building ownership rights; and c. Geographical compliance. Note: Chinese land ?ownership? is very unique in that it permits a system of long-term leases of the land itself, and full ownership rights to the land. Documents must be reviewed thoroughly, specifically, if the land and/or property is of considerable value in terms of the transaction. 3) Debts: Loans, guarantees and mortgage contracts.

Note: China does not yet have a robust central credit reporting system for companies. Consequently, any reports presented must be tested against independent sources to be able to confirm the same, as the initial report may simply lack information regarding the organization, producing a positive report when, in fact, there are many outstanding liabilities. 4) IP rights: Ensure that IP registrations are properly conducted, company is free from violation of others’ IP rights, licensing agreements are properly concluded, etc. 5) Material contracts: Especially, if you’re merging or acquiring the company as a going issue, the company must be cautious to make certain that they fully understand commitments and look into any outstanding commitments and/or liabilities thereunder. 6) Tax filings and payment: Make certain that taxes have been correctly submitted and necessary expenses have been made. (This will have to be done in coordination with an accounting firm.) 7) Regulatory/legal compliance: Special permits and other approvals: This category is often in accordance with the business range of the target or counter-party to the settlement. 9) Employee matters: A robust workforce is especially significant in China, given the concentration of foreign investment in labor-intensive sectors and vast population for the service business. 10) Pending litigation/claims: This investigation, as litigation is often difficult to predict, is associated with robust warranty clauses assuring the counter-party that there are no outstanding or expected litigations or claims; and 11) Insurance plan.

Completing due diligence reports can be done by our lawyers. Visit website for due diligence reports.

Record checks: Under some situations it would be smart to know who actually your partners are. There exists political and legitimate outcomes if you’re not fully conscious of their record. This may be hard to find out in China, because there is no public records office. Nevertheless some diligent, low key questioning may reveal details. Or else, or if you suspect probable concerns, you can find low-key investigations agencies in China that can provide a dossier on identities, backgrounds, and any legal issues pending or previous. It is imperative to find solutions to vital questions in areas such as management, legal problems, overall concept, market, capital requirements and financial statements.

Management. Who are the management team? Have they worked together before and are their thoughts appropriate? What encounter does each member bring to the table, and is it important? What is the focus of each member? Is the team whole? Lawful Problems. Is the financial commitment in China legal? Are there any restrictions required on that specific industry within China? Is the company functioning inside the extent of the business (i.e. is the company acting ultra vires?)? Has the Chinese partner’s fixed assets, to be used as capital injection into the new company, in fact already been pledged to the bank? Have the land rights been issued the suitable land certificate? Are there any restrictions on the company’s land-use rights?

Concept. What’s the overall routine for the project? Will the product have a tough edge in the Chinese market? Are there Intellectual Property or Patent and Trade Mark issues? What are the local company regulatory concerns, and does the plan allow plenty of time for these to be settled? China is not a country in which the Rule-of-Law predominates. Many regulations are contradictory and often rely on the goodwill of a bureaucrat who may have other interests at stake. Although corruption is widely believed to be endemic in China, it is usually sublime to outside observers and the Government is positively competing to manage it from surfacing in the industry community. Market. And how about those monetary and manufacturing projections? What data are they based on? What are the estimates of the need for the company’s products or services? What consumer research has been done, and has it been analyzed? Which are the competitive advantages of the company’s products/services in the China market? What are the future marketing methods? What is the pricing strategy? How about the competition?

Capital requirements. How much funding will be needed now, and into the future, and how will the financing be structured? Will further funding be required and, if so, when, at what stage in the project and from who? Financial statements. It is vital that you have three to five year projections, and for established companies, historical records going back for the same period. It is also important to know the financial position of the Chinese partner, including whether the statements are presented in a “true and fair” manner. Similarly, are they in accordance with International Accounting Expectations? This means that … “are the books cooked?” Investigate. Last, but not least, investigate your suggested partner, getting an investigator who can assess different channels. This is together with due diligence on the recommended joint venture partner and its owners.

Have fixed fee legal due diligence reports prepared by our lawyers. Visit website for due diligence files.

Why Due Diligence Is Beneficial?

Due diligence is essential since it allows one to have a subjective choice and to review the details as is. This is sometimes a lot easier said than done, and the degree of work given to due diligence needs to relate directly into the reasons you are buying a company and anything you reckon as the serious perils, considering that if it is unheard of, it is a danger.

As a client or entrepreneur thinking of buying a business, you are entitled to see all financials and information that is highly relevant to the transaction of the business. There are several ways one can go along with to guarantee the right facts are presented and that it can fit a minimum standard that will help make the final determination. Right at the end of the due diligence process, you need to understand about the total economical health of the business, its prospects, rivals and the marketplace.

The Due Diligence Guidelines

Below are a list of things to tackle and they’re not in any exact structure. These are just guidelines to abide by and you might seek out additional information depending on the kind of business enterprise.

1. Arrange a policy for Due Diligence – which means that both parties have to decide on what problems and specifics will must be suggested to permit for a due diligence to be accomplished. This can include and not tied to organisational properties, shareholdings, annual legal reporting, staff, legal and related groups, and company financials.

2. Examine financial records statements – it’s beneficial to evaluate the profit and loss statements, balance sheets, annual reports and any cashflow statements. Validate all records with an accountant and the tax office to make sure it complements and is appropriate.

3. Verify tax data – For Australian firms, it’s vital to check out the income tax returns for the previous three years and to check every business activity statement (BAS). In addition make sure their tax data reconcile with the profit and loss statements and see that all proper taxes have been paid, as well as payroll tax, stamp duties and GST.

4. Look at assets – inspect plant and equipment if there are any, making certain these are in good operating structure. Do a stock valuation on the sum of stock as at the negotiation date. Also it is smart to investigate insurance details to see if their are included until arrangement.

5. Study the scale of the clients and providers – ask to check the list of key customers and verify if they are active buyers. Check if there are current contracts and if they’re to bring in future business enterprise. Conversely, check their dealers and see if there are any outstanding payments and invoices on agreement. Verify to see if there are any unexpected costs that may occur after you purchase the business enterprise.

6. Know why the particular owner is selling – investigate why the business is being purchased and determine how long the owner has been in business. Ask the attendees and vendors as they can provide information about the company as well.

7. Look at the competition – Study the level of competition to see if they may change the company when you take over. Determine any potential provocations and research industry trends.

8. Check protection under the law – study any government regulations that may impact the company. Seek advice from a licensed lawyer who can supply more details about the legalities that would impact the business.

9. Acknowledge on a schedule to do the due diligence – there should really be a set deadline for the due diligence to be completed which enables you to minimize the expense and impact on the enterprise. On average it should take only 20 days.

10. Sign Non-disclosure Agreements (NDA’s) concerning both parties – for any parties concerned, whether it’s an accountant, lawyer or a consultant, it is advisable to have them sign a NDA to defend you and the companies intellectual property whilst accomplishing a due diligence.

To make the system smooth and efficient, look into acquiring the above records and data in an online storage facility. This makes it easy to find and access for the future. You may think about storing this on Dropbox or Google Docs. You can then grant certain people gain access to to some or all of the data and track their activities. Ensure you number and name each file in a methodical way so you can find it and refer to it.

It’s highly beneficial to retain the due diligence data as it can be used in the near future. If you need more specifics to help you have a decision to get a company, think about reading our due diligence guide on our website.