Analysis For Having A Due Diligence In China

‘An institutional view of China's venture capital business: Detailing the differences among China and the West’, Garry D Bruton and David Ahlstrom- Journal of Business Venturing 18(2), March 2003, 233. When a firm has surpassed its first screening, venture capitalists in the West move forward with due diligence, typically including affirmation of the characteristics and level of the firm's product, production capability, market requirement, and status of key relationships with other organizations (Fried and Hisrich, 1994). When venture capitalists first went into China, due diligence for funded projects in China was limited in extent; in part, since the support activities upon which Western venture capitalists rely to conduct such activities were not present [Bruton et al., 1999] and [Mann, 1997].



While venture capitalists are maximizing efforts to carry out Western-type due diligence, the provision and accuracy and reliability of information is still serious. Regulations in China do not require a similar degree of public information be supplied to the government or other regulatory bodies as happens in the West. Numerous cognitive institutions promote the tight management of information and knowledge in China [Boisot and Child, 1988] and [Boisot and Child, 1996] . In the central planning system, bureaucrats and business people control information is crucial to knowing the market and local regulatory environment closely, allotting it carefully as a way to receive favors and other highly valued items [Boisot and Child, 1988] and [Boisot and Child, 1996] . As one venture capitalist discussed: It's quite common to take three to six months more on due diligence [in China], in contrast to comparable offers in the West. Particularly you need to know what sort of connections the entrepreneur has, both with the government and other agencies. These can depict essential assets for the firm. As a result venture capitalists must be ready to make greater efforts in China in comparison to the West to be able to get and aggregate a larger range of data in executing due diligence.



Major areas to consider in due diligence: legal research of the bureaucratic steps necessary to rent specific land, building certificates, overall operational costs of the rent, geographical regulations, license expected life checking, pre-entry tax advisory, taxes of owners, stamp duty tax, tax incentives, special incentives, import/export duties exemptions (if any), tariff rebate program for your items, regulations for foreign investors in specific business. Commonly, the procedure will proceed the following (we put together a detailed due diligence method, other less demanding trades will warrant lesser investigations/steps where appropriate): a. A Memorandum of Understanding or Letter of Intent setting out the main heads of agreement which will be signed between Chinese party and foreign party, often accompanied by a formal appendix with particular agreements pertaining to the due diligence activity including an exclusivity agreement and confidentiality agreement; b. Party will serve the counter-party with a due diligence document request list, describing various documents/certificates which are necessary from company; c. Review of the returned documents, and analysis of issues.



Request of further documentation in accordance with the findings. d. Independent verification from the following sources: i) Conduct interviews with administration; ii) Review registrations with local Administration of Industry and Commerce, and also other applicable government filings; iii) Site survey; iv) Environmental audit. This would be specially appropriate for the sale that you are performing, with the factory?s potential ecological impacts; v) Verification with banks; and vi) Employment of investigative/valuation agencies, where necessary. B. Information reviewed: Like other jurisdictions, there are certain regions of the business which must be reviewed. We established the aspects of particular importance below: 1) Corporate organization: a. Corporate structure; and b. Corporate approvals by related government agencies. Note: Corporate structures are very dissimilar to that of other countries, as a result, it is important to know the basic principles of Chinese corporate law in order to fully understand the ramifications of findings. 2. 2) Land: a. Land use rights; b. Building ownership rights; and c. Geographical compliance. Note: Chinese land ?ownership? is very unique in that it enables a system of long-term leases of the land itself, and full ownership rights to the land. Documents must be investigated cautiously, particularly, if the land and/or property is of substantial value in relation to the settlement. 3) Debts: Loans, guarantees and mortgage contracts.



Note: China does not yet have a robust central credit reporting system for companies. Therefore, any reports presented must be confirmed against independent sources in order to confirm exactly the same, as the initial report may simply lack specifics of the business, causing a positive report when, in fact, there are quite a few outstanding liabilities. 4) IP rights: Be certain that IP registrations are properly done, company is free from violation of others' IP rights, licensing agreements are properly concluded, etc. 5) Material contracts: Especially, if you're merging or acquiring the organization as a going issue, the company must be careful to ensure that they fully understand obligations and investigate any outstanding commitments and/or liabilities thereunder. 6) Tax filings and payment: Ensure that taxes have been appropriately filed and necessary payments have been achieved. (This will have to be done in coordination with an accounting firm.) 7) Regulatory/legal compliance: 8) Special permits and other approvals: This category is often based on the business range of the target or counter-party to the procedure. 9) Employee matters: A robust workforce is particularly significant in China, given the concentration of foreign investment in labor-intensive sectors and vast population for the service business. 10) Pending litigation/claims: This investigation, as litigation is often difficult to predict, is coupled with solid warranty clauses assuring the counter-party that there are no outstanding or expected litigations or claims; and 11) Insurance coverage.





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