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[M432]Merger Acquisition Due Diligence

by George Silver, Geo

Due diligence is an absolute must if you plan to team up with a Chinese partner. It's a jungle out there, so be wary. This is no place to cut expenses or rush through things because a half-done job may cost you twice as much time and money later. Due diligence is not a particularly prevalent practice among the Chinese and they may have trouble understanding why you are “making things difficult”. If your prospective partner refuses to cooperate, don't be afraid to walk away.

There are three main types of due diligence that you need to concern yourself with – financial, legal, and environmental. Keep in mind that these three inquiries often overlap.

Financial Due Diligence

Many Chinese enterprises (it is said) have three sets of financial records: one for the
owners, one for the tax authorities, and one for foreign investors. Accordingly, determining the value of an enterprise based on its financial records can be difficult. It might be necessary to carry out an independent assessment of the enterprise's reputation, connections, and key employees.

Key pitfalls to watch out for are:

Double-dealing employees – it is not at all uncommon in China for senior management to have their own businesses that directly compete with their employer, and for these executives to use their employer's confidential information to further their own private interests.

Corrupt relationships with Chinese government officials – this presents the risk of civil liability or prosecution, not only by the Chinese authorities should things take a turn for the worse, but also by the US authorities if you happen to be American or otherwise subject to the US Foreign Corrupt Practices Act (some other nations have equivalent legislation; check your home jurisdiction if you are unsure).

Intellectual property piracy – rampant in China.

Legal due diligence

Legal due diligence focuses on a variety of issues including contract rights, corporate authority, regulatory compliance, ownership of assets, and liabilities and claims against the target company. Issues that often arise include:

Scope of business issues – At the minimum, you should authenticate and inspect an original of the enterprise's business license (the scope of business is listed thereon).

Contracts – whether contractual arrangements are adequately documented (or documented at all).

Ownership of buildings and Land Use Rights – Check to make sure all buildings are owned outright and all land is “granted” rather than merely “allocated”.

Intellectual property – make sure that trademarks, etc. used by the target company are either owned by it or licensed to it.

Constitutional documents such as Articles of Association – make sure that they are up to date (properly amended to reflect the company's current situation).

Construction permits and approvals – these should be examined not only for construction in progress, but also for existing structures

Labor disputes – determine whether there are any outstanding disputes, and the level of employee morale.

Debts and encumbrances – make sure that these are adequately documented and not excessive.

Environmental Due Diligence

In a nutshell, you need to know whether your partner's site environment or your FIE's proposed site environment has been contaminated (contamination of your Chinese partner's site could affect its financial stability even if it is not used for the FIE).

Due Diligence in Joint Venture is a process, since recently joining partners might normally consider entity Intellectual Property (IP) assets. While in a JV partnership, you will need to consider legal and monetary analysis, which are carefully issued at the time two parties join in business. The Due Diligent Intellectual Property research will help you to evaluate copyrights of your partner, trademarks, patented asset, and trade secrets. Continue below. If a partner owns right of Intellectual Property, which are protected by licenses, the party has the right to the valuable Joint Venture. This is important since if you are selling a product or line of products for a business you want to make sure that the partner houses all legal rights to the products. Intelligence Property auditing, or diligent investigations will help through the verification process, thus verifying that the Intellectual Property has rights held by the product owner.
Thus, this will leave you room to confirm, verify, exploit, and enforce the rights of the products. The verification will provide suitable joint venture relations, and provide confidence while proposing objectives through business. While writing a contract for Joint Venture you will need to consider the transferring of Intellectual Property. As a venture partner contributing to the Intellectual Properties, including rights, you are placed in the out of the usual run of things, positioning self as a transferee and transferor. The business partner then will consider the transferor or Joint Venture partner, considering the Intellectual Properties, allowing only room for you to successfully run the business jointly, while eliminating any chances of losing control of the portfolio or exposing the IP portfolio to any irrational dangers.
You as the transferor then will find interest in capturing to the limits the Intellectual Properties, while growing into a successful JV relationship. Accordingly while structuring a contract for Joint Venture, you will not only focus on the Intellectual Property, you will also consider agreed transferring of documentation, while drafting the information in detail and leaving out vagueness as much as possible. Thus, the interchanging of Intellectual Property in Joint Venture forms a project and/or license reunion. Still, the projects could prove unbending, while forms of transfers are sent. The project first, might put harsh limits on the abilities of the assignor to utilize Intellectual Property and its rights in the market or industry reached
Furthermore, JV may exclusively limiting its purposes of completing the fulfillments of the venture partner, targeting the particular objectives in business, and once the goals are met, usage of the partners Intellectual Properties may not be needed any longer in the business. Accordingly, you might want to seek out reliable partners, i.e. show reluctance to give over your Intellectual Properties to those ventures that are proven inexperienced.
You want to structure the contract so that the two parties joining in Intellectual Property, including transferee and transferor, leaving no room for impairments of independency, while removing any conflicts produced in the relationship. Thus, licenses may offer more flexibility in the process of transferring Intellectual Properties to joint venture partners. The license in its self has variables, including scopes, terms, etc.The license and its scope decides the rights, including settled on, and if those rights will have copyright exclusions. In other words, the scope of the license is to decide if the usage by you has particular restrictions and/or limits that prevent you from selling to the fullest.

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Both George Silver & Steavewaugh are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

George Silver has sinced written about articles on various topics from Site Promotion, Joint Venture and Tax. David Carnes is licensed to practice law in California. He speaks and reads Mandarin Chinese and has several years experience working with Chinese law firms and Sino-American joint ventures. Check out his website,. George Silver's top article generates over 1300 views. to your Favourites.

Steavewaugh has sinced written about articles on various topics from Site promotion, Arizona Property and Joint Venture. . Steavewaugh's top article generates over 9900 views. to your Favourites.