Due diligence strategies for overseas M&A

In overseas mergers and acquisitions (M&A), Chinese companies are often puzzled, or even upset, because of the major differences in the legal and regulatory environment between the target country and China. In practice, the legal department of a company often needs to conduct due diligence within a tight time schedule. How to identify crucial points as soon as possible in a short time, and communicate effectively with external lawyers, has been a challenge posed to in-house counsel. From the perspective of acquiring companies in Europe and the US, this article will discuss the difficulties and features in overseas due diligence tasks, and propose some ideas for solutions.

Ownership structure. The ownership structure and holdings of shareholders of a target company are the most basic items of a due diligence investigation. Chinese companies often hope they are able to find the exact answers from records in the relevant government departments. However, the government register in the place where the target company is located often keeps only some of the most preliminary and general items, without any complete information on ownership and holdings. In this case, in addition to the ownership documents – e.g. register of shareholders – provided by the other party, companies can check if there are omissions or inconsistencies from communications with major shareholders, creditors, management staff and major customers.

Details about ownership can be verified by reviewing financial statements, tax returns and finance documents of the target company, which often reflect the company’s equity and debt information. Minutes of board meetings also serve as a major basis of documents for European and US companies because many significant adjustments or changes to the ownership structure of companies require board approval.

Duan Min is a partner at Morgan Lewis & Bockius in Beijing. He can be contacted at +86 10 5876 3686 or by email at mduan@morganlewis.com