Of particular importance to doing business in China , foreigners need to know who they are really dealing with for many reasons, mostly to avoid being cheated. Most Chinese companies have close ties to the government and often use these connections to obtain preferential treatment; however, these connections also lead to future problems as many foreign companies have found out, including Fortune 500 companies as evidenced in our news-business/contracts section.
Accurately assessing one's partner is probably one of the most important factors when doing business in China , especially if the government is involved and most of time it is. Foreign companies often end up with the short end of the stick. Performing due diligence in China is a necessary and arduous task, but not impossible.
US companies also need to conduct due diligence to prevent the breaching of the US Foreign Corruption Practice Act (USFCPA). The US Department of Justice has been tougher about enforcing this act in recent years, regardless of the size of the US Company. Recently there have been several high profile cases brought be the US Department of Justice against US companies that have breached the USFCPA.
Closed Book Due Diligence
We at DC Consulting are often able to penetrate the almost-always opaque and deceiving Chinese business environment to conduct closed-book due diligence “the only reliable form of due diligence” here China. Conducting closed-book diligence is extremely difficult in China, but our methods can assess the most insular Chinese companies. We have even conducted due diligence for other multinational due diligence firms that could not achieve required results in China.
Case Study
We have recently provided closed-book due diligence services to a leading multinational company based in the UK that is a world leader in due diligence services and has several offices in China. The multinational was unable to obtain any information for their US client about a very high-profile potential Chinese partner. Because the UK firm could not investigate the Chinese company’s facilities, they contracted DC Consulting to perform the due diligence. The UK firm’s client, a US Company, was planning to invest in and form a Joint Venture with the Chinese company.
The UK firm was also interested in an Intellectual Property Rights investigation. DC Consulting was able to penetrate this Chinese company, which had very close ties to the central, provincial, and local governments. Neither the UK firm nor the US client had any knowledge of such government ties. DC Consulting was also able to find other important information about the Chinese company that provided the end-client with accurate and detailed information so they were able to make a well-informed decision -- not to proceed further in their negotiations with the Chinese firm.
Corporate Due Diligence-Closed Book
We are able to conduct true closed book corporate diligence so your firm is able to properly determine who you dealing with. This is one of the most difficult tasks in China since as a general rule almost no transparency exists. Finding out aboutthe details your potential joint venture partner, or potential firm for acquisition is not an easy task but often we are able to access this information.
If we are not able to we will let you know up front. We are able to gain access to most Chinese firms in a discrete fashion that allows us to collect accurate information about the company’s business, government relationships, current and former dealings with foreign companies, environmental liabilities, and other matters that are important to your business.
More and more Chinese companies are offering this service but you can be almost guaranteed that they are not holding up to their fiduciary duties in protecting you best interests. Most will be also working with the companies that you need investigated. We can provide you with references on this point from various foreign companies that have done business here in China.
Environmental Due Diligence
Due diligence is critical for any foreign company looking to enter a JV, take on a PRC acquisition, or set up a Wholly Foreign Owned Enterprise (WFOE). In the past, the focus was on financials, but these are never accurate in China as the Chinese often keep up to four sets of accounting books, each with different entries.
Now, environmental due diligence is becoming increasingly important as China has been considering moving towards a Superfund-type liability similar to that in the US. If enacted here in China, the main targets of enforcement will most certainly be foreign companies. Therefore, it is becoming more important to conduct environmental due diligence to avoid and minimize future potential environmental liabilities. Should your client be misinformed, or fail to uncover past and current environmental liabilities, your client may inherit the liabilities of your Chinese partner (if a JV) or from China’s future environmental liability laws.
Also, environmental due diligence needs are often identified late in the transaction process, leaving little time for critical evaluation and strategic use in negotiating a transaction. Relevant information must be delivered early in a transaction process, otherwise meaningful evaluation and negotiating leverage may be lost, not to mention time if the new information is serious enough to cause one party to reevaluate the transaction.
DC Consulting possesses the legal, environmental and China experience to conduct environmental due diligence in a professional manner. What risks is your company yet to find in its China projects?
