Due diligence in enterprise merger and acquisition refers to a series of investigations conducted by the acquirer on the overall financial and operating conditions of the target company before the transaction begins. The results of due diligence are of great significance for designing transaction structure, determining transaction price and preventing transaction risks. I. Contents of Due Diligence The acquirer conducts due diligence to serve the acquisition, and its basic purpose is to prevent transaction risks. Generally speaking, due diligence includes the following contents: (1) the subject status and shareholder status of the target company. This survey mainly determines whether the target company exists legally and its basic status, involving the following matters: 1) The main body of the company: specifically, it includes the company's business scope, registration authority, establishment time, company business license, tax registration, etc. 2) Organizational structure and rules of procedure of the company: including articles of association and amendments, resolutions of board meetings and shareholders' meetings. 3) Shareholders and ownership of the company: China's "Company Law" stipulates that the original shareholders of the company have the priority right to transfer shares. In the process of dealing with the project, we have encountered cases in which the shareholders of the target company maliciously exercised their priority, which led to the failure of the company's acquisition. Therefore, it is very important for the acquirer to know the composition of the company's shareholders and whether the shareholders' equity is pledged or otherwise guaranteed. 4) The company's foreign investment and the establishment of branches: Knowing about the subsidiaries established by the company or its participation in other companies or the establishment of branches or representative offices is helpful to evaluate the company's market channels and management risks. (II) Real estate, equipment and property of the target company (1) The real estate of the company is generally of great value to the company. Real estate mainly includes land use rights and buildings. Mainly to understand whether the ownership of the property is owned, leased, mortgaged or sealed up. 2) Important machinery and equipment: For an industrial target company, the advanced level of machinery and equipment can basically reflect the technical level of the company, thus determining the value of the target company to a certain extent. We also need to pay attention to the ownership of machinery and equipment, such as reading sales contracts and shopping invoices. 3) Equity of other companies owned by the company: This will not only help to judge the value of the target company, but also help the future business development of the target company. (III) Intellectual property rights In the current era of knowledge economy, intellectual property rights are particularly important to companies, so the investigation of intellectual property rights in mergers and acquisitions should attract enough attention. 1) patents and patent applications: patents, especially invention patents, reflect the scientific and technological content and innovation degree of the target company, and patents mainly depend on patent certificates. 2) Trademarks: Trademarks are the concentrated expression of the logo and market influence of the target company, and you can see them on the trademark registration certificate. 3) Copyright: Copyright is also very important for the animation industry or the game industry. 4) Trade secret: Trade secret is an unpredictable field in due diligence, but it is indeed one of the ways to maintain the competitiveness of enterprises. 5) Intellectual property licensing: including the investigation of the intellectual property rights holders of the target company; Investigate whether intellectual property rights are licensed to others, and the manner and duration of licensing; Whether the rights of intellectual property rights are flawed, such as whether they are pledged, whether there are rights restrictions such as being sealed up by the court. 6) Protection of intellectual property rights by the target company: such as whether there is a confidentiality agreement with employees or partners, whether there is an agreement with employees on the ownership of intellectual property rights, etc. (IV) Important contracts Some important contracts signed by the target company have a considerable impact on the future development of the company, and are also a concentrated expression of the business channels and market resources of the target company. Such contracts include goods sales, agency, investment, management services, subcontracting, R&D contracts, etc. According to the importance of the business direction of the target company, they also have corresponding emphases, generally including: 1) intellectual property transfer or licensing agreements, such as patents and trademarks. 2) Agreements signed with suppliers and manufacturers, such as continuous supply agreements. If the raw materials of the target company mainly come from one supplier, then the supply contract between the target company and this raw material supplier is extremely important, and this raw material supplier can decide the life and death of this enterprise. If the products of the target company adopt the way of distribution agent, then the distribution contract between the target company and the distributor determines the sales channel of the target company. 3) Contracts with significant restrictions on the company's rights: if some contracts stipulate that the target company's equity transfer or acquisition will also terminate the contract accordingly. For example, some loan contracts stipulate that if the company's equity changes, the loan will be accelerated. 4) Joint venture contract or some major cooperation agreements. 5) Contracts with affiliated companies: contracts with affiliated companies may subject the target company to others. Even if the target company gains control, it cannot gain real control, which will be digested invisibly. (V) The debt of the company and the creditor's rights and debts of the company that guarantees the target determine the purchase price to a certain extent, and the contingent debt of the guarantee may suddenly erupt, leading to the demise of the enterprise. 1) Various loan agreements signed between the company and the bank. 2) Various loan agreements signed between the company and other companies or natural persons. In the case that the company is short of funds and cannot obtain loans from banks, it is possible for the company to raise funds through private lending. 3) Debt of the company to customers or suppliers: There will be various transactions in the company's operation, and whether the company has accounts payable in these transactions. 4) Various guarantee agreements signed by the company, including the guarantee agreement for the company's own debts and the guarantee provided for others. Pay special attention to the guarantees provided by the company for others. A seal that provides guarantee for others may cost the company tens of millions or even hundreds of millions. (VI) Labor Situation With the implementation of the Labor Contract Law, labor issues in mergers and acquisitions are becoming more and more important, which can directly determine the future development of an enterprise. The labor and personnel survey mainly includes the following aspects: 1) The number of employees and post arrangement, including the names, salaries, positions, entry dates and annual leave of all employees who have signed or have not signed labor contracts, especially the situation of core employees. 2) Labor contract and its signing: the labor contract signed with all employees and its contents, the situation and reasons for not signing the labor contract, etc. , including the signing of labor contracts and their renewal period, etc. The new labor law stipulates that if a labor contract is not signed, it will be compensated with double wages. If it is not signed for more than one year, it will be regarded as signing an open-ended labor contract with the laborer. 3) Employee social insurance and housing accumulation fund payment: Social insurance includes endowment insurance, medical insurance, career insurance, work injury insurance, maternity insurance and housing accumulation fund. Underpayment and underpayment of social insurance premiums are very common in China, especially in some enterprises with a long history, which may be as high as tens of millions, which is definitely not a small amount. We also encountered an equity acquisition project, and found that the target company missed and underpaid tens of millions of social insurance premiums, and the acquirer had to give up the acquisition because of risk considerations. 4) Special workers in the target company: mainly refers to employees with work-related injuries and patients with occupational diseases, which is a heavy burden for the acquirer and should be paid attention to in due diligence. 5) Contracts signed by the target company with senior managers and special talents: such as service period agreement, non-competition agreement, confidentiality agreement, stock option arrangement, profit sharing plan, etc. 6) Trade unions: Trade unions are playing a more and more important role in labor relations. Need to know the trade union organization and operation mode of the target company. 7) Employee handbook and other company rules and regulations: After the implementation of the new labor law, employee handbook and other rules and regulations become more and more important. The management of employees by employers depends on rules and regulations, and the establishment of unilateral dismissal also needs the support of rules and regulations. 8) Signing and performance of collective contracts. 9) Company's labor outsourcing and labor dispatch: Labor outsourcing or labor dispatch is also a common employment method, and it is necessary to know the employment situation of labor outsourcing and labor dispatch when understanding the labor and personnel situation. (VII) As a sustainable development issue, the state pays more and more attention to environmental issues, which is particularly important for production enterprises. If the sewage discharge is not up to standard, it may directly lead to the closure of enterprises. Specifically, it mainly includes: 1) sewage discharge inspection records of the target company: mainly to understand whether the discharge standards meet the national standards and local standards. 2) Environmental protection devices of the target company: such as sewage discharge system and air pollution detection system. 3) Penalties and suggestions of the environmental protection department: whether the target company has been subjected to administrative penalties during its operation, whether it has been rectified, and whether the environmental protection department has any suggestions or plans for the environmental protection of the target company. 4) Records of the discharge and disposal of hazardous wastes and general wastes of the target company, descriptions of self-disposal wastes and disposal methods, and installation certificates of self-disposal wastes, such as incinerators and wastewater treatment facilities. 5) Litigation related to environmental pollution: Environmental pollution litigation is different from general economic litigation and can be related to the fate of enterprises. We have dealt with cases where people near the factory sued environmental noise pollution and caused enterprises to stop production and rectify. (VIII) Tax issues Understand the tax status of the target company, such as whether to pay taxes according to law, whether there is tax evasion, and what tax benefits are enjoyed. These are all issues that the acquirer should pay attention to. 1) Description of all taxes and tax rates currently applicable to the company, such as value-added tax, business tax, income tax and stamp duty. Tax is a factor that the acquirer must consider, especially when the acquirer and the target company are in different industries, which deserves special attention. 2) the company's tax payment certificate and whether the company owes taxes, whether the target company pays taxes in full according to law, whether there is a tax payment certificate, whether there is tax arrears or tax evasion, and 3) the details of tax preferences enjoyed by the target company and related approval documents or the tax reduction or exemption certificate enjoyed by the target company, such as some tax preferences enjoyed by high-tech innovative enterprises and export tax rebates enjoyed by the target company. 4) Whether the target company is subject to administrative punishment by the tax authorities, etc. (9) The information system of the target company is now an information society, and the information management system of the target company also plays a more important role in the management of the enterprise. Therefore, it is necessary to understand the information management system of the target company in due diligence. 1) Structure and description of the internal information infrastructure of the target company. 2) List and description of hardware equipment, such as purchase date, model, function, etc. 3) Software list and description, such as software purchase date, model, function and after-sales service system. 4) Relevant information technology contracts and texts, such as license agreement, after-sales service agreement and instruction manual. (10) The litigation and arbitration involved by the target company may have a significant impact on the operation of the target company. Directly related to the possible responsibilities of the target company, litigation or arbitration may cause economic losses to the target company and may also involve reputation. The investigation of litigation arbitration mainly includes the following aspects: 1) List of valid arbitration or litigation cases, focusing on the analysis of the types of cases and their impact on the target company, and of course, checking whether they have been implemented. 2) Because the outcome of ongoing litigation or arbitration is uncertain, it is more important to judge possible outcomes and trends. For example, the dispute over intellectual property rights of the core technology of high-tech enterprises determines the value of enterprises. 3) Details of any known violation of laws, regulations or contracts, or arbitration or litigation time that may be caused by other infringements. Second, the way of due diligence How to conduct due diligence on the target company in mergers and acquisitions is a problem that must be considered. Due diligence is generally carried out when the acquirer and the target company have a certain intention, which requires the cooperation of the target company. The acquirer always wants to know as much information as possible about the target company, and the target company always provides the acquirer with as little information or irrelevant information as possible for some purpose, such as protecting trade secrets. Therefore, due diligence is also a game process between the acquirer and the acquired party. Due diligence generally has the following methods: (1) issue a due diligence list to the target company, and the target company will provide materials or make a written reply or commitment according to the due diligence list. This involves how to list the due diligence list, generally according to the size of the acquisition project, the concerns of the acquirer and the specific characteristics of the target company. In the process of doing the project, the due diligence list we come into contact with ranges from a few pages to dozens or even hundreds of pages. For the due diligence list, the target company may provide some materials or refuse to provide materials. For the materials provided by the target company, it is necessary to judge their authenticity and legal risks and ask them to further explain. For the rejected materials, it is necessary to analyze the reasons and understand the risks that may be hidden behind them. (two) to investigate the relevant government departments or related enterprises of the target company. To know the shareholders or articles of association of the target company, you can go to the industrial and commercial bureau where the target company is registered for information. Industrial and commercial archives generally register the shareholders, capital contribution, articles of association, changes and annual inspection data of the company. You can know the basic situation of a company through the industrial and commercial registration department. For the environmental protection problems faced by the company, you can ask the environmental protection department whether it is subject to administrative punishment for violating the environmental protection law, or whether the preliminary construction has passed the evaluation of the environmental protection department. Tax payment can also be inquired from the tax authorities, whether there is tax evasion, tax evasion and whether there has been administrative punishment. For employment and social insurance, you can inquire about employment registration and payment of social insurance premiums from the labor and social security department. Handle land use rights, housing property rights, etc. , you can query the real estate department to understand its ownership, mortgage and seizure. The ownership and pledge of the equity of the target company can be inquired by the securities registration and settlement department or the administrative department for industry and commerce. You can also learn about the credit operation of the target company from other customers. (three) through open channels to understand the information of the target company. If a company wants to survive in business, its development will always leave a lot of traces and disclose its information to the society, such as the website of the target company and the social media reports on the target company. Advertising of the target company and so on. (4) Conduct field visits to the target company and interview its employees. The process of due diligence is also the process of understanding the target company, which plays an important role in resolving the risk of M&A, determining the design of M&A transaction mode, and whether to adopt equity transfer or asset acquisition, and should attract our attention. Due diligence in mergers and acquisitions is quite complicated in practice, involving many legal issues. This paper only introduces the basic contents and methods of due diligence according to our experience in handling cases. Author: Lawyer Zhu Hui (partner of Shanghai Tonggan Law Firm) and Lawyer Chen Huiying (executive partner of Shanghai Tonggan Law Firm).