10 Sept 2014
Due Diligence: The Safeguard Against Overseas Investment Risks
When it comes to overseas mergers and acquisitions, companies must guard against investment risks, says Charles CC Chau, a partner in the solicitors’ firm Morrison & Foerster, and a council member of the Law Society of Hong Kong. Interviewed by Wing Chu, an HKTDC economist, Chau said companies need to seek out proper legal advice and undertake due diligence before committing themselves to investment projects. Only then, he said, can they be sure they will achieve their intended results.
Chu: What do you think mainland enterprises should watch out for when it comes to overseas mergers and acquisitions? What can they do to reduce any risks?
Chau: Due diligence is very important from the legal and risk control point of view. Its aim is to give the investor a deep understanding of every aspect of a target company's situation. This includes its business, financial and legal status. It allows for problems to be discovered and remedies to be found in a timely manner.
If the target company, for example, has a loan contract with a bank - usually involving a change of control clause – the company is obliged to pay off the loan immediately should there be any changes in the controlling shareholding. If the investor overlooked this clause and failed to carry out due diligence, the instant repayment obligation would be triggered immediately after the takeover. This can lead to significant losses on the part of the investor.
If the target company owns factory premises, due diligence may help the investor find out whether there are problems with the property rights and whether other people have claims to the ownership of the land and the factory premises. If due diligence is not carried out and this is overlooked, litigation over said premises could occur after the acquisition. This would cause the investor unnecessary legal problems.
Chu: So, if a mainland company invests overseas and uses Hong Kong's legal services, it is getting not just the services provided by Hong Kong lawyers, but also a massive network that can help meet their various needs?
Chau: There are a number of international law firms in Hong Kong and they have many offices worldwide. If a mainland company retains the Hong Kong office of one of these international law firms as its principal attorney, it will get a one-stop service. Even if a particular international law firm in Hong Kong does not have an office in a specific foreign country, their Hong Kong-based lawyers will still be able to lead and coordinate efforts to find (and retain) lawyers in other areas, such as Germany, Africa and the Middle East. This saves the company the trouble of securing and coordinating the services of law firms in various parts of the world.
Chu: Hong Kong plays an important coordinating role, then?
Chau: Yes, its role in providing the lead is particularly important.