Mergers & Acquisitions: What does a Due Diligence Report consist of?

Published:2014-09-25    Source:HICG

Due Diligence refers to detailed investigations upon a target company conducted by the acquirers during Mergers & Acquisitions activities in order to evaluate the values and risks of the target.

Typically, Due Diligence consists of the following contents:

1. The business type of the target company (private, state-owned, foreign)

1.1. Business registration certificate: Subject to the current rules and regulations regarding the Foreign Direct Investment, foreign investors shall generally inject no less than 25% of the registered capital for Sino-foreign joint venture and Sino-foreign cooperative enterprises with foreign investment. 

Except if laws and statutory regulations stipulate otherwise, foreign investors shall proceed with the examinations and registrations in accordance with approval and registration of the establishment of foreign-funded enterprises. If approved, the approval certificate of foreign invested enterprises shall be issued and noted with the sentence “Less than 25% of the registered capital is injected by foreign investors”. If registered, the authority shall add “Less than 25% of the registered capital is injected by foreign investors” to the Business Type column. 

1.2. Certificate of approval for foreign enterprises

1.3. Subject to the regulations, the document of approval to engage in specific industries.

1.4. Funding Agreements & Contracts

1.5. The articles of association and the capital contribution of shareholders 

With high and new technology achievements as capital contributions, the total amount of the achievements may exceed 25% of the registered capital of the company, but not more than 35%.

1.6. Changes in equity and equity

Enterprise investors shall comply with the relevant Chinese laws and regulations upon the equity change. In addition, enterprise investors shall proceed with the examinations and registrations in accordance with approval and registration of the establishment of foreign-funded enterprises. The changes of equity shall be invalid without approval from the approving authority.

1.7. The capital verification report

2. Asset, Liability and Owners' Equity

2.1. Premises

List, certificate of ownership, certificate of other ownership. If there is construction in progress, applicant shall provide illustrations of the construction and approval documents. Mortgage, seizure and rental situation, if applicable.

2.2. Land

List, certificate for the use of land, Approach of acquiring the land (allocation, assignment, transfer, or lease). Mortgage, seizure and rental situation, if applicable.

2.3. Machinery and Equipment

List; Mortgage, seizure and rental situation, if applicable. Equipment subject to customs supervision if applicable. Deregulation prove for tax relief for foreign-invested enterprises imported goods. 

2.4. Intangible Asset

2.4.1. Trademark

Registration of trademark. Mortgage, seizure, transfer and other situations if applicable.

2.4.2. Patent

Patent certificate, mortgage, seizure, transfer and other situations if applicable. Prove of annual fee if applicable.

2.4.3. Copyright

Relevant registration certificate. Mortgage, seizure, transfer and other situations if applicable.

2.5. Credit

List. Guarantees, the statute of limitations, implementation capability if applicable.

2.6. Debtor

List. Guarantees, the statute of limitations if applicable.

3. Crucial Contracts and Agreements

Relevant documents. Prove of implementation, guarantees if applicable.

4. Litigation and administrative penalties

5. Insurance

Insurance on transportation tools, premises and other material assets if applicable.

6. Human Resource

Contract of labor, social insurance, labor disputes if applicable.

7. Taxation

Tax Registration Certificate. Tax exemption, delinquent tax, penalties from taxation authorities if applicable.

8. Environmental Protection

Declaration and registration for discharge of pollutants if applicable. Approval for construction in progress if applicable.

9. Foreign Currencies

Foreign exchange registration certificate for foreign enterprises if applicable.

10. Fiscal

Fiscal registration certificate for foreign enterprises if applicable.