International Law

China M&A. The Extreme Basics On Due Diligence.

By Dan

Been spending my Saturday deleting old e-mails and came across one that we sent to a client setting out the starting point for the due diligence we would need to undertake surrounding its stock purchase of a small to mid-sized existing China WFOE. This was the initial email where we were setting out the sorts of things we would need to do as part of the due diligence investigation to make sure that what our client thought it was buying was what it was actually buying.

The thing that strikes me about the list is how it is really no different from an initial due diligence list we would be drawing up for a stock purchase of any company pretty much anywhere in the world.  

Here's the list:

Purchase of stock in Beijing WFOE: Basic Required Documents

1. Company documents: articles of association, business license, WFOE approval, listing and record of appointment of directors and officers, etc.
2. Annual audit and tax returns and all communications with and notices from the tax authorities, both national and local.
3. Real estate documentation: ownership, lease, mortgages, etc.
4. Employee list, and copies of employee contracts and records for tax and social welfare payments.
5. Insurance documents.
6. Significant existing contracts with vendors and customers.
7. Current financial statements.
8. Record of distributions to shareholders.
9. Listing of lawsuits and other claims, if any.
10. Listing of hard assets and vehicles.
11. Intellectual property: trademarks, patents, copyrights, technology licenses.
12. Listing of loans payable and guarantees payable and contingent, if any.
13. Environmental approvals/licenses and annual environmental inspection reports

The biggest differences we usually see between a Chinese company acquisition and a domestic company acquisition are the following: 

• The books of the Chinese company are usually in not terribly good order and it is not at all uncommon for the company to have two (or more) sets of books. 
• Chinese companies tend to be more unwilling to turn over their books and records than U.S. companies.
• Many, if not all of the documents of the Chinese company are, logically enough, in Chinese.
• China requires far more government sign-offs and registrations than the United States.  

But overall, the goals and the strategies are not all that different. In both cases, the goal is to find out as much as you can about the company to be acquired and to structure the deal in such a way as to maximize the returns for your client going forward.  

For more on doing the China deal, check out, "Five Things About China Deals That Differ From The West" and "Five More Things About China Deals That Differ From The West."

Full post as published by China Law Blog on August 14, 2010 (boomark / email).