Legal and financial Due Diligence

If you fail to do so, your entire China business may be at risk. Some of the basics you can actually do yourself ? other investigation may require professional assistance.

Due diligence can also extend to forensic accounting on a partners? books, as well as political risk and other issues, especially if the JV is sizable. However, this is unlikely to worry most SME JVs and may not be necessary for a simple production unit. Again, take advice.

Some potential partners may interpret such enquiries as intrusive, or infer that you do not believe them. If they are keen to close a deal quickly, they may try to skirt round such issues. This part of the negotiation process therefore needs to be handled with patience and some sensitivity. However, reliable and serious partners will understand your need, and that of your foreign parent, for these issues to be confirmed. Indeed, if they are doing their job properly, they should also require similar disclosure and transparency from you.

The bottom line here is ? take your time, know what you are getting into, and if you are uncomfortable, go elsewhere. Don?t be rushed.

Business licence

Details of who is actually who in the Chinese company, and details of their limited liability must be obtained.

Ask for a copy of their business licence. It will list (in Chinese) details of the legally responsible person (Legal Representative), the registered address, the amount of registered capital (which is also the limited liability) and the period of the licence. This basic information should be checked off against what you know. If there are any discrepancies, ask the reasons why. Sometimes the answer may be quite reasonable ? on other occasions it may alert you to potential difficulties.

It is quite common for the actual legally responsible person not to even be the person you?re dealing with. Licence periods may not be consistent with liabilities – such as the case of the ten year projected JV with a Chinese partner whose licence was due to expire in three months time! Check this out and make sure you know with whom you are really dealing, and that they can deliver what they say they can.

Capital verification report

This is issued by a Chinese independent CPA firm, confirming the fact that the registered capital as identified on the business licence was in fact paid up. If the registered capital has not been paid, not only does this mean your partner has not actually capitalised his business, but it also means he has not complied with limited liability requirements. As a consequence he will also be in breach of his own articles of association ? which could cause serious problems in the event of a failure or other legal issues.

Next :
JV contracts and articles of association


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

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