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Doing Buisness in China - Loose-leaf
Doing Buisness in China - Electronic
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§ 12.01 Introduction
Foreign investment in and cross-border acquisitions involving
China have become commonplace since the beginning of this century.
Nevertheless, due diligence in connection with such transactions has
arguably become more important as China’s investment environment
has grown in sophistication and where compliance has assumed even
greater importance for many multinational M&A participants.
The goals of any due diligence examination, irrespective of where
the target may be located, include (1) obtaining full disclosure relative
to the investment target, and (2) permitting a fair evaluation of the
transaction. The investigation should assist in verifying material
information about the target that is the basis of the deal and identifying
business and legal risks that could impede fulfillment of the strategic
rationale for the transaction. These objectives apply equally to
investments in China and although the lack of transparency and a still
developing legal system pose barriers to the due diligence process in
China, they do not render the process any less critical. Undisclosed
liabilities and non-compliance with legal and regulatory requirements
remain a very real risk in connection with investments in China and
while due diligence may not uncover every problem, the utility of the
examination process cannot be gainsaid.1
§ 12.02 Due Diligence Process
China’s investment environment has evolved significantly in past
decades following the launch of the Open Door Policy in the late 1970s.
During the 1980s, foreign investment in China often took the form of
so-called “greenfield” projects in which the foreign investor and
Chinese partner agreed to build a new production facility on an
undeveloped parcel of land. Since the only existing asset at the time of
the investment was the land, these greenfield projects required
substantially less investigation. During the 1990s, merger and
acquisition transactions and overseas listings proliferated, subjecting
Chinese targets and issuers to Western-type due diligence. At first,
these intrusive examinations were not well tolerated. For most Chinese
entities at the time, and even for some state-owned enterprises (“SOEs”)
today, due diligence was a unique and novel experience. It also was not
common for SOEs to hire financial or legal advisors to assist in the
preparation for due diligence. Prior to the Open Door Policy, allowing
foreign lawyers, accountants and investment bankers liberal access to
financial and operating records and documents of an SOE could have
violated the state secrets regime and subjected the offender to severe
punishment. In some industries, the culture of secrecy formulated in
past decades still thrives today. Although some Chinese sellers,
particularly those who have dealt with foreign investors before or who
have accessed capital markets abroad, may be familiar with the due
diligence exercise, the expectations of many Chinese sellers in relation
to the level of disclosure and thoroughness of the exercise may not
always be satisfactory to foreign investors. As a result, it is sometimes
necessary and always good practice for the foreign investor and its
advisors to explain to senior management of the Chinese side early in
the investment preparation process what exactly due diligence is and to
encourage their active participation and cooperation.
Cole R. Capener is a former partner in and now of counsel to the international law firm of Baker & McKenzie. His practice focuses on cross-border mergers and acquisitions involving the People’s Republic of China.
Tracy Wut is a partner of Baker & McKenzie, Hong Kong. She specializes in mergers and acquisitions in China.
Mr.Capener and Ms. Wut would like to thank their colleagues, Daniel Tang, Jonathan
Isaacs, Jon Eichelberger and Jinghua Liu at Baker & McKenzie for their contributions
to this chapter.
