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2021

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07

Lawyer Wu Jie: How Lawyers Conduct Legal Due Diligence in Enterprise Merger and Acquisition Transactions (6)

In enterprise mergers and acquisitions, there are operations where the acquiring party intends to engage in merger and acquisition transactions in order to obtain qualifications for a certain industry or business. In the due diligence of such mergers and acquisitions projects, it is particularly important to review the business qualifications of the target company. Whether the qualification documents of the target company are complete, whether they have obtained the necessary qualifications for business operations, and whether their business operations are legal and compliant are key issues that need to be addressed during the due diligence process.


In enterprise mergers and acquisitions, there are operations where the acquiring party intends to engage in merger and acquisition transactions in order to obtain qualifications for a certain industry or business. In the due diligence of such mergers and acquisitions projects, it is particularly important to review the business qualifications of the target company. Whether the qualification documents of the target company are complete, whether they have obtained the necessary qualifications for business operations, and whether their business operations are legal and compliant are key issues that need to be addressed during the due diligence process.

 

Business operations

 

1. Verification methods and documents

 

The main verification methods used in verifying the business operations of the target company include document review, online verification, and interviews with company leaders or management. The documents to be verified mainly include the company's business license, company introduction, business process description, qualification documents, business related approval documents, major contracts, financial statements, and audit reports.

 

In addition to the above methods, a faster and more effective way to conduct business qualification verification is to search for listed companies or companies listed on the New Third Board in the same industry or business, and through: http://www.cninfo.com.cn/new/index National Equities Transfer System for Small and Medium Enterprises: http://www.neeq.com.cn/ (Copy link to browser to open)

 

Check and express the relevant business qualifications in the legal opinions published by the listed or listed company. This method can serve as a reference and reference for business qualifications, but the scope of verification is not comprehensive. In the specific due diligence process, it is still necessary to combine the actual situation of the target company and conduct a comprehensive verification.

 

In addition, when verifying business qualifications, attention should also be paid to the business scope of the target company's industrial and commercial registration. It is important to focus on whether the target company's business scope includes situations that require special and special pre licensing to carry out business operations. At this point, it is necessary to have a comprehensive understanding of the relevant laws, regulations, policies, and even industry norms and standards involved in the company's business operations, in order to clarify the relevant qualifications, certifications, licenses, etc. required for the company's business operations.

 

2. Legal issues to pay attention to

 

In matters related to the target company's business operations, issues that need to be verified and paid attention to include the company's business qualifications, business scope, and legal compliance of operations.

 

(1) Business qualifications

In terms of business qualifications, the most common problems are that the target company has not obtained the corresponding business qualifications or the relevant business qualifications have exceeded their validity period. Taking a real estate M&A project handled by the author as an example, the target company is a real estate development enterprise. After obtaining a certain plot of land, due to financial issues, the company has not been able to start construction, and the company's operations are basically stagnant. We found during due diligence that the target company has not yet obtained the qualification level certificate for real estate development enterprises. We believe that according to the relevant provisions of the "Regulations on the Management of Qualification of Real Estate Development Enterprises", the target company operates real estate development projects but has not obtained a real estate development qualification level certificate, which carries the risk of being ordered by the real estate administrative department and other administrative departments to make corrections within a specified period of time, fined, or even revoked the business license.

 

In some industries that require specific pre licensing, such as energy, pharmaceuticals, medical devices, real estate, judicial appraisal, certification, testing, etc., business qualifications are crucial. When conducting due diligence for relevant industry companies, lawyers must pay attention to the acquisition and continuation of the target company's business qualifications, and whether there are any situations such as expired qualifications, failure to undergo annual inspections, or even revocation.

 

(2) Business scope

The most common issue in verifying the business scope and current situation of the target company is that the actual business operations of the target company are inconsistent with the business scope stated in the business license. If the registered business scope of the target company is inconsistent with the actual business operations, and the relevant change registration procedures have not been completed, according to the provisions of laws and regulations such as the "Regulations on the Administration of Company Registration" and the "Measures for the Investigation and Suppression of Unlicensed Operations", there is a risk of being lawfully banned from business activities, confiscated of illegal income, fined or even revoked of business license by the administrative department for industry and commerce.

 

(3) Advertising Release

In the verification of the target company's business operations, advertising is not the main business of the company in most industries, and its impact on the company's operations is relatively small, resulting in advertising release becoming a matter that is easily overlooked. However, for some special industries, such as the medical industry, the release of relevant advertisements needs to be reviewed by the competent department and obtain a "Medical Advertising Review Certificate". If a medical institution publishes medical advertisements and fails to review them in accordance with the provisions of the "Medical Advertising Management Measures", it may face the risk of being warned by the health administrative department, ordered to make corrections within a specified time limit, suspended for rectification, or even revoked the "Medical Institution Practice License". However, if a medical institution does not obtain the "Medical Institution Practice License" to publish medical advertisements, it shall be punished as illegal medical practice.

 

The newly revised "Advertising Law" in 2021 has stricter and clearer regulations for advertisers, advertising operators, publishers, and other advertising activities. Therefore, in industries involving the advertising industry, where there are many advertisements published in business operations, or where there are special requirements for advertising publication, the legality and compliance of advertising publication will also be an important reference factor for considering the overall legality and compliance of the target company's business operations.

In enterprise mergers and acquisitions, there are operations where the acquiring party intends to engage in merger and acquisition transactions in order to obtain qualifications for a certain industry or business. In the due diligence of such mergers and acquisitions projects, it is particularly important to review the business qualifications of the target company. Whether the qualification documents of the target company are complete, whether they have obtained the necessary qualifications for business operations, and whether their business operations are legal and compliant are key issues that need to be addressed during the due diligence process.

 

Business operations

 

1. Verification methods and documents

 

The main verification methods used in verifying the business operations of the target company include document review, online verification, and interviews with company leaders or management. The documents to be verified mainly include the company's business license, company introduction, business process description, qualification documents, business related approval documents, major contracts, financial statements, and audit reports.

 

In addition to the above methods, a faster and more effective way to conduct business qualification verification is to search for listed companies or companies listed on the New Third Board in the same industry or business, and through: http://www.cninfo.com.cn/new/index National Equities Transfer System for Small and Medium Enterprises: http://www.neeq.com.cn/ (Copy link to browser to open)

 

Check and express the relevant business qualifications in the legal opinions published by the listed or listed company. This method can serve as a reference and reference for business qualifications, but the scope of verification is not comprehensive. In the specific due diligence process, it is still necessary to combine the actual situation of the target company and conduct a comprehensive verification.

 

In addition, when verifying business qualifications, attention should also be paid to the business scope of the target company's industrial and commercial registration. It is important to focus on whether the target company's business scope includes situations that require special and special pre licensing to carry out business operations. At this point, it is necessary to have a comprehensive understanding of the relevant laws, regulations, policies, and even industry norms and standards involved in the company's business operations, in order to clarify the relevant qualifications, certifications, licenses, etc. required for the company's business operations.

 

2. Legal issues to pay attention to

 

In matters related to the target company's business operations, issues that need to be verified and paid attention to include the company's business qualifications, business scope, and legal compliance of operations.

 

(1) Business qualifications

In terms of business qualifications, the most common problems are that the target company has not obtained the corresponding business qualifications or the relevant business qualifications have exceeded their validity period. Taking a real estate M&A project handled by the author as an example, the target company is a real estate development enterprise. After obtaining a certain plot of land, due to financial issues, the company has not been able to start construction, and the company's operations are basically stagnant. We found during due diligence that the target company has not yet obtained the qualification level certificate for real estate development enterprises. We believe that according to the relevant provisions of the "Regulations on the Management of Qualification of Real Estate Development Enterprises", the target company operates real estate development projects but has not obtained a real estate development qualification level certificate, which carries the risk of being ordered by the real estate administrative department and other administrative departments to make corrections within a specified period of time, fined, or even revoked the business license.

 

In some industries that require specific pre licensing, such as energy, pharmaceuticals, medical devices, real estate, judicial appraisal, certification, testing, etc., business qualifications are crucial. When conducting due diligence for relevant industry companies, lawyers must pay attention to the acquisition and continuation of the target company's business qualifications, and whether there are any situations such as expired qualifications, failure to undergo annual inspections, or even revocation.

 

(2) Business scope

The most common issue in verifying the business scope and current situation of the target company is that the actual business operations of the target company are inconsistent with the business scope stated in the business license. If the registered business scope of the target company is inconsistent with the actual business operations, and the relevant change registration procedures have not been completed, according to the provisions of laws and regulations such as the "Regulations on the Administration of Company Registration" and the "Measures for the Investigation and Suppression of Unlicensed Operations", there is a risk of being lawfully banned from business activities, confiscated of illegal income, fined or even revoked of business license by the administrative department for industry and commerce.

 

(3) Advertising Release

In the verification of the target company's business operations, advertising is not the main business of the company in most industries, and its impact on the company's operations is relatively small, resulting in advertising release becoming a matter that is easily overlooked. However, for some special industries, such as the medical industry, the release of relevant advertisements needs to be reviewed by the competent department and obtain a "Medical Advertising Review Certificate". If a medical institution publishes medical advertisements and fails to review them in accordance with the provisions of the "Medical Advertising Management Measures", it may face the risk of being warned by the health administrative department, ordered to make corrections within a specified time limit, suspended for rectification, or even revoked the "Medical Institution Practice License". However, if a medical institution does not obtain the "Medical Institution Practice License" to publish medical advertisements, it shall be punished as illegal medical practice.

 

The newly revised "Advertising Law" in 2021 has stricter and clearer regulations for advertisers, advertising operators, publishers, and other advertising activities. Therefore, in industries involving the advertising industry, where there are many advertisements published in business operations, or where there are special requirements for advertising publication, the legality and compliance of advertising publication will also be an important reference factor for considering the overall legality and compliance of the target company's business operations.