Due diligence and disclosure

Scope of due diligence

What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?

Due diligence on the target company or assets usually includes legal due diligence conducted by lawyers and financial due diligence conducted by accountants. In some cases, separate tax due diligence and business due diligence are also performed. Where the circumstances warrant it, a background check on the key personnel of the target company may also be commissioned. Legal due diligence typically covers corporate history, assets, licences and permits, employment, tax, foreign exchange issues, environmental issues, compliance, litigation and administrative penalties of the target company. Most of the time, a due diligence report is prepared by the buyer’s advisers, and sellers typically do not provide due diligence reports to prospective buyers.

Liability for statements

Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?

As discussed in question 10, a seller is subject to the principles of honesty and trustworthiness during the course of negotiating and entering into a contract. Specifically, when negotiating and concluding a contract, one should not make false assertions or misstatements, or deliberately conceal material facts relevant to the conclusion of the contract. A breach in this regard may result in the contract being revoked. Such liability cannot be excluded by agreement between the parties.

In addition, according to the PRC Contract Law, clauses that exempt a party from liabilities arising from such party’s wilful misconduct or gross negligence shall have no legal effect.

Publicly available information

What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?

The AIC operates the National Information and Credit of Enterprise System, which publishes general information of all PRC companies such as their registered address, registered capital, legal representative and business scope. It is usually the first source that a potential buyer or its advisers will look to when obtaining preliminary information on a target company that it intends to purchase. Certain other governmental agencies also operate systems that publish relevant information of companies that they are mandated to regulate and monitor, which can also be utilised by buyers for due diligence purposes. For example, information about the intellectual property of a company, such as trademarks, patents, copyrights and domain names, can be obtained in the trademark, patent and domain name registration systems operated by the relevant regulatory authorities. Where a party operates a business by way of franchise, relevant information with respect to the franchise arrangement will be filed with and disclosed on a designated system operated by the Ministry of Commerce (MOFCOM). Pursuant to the latest regulation promulgated by the Supreme People’s Court of PRC, all branches of the People’s Court are obligated to publish all effective judgments and judicial decisions on their respective websites, unless laws and regulations provide otherwise.

Buyers should be cautioned that information on these publicly available sources may not be up to date, and they should cross-check such information against the due diligence materials provided by the sellers or target company.

Impact of deemed or actual knowledge

What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?

A buyer’s knowledge of defects in the target assets or business typically has the effect of precluding the buyer from claiming damages arising from such defects, especially if the knowledge comes from the seller’s proactive disclosure, unless at the time of signing of the contract the buyer was not aware of the fact that the defects could substantially impair the basic function of the target assets.