Due Diligence

Effective Steps About Legal Due Diligence In China

2012-02-28T06:14:00.000-08:00

Intellectual Property: This consists of trademarks, patents, copyright, and technology licensing. Here you'll need documentation of ownership or a license agreement for all IP that is being used by the Chinese company. Take into account that if you'll need to have the IP rights of a Chinese company to allow you to carry on its functions as these rights take some time. The firm who is conducting your legal due diligence might be able to counsel you on composing an agreement about the utilization of IP rights while you are anticipating an assignment. Also check that the company is not infringing anyone else’s intellectual property rights. And something that is often disregarded, verify who the company’s IP rights may be licenced to, for how long, and whether or not this is in line with your plans for the company.

Incorporation: In this area, legal due diligence will overlap with corporate due diligence, however it is vital from a legal perspective to recognize that a company has been properly incorporated and licenced. Documents to look at are the company’s articles of association, records appointing the board and management, as well as any shareholder agreements that might be in place. This information should be attainable from the local AIC. It is also important to make sure that a business has all the licenses required to carry out its current operations, and to check that the scope of these licenses will cover any new procedures that might be undertaken along with foreign investment. Business licenses in China need frequent renewal so the expiry date of licenses should also be examined. Finally, the name on the license should be that of the person you are working with, if it not figure out why. Also check the registered capital amount of the company as this will influence its limited liability status.

Contracts: Legal due diligence will examine 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 examine employee contracts, not merely those of management, to see that tax and proper wages are being paid. Check if the company you are planning to put money into actually employs their workers or if it is completed by a labour agency which will consequently need to be inspected to determine if it reliable. Financial statements: These will certainly also should be checked out by an accounting firm throughout financial due diligence, however it is also an vital part of legal due diligence to verify compliance 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 acquired from the local AIC if they are not coming from the company itself. The main thing to check is that the books are not deceptive, the company is not trading 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, such as infringing another’s intellectual property, is a vital component of legal due diligence. Nevertheless being equally necessary is knowing if the company has previously had any suits against it and what the outcome was. If a company has previously been sued by the Ministry of Commerce, China’s corporate regulatory body, then investment may not be the wisest idea as no government favours are likely 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 investing in China. Debts and other liabilities: Obviously it is important in terms of risk management to find out what debts and liabilities a Chinese company has both short and long term. This can include loans, ongoing contracts, and of course any pending and future litigation.

Document List: The following is a non-exhaustive list of the types of documents we consider will be checked out when executing 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 employ a professional? Wealth building in China can be highly profitable, or extremely difficult, a large section 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 simply the obvious locations where legal compliance is critical for example business licencing and land rights, but to delve deeper and examine a company’s past, especially litigation. Hiring professionals is the way to ensure that the information you find is accurate, and put together to see the whole picture of a company, thus avoiding even the less than noticeable dangers.

Complete a due diligence report by visiting our website for resources how to have due diligence completed.

Steps To Identify Legal Due Diligence In China

2012-01-25T00:49:00.000-08:00

What is legal due diligence? There are lots of types of due diligence, for instance financial due diligence carried out by accountants to evaluate 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 looking into things such as the individual connections of management, is another area to consider particularly in the context of China. Legal due diligence nonetheless targets whether or not a company is complying with local and international laws and how the compliance or non-compliance will influence your investment. Executing legal due diligence includes considering a company’s ownership of property both physical and intellectual, contracts and other agreements, litigation that it has undertaken or which has been pursued against it, as well as overlapping with other kinds of due diligence in the aspects of business licencing, finances, tax, and management. Legal due diligence if properly done will also show what type of company you are coping with. Are they highly litigious? Have they been punished by governing bodies? Or have they outsourced all of their procedures and don’t actually deliver anything?

Why carry out legal due diligence? If you are considering a transfer to China, be it stepping into a cross-border joint venture, merger or acquisition, participating local management, or new international franchisees, partners or investors, it is recommended to know just as much as possible before making an investment. Not actively taking part in comprehensive investigation can lead to nasty surprises on the track. Performing due diligence is more 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 demonstrate exactly what kind of business you are working with. By selecting professionals to take on legal due diligence, you can in turn steer clear of unnecessary risks and confidently take advantage of the rapidly expanding market that is China.

How do you begin it? What areas should you focus on? The process of legal due diligence is simply a process of gathering information and being able to determine what it tells you and how it fits together. That having been said, knowing what to consider, which questions to ask, and where to go are often less than straightforward, particularly in China. One thing to do when executing legal due diligence is to talk to a professional, typically a specialist law firm, and explain to them what you are planning to do, for example are you making an investment in a joint venture, buying a company outright, or establishing a franchise. This will help a firm determine 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 about to take, nonetheless the methods 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 investing 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 check the company’s incorporation documents and business licence. When it comes to legal due diligence a trip to the local court will also be essential. Important Areas: Legal due diligence will cover many of the sections of financial and corporate due diligence as well as some discrete aspects of its own such as intellectual property and the hunt for past, present, and even pending and future litigation. The following are the main areas to consider 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 precisely 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 crucial to find out if there are any restrictions on a company’s land use. This can be achieved at the local Estate Bureau by looking for the company’s land possession 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 transfer can occur. Also in relation to real property, check the environmental regulations for the region in which the business is located.

Complete a due diligence report by visiting our website for resources how to have due diligence completed.

Legal Views Concerning Due Diligence In China

2012-01-18T02:03:00.000-08:00

Valuations: Valuations of apparatus and buildings can be notoriously irregular in China, not least because there may be a partnership among the valuer and the owner. It can be a tough negotiating position over which valuer to utilize. If you'd like to refer to a completely independent valuer who is not known to the Chinese partner, you will most likely be expected to cover the costs. Nonetheless, it's usually rewarding. Professional valuers such as American Appraisal or the major Real Estate firms in China will have a valuations department, and will often be truthful, fair and use internationally recognized expectations in undertaking work. Utilizing them is to your advantage.

Record checks: Under some circumstances it would be advisable to find out who exactly your partners are. There exists political and legal outcomes if you are not fully aware of their record. This is hard to find out in China, since there is no public records office. Nevertheless some diligent, low key questioning may reveal details. Or else, or if you feel potential concerns, you can find low-key investigations agencies in China that are able to give a dossier on identities, backgrounds, and any legal issues pending or previous. It is imperative to search for answers to vital questions in areas such as management, legal concerns, overall concept, market, capital requirements and financial statements.

Management. Who are the management team? Have they performed together before and are their thoughts appropriate? What experience does each member offer, and is it suitable? What is the focus of each member? Is the team whole? Legitimate Problems. Is the financial investment in China lawful? Will there be any limitations enforced on that distinct industry within China? Is the company running within the scope 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 actually been pledged to the bank? Have the land rights been issued the appropriate land certificate? Are there any limitations on the company's land-use rights?

Concept. What's the overall timetable for the project? Will the product have a competitive benefit in the Chinese market? Are there Intellectual Property or Patent and Trade Mark problems? Which are the local company regulatory issues, and does the plan allow enough time for these to be solved? 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 thought to be endemic in China, it is often sublime to outside observers and the Government is definitely fighting to control it from appearing in the market community. Market. And what about those financial and manufacturing projections? What data are they depending on? What are the approximations of the need for the company's services or products? What market research has been done, and has it been reviewed? What are the tough advantages of the company's products/services in the China market? Which are the future marketing plans? What's the pricing strategy? How about the competition?

Capital requirements. What amount of funding will be demanded now, and into the future, and how will the financing be organized? Will more funding be required and, if so, when, at what stage in the project and from who? Financial statements. It is imperative 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. Likewise, are they according to International Accounting Expectations? To put it differently ... "are the books cooked?" Investigate. Last, but most famously, investigate your suggested partner, using 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.

Full Details About Due Diligence In China

2012-01-18T01:58:00.000-08:00

‘An institutional view of China's venture capital trade: Detailing the variations involving China and the West’, Garry D Bruton and David Ahlstrom- Journal of Business Venturing 18(2), March 2003, 233. As soon as a firm has gone by its first testing, venture capitalists in the West move forward with due diligence, normally along with confirmation of the dynamics and position of the firm's product, output capability, market need, and level of key connections with other companies (Fried and Hisrich, 1994). When venture capitalists first went into China, due diligence for funded projects in China was limited in extent; in part, as the support activities where Western venture capitalists rely to carry out such activities were not present [Bruton et al., 1999] and [Mann, 1997].

While venture capitalists are increasing efforts to execute Western-type due diligence, the provision and accuracy and reliability of data is still troublesome. Regulations in China don't require the same level of public information be given to the government or any other regulatory bodies as occurs in the West. A variety of cognitive institutions encourage the tight management of information and knowledge in China [Boisot and Child, 1988] and [Boisot and Child, 1996] . Underneath the central planning system, bureaucrats and business people regulation information is crucial to understanding the market and local regulatory environment strongly, allotting it carefully to be able to obtain favors and other appreciated items [Boisot and Child, 1988] and [Boisot and Child, 1996] . As one venture capitalist described: It's common to take three to six months more on due diligence [in China], compared to equivalent offers in the West. Particularly you should know what kind of connections the entrepreneur has, both with the government and other agencies. These could represent essential assets for the firm. The result is that venture capitalists must expect to make greater efforts in China in comparison to the West to help find and aggregate a larger range of data in conducting due diligence.

Major areas to think about in due diligence: legal research of the bureaucratic steps important to rent particular land, building certificates, total operational costs of the rent, ecological regulations, license expected life checking, pre-entry tax advisory, taxes of owners, stamp duty tax, tax incentives, special incentives, import/export duties exemptions (if any), tariff rebate plan for your solutions, rules and regulations for foreign traders in particular business. Normally, the method will move forward as follows (we outline a complete due diligence system, other less demanding transactions will warrant lesser investigations/steps where appropriate): a. A Memorandum of Understanding or Letter of Intent setting out the main heads of agreement that'll be signed in between Chinese party and foreign party, often along with a formal appendix with certain 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, describing various documents/certificates which are necessary from company; c. Review of the returned documents, and analysis of issues.

Request of further documentation in accordance with the findings. d. Independent verification through the following sources: i) Perform interviews with administration; ii) Review registrations with local Administration of Industry and Commerce, as well as other related government filings; iii) Site survey; iv) Environmental audit. This might be specially relevant for the sale that you are doing, 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 regions of the company which must be reviewed. We laid out the regions of particular importance below: 1) Corporate organization: a. Corporate structure; and b. Corporate approvals by relevant government organizations. Note: Corporate structures are very dissimilar to that of other countries, thus, it is important to understand the basic principles of Chinese corporate law as a way to recognize the implications of findings. 2. 2) Land: a. Land use rights; b. Building ownership rights; and c. Ecological compliance. Note: Chinese land ?ownership? is very unique in that it allows for a system of long-term leases of the land itself, and full ownership rights to the land. Documents must be examined carefully, specifically, if the land and/or property is of considerable value in relation to the transaction. 3) Debts: Loans, guarantees and mortgage contracts.

Note: China does not yet have a powerful central credit scoring system for companies. Consequently, any reports offered must be tested against independent sources in order to confirm the same, as the first report may simply lack specifics of the organization, causing a positive report when, the truth is, there are quite a few outstanding liabilities. 4) IP rights: Be certain that IP registrations are properly executed, company is free from violation of others' IP rights, licensing agreements are properly concluded, etc. 5) Material contracts: Especially, if you are merging or acquiring the business as a going matter, the business must be very careful to make certain that they fully fully understand commitments and investigate any outstanding commitments and/or liabilities thereunder. 6) Tax filings and payment: Be sure that taxes have been correctly submitted and necessary payments have been made. (This will have to be conducted in coordination with an accounting firm.) 7) Regulatory/legal compliance: 8) Special permits and other approvals: This category is often based on the business scope of the target or counter-party to the procedure. 9) Employee matters: A powerful workforce is specially crucial 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 strong warranty clauses assuring the counter-party that there are no outstanding or expected litigations or claims; and 11) Insurance policy.

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

The Due Diligence Checklist

2011-09-22T17:23:00.000-07:00

If you're planning on buying or selling a business then due diligence has to be an important part of your method and there can be many areas you must think about.

Why Due Diligence Is Essential?

Due diligence is beneficial given it allows one to create a very subjective conclusion and to investigate the main points as is. This is sometimes easier claimed than done, and the level of work given to due diligence must relate into the reasons why you are buying a company and anything you reckon as the serious challenges, looking at that if it is not known, it is a risk.

As being a purchaser or entrepreneur looking to buy a company, you are allowed to see all financial records and information that is relevant to the sale of the business. There are a few procedures one can abide by to ensure the right data is supplied and that it can fit a minimum level that may help you make the final choice. In the end of the due diligence operation, you have to know about the general budgetary health of the organization, its opportunities, competing firms and the industry.

The Due Diligence Guidelines

Listed below are a summary of items to tackle and they're not in any certain structure. These are just recommendations to stick to and you can seek out more information according to the kind of enterprise.

1. Plan plans for Due Diligence - it means that both sides need to decide on what issues and data will have to be provided to permit for a due diligence to be carried out. This can include and not tied to organisational set ups, shareholdings, annual legal reporting, workforce, legal and related groups, and company financials.

2. Examine financials statements - it’s significant to examine the profit and loss statements, balance sheets, annual reports and then for any cashflow statements. Validate all data with an accountant and the tax office to guarantee it matches and is correct.

3. Check tax information - For Australian companies, it’s important to examine the income tax returns for the previous three years and to analyze every enterprise activity statement (BAS). In addition make sure their tax data balance out with the profit and loss statements and see that all proper taxes have been given, along with payroll tax, stamp duties and GST.

4. Investigate assets - look at plant and equipment if there are any, ensuring they are in good operating order. Do a stock valuation on the sum of stock as at the agreement date. It is also smart to verify insurance specifics to see if their are covered until arrangement.

5. Evaluate the range of the clients and vendors - ask to analyze the list of key clients and find out if they are active buyers. Investigate if there are current contracts and if they are to bring in future company. Conversely, check their providers and see if there are any outstanding payments and invoices on agreement. Check out to see if there are any unexpected expenses that may occur after you purchase the company.

6. Know why the owner is selling - investigate why the organization is being distributed and figure out how long the particular owner has been in enterprise. Ask the clients and dealers as they can provide data about the organization as well.

7. Verify the competing firms - Study the rivals to see if they may affect the organization when you take control. Discover any potential provocations and examine industry trends.

8. Investigate legal rights - analyze any government limitations that may impact the business enterprise. Seek guidance from a qualified lawyer who can supply additional information about the legal issues that would impact the organization.

9. Come to an agreement on a time frame to do the due diligence - there ought to be a set deadline for the due diligence to be completed that will help minimize the cost and effect on the business enterprise. Typically it should take no more than 20 days.

10. Sign Non-disclosure Agreements (NDA’s) concerning each party - for any parties involved, whether it's an accountant, lawyer or a consultant, it is really useful to have them sign a NDA to secure you and the companies rational property whilst doing a due diligence.

To help make the approach consistent and successful, look at collecting the above files and data in an online space facility. This makes it easy to find and gain access to in the future. You may look into storing this on Dropbox or Google Docs. You can then grant certain people obtain to some or all of the data and track their activities. Make sure you number and name each report in a coordinated way so you're able to find it and refer to it.

It’s highly beneficial to keep hold of the due diligence data as it can be used in the long run. If you want more important information to aid you to develop a conclusion to purchase a small business, consider reading our due diligence guide on our website.