Due diligence and disclosureScope 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 provides potential buyers with the opportunity to evaluate the legal, financial, tax and commercial position of a company, business or asset. Legal due diligence will typically confirm title to the company or business, the legal structure, terms of financial obligations, ownership and use of information technology, intellectual and real property, physical assets, employee arrangements, litigation and compliance with law.
Vendor due diligence reports are a common feature of controlled sales processes in Hong Kong, enabling a seller to accelerate the sale process, minimise disruption to the target business, and have access to management and explain any complexities associated with the transaction. It is customary for a successful buyer, and its lenders, to be able to rely on such vendor due diligence reports, although buyers will often also complete confirmatory due diligence to complete their evaluation of a transaction.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?
A seller can be liable for pre-contractual misrepresentation. Except with respect to fraudulent misrepresentations, the parties generally have freedom to negotiate the extent of the seller’s liability for pre-contractual and misleading statements in the sale and purchase agreement. Practice differs widely according to the nature of the transaction and the parties, but it is customary for the buyer to confirm that it has not relied on any representation outside the contract. Alternatively, parties may agree to a contractual term that limits the scope of liability for (non-fraudulent) pre-contractual misrepresentation or restricts any remedy available by reason of such misrepresentation. In such a case, the term is not effective unless it is fair and reasonable in the circumstances, as set out under the Control of Exemption Clauses Ordinance (Cap 71).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?
Hong Kong incorporated private companies are required to make certain filings with the Hong Kong Companies Registry. Information that is made publicly available includes:
- the company’s articles of association;
- incorporation form (Form NNC1) and the subsequent annual returns (Form NAR1) containing information about the directors, the identities of shareholders and their respective shareholdings;
- notice of alteration of shares capital (Form NSC11) setting out details of changes to a company’s share capital;
- statement of particulars of charge (Form NM1) containing information relating to mortgages over the company’s assets; and
- certain specified types of shareholders’ resolutions, including special resolutions.
As part of the legal due diligence, a buyer of a company will typically carry out searches of publicly available information at the relevant governmental authorities. Nominal fees are generally payable to carry out such searches. The searches serve as an independent check against the information provided by the seller. In Hong Kong, these governmental authorities typically include:
- Companies Registry: to ascertain that the target has been duly incorporated and that it remains registered at the relevant time of the transaction;
- Land Registry: to verify the ownership of real property, mortgages and charges, and other attributes of real property land pertinent to the transaction;
- Trade Marks Registry: to confirm the ownership of the trademarks that form a crucial part of the transaction;
- Patent Office: to ascertain the ownership of a patent that may be the subject matter of the transaction;
- Official Receiver’s Office: to check for any petition for compulsory winding up; and
- Registry of the High Court or District Court of Hong Kong: a search of the cause book for any proceedings that have been taken against the target for a certain period of time relevant to the transaction.
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 actual or deemed knowledge at the time of entering into an acquisition may preclude claims being brought against the seller in respect of relevant representations, warranties and covenants. Parties generally are free to modify this principle and set out the way in which actual or deemed knowledge of the buyer may or may not affect any claims afterwards.
Apart from such contractual negotiations, if there are any restrictions or provisions under the articles of association or by way of resolution of a Hong Kong company that is a party to the transaction or whose shares form the subject matter of the sale and purchase, section 120 of the CO provides that a person is not to be taken to have notice of such restrictions or provisions merely because they are disclosed in the articles of association or a return of such resolution kept by the Hong Kong Companies Registry.