Due diligence in China
Charltons undertakes comprehensive legal due diligence investigations and reports for clients buying or selling companies or businesses in China. We can provide a tailored and cost-effective service based on a client’s requirements, budget and risk profile. We have almost two decades of experience in China and have offices in Shanghai and Beijing, as well as long established relationships with top Chinese law firms in all of the major Chinese cities.
Our deep local knowledge and international perspective gives an insight into the unique due diligence issues often presented in China M&A transactions. We have particular experience in helping overseas acquirers to evaluate and gain a better understanding of risks associated with potential Chinese targets, including their relationships with customers, suppliers, government bodies and officials, and other business counterparties. We understand and take a pragmatic approach to the challenges of carrying out China due diligence on Chinese businesses and assets, including the difficulties in tracking ownership or in identifying liens and other encumbrances, the unreliability of financial and business information, and the lack of legal agreements to document key business relationships.
Our team comprises multi-cultural and multi-lingual lawyers with a broad range of skills sets and experience to conduct due diligence that uncovers problem issues, who provide an insightful and highly personalised service to clients. In reviewing due diligence results and identifying red flags, we aim to provide useful and actionable information for clients, to enable them to proactively assess and mitigate the risks involved when making acquisitions. We can also structure and draft key transaction documentation to address transaction risks and purchase price adjustments arising from due diligence findings.
In the context of acquisitions, due diligence in a target company involves not only reviewing its good standing and title to assets and property held, but also examining the full extent of liability that the purchaser will assume as well as any restrictions (regulatory or otherwise) on the business of the target company, so that it can properly assess the risks involved in the acquisition. As such, some aspects of due diligence on target companies may involve:
- examining the statutory books and corporate records of the company (including its minutes, resolutions, registers, share certificate book, transfer documents an audited financial statements kept with the company secretary) and reviewing compliance with constitutional documents, shareholders agreements and other laws and regulations of Hong Kong
- reviewing material contracts (including leases, rental, hire purchase, partnerships, joint ventures and other cooperative agreements, confidentiality and exclusivity agreements, licences, powers of attorneys, insurance contracts, contracts with government or regulators etc). Such a review will involve, inter alia, (a) reviewing for breaches of legal requirements or contractual provisions; (b) assessing the likelihood or impact of enforcements of any consequential claims or damages; (c) reviewing change of control restrictions or other prohibitions from sale/transfer of assets the subject of the proposed transaction; (d) reviewing requirements relating to notification to, and/or consents to be obtained from, counterparties or other third parties for consummation of the transaction; and (e) any matters which may inhibit the ability of closing the transaction or future operations of the business;
- debt and financing arrangements (including review of details of borrowings (including bank loans, intra-companies borrowings and other borrowings, current and future borrowing capacity etc.); bank guarantees; conditions and restrictions imposed on the business; security and mortgage arrangements; pledges, charges and other encumbrances; contingent liabilities and capital commitments etc.)
- investigation of any corrupt practices, money laundering, bribery or similar activities
- reviewing for any regulatory restrictions on the businesses of the company (e.g. restrictive covenants on sales and marketing of products)
- reviewing related party transactions and documents as well as relationships with or among shareholders
Charltons can assist with all aspects of China due diligence and China M&A transactions.