Author of this article: Lux Xiaomaster Article is reproduced from: iCourt Faxiu
The copyright of this article belongs to the author and is reproduced for communication only. If you have any objections, please contact us to delete
Legal due diligence, which is one of the essential work skills of lawyers. The author summarizes and shares existing practical experiences around equity mergers and acquisitions projects, in order to help lawyers quickly grasp the key points and context of due diligence.
directory
1. Basic concepts in due diligence
III. The 11 main contents of due diligence and review focus
IV. The 8 routine steps of due diligence
III. The basic concepts in due diligence
Mastering the basic concept is a key to smoothly carry out specific work.
(I) Due Diligence
In a corporate merger and acquisition project, the acquirer needs to conduct a comprehensive investigation of the due diligence object before the project is started. In order to seek the basis for decision-making of merger and acquisition transactions, the acquirer often entrusts intermediary institutions to conduct due diligence on the merger and acquisition targets.
Due diligence refers to the entire process of each due diligence participating intermediary agency, through written review, on-site inspection, interviews, confirmation letters, online verification and other methods, to fully understand and analyze the due diligence objects, and finally form a written due diligence report for the client to refer to.
Due diligence is mainly divided into financial due diligence, legal due diligence, tax due diligence, industry due diligence, etc. The core of legal due diligence is that lawyers conduct legal analysis and evaluation of the due diligence targets based on the collected materials and information, thereby providing professional legal opinions and solutions to the problems found in the project. Lawyers should make careful evaluations on non-legal issues.
(II) In the target company
equity merger project, the target company is the target company to which the acquirer intends to acquire the equity. The target company is the most important and direct due diligence object. At the same time, important affiliates of the target company, such as the target company's shareholders, actual controllers and other companies that have invested abroad, may be within the scope of the due diligence object.
It should be clear that the target company is the core of due diligence objects, and all professional analysis of legal due diligence should be mainly carried out around the target company. Investigating other affiliates ultimately serves to understand and analyze the target company.
(III) Due diligence base date
Due diligence base date, in layman's terms, it is the latest time node where the due diligence material and data are collected. For example, the base date is June 30, 2022. When companies are asked to provide materials, it is usually the latest data information before the base date. The due diligence report date indicates the date of reporting. There is a time difference between the base date and the reporting date. If there is a significant change in the company's situation during this period, the principle of due diligence and diligence should also be disclosed in the due diligence report.
(IV) Due diligence content
Revolving around the due diligence object, the content of legal due diligence generally includes: the basic situation of the enterprise, establishment and historical evolution, equity structure, business operations, major assets, major contracts and claims and debts, labor employment, taxation, litigation and arbitration, etc. For different types of enterprises, the due diligence content can be adjusted. For example: the scrap steel processing industry should pay special attention to the company's environmental protection, tax preferential policies and other related matters.
(V) Due diligence report
Due diligence report is a written result of due diligence work. Generally speaking, due diligence reports are composed of a preface, main text, legal risk warnings, suggestions and attachments.
Preface generally includes: due diligence background, due diligence object and scope, abbreviation and definition, due diligence legal basis, assumption premise, statement and other contents.
main content includes: sub-module expressions of due diligence content and corresponding legal evaluations.
legal risk warnings and suggestions include: opinions on the legal conclusions and opinions on the feasibility of this merger and acquisition transaction, the main problems and legal risks found in due diligence, and the corresponding solutions are proposed in combination with the due diligence purpose.
Attachments include: tables that are not convenient to be reflected directly in the text, such as list of fixed assets of the enterprise and working papers for issuing due diligence reports.
(VI) Working Paper
Working Paper is a general term for materials related to due diligence objects obtained during the due diligence process and various work records. It is the fundamental basis for lawyers to issue due diligence reports, like evidence materials in litigation cases. From collecting materials, organizing materials, analyzing materials, and forming reports, it can be said that all the work contents are carried out around the draft.
working papers are mainly composed of materials provided by the company and external investigation materials for lawyers. The materials provided by the company include: copies of relevant materials, issued confirmation and commitment letters, situation descriptions, etc.; materials for external investigation by lawyers include: material information obtained from third parties, online verification records, interview records, etc.
2. 3 types of work thinking for due diligence
comes into contact with a new work content. With a template, you can solve some basic problems, but everything is not good. In legal due diligence, collecting related templates such as due diligence material lists, due diligence reports, etc. is not helpful to get started. Mastering the core work thinking will help us grasp the work priorities and target our targetedness. The work thinking that should be sorted out in due diligence, the author summarizes it as follows:
(I) Grasp the needs of customers
Corporate mergers and acquisitions can be divided into 3 main stages.
first stage:
1. The project team selects and determines the target company according to the needs of the company's development plan;
2. After preliminary negotiations and communication with the target company, sign an intent agreement;
3. After the project team submits the project report and passes the approval, it enters the specific merger and acquisition business stage;
Stage 2: Each intermediary agency accepts commissions to carry out due diligence, due diligence report feedback to the company, audit and evaluation, pricing, internal company decision-making, and signing of the merger and acquisition agreement;
Stage 3: handle company change registration procedures and capital injection.
Before the due diligence work was carried out, the company had a relatively in-depth understanding of the target company before entrustment. So what is the purpose of entrusting a law firm to pay due diligence? It depends on the real needs of the customers. Generally speaking, customer needs can be divided into two aspects:
1. A comprehensive understanding of the basic situation of the target company and reduce information deviations and errors
When companies choose to acquire target companies, they often investigate and understand some important matters rather than a comprehensive and detailed investigation. In previous due diligence work, we found that most business owners do not really understand the company's situation, and they are not even clear about the actual payment of registered capital. Therefore, it is very necessary to comprehensively collect and analyze the target company information, which depends on the assistance of professional intermediaries.
2. Discover various risks in merger and acquisition transactions, and eliminate and prevent them from being exposed and prevented. Investment is accompanied by various risks, and mergers and acquisition transactions are no exception. During the process of a company from its establishment to operation, the historical legal problems arising from its establishment to its operation and the possible legal risks that may arise in the future require professional analysis and judgment of lawyers. Before formal transactions, be aware of legal issues and risks, evaluate and prevent them, so as to provide a basis for transaction decisions.
(II) Find the positioning of lawyers
After understanding the above basic entrustment needs of clients, the significance and value of lawyers carrying out due diligence is obvious. The author believes that in legal due diligence, the main positioning of lawyers is to comprehensively sort out the basic situation of the target company and assist clients in making decisions through risk warnings.
Specifically, there are two dimensions of due diligence work: on the one hand, comprehensively verify corporate information through reviewing materials, on-site interviews, online verification, etc.; on the other hand, risk warnings are made on the legal issues found during due diligence, and corresponding feasibility solutions are proposed. After finding the correct positioning, you will be able to carry out subsequent due diligence work with
. For example, after entering the site, in addition to collecting materials, you can learn more about the actual situation of the target company with the company's head, and you can also understand the development of the company's industry, the main problems currently exist in the company, etc. In short, lawyer due diligence work cannot be just about reviewing written materials, but requires exhaustive methods to understand the target company.
(III) Working draft thinking
Working draft is an important part of due diligence work. The working draft thinking is ultimately reflected in the facts described in the due diligence report are based on legal analysis.
Working draft thinking is manifested in the specific due diligence work:
1. Collect materials as comprehensively as possible. The more materials, the more knowledge you know about the company, and the more comprehensive the problems you find;
2. Pay attention to and verify the authenticity of the materials, and check the copies and originals. For documents that cannot be obtained, the target company requires the official seal on the copy;
3. In the face of the situation where there is no direct written material, the basic facts are fixed through interviews, company issuing situation statements, commitment letters, etc.;
4. When interviewing the heads of various departments, a certain information can be cross-verified, etc.
Establishing a working draft mindset is conducive to carrying out specific due diligence work, ensuring the quality of due diligence work, and reducing the professional risks of lawyers.
3. 11 main contents of due diligence investigation and review focus
The purpose of legal due diligence is to make legal analysis and judgment on the entire situation of the target company. The regular due diligence content mainly includes the following 11 topics.
(I) Basic information of the company
Basic information of the company, including the registration status and equity information of the target company. The current registration status includes information such as name, legal representative, address, registered capital, business term, business status, etc.; equity information includes the company's equity structure, equity holder, and equity burden.
main materials for verification: current business license, industrial and commercial archives, national enterprise credit information disclosure report, and the latest company annual report.
Review focus: Whether the company has the civil subject qualifications and is in an effective state of existence; whether there are pledge and other rights burdens for the company's equity. In equity mergers and acquisitions projects, a series of legal matters in the target company's equity should be the key content that lawyers pay attention to.
(II) The establishment and historical evolution of the company
The establishment and historical evolution of the company refer to the procedures and contents of the target company's initiation and establishment and previous changes of registration. This part can fully reflect the entire process of the company's establishment, growth and development. Through a comprehensive review of historical changes, major changes in the company can be checked, such as: changes in main business, previous capital increase and reduction, equity structure and shareholder changes, changes in actual controllers, major asset changes, etc. This helps us verify whether the target company's previous changes are legal and compliant and whether there are historical legal issues.
Main materials for verification: industrial and commercial archives, sponsor agreement, capital verification report, shareholder resolution documents, company articles of association, equity transfer agreement and payment certificate (if any), materials related to major asset changes, etc. A complete set of industrial and commercial archives can basically meet the due diligence content in this part.
Review focus: Whether the establishment and change procedures of company comply with the company's articles of association and company law; whether the registered capital contribution method is legal and actual payment, whether the equity investment in non-monetary form is evaluated; whether the ownership of the equity is clear and there is no objection, whether there is a situation of holding on behalf of others; whether the equity transfer is legal, whether the consideration is paid, whether the taxes and fees are paid, etc.
(III) The company's organizational structure and labor employment
The company's organizational structure is an internal operating structure that reflects corporate governance, department settings and functional planning. It can help judge the governance level of the target company, whether the functional departments are complete, and whether the company's operation is good. The labor employment part mainly includes: the list of senior executives and other major managers, the number of employees, the form of labor employment, employee wages and social security payment, etc., which can help verify the basic situation of the company's human resources.
Main materials for verification: Current company articles of association, list of managers and resumes, employee list, labor contract and labor agreement, wage payment vouchers, social security and provident fund payment vouchers, etc.
Review focus: Whether the corporate governance structure complies with the provisions of the articles of association; whether the company's directors, supervisors and senior management are qualified to serve; whether the labor contract complies with the legal provisions; whether the wages are paid on time and in full, and social security and housing provident fund are paid; whether there are potential labor employment risks, etc.
(IV) The company's business and qualifications
The company's business includes the registered business scope, actual main business business, business model and main products, production capacity and sales profitability, and the basic situation of competitors and partners. Qualification certificate refers to all certificates held by the company, including business license, three-mark certificate, honor certificate, license certificate, etc.
main materials for verification: business license, certificate, etc., written instructions on business situation provided by the company, list of major suppliers and customers, etc.
Review focus: Whether the actual business of meets the scope of the business license; whether the main business has obtained relevant licenses, whether the qualification certificate is true and valid; what advantages does the main business have, etc.; what competitive advantages does the enterprise have; the validity period of the certificate held, etc.
(V) The company's main assets
The company's main assets include: land use rights, houses, production machinery and equipment, vehicles, projects under construction, intellectual property rights and other basic situations.
main materials for verification: asset list, asset ownership certificate, construction project filing and approval procedures and main construction contracts, etc. Among them, the state-owned land use rights verification materials mainly refer to the transaction confirmation letter, transfer contract, use rights certificate, land transfer fee payment certificate or payment receipt; the house verification materials mainly refer to the real estate certificate. If a self-built property has not obtained a certificate, the project planning procedures shall be checked, including, but not limited to filing procedures materials, four books and one certificate, completion acceptance report, etc.; other fixed assets verification procurement contracts and invoices, and the vehicle should also verify the driving license; the intellectual property verification materials include trademark patents and other certificates.
Review focus: Is the ownership of assets legal, whether there are ownership disputes and flaws; whether there are any rights burdens such as mortgage and seizure of assets; whether the construction procedures are complete, etc.
(VI) Company's major contracts, claims, and debts
Company's major contracts can be divided into business contracts, loan contracts, guarantee contracts, etc. Creditors and debts generally include contractual debts and other types of debts and debts. Generally speaking, major contracts and creditors will be placed in the same topic.
main materials for verification: business contract copy, performance statement and voucher; loan contract and payment voucher; lease contract; guarantee, pledge, mortgage contract and related registration documents.
Review focus: the legality and validity of the contract, whether there is a potential contract dispute; whether there is an overdue situation for the loan; whether external guarantees, pledges, and mortgages are legal and valid, whether the corresponding registration procedures are handled; whether the company has major debt and debt risks, etc.
(VII) Competitive transactions with peers
Related transactions mainly include investigations on the business and financial transactions between the target company's affiliates and related parties. Inter-industry competition means that the company's business is the same as other business operations invested, served, and controlled by the controlling shareholder/actual controller, and the two parties constitute a direct or indirect business competition relationship.
main materials for verification: enterprise controlling shareholder status, directors, supervisors and senior personnel; list of enterprises that are invested, served and controlled by themselves and their close relatives; main business situation of related enterprises; fund lending between related parties involves contracts, business contracts, etc., and company related transaction system documents.
Review focus: Whether the actual controller of company is consistent with the controlling shareholder; the necessity and rationality of related transactions; whether related transactions affect the business independence of the target company; whether there is competition in the same industry. In addition to considering the business scope, we also need to make a comprehensive judgment based on multiple factors such as the company's actual business operations, main customer objects, and business territory.
(8) Company tax
Company tax mainly conducts investigations on the applicable tax types and tax rates of the target company, as well as tax payment situations, tax preferential policies, tax penalties and other matters in the past three years.
main materials for verification: tax declaration materials, tax payment certificates, tax vouchers, tax preferential policy basis documents, actual tax preferential conditions, tax audit documents, etc.
Review focus: Whether the tax types and tax rates implemented by the target company comply with the legal provisions; whether tax payments have been paid normally in the past three years, whether there are any tax evasion, tax evasion, tax arrears, etc.; whether there are legal basis for tax incentives, etc.; whether there are tax-related administrative penalties.
(9) Company's environmental protection and safety
Company's environmental protection mainly includes: environmental protection related licenses, qualification certificates, environmental protection approval and acceptance of construction projects, environmental protection implementation measures, etc.; safety mainly includes: safety management of the production process, safety assessment and approval of project construction, etc.
main materials for verification: pollutant discharge permit, construction project environmental impact registration form, environmental impact report form/book, approval and acceptance documents, environmental inspection report; safety assessment report, acceptance report.
Review focus: company has obtained environmental protection and safety licenses necessary for business operations; whether the construction project has completed environmental impact assessment procedures, whether the environmental protection and safety acceptance report has been obtained; whether there are major administrative penalties, etc.
(10) Litigation, arbitration, and administrative penalties
This part includes unfinished litigation, arbitration, and administrative penalties cases that have been completed by the target company or have been completed in the past three years.
Verification materials: All legal documents related to litigation, arbitration, and administration can be queried using Judgment Document Network, China Execution Information Disclosure Network, Alpha Database, Qichacha and other inquiries.
Review focus: Whether the target company has any situations that affect litigation, arbitration, and administrative penalties, whether it is sufficient to affect normal operations, or affect this merger and acquisition transaction; whether there is a situation that is listed as a list of dishonest persons; judge from the completed litigation, arbitration, and administrative penalties, whether there are irregularities in the business behavior of the target company, etc.
(11) The actual controller and controlling shareholder
The actual controller refers to a person who is not a shareholder of the company but can actually control the company's behavior through investment relations, agreements or other arrangements. The controlling shareholder is a shareholder holding more than 50% of the shares. When a company acquires a merger, the actual controller or controlling shareholder will also be listed as due diligence targets.
If the actual controller/controlling shareholder is the corporate legal person, the scope of due diligence is the same as that of the target company, and the focus is on reviewing related transactions, loans, etc. with the target company. Verify the entire material scope of the material with the target company.
If the actual controller/controlling shareholder is a natural person, the focus will be on investigating the situation of the same type of enterprises in which they invested from abroad, personal credit, whether there is a list of dishonest debtors, and whether there is any fund dismantling of the target company. Main materials for verification: personal resume, marital status and close relatives list, list of individuals and close relatives engaged in the same type of enterprises as the target company, personal credit report, etc.
4. 8 routine procedures for due diligence
The routine procedures for legal due diligence are roughly in the order of the work stage (parts can be flexibly adjusted), and are summarized as the following 8 main steps:
(I) Receive the entrustment and have a preliminary understanding of the due diligence object information
After formally accepting the entrustment, you can first make a preliminary understanding of the basic information of the due diligence object through the National Enterprise Credit Information Disclosure Platform, Qichacha and other websites, and due diligence company websites (if any). The problems found in external verification can be further confirmed during on-site due diligence.
After understanding the basic subject information of the due diligence object, you can also first prepare the relevant industry information. By reviewing research reports from the entire industry, we can learn about the general background of this type of enterprise, including policy background, market composition and some cutting-edge information. On the one hand, deepen the macro-cognition of due diligence objects and improve the ability to learn by yourself; on the other hand, it can effectively promote subsequent due diligence work. For example, when you first communicate with the boss or main person in charge of the target company, you have some common topics, which will invisibly bring the distance closer, which is conducive to the work development.
(II) Make and send due diligence material list
Before officially entering the on-site due diligence, the client project team will generally establish a related work communication group. At this time, the lawyer should complete the work of preparing and sending a due diligence material list to facilitate the company to start preparing materials.
Due diligence material list generally uses a fixed template, and personalized adjustments will be made depending on the due diligence object. The due diligence list is recommended to use a table form to provide due diligence content for different subjects and specify the required due diligence materials. And provide options such as "provided this time, to be provided, not applicable, and notes". According to the material provision, mark and check it accordingly for easy later verification.
(III) Collect and check due diligence materials
After the list of due diligence materials is issued, before the official on-site due diligence, the lawyer can first communicate with the docking person in charge and ask the company to provide the prepared electronic version of due diligence materials, so as to carry out preliminary verification work. During the on-site due diligence process, comprehensively collect and check materials, and synchronize problems and supplement material lists. After the on-site due diligence is completed, we must also maintain contact with the company's docking person in charge and communicate at any time about the preparation and supplement of due diligence materials.
(IV) On-site due diligence
On-site due diligence requires the lawyer to arrive at the actual business location of the due diligence object. The time period is generally around 5 days. The main work content can be roughly divided into 3 categories:
1. Collect and verify due diligence materials
On the first day of entering the market, you can first explain and explain the content of the due diligence materials with the company. Check the due diligence materials prepared by the company with the original. If there is no original, the company is required to stamp the official seal on the copy.At the same time, the company was asked to arrange personnel to accompany the lawyer to the industrial and commercial department to retrieve archive materials.
2, on-site interview
On-site interview subjects are mainly relevant persons in charge of the company. Generally speaking, the interviewees should cover the actual controller, legal representative, financial director, personnel director, legal affairs, business department head, etc., and the specific department structure set by the enterprise shall prevail. Before the formal interview with
, an interview outline should be prepared and sent to the interviewee first. During specific interviews, the issues can be adjusted according to the situation. Records must be made during the interview, and written interview transcripts must be formed, and signatures must be signed after the interviewee confirms that the content is correct.
In addition to understanding the basic situation of the due diligence object, on-site interviews can also solve some unconventional problems. For some facts and information that cannot be reflected in written materials, questions can also be asked when interviewing the relevant person in charge of the due diligence object on-site.
live interviews can cross-verify the authenticity of the information through the answers of different interviewees. At the same time, they can also help lawyers discover hidden problems in the company.
3. Field inspection
If the due diligence object has a production and processing base, on-site field inspection is essential. On the one hand, on-site visits can intuitively understand the situation of the enterprise base, including land, houses, workshops, equipment, production lines, inventory, environment and other general information; on the other hand, you can have an in-depth understanding of the enterprise's production processes, technologies, and product production processes, and deepen your understanding of the enterprise's main business model and main products.
(V) Network verification
The main purpose of network verification is, first, to verify the authenticity and effectiveness of the materials provided by the enterprise; second, to check for shortcomings and fill in the gaps and prevent enterprises from ignoring or hiding some materials and information. Here we recommend a must-have website for due diligence: http://www.oslaw.net/
(VI) Communication with other intermediary agencies
During the entire due diligence process, lawyers need to maintain active communication with other due diligence agencies (financial, audit, assessment, environmental protection and safety assessment). Among them, there are similarities between the due diligence content of legal due diligence and financial due diligence. If problems are found during due diligence, lawyers can discuss with accountants to avoid major deviations in data and conclusions.
(VII) Write due diligence report
During the process of collecting due diligence materials, you can start writing due diligence report. Generally, the first draft should be submitted to the client within the due diligence work schedule. After the client feedbacks, the report will be revised in combination with supplementary materials to form the final draft.
summarizes 3 experiences to share with you :
1. For the convenience of viewing, each level title format should be set first when building a framework. It is generally recommended to set to level 3 titles. Each level of title indentation is also distinguished.
2. Make good use of tables and make some due diligence content, such as list and statistics content, the form is more intuitive and concise. If the table has a lot of content and takes up a lot of space, it is recommended to display it as an attachment to the report.
3. Important content can be expressed in bold. Special reminders, legal evaluations, special matters, and supplementary explanations involved in the due diligence report can be used in bold fonts and key marks.
will not discuss in detail here. Lawyers who write reports for the first time recommend collecting more templates for due diligence reports, adjusting them according to the due diligence content of different companies, constantly imitating and learning, and forming a self-style writing method.
(eight) Production of working papers
Work papers contain materials provided by the company during the entire due diligence process and the work records of the lawyer.For working papers that are generally not required by regulatory requirements, the order in which the due diligence report is quoted in the order of the due diligence materials can be prepared. After the catalog is produced, sort the corresponding electronic version materials to form a complete electronic version draft.
or above is the author’s practical summary of the legal due diligence business in equity mergers and acquisitions projects for your reference. If there is any inappropriateness, criticism and correction are welcome.
