Due diligence outlines

For a merger and acquisition operation (M&A), the due diligence process is one of the most important parts, if not the most important. In the timeline of an M&A operation, this step comes after the signing of the letter of intent, and should be conducted with the utmost care. I say so because it is the main way to assess the accuracy of the corporate information on the subject of the operation, but also to estimate the potential risks attached to the transaction.

Even if the due diligence process in China is pretty much the same than in any other country, Chinese companies often lack transparency and are not used to disclosing their corporate information to third parties. Since the last years though, the idea has begun to stick in the Chinese minds, and they are now less reluctant to undergo this process in good faith.

It is still wise to hire legal advisors having local offices in China to help with the due diligence process though, as there are some irregularities in Chinese companies that foreign practitioners may not be able to spot.

Here are the main areas of the subject company to be reviewed during the due diligence process (the whole process shall be covered by a confidentiality agreement, and its purpose shall be stated in the letter of intent) :

1 - corporate organization, including corporate approvals by relevant government organizations;

2 - land use rights, ownership, leases…

3 - debts including loans, mortgages and guarantees;

4 - intellectual property rights including trademarks and patents, records of any infringement or alleged infringement of the intellectual property rights of any of the members of the Group;

5 - contracts;

6 - tax filing and payment;

7 - compliance with other legal requirements or regulatory frameworks;

8 - employment matters;

9 - ongoing or pending litigations, arbitrations or other claims, and

10 - insurance policy and coverage.

If deemed necessary, the purchaser may conduct independent research including but not limited to :

1 - interviews with senior management in relation to the actual performance of the company;

2 - on-site visit;

3 - financial audit…

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Source : LexisNexis