Due diligence in company acquisitions and mergers refers to a series of investigations conducted by the acquiring party on the overall financial and operational status of the target company before the transaction begins. The results of due diligence are of great significance for designing transaction structures, determining transaction prices, and preventing transaction risks. 1. Contents of due diligence The acquiring party conducts due diligence to serve the acquisition. The basic purpose is to prevent transaction risks. Generally speaking, due diligence includes the following contents: (1) The main status of the target company and the status of shareholders. This investigation mainly It is to determine whether the target company exists legally and its basic status. The matters involved are as follows: 1) The main status of the company: specifically including the company’s business scope, registration authority, establishment time, business license, company’s tax registration certificate, bank account certificate, company Annual inspection records, etc. 2) The company's organizational structure and rules of procedure: including the company's articles of association and amendments, the company's board of directors meetings and shareholders' meeting resolutions. 3) The company’s shareholders and ownership status: my country’s Company Law stipulates that for equity transfers, the company’s original shareholders have priority in equity transfers. In our management projects, we have encountered cases where corporate acquisitions failed due to malicious exercise of priority rights by shareholders of the target company. Therefore, it is important for the acquirer to understand the company's shareholder composition and whether the shareholders' equity is pledged or has other forms of guarantees. 4) The company's external investment and branch establishment status: Understanding the company's subsidiaries, equity participation in other companies, or establishment of branches or representative offices will help assess the company's market channels and management risks. (2) Real estate, equipment and property of the target company 1) The company’s real estate generally has great value to the company. Real estate mainly includes land use rights and buildings. It is important to know whether the ownership status of the real estate is owned or leased. , whether it is mortgaged and whether it has been seized. 2) Important machinery and equipment: For a target company engaged in industry, the advanced level of machinery and equipment can basically reflect the company's technical level, thus determining the value of the target company to a certain extent. You also need to pay attention to the ownership of machinery and equipment, such as looking at the sales contract, shopping invoices, etc. 3) Equity of other companies owned by the company: This not only helps to judge the value of the target company, but also helps the direction of the target company's business expansion in the future. (3) Intellectual property rights In the current era of knowledge economy, intellectual property rights are particularly important to companies. Therefore, the investigation of intellectual property rights in mergers and acquisitions should attract sufficient attention. 1) Patents and pending patent applications: Patents, especially invention patents, reflect the technological content and innovation level of the target company. Patents mainly look at the patent certificate. 2) Trademark: A trademark is a symbol of a target company and a concentrated expression of its market influence. The trademark can be found in the trademark registration certificate. 3) Copyright: Copyright is also very important to the animation industry or game industry. 4) Trade secrets: Trade secrets are an unpredictable area of ??due diligence, but trade secrets are indeed one of the ways to keep a business competitive. 5) Licensing status of intellectual property: including investigation of the rights holder of the target company's intellectual property; investigation of whether the intellectual property is licensed to others, the method and period of licensing; whether there are flaws in the rights of the intellectual property, such as whether it is pledged, Whether there are any rights restrictions such as being seized by the court. 6) The protection of intellectual property rights of the target company: such as whether there is a confidentiality agreement with employees or partners, whether there is an agreement with employees on the ownership of intellectual property rights developed, etc. (4) Important Contracts Some important contracts signed by the target company have a considerable impact on the future development of the company, and are also a concentrated reflection of the target company’s business channels and market resources. Such contracts include the sale of goods, agency, investment, and management services. , subcontracting, R&D contracts, etc., depending on the importance of the target company's business direction, generally include: 1) Intellectual property transfer or licensing agreement, such as patent, trademark, copyright licensing agreement, etc. 2) Agreements signed with suppliers and manufacturers, such as continuous supply agreements, etc. If the target company's raw materials mainly come from one supplier, then the supply contract between the target company and this raw material supplier is extremely important. This raw material supplier can determine the life or death of the company. Another example is if the target company's products are distributed through agents, then the distribution contract between the target company and the dealer determines the target company's sales channels.

3) Contracts with significant restrictions on the company's rights: For example, some contracts stipulate that if the target company's equity is transferred or acquired, the contract will be terminated accordingly, etc., such as some loan contracts stipulate that if the company's holding changes, the loan will be accelerated to period and so on. 4) Joint venture contract or some major cooperation agreement. 5) Contracts with affiliated companies: Contracts with affiliated companies may make the target company controlled by others. Even if you obtain a controlling stake in the target company, you will not be able to obtain real control of the target company, and will be digested invisibly. (5) Company Debts and Guarantees The creditor's rights and debt status of the target company determines the acquisition price to a certain extent, and guarantees, as a contingent debt, may suddenly explode and lead to the demise of an enterprise. 1) Various loan agreements signed between the company and the bank. 2) Various loan agreements signed between the company and other companies or natural persons. When a company is short of funds and unable to obtain a loan from a bank, it is possible for the company to obtain financing through private borrowing. 3) The company's debt to customers or suppliers: The company will have various transactions during its operations, and whether the company has accounts payable in these transactions. 4) Various guarantee agreements signed by the company, including guarantee agreements for the company's own debts, and guarantees provided for others. Pay special attention to the guarantees provided by the company for others. A seal that provides guarantees for others may make the company The loss is tens of millions or even hundreds of millions. (6) Labor and Management Situation With the implementation of the Labor Contract Law, labor and management issues in mergers and acquisitions have become increasingly important. Labor and management issues can directly determine the future development of an enterprise. The investigation of labor and personnel mainly includes the following aspects: 1) The number of employees and Position arrangements, specifically, include the names, salaries, positions, dates of employment, annual leave, etc. of all employees who have signed or not signed labor contracts. In particular, the situation of core employees is a top priority in the investigation. 2) Labor contract and its signing status: the labor contract signed with all employees and its content, as well as the situation and reasons for not signing the labor contract, etc. It also includes the number of years and renewal status of the labor contract. The new Labor Law stipulates that the labor contract has not been signed. The labor contract requires double wage compensation, and if the labor contract is not signed for more than one year, it will be regarded as an open-term labor contract with the employee. 3) Employees’ social insurance and housing provident fund payment status: Social insurance includes pension insurance, medical insurance, career insurance, work-related injury insurance, maternity insurance, and housing provident fund. Underpayment and underpayment of social insurance premiums are common in my country, especially for some enterprises with a long history of existence. The underpayment and underpayment of social insurance premiums may reach tens of millions, which is definitely a large amount of money. We have also encountered an equity acquisition project where it was found that the target company had missed and underpaid social insurance premiums amounting to tens of millions, and the acquirer had to give up the acquisition due to risk considerations. 4) Special workers in the target company: mainly refers to workers injured at work and patients with occupational diseases. This is a relatively heavy burden for the acquirer and should be paid attention to during due diligence. 5) Contracts signed between the target company and senior managers and special talents: such as service period agreements, non-competition agreements, confidentiality agreements, stock option arrangements, profit sharing plans, etc. 6) The situation of labor unions: The position of labor unions in the company is becoming increasingly strong, and their role in labor relations is becoming more and more important. It is necessary to understand the organization and operation mode of the labor unions in the target company. 7) Company rules and regulations such as employee handbooks: Employee handbooks and other rules and regulations have become more important after the implementation of the new Labor Law. Employers’ management of employees depends on rules and regulations. The establishment of unilateral dismissal also requires the support of rules and regulations. . 8) Signing and performance status of collective contracts. 9) The company’s labor outsourcing and labor dispatch situation: Labor outsourcing or labor dispatch are also common employment methods. When understanding the labor and personnel situation, it is also necessary to understand the employment situation of labor outsourcing and labor dispatch. (7) Environmental issues Environmental issues are an issue of sustainable development that the country is paying more and more attention to. This is particularly important for production-oriented enterprises. If the pollutant discharge does not meet the standards, it may directly lead to the closure of the enterprise. Specifically, it mainly includes: 1) The target company's Various sewage emission testing records: mainly to understand whether various emission standards meet national standards and local standards. 2) Various environmental protection devices of the target company: such as sewage discharge system, air pollution detection system, etc. 3) Penalties and suggestions from the environmental protection department: Whether the target company has been subject to administrative penalties during its operation, whether it has been corrected, and whether the environmental protection department has any suggestions or plans for the environmental protection of the target company.

4) Records of the target company’s hazardous waste and general waste discharge and disposal, instructions for self-disposal of waste and disposal methods, installation certificates for self-disposal of waste such as incinerators, wastewater treatment facilities, etc. 5) Litigation related to environmental pollution: Litigation over environmental pollution is different from general economic litigation, as it can affect the fate of an enterprise. We have handled cases where people near the factory filed complaints about environmental noise pollution, which resulted in the company suspending production for rectification. (8) Tax issues Understand the tax status of the target company, such as whether it pays taxes in accordance with the law, whether there is tax evasion and tax evasion, and what tax benefits it enjoys. These are all issues worthy of attention by the acquiring party. 1) Description of all taxes and tax rates currently applicable to the company, such as value-added tax, business tax, income tax, stamp duty, etc. Tax is a factor that must be considered by the acquirer, especially when the acquirer and the target company are in different industries. This is particularly worthy of attention. . 2) The company’s tax payment certificate and whether the company has tax arrears, whether the target company pays taxes in full and in accordance with the law, whether there is a voucher for tax payment, whether there is tax arrears or tax evasion, and 3) the preferential tax treatment enjoyed by the target company Details and relevant approval documents or proof of tax reductions or exemptions enjoyed by the target company, such as certain tax benefits enjoyed by high-tech innovative enterprises, export tax rebates enjoyed by the target company's industry, etc. 4) Whether the target company has received administrative penalties from tax administrative agencies, etc. (9) The information system of the target company Now that we are in the information society, the information management system of the target company also plays a more important role in the management of the enterprise. Therefore, it is necessary to understand the information management system of the target company during due diligence. 1) The structure and description of the target company’s internal information infrastructure. 2) List and description of hardware equipment, such as purchase date, model, function, etc. 3) Software list and description, such as software purchase date, model, function, after-sales service system, etc. 4) Contracts and texts related to information technology, such as license agreements, after-sales service agreements, instructions for use, etc. (10) Litigation and arbitration involved Litigation and arbitration involving the target company may have a significant impact on the operation of the target company. It directly involves the possible responsibilities of the target company. Litigation or arbitration may cause economic losses to the target company and may also involve reputation. The investigation of litigation and arbitration mainly includes the following aspects: 1) List of arbitration or litigation cases that have taken effect, Focus on analyzing the type of case and its impact on the target company, and of course review whether it has been completed. 2) Since the outcome of ongoing litigation or arbitration is uncertain, the possible results and directions should be evaluated. For example, the intellectual property dispute over the core technology of a high-tech enterprise determines the value of the enterprise. 3) The time of any known violation of laws, regulations or contract details, or other infringements that may give rise to arbitration or litigation. 2. Methods of due diligence How to conduct due diligence on the target company during mergers and acquisitions? This is an issue that must be considered. Due diligence is generally conducted when there is a certain intention between the acquiring party and the target company. This is required. This can only be accomplished with the cooperation of the target company. The acquiring party always hopes to know as much information about the target company as possible, and the target company, for certain purposes, such as the consideration of protecting trade secrets, always provides the acquiring party with as little information as possible or provides the acquiring party with irrelevant information. Therefore, due diligence is also a game process between the acquiring party and the acquired party. Due diligence generally has the following methods: (1) Issue a due diligence checklist to the target company, and the target company will provide materials or make a written reply or commitment based on the due diligence checklist. This involves how to prepare a due diligence checklist. Generally, it should be listed according to the size of the acquisition project, the issues that the acquirer is concerned about, and the specific characteristics of the target company. During the project process, we have come across due diligence checklists ranging from several pages to as many as Dozens, even hundreds, of pages. The target company may provide some materials for the due diligence list, or may refuse to provide materials. The authenticity of the materials provided by the target company must be judged, and its legal risks must be judged, and further explanations must be required, especially for materials that are refused to be provided. Analyze the reasons and understand the risks that may be hidden behind them. (2) Conduct investigations with relevant government departments or related enterprises of the target company. To understand the shareholders of the target company or its articles of association, you can inquire information from the Industrial and Commercial Bureau where the target company is registered. Industrial and commercial files generally record the company’s shareholders, capital contributions, articles of association and changes, and annual inspection information. Through the industrial and commercial registration department, you can understand the basic information of a company. Condition.

Regarding the environmental law issues faced by the company, you can check with the environmental protection department to find out whether it has received administrative penalties for violating environmental protection laws, or whether the early construction has passed the review of the environmental protection department, etc. You can also inquire with the tax department about your tax status, whether there is tax evasion, tax evasion, whether you have received administrative penalties, etc. For labor employment and social insurance status, you can inquire about employment registration and social insurance premium payment status from the labor and social security department. For matters involving land use rights, house property rights, etc., you can inquire with the real estate department to learn about their ownership, mortgage, seizure, etc. For inquiries about the equity ownership and pledge status of the target company, please contact the securities registration and settlement department or the industrial and commercial administration department. The target company's credit management status can also be obtained through other customers. (3) Understand the target company’s information through public channels. If a company wants to survive in business, its development will always leave many traces and disclose its information to the society, such as the target company's website and social media reports on the target company. Target company advertising and more. (4) Conduct on-site inspections of the target company and conduct interviews with its employees. The process of due diligence is also a process of understanding the target company. It plays an important role in resolving the risks of mergers and acquisitions, deciding the design of the mergers and acquisitions transaction model, and whether to adopt equity transfer or asset acquisition, and should attract our attention. Due diligence in mergers and acquisitions is quite complex in practice and involves many legal issues. This article only introduces the basic content and methods of due diligence based on our experience in handling cases. Author: Lawyer Zhu Hui (Partner of Shanghai Tongqian Law Firm) Lawyer Chen Huiying (Managing Partner of Shanghai Tongqian Law Firm)