Positive Effects Of Legal Due Diligence In China

What is legal due diligence? There are many types of due diligence, for example financial due diligence undertaken by accountants to check a company's profits, debts, solvency, financial reporting and tax status. There's also corporate due diligence concentrating on a company's incorporation and board. Investigatory due diligence, that is considering things such as the personal links of management, is another area to think about especially in the framework of China. Legal due diligence nevertheless concentrates on whether or not a company is complying with local and international laws and how the compliance or non-compliance will influence your investment. Performing legal due diligence includes looking at a company's ownership of property both physical and intellectual, contracts and other agreements, litigation that it has undertaken or that has been went after against it, as well as overlapping with other types of due diligence in the elements of business licencing, finances, tax, and management. Legal due diligence if properly carried out will also disclose what kind of company you are working with. Are they highly litigious? Have they been prosecuted by authorities? Or have they outsourced all of their operations and don't actually produce anything?

Why take on legal due diligence? If you are contemplating 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 important to know just as much as possible before investing. Not partaking in thorough investigation can result in unpleasant surprises down the track. Carrying out due diligence is more than just a hunt for whether or not your preferred company is presently complying with China's legal requirements. If done properly, legal due diligence will put your investment into industry framework and show you just what kind of business you are coping with. By hiring professionals to take on legal due diligence, you can in turn steer clear of unnecessary risks and confidently tap into the rapidly growing market that is China.

How do you set about it? What areas should you focus on? The process of legal due diligence is simply an activity of gathering information and being able to determine what it tells you and how it fits together. That having been said, knowing what to look for, which things to ask, and where to search are often less than straightforward, specifically in China. One thing to do when undertaking legal due diligence is to talk to a professional, in most cases an expert law firm, and reveal to them what you are going to do, for instance 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 techniques differ. Most of the Western world has fairly centralised and open documentation of the legal particulars of registered companies, in China then again 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 mentioned you will also have 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 aspects 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 think about when executing legal due diligence.

Real Property: In China a company will have either 'granted', being full possession, 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 very important for checking that the price has not been inflated. It is also important to determine whether 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 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 move can happen. Also with regards to real property, check the environmental regulations for the area in which the business is situated.