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Due diligence requirements
What due diligence is necessary for buyers?
Due diligence investigations remain an essential tool for assessing and reducing the risks inherent in M&A transactions in China. In the absence of complete knowledge of the operations, the scope of the assets and the extent of the liabilities of the target, due diligence investigations give the prospective buyer an opportunity to assess the target’s legal and financial affairs. They also facilitate consideration of structuring issues. Accordingly, thorough due diligence is vital in most M&As in China.
What information is available to buyers?
The concept of due diligence is relatively new to many Chinese targets. Many Chinese companies do not keep proper corporate or accounting books and records, and are used to concluding transactions without any pre-acquisition documentary review of target companies. As a result, foreign buyers may still find some Chinese parties reluctant to fully disclose information about the target. There have also been cases of lawyers, accountants and other business professionals being accused of violating China’s vague state secrets regime because they were closely inspecting certain financial and management records of Chinese state-owned enterprises. Document forgery can also be an issue when dealing with some Chinese parties. Generally, foreign investors and their advisers need a high level of patience, experience and diplomacy to carry out due diligence investigations up to international standards.
Parties should be careful of ‘gun-jumping’ restrictions under anti-monopoly laws, as underlined by the principle that business operators which are competitors should continue to act as such until the transaction completes. The extent to which this restriction applies will depend on the anti-monopoly laws applicable to the transaction.
The ability to do public searches on real property title, litigation, credit history or bankruptcy is quite limited in China, as the country is still developing national, searchable databases of such information. Intellectual property registrations are generally searchable.
What information can and cannot be disclosed when dealing with a public company?
Under the Securities Law, any person with non-public information that concerns the business operations or financial condition of a company or that may have a significant influence on the market price must not disclose it. In addition, the Administrative Measures for the Takeover of Listed Companies contain detailed reporting and announcement requirements.
How is stakebuilding regulated?
Under the Administrative Measures for the Takeover of Listed Companies, an investor whose shareholding reaches 5% or more of a listed company’s issued shares must make a written report to the securities regulator and the stock exchange, notify the listed company and make a public announcement within three days of acquiring that shareholding. During this period, the investor may not continue to buy or sell shares in the listed company. The investor must follow similar reporting and announcement procedures for each 5% increase or decrease in its shareholding in the listed company.
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