How to conduct due diligence in corporate mergers and acquisitions

The due diligence in mergers and acquisitions refers to a series of investigations into the financial and operational conditions of the target company before the start of the transaction. The results of due diligence for the design of the transaction structure, determine the transaction price, to prevent the transaction risk is of great significance. First, the content of due diligence investigation mergers and acquisitions to carry out due diligence is for the acquisition of services, the basic purpose is to prevent the risk of the transaction, generally speaking, due diligence includes the following: (a) the main body of the target company's situation and the situation of shareholders, the investigation is to determine whether the target company's legal existence and the basic situation, the matters involved are as follows: (1) the main body of the company's situation: including the company's scope of business, registration, time of establishment, business license, business license and the business of the target company's financial and operational status. (1) the main body of the company: specifically including the company's business scope, registration authority, establishment time, business license, the company's tax registration certificate, proof of bank account, the company's annual inspection records, etc. (2) the company's organizational structure and rules of procedure: including the company's articles of incorporation and amendments, the company's board of directors' meetings and shareholders' meeting resolutions. (3) the company's shareholders and ownership of the company: China's company law provides that the original shareholders of the company for the transfer of equity shares, the company's original shareholders of the transfer of equity shares has priority. In our projects, we have come across cases in which the acquisition of a company failed due to the target company's shareholders exercising their preferential rights in bad faith. Therefore, it is important to understand the composition of the shareholders of the company and whether the shareholders' equity is pledged or otherwise guaranteed for the M&A party.4) The company's foreign investment and the establishment of branch offices: to understand the subsidiaries set up by the company, or the participation in other companies or the establishment of branch offices or representative offices will help to assess the company's market channels and management risks. (ii) Real estate and equipment, property of the target company 1) The company's real estate is generally of great value to the company, and real estate mainly includes land use rights and buildings, and it is important to know whether the ownership status of real estate is owned, leased, mortgaged or not, and whether it is seized or not. 2) Important machines and equipments: For a target company engaging in the industry, the advancement of the machines and equipments can basically show the technical level of the company. The level of sophistication of machinery and equipment basically shows the technical level of the company, which determines the value of the target company to a certain extent. It is also necessary to pay attention to the ownership of machinery and equipment, such as the purchase and sale contracts, purchase invoices, etc. (3) Equity in other companies owned by the company: this not only helps to determine the value of the target company, but also helps to expand the direction of the business of the target company in the future. (iii) Intellectual property rights: In the current knowledge-based economy, intellectual property rights are particularly important to a company, so the investigation of intellectual property rights in mergers and acquisitions should be given sufficient attention. 1) Patents and patent applications to be approved: patents, especially invention patents, reflect the scientific and technological content of the target company and the degree of innovation, and patents mainly depend on the patent certificates. 2) Trademarks: Trademarks are the symbols of the target company and the concentration of its market influence, and trademarks can be used as the basis for determining the value of the target company. Trademarks can be seen in the certificate of trademark registration. 3) Copyrights: copyrights are also important for the animation industry or the game industry. 4) Trade secrets: trade secrets are an unpredictable area in due diligence, but trade secrets are indeed one of the ways to keep the enterprise competitive. 5) Licensing of intellectual property rights: this includes the investigation of the right holders of intellectual property rights of the target company; whether there is any license for others to use the intellectual property rights, and whether the intellectual property rights of the target company can be used by others, and whether the intellectual property rights of the target company can be used by other people. (D) important contracts signed by the target company some important contracts for the future development of the company has a considerable impact, but also the target company's business channels and have a concentrated reflection of market resources, such contracts include the sale of goods, agents, investment, management services, subcontracting, research and development contracts, depending on the direction of the target company's operations of the respective importance of the focus, generally include: 1) intellectual property rights transfer or license agreements, such as patents, trademarks, trademarks, and other rights restrictions. (1) Intellectual property rights transfer or license agreements, such as patents, trademarks, copyright licensing agreements, etc. (2) Agreements with suppliers, manufacturers, such as continuous supply agreements, etc.. If the target company's raw materials mainly from a supplier, then the supply contract between the target company and the raw material supplier is extremely important, the raw material supplier can determine the life and death of the enterprise. Again, such as the target company's products using the distribution agent, then the target company and the distributor of the distribution contract determines the target company's sales channels. 3) the company's right to have a significant limitation of the contract: such as some contractual agreements, the target company's equity transfer or acquisition of the contract is also corresponding to lift and so on, such as some of the borrowing contract, such as changes in the company's holding, the borrowing of money to accelerate the expiration of the loan, and so on. 4) the joint venture contract or some major cooperation agreements. Joint venture contracts or some major cooperation agreements. 5) Contracts with affiliated companies: contracts with affiliated companies may make the target company subject to, even if the target company to obtain a controlling stake in the target company, but also can not obtain the real control of the target company, and be digested in the intangible. (v) Debts and guarantees of the company The debt status of the target company determines the acquisition price to a certain extent, while guarantees, as a kind of contingent debt, may suddenly erupt and lead to the demise of an enterprise. 1) Various types of loan agreements entered into between the company and the bank. 2) Various types of borrowing agreements entered into between the company and other companies or natural persons. 3) Various types of loan agreements entered into between the company and other companies or natural persons. 4) Various types of loan agreements entered into between the company and other companies. In the case where the company is strapped for cash and is unable to obtain a loan from a bank, the company may be able to finance itself by means of private borrowing.3) The company's outstanding debts to its customers or suppliers: the company will incur a variety of transactions in the course of its operations, and whether there are any accounts payable by the company during these transactions.4) Various types of security agreements entered into by the company, including the company's agreements to guarantee its own debts, but also the guarantees it has provided for other people, and particularly To pay attention to the company for others to provide security, a guarantee for others to provide security stamp, it is possible to make the company lose tens of millions or even hundreds of millions. (F) labor situation with the implementation of the "Labor Contract Law", mergers and acquisitions in the labor and management issues are increasingly important, labor and management issues can directly determine the future development of an enterprise, the investigation of labor and personnel mainly includes the following aspects: 1) the number of employees and job arrangements, specifically including all the signed or for the non-signing of labor contracts for the name of the employee, salary, job title, date of employment, annual leave and so on, in particular The situation of core employees is the most important in the investigation. 2) Labor contracts and signing: labor contracts signed with all employees and their contents, and the situation and reasons for not signing labor contracts, including the number of years of signing a labor contract and the renewal of labor contracts, etc., the new Labor Law stipulates that double salary compensation for not signing a labor contract, and not signing for more than one year will be regarded as signing an open-ended labor contract with the worker. 3) Employees' social security and housing insurance. ) Employee's social insurance and housing fund payment: Social insurance includes pension insurance, medical insurance, career insurance, work injury insurance, maternity insurance, and housing fund. Underpayment and underpayment of social insurance premiums are relatively common in China, especially for enterprises with a long history of existence, and the underpayment of social insurance premiums may amount to tens of millions of dollars, which is definitely a lot of money. We have also encountered an equity acquisition project in which the target company was found to have underpaid social insurance premiums amounting to tens of millions of dollars, and the acquirer had to give up the acquisition due to risk considerations.4) Special laborers in the target company: mainly workers who have been injured at work and patients with occupational diseases, which is a heavy burden for the acquirer, and should be emphasized in due diligence.5) Contracts signed between the target company and its senior management and special talents: for example, service personnel and special talents, such as those who have been injured at work and those who have suffered from occupational diseases. (5) Contracts signed by the target company with senior management and special talents: such as service agreements, non-competition agreements, confidentiality agreements, stock option arrangements, profit **** enjoyment plans, etc. (6) Trade unions: trade unions are becoming increasingly strong in the company and are playing an increasingly important role in labor-management relations, so it is necessary to have an understanding of the mode of organization and operation of trade unions in the target company. (7) Employee handbook and other company regulations: employee handbook and other regulations in the new "Labor Manual" and the new "Employee Handbook" are not applicable to the target company. Handbook and other rules and regulations in the implementation of the new Labor Law is more important, the employer for the management of employees depends on the rules and regulations, unilateral dismissal of the establishment of the rules and regulations also need to support. 8) the collective contract signed and the implementation of the status of the collective contract. 9) the company's labor outsourcing and labor dispatch status: labor outsourcing or labor dispatch is a common way of employing workers, in understanding the situation of the labor force is also necessary to understand the labor outsourcing and labor dispatch. Labor outsourcing and labor dispatch employment situation. (VII) environmental issues environmental issues as a sustainable development issues, the country is also increasingly important, which is particularly important for production-oriented enterprises, if the sewage does not meet the standards may lead to the closure of the enterprise, specifically, mainly including: 1) the target company's various sewage testing records: mainly to understand the various emission standards to meet the national standards and local standards. 2) the target company's environmental protection equipment (2) Environmental protection devices of the target company: such as sewage discharge system, air pollution detection system, etc. (3) Penalties and recommendations of environmental protection departments: whether the target company has been subjected to administrative penalties in the course of operation, whether it has been corrected, and whether the environmental protection departments have any recommendations or plans for the environmental protection of the target company. (4) Records on the emissions and disposal of hazardous and general wastes of the target company, description of the self-disposal of wastes and the method of disposal, and the description of the self Disposal of waste, such as incinerators, wastewater treatment facilities, installation certificates, etc. (5) environmental pollution-related lawsuits: environmental pollution lawsuits are different from general economic litigation, which can be related to the fate of the enterprise. We have handled because of the plant near the people filed a lawsuit of environmental noise pollution, which led to the suspension of production and rectification of the situation. (H) tax issues to understand the tax status of the target company, such as whether the tax according to law, whether there is tax evasion, tax evasion phenomenon, to enjoy what tax benefits, these are mergers and acquisitions are worth paying attention to the problem. 1) the company applies to all types of taxes, tax rates, such as value-added tax, business tax, income tax, stamp duty, etc., the tax for the mergers and acquisitions is a must be taken into account, especially mergers and acquisitions and the target company is in a different industry, this point is particularly worth paying attention to. This is especially noteworthy when the M&A party and the target company are in different industries. 2) Proof of the company's tax payment and whether there is any tax arrears, whether the target company pays tax in full in accordance with the law, and whether there is any proof of tax payment and whether there is any tax arrears, tax evasion or leakage. 3) Details of the preferential tax treatments that the target company is entitled to, and the relevant approving documents or proof of the target company's entitlement to tax reductions or exemptions, for example, high-tech innovative enterprises are entitled to certain tax concessions. (3) Details of tax preferences enjoyed by the target company and relevant approval documents or proof of tax reductions or exemptions enjoyed by the target company, such as high-tech innovative enterprises enjoying certain tax concessions, etc., and export tax rebates enjoyed by the industry in which the target company operates, etc. (4) Whether the target company has been subjected to any administrative penalties imposed by tax administration authorities, etc. (ix) The information system of the target company is now an information society, and the information management system of the target company plays a more important role in the management of the enterprise, therefore, it is necessary to understand the information management system of the target company during the due diligence. 1) The structure and description of the internal information infrastructure of the target company. 2) The list and description of the hardware equipment, such as the date of purchase, model number, function, etc. 3) The list and description of the software. (3) List and description of software, such as date of purchase, model, function, after-sale service system, etc. (4) Contracts and texts of related information technology, such as license agreements, after-sale service agreements, instruction manuals, etc. (5) List and description of the information management system of the target company. (x) Litigation and arbitration involving the target company Litigation and arbitration involving the target company may have a significant impact on the target company's operations. Directly related to the liability that the target company may assume, the litigation or arbitration may cause economic losses to the target company, and may also involve reputation. The investigation of the litigation and arbitration mainly includes the following aspects: 1) A list of arbitration or litigation cases that have taken effect, with emphasis on analyzing the type of the case and the impact on the target company, and of course, reviewing whether the execution is completed. 2) Ongoing litigation or arbitration, as the outcome is uncertain, more should be evaluated. 3) Litigation or arbitration, as the result of which is uncertain, should be evaluated. is uncertain, it is all the more important to assess the possible outcome and direction. For example, a high-tech enterprise's core technology of the intellectual property rights of the dispute will determine the value of the enterprise. 3) Known details of any violation of laws and regulations or contracts, or other infringement of the arbitration or litigation may be caused by the time of the arbitration or litigation. Second, the way of due diligence in the acquisition and merger of how to conduct due diligence on the target company, which is a must consider the issue of due diligence is generally mergers and acquisitions and the target company with a certain intention to carry out when the target company, which is required to target the company's cooperation in order to complete. Mergers and acquisitions always want to know as much as possible about the target company's information, while the target company for some purposes, such as for the protection of trade secrets, always provide as little information as possible to the mergers and acquisitions party or provide the mergers and acquisitions party irrelevant information, therefore, due diligence is also a game between the mergers and acquisitions party. Due diligence is generally conducted in the following ways: (i) A due diligence checklist is issued to the target company, and the target company provides materials or gives written replies or undertakings in accordance with the due diligence checklist. This involves how to open the due diligence list, generally according to the size of the acquisition project, the acquirer's concerns and the specific characteristics of the target company to list, we do the project in the process of contact with the due diligence list of a few pages, more dozens of pages, or even hundreds of pages. The target company for the due diligence list, may provide part of the materials, may also refuse to provide materials for the target company to provide materials to determine its authenticity, and its legal risk to make a judgment, request for further clarification, for the refusal to provide materials to analyze the reasons for the understanding of the risks that may be hidden behind it. (ii) Investigate with the relevant government departments or enterprises of the target company. To understand the target company's shareholders or its constitution, you can inquire the information from the target company's registered industrial and commercial bureau, industrial and commercial files generally register the company's shareholders, capital contribution, constitution and its changes, annual inspection information, through the industrial and commercial registration department can understand the basic situation of a company. The environmental law issues facing the company, you can check with the environmental protection department, whether the violation of environmental protection law and has been subject to administrative penalties, or whether the preliminary construction through the environmental protection department's review and so on. The tax situation can also be inquired from the tax department, whether there is tax evasion, tax leakage and whether it has been subject to administrative penalties. For labor and social insurance status, you can check with the labor and social security department for labor registration and payment of social insurance premiums and so on. For land use right and house property rights, inquiries can be made to the real estate department to learn about the ownership, mortgages and seizure of the property. For the ownership and pledge of the target company's equity, inquiries can be made to the securities registration and settlement department or the industry and commerce administration department. Side-by-side information on the credit operation status of the target company may also be obtained from other customers. (iii) Information about the target company through public channels. The company to survive in business, development will always leave a lot of traces to the community to publicize its information, such as the target company's website, social media reports on the target company. The target company's advertisements and so on. (iv) Conduct site visits to the target company and interviews with its employees. Due diligence process is also a process of understanding of the target company, to resolve the risks of mergers and acquisitions, mergers and acquisitions to determine the design of the transaction model, whether to use equity transfers or asset acquisitions play a very important role, should attract our attention. Due diligence in mergers and acquisitions, in practice, quite complex, involving a lot of legal issues, this paper is just based on our experience in handling cases, introduced the basic content and manner of due diligence. Author: Zhu Hui (partner of Shanghai Tongqian Law Firm) Chen Huiying (Managing Partner of Shanghai Tongqian Law Firm)