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Due_Diligence_For_Chinese_Joint_Ventures

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									Title:
Due Diligence For Chinese Joint Ventures

Word Count:
534

Summary:
Due diligence is an absolute must if you plan to team up with a Chinese
partner. It’s a jungle out there, so be wary. This is no place to cut
expenses or rush through things because a half-done job may cost you
twice as much time and money later. Due diligence is not a particularly
prevalent practice among the Chinese and they may have trouble
understanding why you are “making things difficult”. If your prospective
partner refuses to cooperate, don’t be afraid to walk away.
...


Keywords:
China, invest, due diligence, legal, financial, environmental, joint
venture


Article Body:
Due diligence is an absolute must if you plan to team up with a Chinese
partner. It’s a jungle out there, so be wary. This is no place to cut
expenses or rush through things because a half-done job may cost you
twice as much time and money later. Due diligence is not a particularly
prevalent practice among the Chinese and they may have trouble
understanding why you are “making things difficult”. If your prospective
partner refuses to cooperate, don’t be afraid to walk away.

There are three main types of due diligence that you need to concern
yourself with – financial, legal, and environmental. Keep in mind that
these three inquiries often overlap.

Financial Due Diligence

Many Chinese enterprises (it is said) have three sets of financial
records: one for the
owners, one for the tax authorities, and one for foreign investors.
Accordingly, determining the value of an enterprise based on its
financial records can be difficult. It might be necessary to carry out an
independent assessment of the enterprise’s reputation, connections, and
key employees.

Key pitfalls to watch out for are:

Double-dealing employees – it is not at all uncommon in China for senior
management to have their own businesses that directly compete with their
employer, and for these executives to use their employer’s confidential
information to further their own private interests.

Corrupt relationships with Chinese government officials – this presents
the risk of civil liability or prosecution, not only by the Chinese
authorities should things take a turn for the worse, but also by the US
authorities if you happen to be American or otherwise subject to the US
Foreign Corrupt Practices Act (some other nations have equivalent
legislation; check your home jurisdiction if you are unsure).

Intellectual property piracy – rampant in China.

Legal due diligence

Legal due diligence focuses on a variety of issues including contract
rights, corporate authority, regulatory compliance, ownership of assets,
and liabilities and claims against the target company. Issues that often
arise include:

Scope of business issues – At the minimum, you should authenticate and
inspect an original of the enterprise’s business license (the scope of
business is listed thereon).

Contracts – whether contractual arrangements are adequately documented
(or documented at all).

Ownership of buildings and Land Use Rights – Check to make sure all
buildings are owned outright and all land is “granted” rather than merely
“allocated”.

Intellectual property – make sure that trademarks, etc. used by the
target company are either owned by it or licensed to it.

Constitutional documents such as Articles of Association – make sure that
they are up to date (properly amended to reflect the company’s current
situation).

Construction permits and approvals – these should be examined not only
for construction in progress, but also for existing structures

Labor disputes – determine whether there are any outstanding disputes,
and the level of employee morale.

Debts and encumbrances – make sure that these are adequately documented
and not excessive.

Environmental Due Diligence

In a nutshell, you need to know whether your partner’s site environment
or your FIE’s proposed site environment has been contaminated
(contamination of your Chinese partner’s site could affect its financial
stability even if it is not used for the FIE).

								
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