After investigating the establishment of the target company, it is immediately necessary to review its historical evolution and current status.

 

1、 Historical evolution

 

1. Verification methods and documents

In equity acquisition projects, whether the historical evolution of the target company is legal and compliant, the intended investment or acquisition targets, and whether the history is "innocent" are generally issues of concern to the acquiring party, and are also issues that lawyers need to carefully verify. The verification method for the historical evolution of the target company mainly involves document review, and the main reviewed documents are the business archives. Generally speaking, the business records will provide detailed records of the target company's past changes since its establishment, including increases or decreases in registered capital, mergers, divisions, equity transfers, changes in directors, supervisors, and senior management personnel, etc. During the verification process, the documents to be reviewed include the company's previous equity transfer agreements, shareholder meeting resolutions, board of directors resolutions, articles of association, and other relevant documents. Of course, in addition to business records, requiring the target company to provide information and conducting interviews is also a necessary verification method.

 

2. Legal issues to pay attention to

In historical events, the most common problems mostly arise from the equity transfer process, and the legal issues involved in this process are diverse, requiring the acquirer and lawyer to carefully review the situation of the specific project during the due diligence process. Below are only three cases handled by the author to illustrate some of the issues.

 

(1) Failure to complete industrial and commercial registration procedures for equity transfer

The industrial and commercial registration of equity changes is a legal obligation of a company, but this obligation is often not taken seriously by shareholders. The author has encountered a case where the current shareholder of the target company transferred the original shareholder's equity and paid the equity transfer fee, but did not go to the industrial and commercial department to handle the change registration procedures. According to Article 32 of the Company Law, those who have not undergone registration or change of registration shall not act against third parties. According to Article 27 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (III) and Article 311 of the Civil Code, if the original shareholders of the target company transfer the transferred equity to a third party and complete the registration of changes, or establish a pledge guarantee for the transferred equity and register it, the relevant stakeholders can register as adversaries against the existing shareholders of the target company, There is a potential dispute over the equity of the target company as a result. In addition, according to Articles 34 and 68 of the Regulations on the Administration of Company Registration, the target company may be ordered by the company registration authority to register within a specified time limit due to its failure to timely handle shareholder change registration; Failure to register on time may result in the target company being fined between 10000 and 100000 yuan.

 

(2) Conflict between equity transfer and restrictive provisions of the company's articles of association

In a equity acquisition project handled by the author, we found that there is a provision in the target company's articles of association that "within three years from the date of establishment of the company, shareholders shall not transfer their shares of the company to a third party other than shareholders". In the previous equity transfer records of the target company, one of them occurred within two years after the establishment of the company.

 

If other shareholders of the target company claim that the equity transfer is invalid on this grounds, it may lead to disputes over the target company's equity structure. We suggest that the shareholder communicate with other shareholders in a timely manner and obtain a written commitment and other documents from them that they have no objections to the equity transfer.

 

This also reminds us that when handling equity acquisition projects, it is necessary to focus on the relevant provisions in the company's articles of association of the equity transferor regarding the transfer of equity by shareholders, and try to avoid or reduce the restrictions and legal risks of equity transfer as much as possible.

 

(3) Low price transfer of equity without tax declaration

In a certain M&A project handled by the author, after reviewing the business records of the target company, it was found that the most recent equity transfer agreement of the target company agreed that the equity transfer price was 0 yuan. After conducting interviews with the shareholders of the target company, it was confirmed that the equity transfer has not yet undergone tax declaration. According to the Announcement of the State Administration of Taxation on the Administration of Individual Income Tax on Equity Transfer Income (Trial), if the declared equity transfer income is significantly low and without justifiable reasons, the competent tax authority can verify the equity transfer income. If the declared equity transfer income is lower than the corresponding net asset share of the equity, it is considered that the equity transfer income is significantly lower.

 

The competent tax authority shall assess the income from equity transfer in accordance with the net asset assessment method, analogy method, and other reasonable methods. We believe that the equity transfer of the target company is not a legal "legitimate reason", and the target company may face verification by the tax department, which may result in heavier tax burden, and may even face the risk of administrative penalties from the tax department.

 

It should be noted that the tax department is currently increasing its supervision of tax declaration matters related to the transfer of company equity. If the State Administration of Taxation, Guangzhou Taxation Bureau, and Guangzhou Market Supervision Administration jointly issued a notice on March 16, 2021 on the need to verify tax payment vouchers for individual equity change registration, starting from April 1, 2021, those who handle individual equity transfer and shareholder change registration in Guangzhou should first go to the tax authority to apply for personal income tax declaration, The registration authority of the market entity shall verify the tax payment certificate of the individual income tax related to the equity transaction. This requires us to review relevant tax payment vouchers in addition to the traditional review of equity transfer documents when handling equity transfer projects. At the same time, it is also necessary to focus on and verify the possibility of some equity transfers being falsely registered or even not registered in order to pay less or even no taxes.

 

In the verification of equity transfer matters, in addition to the issues mentioned in the above cases, there are also other issues and risks, such as the transfer of equity involving special types of enterprises such as state-owned enterprises and foreign-invested enterprises, which need to focus on the procedural issues of equity transfer.

 

2、 Survival

 

1. Verification methods and documents

Regarding the existence of the target company, the main verification methods are written review and online verification. The main review documents include the target company's industrial and commercial registration materials, as well as the registration information of the national enterprise credit information disclosure system and relevant market supervision and management department information disclosure websites.

 

2. Legal issues to pay attention to

The existence issues of the target company are relatively few, mainly concentrated in the field of company registration management, and have relatively little impact on the overall transaction. A common issue is the expiration of the business term, especially in real estate mergers and acquisitions projects.

 

During the due diligence process, we found that many project companies are established separately for a certain plot or project, without a fixed management team. When project operations are hindered or the target company is burdened with debt, there may be situations where the target company's business registration period has expired but no one pays attention. According to Article 68 of the Regulations on the Administration of Company Registration, if the target company fails to extend its business term, it may result in the target company being unable to carry out business activities in accordance with the law. In addition, the target company may also be ordered by the company registration authority to register within a specified period of time; If the target company fails to register after the deadline, it may be fined not less than 10000 yuan but not more than 100000 yuan.