CHINA Law and Practice Contributed by: Lingyun Dai, Tao Liu, Xueyong Liao and Yuzhou Shang, Lifeng Partners
4.2 Vendor Due Diligence In auction sales, it is relatively common for the seller to provide a due diligence report when the seller is a private equity firm. As the sell-side legal adviser, one may provide a standard version of the due diligence report (as men - tioned in 4.1 General Information ), or alternatively, only provide an issue list that includes the principal red-flag issues to the buyer. In such circumstances, the sell-side adviser will not solely rely on this report; in fact, in large transactions, both parties typically place greater reliance on their respective independ - ent due diligence. Acquisitions by private equity funds are usually con - ducted in the form of a sale and purchase agreement, with other scenarios being relatively rare. There are definitely some differences in the acquisi - tion terms between a privately negotiated transac - tion and an auction sale. However, the key still lies in which party has the stronger bargaining power in the transaction. In an auction sale, the seller is likely to be in a dominant position, as more options enable the seller to be more assertive. For example, the seller might require the buyer to purchase M&A insurance as a precondition for the deal. On the other hand, in a transaction involving a sale and purchase agree - ment, the buyer’s demands might be greater, such as imposing constraints on liability clauses or setting 5. Structure of Transactions 5.1 Structure of the Acquisition Private equity funds typically still set up a holding entity to acquire the underlying assets. This holding entity may be established in the Cayman Islands or Singapore. Acquiring the underlying assets through this entity makes it more convenient for co-investors (including limited partners (LPs), the deal team and employees) to participate in the investment. core conditions for payment. 5.2 Structure of the Buyer
countermeasures on transactions in specific national markets. For example, if a Chinese private equity fund wishes to invest in the United States, it may not be able to complete an outward direct investment.
4. Due Diligence 4.1 General Information
In China, legal due diligence in transactions is highly detailed and systematic. Taking the perspective of buy-side counsel for private equity firms as an exam - ple, the process includes the following steps: • Buy-side counsels send a due diligence checklist to the target company. • The target company assists in preparing the rel - evant materials for due diligence. • Buy-side counsels review the materials either on site or in a data room. • Based on the reviewed materials, buy-side coun - sels prepare an interview list and conduct inter - views with stakeholders of the target company, such as founders, management and major share - holders. • According to the reviewed materials and the results of the interviews, buy-side counsels provide a due diligence report. In addition to business issues, the legal due diligence report will include: • basic company information: equity structure, financing history, organisational structure, history of changes in control, creditor-debtor relationships, etc; • key business contracts and agreements, including supplier/vendor contracts, client contracts and an analysis of major clients; • labour and personnel matters, insurance coverage, environmental impact assessment systems and intellectual property (protection, application and maintenance); and • dispute resolution situations.
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