Supporting Your Business With Legal Due Diligence In China

What is legal due diligence? There are numerous kinds of due diligence, for example financial due diligence carried out by accountants to examine a companys profits, debts, solvency, financial reporting and tax status. Additionally there is corporate due diligence centering on a companys incorporation and board. Investigatory due diligence, that is considering things such as the personal connections of management, is yet another region to consider particularly in the framework of China. Legal due diligence nevertheless concentrates on regardless of whether a company is complying with local and international laws and how the compliance or non-compliance will affect your investment. Carrying out legal due diligence includes looking at a companys possession of property both physical and intellectual, contracts along with other agreements, litigation that it has carried out or which has been pursued against it, as well as overlapping with other types of due diligence in the sections of business licencing, finances, tax, and management. Legal due diligence if properly done will also uncover what type of company you are working with. Are they highly litigious? Have they been punished by governing bodies? Or have they outsourced all of their procedures and dont actually generate anything?



Why perform legal due diligence? If you are contemplating a move into China, be it stepping into a cross-border joint venture, merger or acquisition, joining local management, or new international franchisees, partners or investors, it is recommended to know as much as possible before making an investment. Not actively taking part in thorough investigation can result in unpleasant surprises on the track. Performing due diligence is greater than just a hunt for whether or not your desired company is presently complying with Chinas legal requirements. If done efficiently, legal due diligence will put your investment into industry framework and demonstrate just what kind of business you are dealing with. By selecting professionals to undertake legal due diligence, you can in turn steer clear of unwanted risks and confidently tap into the rapidly expanding market that is China.



How do you set about it? What areas should you focus on? The entire process of legal due diligence is simply a process of accumulating information and being able to understand what it tells you and how it fits together. That having been said, understanding what to consider, which things to ask, and where to go are often less than straightforward, especially in China. The first thing to do when undertaking legal due diligence is to consult a professional, in most cases a specialist law firm, and reveal to them what you are planning to do, for instance are you making an investment in a joint venture, buying a company outright, or establishing a franchise. It will help a firm understand what they need to consider 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 Chinas regulatory bodies and courts.



Go Local: Executing 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 methods differ. Most of the Western world has comparatively 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 mentioned you will also need to visit local authorities including 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 companys 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 areas of financial and corporate due diligence as well as some discrete aspects 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 executing 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 just 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 whether there are any restrictions on a companys land use. This can be done at the local Estate Bureau by looking for the companys land ownership 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 happen. Also in relation to real property, check the environmental regulations for the area in which the business is situated.