Legal due diligence and risk prevention in overseas M&A

An overseas merger and acquisition (M&A) transaction does not only involve two or more countries or regions, but also parties that may differ notably in terms of strategy plan, expertise, financial strength and human resources. In recent years, not a few overseas M&A proposals offered by Chinese companies suffered setbacks as a direct result of severely asymmetric information in the possession of the parties and a lack of effective risk control measures of the Chinese acquirers. In this article, we look into the possible issues and risks that legal due diligence (LDD) may address.

Purpose and effect. By confirming legal status of significant issues (e.g., legal capacity, business and assets of the seller), identifying potential risks and determining their nature and extent, as well as their impact and implications on the proposed transaction, the LDD of an overseas M&A transaction aims to provide a basis for pertinent arrangements under the transaction agreement so that legal risks are brought under control. Valuation, design of transaction structure, negotiation of terms and conditions, and development of an integration programme are based on findings of the LDD. The accuracy and completeness of an LDD report, and its quality of relevant analysis, may have a direct impact on the outcome of an M&A offer.

Preparations. How is thorough and intensive LDD conducted on an overseas target in a given time frame? Since an overseas M&A transaction involves at least two jurisdictions, dividing collaborative work between experienced, reliable PRC and local lawyers is crucial for the efficiency and quality of an LDD.

Lin Zhong is a partner at EY Chen & Co. Law Firm