DUE DILIGENCE FOR WORLDWIDE CLIENTS An Overview

Transcription

1 DUE DILIGENCE FOR WORLDWIDE CLIENTS An Overview Eshwar Sabapathy, Esq. S Eshwar Consultants House of Corporate & IPR Laws Chennai, India June 8, 2017 Presented By: Caroline Berube, Esq. HJM Asia Law & Co LLC Guangzhou, China Singapore, Singapore Association of Corporate Counsel

2 Today s Program is Sponsored by The International Society of Primerus Law Firms Primerus is an interna,onal society of the world s finest small to mid- size law firms. Membership in Primerus is by invita,on only, and all Primerus law firms are pre- screened before accepted, and audited annually for their con,nued commitment to providing excellent work product and superior client service at reasonable rates. Currently, there are nearly 3,000 Primerus lawyers in over 180 Primerus firms located in 45+ countries. If you would like to learn more about Primerus, please visit the Primerus website at

3 Eshwar Sabapathy, Esq. S Eshwar Consultants House of Corporate & IPR Laws #4 6th Street Kumaran Colony, Vadapalani Chennai, India Tel: Fax: seshwar@eshwars.com Website:

4 DUE DILIGENCE - INDIA The Confederation of Indian Industry ( CII ) estimates 60% to 70% of GDP is contributed by Family Business (Source: No. of Companies registered in India - 1,580,938 No. of active companies - 1,064,414 Average age of active companies 10 years 1 month 57% of the companies Capital size INR 1 to 250,000. 3% of the companies - Capital over INR 500 Million. (Source Jan 2016 Newsletter)

5 Total Area - 32,87,263 sq km Total Area - 32,87,263 sq km Distance from East to West 2,933 km No. of States - 29 No. of UT - 7 Major Languages - 10 Population ,210,193,422

6 Legislative System Federal Laws DUE DILIGENCE - INDIA Federal Laws with State regulatory control State Laws

7 DUE DILIGENCE - INDIA Corporate Laws are Federal Laws Company Law; Management, Shareholders, Corporate Governance including Related Party Transactions Income-tax; Exchange control; Securities Laws; Insolvency & Bankruptcy; Competition;

8 DUE DILIGENCE - INDIA Federal Law with State regulatory control HR & Labour Laws Environment and Pollution Laws Industrial Laws

9 DUE DILIGENCE - INDIA State oriented Immovable property, land records and administration Title documents are likely to be in vernacular language

10 PUBLICLY AVAILABLE DATA Constitutional Documents Memorandum of Association & Articles of Association; Details of Directors and their other directorships; Financial Statements; Shareholding; Borrowings and security offered for such IPs Trademarks, Patents & Industrial Designs Corporate Information can be obtained for evaluation purposes, and the data can be validated with corporate records.

11 BUSINESS LICENSES Multiple Business Licenses Industry related Activity oriented Pharma, Non-banking Finance Companies Manufacturing activity related Environment & Pollution Control etc. Human Resources & Labour related Factory, Contract Labour etc.

12 TAXATION Financial Year 1 st April to 31 st March. Corporate Tax Return 30 th September. Payment of Withholding Tax Monthly Remittance. Withholding Tax Return Quarterly returns 4 times a year. Time limit for completion of tax assessment 4 years. No tax information is publicly available. Data given by Target needs to be relied upon. Suitable Reps and Warranties to be taken.

13 SOCIAL SECURITY Called as Provident Fund Applicability 20 or more persons are employed Employer cost 12% of INR 15,000 Target may have created structures to overcome this Non-payment leads to personal liability on the directors.

14 PENDING LITIGATION No publicly available data of pending litigation (unless there are any interim orders) Supreme Court of India Apex Court High Court in each State District Court in each District of every State Civil Courts / Criminal Courts Specialised Tribunals

15 IP & SOFTWARE Care to be taken in IP In small and medium enterprises (SMEs) possibility of IP being filed / registered in the name of the Promoter. Software usage related issues in SMEs.

16 SHE DUE DILIGENCE Safety, Health & Environment Licenses and Returns Pressure Vessels & Explosives

17 AREAS OF CAUTION Business Contracts; Ownership of immovable property sometimes can be with Promoters in their individual names; All insurable instances may not be covered due to limited knowledge of promoters on insurable instances;

18 Caroline Berube, Esq. HJM Asia Law & Co LLC B-1002, R&F Full Square Plaza No. 16, Ma Chang Road ZhuJiang New City Tianhe District Guangzhou, China Tel: Fax: , Kim Yam Road Singapore, Singapore Tel: Website: All rights reserved. Please contact HJM Asia Law & Co for any reproduction of this document. Tous droits réservés. Veuillez contacter HJM Asia Law & Co pour toute reproduction de ce document.

19 Contents: 1. Introduction 2. Due Diligence For M&A 3. Regulatory/ Compliance Considerations 4. Challenges, Pitfalls & Risks 5. Q&A Session 19

20 Introduction Legal advisors must be able to provide companies with the relevant legislative framework pertaining to various types of investment transactions and advise investors on the most appropriate way to structure a project. This discussion will examine the different focuses of due diligence and will also discuss practical issues for companies to consider before engaging in any business projects. 20

21 Introduction What is a due diligence? General Principles of Due Diligence 1. Prior to commencement of the due diligence: What is your client s focus in the transaction? What information from the due diligence is important to your client? Preparation of due diligence checklist and planning memorandum. 21

22 Introduction 2. Conducting the due diligence: Managing the dataroom and expected timeframe; Work allocation and information sharing with team members and other due diligence teams; Clarification and communication with management of Target; Identify legal issues of commercial relevance which will impact the Proposed Transaction; and Prioritise issues based on client s feedback. 22

23 Introduction In China, due diligence is usually done in two times. We first advise to do a business search on a potential target (and even clients or suppliers) to have an idea of the financial health, legal structure, evolution, etc. At HJM, we have our own tool which is an ID card of the entity and it provides also relevant information on trademarks applied for in China, main customer/supplier, evolution of management, balance sheets, etc. 23

24 Due Diligence For M&A Due Diligence in the context of M&A (A) GENERAL ISSUES Keep in mind the focus and goals of the client (i.e. important assets and risk management). Identify material issues of commercial relevance which will impact the Proposed Transaction. For e.g.: 24

25 Due Diligence For M&A a) Was the company properly incorporated and does it possess valid licenses, approvals, and/or other authorizations to engage in its specified business activities in the jurisdiction? b) Does the list of registered shareholders accurately reflect the true shareholding of the company (i.e. are there other ultimate beneficial owner(s) of the company), and if not, are there any written agreements regarding the true shareholding? 25

26 Due Diligence For M&A c) Will any existing contracts (i.e. license agreements, service agreements, etc.) survive and remain valid and binding after the transaction is complete? Eg: Change in control provisions. d) Any notification or prior consent to be sought from third parties or regulators pursuant to the Proposed Transaction? Eg: Lenders (bank or bond holders) consent or events of default. 26

27 Due Diligence For M&A (B) PURPOSE/FOCUS OF DUE DILIGENCE The focus of a legal due diligence report for any M&A transaction should be to review the relevant corporate documents of the target company and identify any potential areas of risk or concern. Considerations for each area when conducting due diligence are considered in the following slides. 27

28 Due Diligence For M&A Corporate Information - The corporate information of the entity to be acquired must be known including: - Type of entity (representative office, limited liability company, company publicly listed or not, etc.); - Group (is there any subsidiary domestically or in a foreign country); 28

29 Due Diligence For M&A - Identity of shareholders, directors, legal representative; - Registered capital; - Registered business scope; etc. - In SEA, much information on companies is available on the company registry website of the country where the entity is incorporated, which allows a good overview of the target company. 29

30 Due Diligence For M&A Corporate Compliance - Was the company properly incorporated and does it possess valid licenses, approvals, and/or other authorizations to engage in its specified business activities in the jurisdiction?; - Is the company in good standing (business license valid, etc.)?; - Has the company fully paid up its registered capital?; - Have any corporate amendments (i.e. change of shareholder(s), director(s), etc.) been properly made in accordance with the company s articles of association and registered with the relevant authorities?; 30

31 Due Diligence For M&A - Has the company satisfied any annual/ongoing corporate requirements (i.e. held Annual General Meetings on time, filed annual reports, prepared annual audit)?; - Have any corporate documents executed outside the jurisdiction been properly notarized or legalized; and - Are there any restrictions on the transfer of shares or restrictions on ownership in the jurisdiction or industry of interest? 31

32 Due Diligence For M&A Employment Information - Employment agreements shall be reviewed to understand whether the employees all have employment agreements and whether their taxes and social contributions are paid (a physical count is necessary to check the number of employees). Employment Issues - Does the company have valid, signed employment contracts with any employees, etc.?; - Does the company have an employee handbook or other employee policies?; 32

33 Due Diligence For M&A - Have any foreign employees been issued the necessary work/residence permits? If the foreign employee has any dependents, have these been issued the necessary residence permits?; - Does the company satisfy any statutory requirements for local employees?; - In China, the acquirer can be held liable for unpaid social charges for the previous year as the limitation of action for employment issue is one (1) year. - Have all necessary contributions been made on behalf of the employees; - Does the company have any consultants or independent contractors, and if so, have these agreements been properly registered? 33

34 Due Diligence For M&A Commercial Information - All the commercial agreements should be reviewed to assess the real flow of activity (short term or long term), the enforceability of contractual rights, and potential risks of liability towards customers. Commercial Issues - Will the transaction be allowed by any existing contracts (i.e. license agreements, service agreements, etc.)? - Transfer pricing arrangement with the investor/shareholder? 34

35 Due Diligence For M&A Intellectual Property - Identify all the registered rights such as trademarks, patents, domain names, copyrights, and unregistered rights such as trade secrets, softwares (including commercial and open source (available to the public) and database rights; - Full disclosure by the target company, especially for unregistered rights; - Review the chain of title to ensure ownership and control of the target company; - Identification of strategic value of the target company s IP; and - IP clauses included in contracts with employees and any contractors involved in IP creation. 35

36 Due Diligence For M&A Intellectual Property issues - Has the company s IP been properly registered and/or does the company have any applications pending in the jurisdiction? ; - Does the company have any license agreements, and if so, are these registered, if necessary?; - In China, has the company filed the trademarks with the Chinese customs?; - Does the company have any confidentiality agreements, NDAs, or related IP agreements with any employees or third parties? 36

37 Due Diligence For M&A - Evaluate exposure of the target to liability from IP of others, including potential patent trolls; - Identify security vulnerabilities that can have an impact on software asset value; - Software: need of establishing the chain of creation to ensure proof of ownership properly vested in the target company; - Track of cyber security incidents to be provided by the target company; - Are there security device or protection plan into place?; and - Software as a service (SaaS), or cloud computing, delivered by internet: who is the provider? Reliable one? Solid policies and procedures in place to guarantee the highest security level? Recovery plan? Ask the Target to provide detailed information about service delivery and performance of the 37 provider.

38 Due Diligence For M&A Other verifications - Financial situation of the Target - The financial records and audit reports. - Taxed and Related Duties - What stamp duties, if any, are due for the share transfer and have all previous stamp duties been paid? - Has the company filed/paid all relevant corporate and/or employment taxes (note this may overlap with any financial due diligence). - Environmental and Regulatory - Does the company have all necessary permits, licenses, and related authorizations for the type of business? 38

39 Due Diligence For M&A - Lawsuits - Are there any complete, pending or potential lawsuits involving the company? This information is crucial too. Corruption and bribery risks Availability of skilled labor Provisions of the Anti-Monopoly Law 39

40 Due Diligence For M&A In a nutshell, what do we have to know particularly in China? Investors need to check whether the company is a JV, a WOFE or a 100% Chinese owned company; Need to know if the industry requires specific licenses or approvals for foreign investment; Need to check the employees are all registered with labor bureau and social insurances are paid (even for foreign employees); and Need to check if the annual exam is passed (foreign funded enterprises) and if all the certificates are up to date. 40

41 Regulatory/ Compliance Considerations Foreign Investment Requirements - As some limitations regarding foreign investment may apply, it shall be checked upfront whether the business scope of the entity/business activities is open to foreign investment. - The system in China is relatively restrictive. - Otherwise, other plans shall be set up such as: - Co-investment with a local partner; - Spin off of the activities not open to foreign investment; - Amendments of the business scope and business model. 41

42 Challenges, Pitfalls & Risks Balancing legal issues and commercial relevance. Identifying practical considerations; Understanding client s focus and goals. Posturing and structuring Proposed Transactions based on client s goals; Management of time, dataroom, team members and Target; Co-ordination between different due diligence teams of local and different jurisdictions. Language barriers. Information sharing; Presentation and consolidation of final report for consideration of management. 42

43 Q&A Session 43

44 Thank You Eshwar Sabapathy, Esq. S Eshwar Consultants House of Corporate & IPR Laws #4 6th Street Kumaran Colony, Vadapalani Chennai, India Tel: Fax: seshwar@eshwars.com Website: Presenters Caroline Berube, Esq. HJM Asia Law & Co LLC B-1002, R&F Full Square Plaza No. 16, Ma Chang Road ZhuJiang New City Tianhe District Guangzhou, China Tel: Fax: , Kim Yam Road Singapore, Singapore Tel: cberube@hjmasialaw.com Website: