By Vlad Cuc, specialist in company formation matters
Due diligence Hong Kong is the process during which a company is reviewed in depth in multiple areas that concern matters such as litigation, its ownership structure, licenses and permits as well as financial issues. The process is commonly performed before purchasing a company or in a merger case and it can also be performed before buying a shelf company in Hong Kong.
In this article, our company formation specialists list the most important matters to take into consideration during the due diligence Hong Kong process as well as present a checklist with the core elements that are commonly included, as well as those that are mandatorily contained.
Compliance with the local company laws and regulations is a key to purchasing and owning a successful business in Hong Kong. Investors who need additional advice on corporate regulation, control and incorporation can reach out to our agents.
Due diligence verification in Hong Kong
The company due diligence Hong Kong process is necessary in business transactions that involve company mergers or acquisitions. Due diligence offers a thorough analysis of the targeted company's history, financial background, credit information and many others.
The process is important in the final decision made by the foreign investor who is interested in purchasing a Hong Kong company. Buyers can rely on the information obtained after a company due diligence procedure to make an appropriate business decision and avoid any investments that could prove to be risky or inefficient on long-term.
Our company registration agents in Hong Kong can help you with a complete due diligence verification and the necessary assistance for carrying out company mergers. The process of verifying a company in Hong Kong is also described in this concise video below. Take a look!
The due diligence Hong Kong process
The due diligence process is performed on key elements that characterize the business. An expert will target the financial, commercial and operational information about the company so that the buyer will have all the relevant data concerning its status before the purchase.
The companydue diligence Hong Kong process can target the following key areas:
-corporate structure: the company directors and its shareholders, the share capital, contacts with other affiliates;
-employees: the number of employees and details about their wages and contractual clauses;
-tax compliance: up to date financial records, tax returns submitted by the company, confirmation that the company has proper books and records; information about any debts and creditors.
Checking the organization of the company is important in order to make sure that the buyer is aware of all the business owners. It is particularly important when some or all of the shareholders are legal entities. The list will also include the descriptions of the company officer’s duties and the evaluators will look at the most recent version of the company’s by-laws. During this stage, the due diligence process will reveal all the jurisdictions in which the business has branches or maintains an office (included here are also partnerships in which the company may be part of or other legal entities in which the company may have an equity interest).
The company due diligence in Hong Kong is tailored to the profile of the business, the industry in which it activates and any potential problems that the investors may already be aware of or may presume that exist. Below, our team presents a sample list of elements that need to be checked, starting which but not limited to the four ones described above.
You can reach out to our specialists before commencing the company purchase process in order to determine the verification phases and issues that will be checked, in order of their importance.
The due diligence Hong Kong checklist, presented by our team of company formation experts
The four areas described above (organization and control, real estate property, employees and tax matters) are important pillars when commencing the due diligence process, however, these are not the only areas of interest. We list below other additional categories that are important during this process:
Litigation: past legal proceedings, unsatisfied judgments, pending litigation (if any) and a review of any issues that may have been encountered with the authorities over the years; the verifiers will also check any available documents about settlements the company agreed upon up until the evaluation date;
Services: a complete list of the products and services offered by the company; the party making the purchase (the buyer) will be well aware of the industry in which the company activates, however, he may also wish to receive a list of products that may be under development as well as the status of any others that may be subject to approvals;
Information technology: IT services that are outsourced, software used by the company, systems analysis, an evaluation of the licenses and/or apps or products developed by the company;
Insurance: the insurance coverage currently in place, copies of any insurance claims, information about general liability and product liability, among others;
Regulatory matters: due diligence Hong Kong also includes issues related to antitrust; our team can give you more information;
Agreements: a comprehensive list of contracts signed with other parties, nondisclosure and noncompete agreements, supply, agreements, exclusivity and franchise agreements, to name a few;
Licenses and permits: a list of all the licenses and permits the Hong Kong company has obtained and, if any, the ones for which the authorization is ongoing;
Environmental matters: if applicable, a list of any environmental liabilities or contingencies; the buyer needs to know of any issues the company may have had in the past with the Environmental Protection Department in Hong Kong;
Intellectual property: this is important, especially in fields such as research and development; the due diligence process will reveal all the trademarks, copyrights and patents that are currently held by the company as well as any trade secrets, of applicable.
Due diligence as part of private mergers and acquisitions
As previously mentioned, the due diligence process is often used for mergers and acquisitions performed in any type of industry. As a complex process, the merger and acquisition, or M&A, will involve several stages, out of which the comprehensive verification of the company details will be a defining one.
The transaction to acquire or take over an existing company required thoughtful planning and a strategy that will take into account issues such as negotiations, closing down the company that is merged, restructuring, human resources restructuring and planning as well as many other types of preparations. In such a multifactorial process, specialized assistance is always recommended and our team of company formation experts, along with our legal partners, can provide all of the needed support during the merger or the company takeover/acquisition.
The due diligence section of the merger and acquisition transaction yields important information about the seller. As stated above, issues such as previous contracts, the financial situation, the existing customers, tax issues and licensing matters will be revealed.
The first stage during the M&A transaction, after which the due diligence process is scheduled, is the signing of the letter of intent (LOI). This is a written document, although non-binding, that outlines the principles of the transaction. It includes the proposed price as well as the terms previously discussed by the buyer and the seller of the business.
The terms of the letter of intent are non-binding because the process is a complex one and there are further steps (and implications) once the transaction commences. The manner in which the letter of intent is formulated, as well as the steps that will follow afterwards, can depend on the type of purchase (asset sale or stock sale).
The due diligence process should take place irrespective of whether the parties agree to an asset sale or a stock sale, however, it is of greatest importance for the latter. In an asset sale the parties have a certain level of flexibility when deciding the types of assets that will be included in the transaction while in the stock sale the buyer will be purchasing ownership or stick in the entire business. In many company acquisitions, the stock sale is favored, however, it is also the situation in which the buyer acquires all the liabilities that may come with the company. This is why the verification is important immediately after deciding to go on with the procedure, after signing the letter of intent. When the due diligence take place in a timely manner, the buyer will be aware of the company’s history, previous agreements, and all or any liabilities. An informed decision is essential in an M&A transaction.
The letter of intent signed by the parties can also include information on the proposed due diligence verification that will be performed by the buyer. It can also serve as a means of gaining access to essential information, which will henceforth be provided by the seller.
Assistance in verifying Hong Kong companies
A well-performed company due diligence in Hong Kong can ensure a successful business transaction. Another benefit is that the buyer will have more control over the purchase. Our representatives can help you shorten the time needed to buy an already existing company or perform the necessary procedures for company mergers.
Working with an experienced team of advisors is recommended as early as one starts considering the M&A transaction, and the advisor can also be present when signing the letter of intent. The use of advisors, such as specialists in legal, tax and accounting matters, is common in these types of cases and both parties will commonly use their own team and have them involved before the signing of the letter of intent. The negotiation period is important when involved in a corporate merger or acquisition transaction and it outlines the basis for the entire transaction.
Our company formation agents in Hong Kong are able to assist you if you wish to purchase an existing company or if you are interested in a corporate merger. We will offer assistance, advice and representation throughout the process and will pay close attention to the due diligence review. With our help, you will rest assured that the transaction is a secure one. Our team will work to provide the due diligence report as soon as possible after signing the letter of intent as the data obtained in this manner can prove useful in future negotiations.
The company verification process known as the due diligence review is only part of the services that can be provided upon request as part of our category comprising M&A transactions. We assist clients with private mergers and acquisitions, cross border transactions, M&A transactions with Chinese companies, and other types of takeovers. We offer the due diligence review services across all types of industries, irrespective of the type of company.
Hong Kong remains an important business center and an Asian hub chosen by many foreign entrepreneurs. The 2020 statistical data on the number of available companies, as presented by the Companies Registry, include the following:
- by the end of 2020 there were 1,387,919 companies in Hong Kong;
- this is an increase compared to 2019, up by 7,734 new legal entities;
- 99,405 new local companies were registered in 2020 and 1,757 non-Hong Kong companies established new places of business in the Special Administrative Region.
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