The main points of the lawyer's evaluation and review in the pre-merger legal risk assessment are as follows:
I. Subject qualification and legal risk of the target company
Evaluating the subject qualification of the target company is to ensure that the transaction is legal and effective, that is, the counterparty is legal, has the ability to trade and can trade with it.
The main purpose of evaluating the subject qualification of the target company is to understand its establishment, registration, shareholders, payment of registered capital, annual review, company change, cancellation or cancellation, etc. These activities do not actually produce legal risks, but they are an indispensable link to control the legal risks of mergers and acquisitions. When enterprises engage in M&A activities, it is sometimes easy to ignore this simple trading premise. The legal risk caused by such misconduct is extremely serious.
Second, the establishment contract, articles of association and legal risks of the target company.
The establishment contract and articles of association of the target company should be carefully evaluated. When reviewing the contract and articles of association, we should pay attention to whether there are the following clauses, contents or provisions to prevent takeover in the contract and articles of association:
1, absolute majority voting and legal risks
The articles of association of some companies may stipulate that mergers, acquisitions or other major transactions that may lead to the transfer of control rights of the company must be approved by the absolute majority of shareholders of the company before implementation.
This regulation will increase M&A's activities, and M&A will encounter legal risks because it cannot meet the procedural requirements of the articles of association.
2. It is forbidden to change directors or rotate directors.
Some articles of association stipulate that directors shall not be replaced before the expiration of their term of office unless they commit a crime or intentionally endanger the interests of the company. The rotating director system divides the board members into several groups, each with a term of two years. Every year, a group of directors is re-elected at the shareholders' meeting, which makes a group of board members constantly change. In this way, even if most of the shares of the company are controlled, the control of the board of directors at the next annual meeting of shareholders cannot be guaranteed in the face of the rotation system.
The legal risk that this kind of management right cannot be realized should be highly valued. If the company can't participate in the operation within a few years after entering the company, the whole M&A plan will be seriously disrupted, and even the whole M&A activity will be meaningless.
3. Compensate the dismissed senior managers with high salaries.
Some company's articles of association stipulate that the general manager, deputy general manager and other senior managers should receive very generous dismissal fees or compensation if they are dismissed by the company through no fault of their own.
Such regulations will make the company pay a heavier price for management after entering the company, and this extra expenditure is often not considered when implementing M&A activities, which constitutes a serious legal risk.
4. Shareholders' Rights Plan
There are many different types of shareholder's rights plans, but their basic contents are almost the same, that is, the shareholders of a company have acquired another right at the same time, and they can exercise this right in the event of some unexpected or triggering events such as acquisition and merger. The content of shareholders' exercise of this right is that they can buy shares of the company at a price slightly higher than the issue price of similar shares of the company. In this way, shareholders may buy shares of the company at a price far below the current market price. This will undoubtedly greatly increase the acquisition cost of the acquirer.
The purpose of evaluating and examining whether the above contents exist in the company's contracts and articles of association is to correctly analyze the difficulty of the target company's merger and whether the merger cost will increase.
Three. Resolutions of the board of directors of the target company, resolutions of the shareholders' meeting, meeting minutes, etc.
In the case of bona fide mergers and acquisitions, the board of directors and shareholders' meeting of the target company naturally agree to mergers and acquisitions. According to the Company Law, such consent must be made by the board of directors and the shareholders' meeting. At the same time, it is necessary to review whether there is a magic weapon or the number of agreed votes stipulated in the articles of association, whether the equity is valid, and ensure that the procedures are flawless.
Four. Assets of the target company
The assets mentioned in this item refer to the tangible assets such as land, real estate and equipment of the target company. The value of land and real estate depends on its rights. The value of land and real estate allocated to commercial housing will be very different from that allocated to hotels and office buildings; The land use right of 70 years and the property attached to it will be very different from the land use right of the remaining ten years and the value of the property attached to it; The transfer of mortgaged land and real estate will be restricted, and unsecured land and real estate will not be restricted. Therefore, it is necessary to carefully evaluate their rights in advance, such as what is the use of land and real estate that have been approved? Can it be transferred? How long is the right to use or ownership? When did it start? Is the right complete or flawed? Are there any events that may affect this right in the short term, such as government expropriation and forced demolition? Did you pay the consideration when you obtained this right? Have you obtained the relevant certificate of rights? Is there a lease or mortgage? What are the terms of lease or mortgage? Wait a minute.
With regard to machinery and equipment, the common risk assessment points are: if some machinery and equipment are financed and leased by the target company, their ownership still does not belong to the target company and cannot be used as investment or assets of the target company before the lease payment is paid. If there is an agreed ownership reservation when purchasing some mechanical equipment, if the target company fails to pay all the money for the equipment, the seller may retain the ownership of the equipment. If the target company is a foreign-funded enterprise or a processing enterprise with supplied materials, the machinery and equipment that need to be imported for production shall not be transferred without customs approval and tax payment within the time limit of customs supervision. So pay attention to the source and nature of mechanical equipment; Second, its transfer restrictions; The third is the handling of transfer procedures.
The significance of the lawyer's evaluation of this content is to find or straighten out the property right relationship of the target company in advance, find problems in advance and propose solutions to ensure that the property right relationship of the target company obtained by the acquirer is clear, complete, flawless and free from legal sequelae.
Verb (abbreviation of verb) intellectual property
In some target companies, intangible assets in the form of intellectual property rights may be more valuable than their tangible assets. Patents, trademarks and designs can all be protected by registration. Although copyright, technical secrets and other forms of confidential information cannot be registered, they can be protected by law. The details of all intellectual property rights should be reviewed whether they are directly owned or licensed to ensure that the acquirer can continue to benefit from them after the acquisition. For registered intellectual property rights, it also includes the review of the payment of registration and renewal fees, and the validity period of patents should also be paid attention to. For commercial trademarks, service trademarks and patents, the proper use of copyright owners or licensed users should be confirmed. For the rights under the license, the relevant license or registered user agreement should be reviewed to ensure that there are no clauses terminated due to the change of control. You should also ask whether there are any lawsuits related to infringement, including those filed by the target company to protect its own rights and those accusing the target company of infringing the rights of third parties.
The lease of the target company.
The leasing situation of Moody's includes two aspects: leasing and being leased. Is the commitment letter and lease agreement between the target company and the lessee or lessor legal and valid when leasing or renting? Is there any control right of the target company in the agreement? If there is any change, the lease or lease relationship will be terminated or restricted. If it is terminated or restricted, what adverse effects or consequences will it bring to the acquirer? These are also directly related to how the acquirer operates after the merger, so it needs to be reviewed and evaluated in advance.
Seven. Key contracts and contracts
Most companies have several contracts that are crucial to their success. Usually, these contracts include long-term procurement or supply contracts, joint venture contracts or technology licensing arrangements. In these contracts, the identity and good status of the other party are very important for long-term cooperative relations. Therefore, such contracts generally stipulate that when the situation of one party's company changes directly affecting the continued performance of such contracts, the changed party must obtain the consent or recognition of the other party before transferring its rights and obligations in such contracts, or it is allowed to terminate the contract when the control right of the other partner changes. If the control right is transferred to another party with inappropriate or competitive interests, the right to terminate the contract can be exercised.
Since the target company depends on the continued performance of these contracts after the completion of the transaction, the buyer will want to be assured that the other party has no right to terminate the contract when the control right is transferred, or if there is such right, it will not exercise such right to terminate. In addition, the above-mentioned key contracts should be reviewed to ensure that there are no abnormal agreements or agreements with obligations greater than rights, no restrictive guarantees that may affect the buyer's free operation, no major compensation clauses and no clauses that violate the competition law or other laws and regulations.
The acquirer also wants to ensure that the target company has not made any contracts inconsistent with the acquirer's own business plan in the near future, such as providing capital for new production lines or new enterprises or joint ventures, purchasing key patents and copyrights, signing new long-term contracts with suppliers or customers, and promising new high remuneration or stock option arrangements to employees.
If the target company relies too much on a few suppliers or customers, there will be disputes with relevant enterprises or individuals, or relevant enterprises or individuals are dissatisfied with the transfer of the target company, which will be potential risks. Therefore, the acquirer will want to ensure that a reliable long-term contract is signed before the transaction is completed or as a condition of the transaction, or to investigate and negotiate alternative purchase and sale channels. A similar situation will occur when the enterprise relies too much on personal professional technical knowledge or experience, and then the acquirer may want to ensure that long-term service contracts are signed with relevant employees.
In addition, special attention should be paid to the evaluation of loan contracts, mortgage contracts, guarantee contracts, agency contracts and franchise contracts. , to see if there is any provision that the payment obligation must be fulfilled in advance or the right to use or related rights must be terminated when the control right of the target company changes.
Evaluating such agreements or regulations is to weigh whether the acquirer will lose some expected benefits or rights due to the merger after the merger is completed.
Eight, the target company's employee placement
If the target company has many employees, the general practice is to evaluate only the standard labor contract text applicable to most employees, while directors and important employees must review and evaluate the contents of their service agreements one by one.
In this regard, the main issues are the level of benefits provided, the notice time required before termination of the contract and possible compensation. This not only affects the potential compensation expenses for the termination of the contract, but also may indicate that in the case of continuing employment, it is necessary to spend a lot of money to make up for the significant difference between it and the employment conditions. As for providing personal benefits such as cars, mortgages, subsidies, stock terms or funds, you may also need to buy them. The target company may also undertake pension without funds, or make a commitment to the position or career prospects, so it is necessary to conduct a detailed review and evaluation of the relevant aspects of the contract terms.
Nine, the creditor's rights and debts of the target company
The debts of the target company can include known debts and potential debts. Potential debts mainly include contingent liabilities, and tax and environmental protection responsibilities belong to contingent liabilities.
Taxation may be an important aspect of potential liabilities, especially when the relevant tax laws and policies of the country change, or there are various taxes and the target company is not clear. When there is a target company or the target company deliberately fails to pay or is unaware of it, the tax authorities will naturally ask the acquirer who takes over the target company to bear or make up the tax obligation, which makes the acquirer pay extra fees after paying the merger fee to increase the burden on the acquirer. Moreover, unpaid taxes may also bring legal liability for fines.
With the development of human civilization and people's increasing concern for their own living environment, environmental protection has become an extremely important issue. The environmental protection laws of various countries have also clearly defined and improved the environmental requirements and responsibilities. Violation of the provisions of the environmental protection law will not only bear environmental responsibility, but also be fined, and it is more likely to be sealed up and treated within a time limit. If these processing results are produced after the acquirer obtains the target company, then the acquirer will bear these responsibilities, which will not only cause heavy damage to the acquirer, but also be fatal.
This requires the acquirer to carefully understand and evaluate the tax payment of the target company, including the tax paid, whether it is in arrears, and whether the tax country where the target company is located has provisions for adjustment and preferential treatment. Understand the environmental protection situation, including the relationship between the products and business premises of the target company and environmental protection, the relevant environmental protection laws and regulations of the target company, how the target company passed the environmental protection review when it was established, whether the target company has violated the environmental protection laws and regulations, the discharge of air and water, the disposal of waste storage, whether it meets the relevant licenses and permits, the pollution of the site and groundwater by toxic and dangerous substances, and whether the environmental protection department has issued a notice of rectification and punishment. Only by investigating this situation as much as possible in the process of risk assessment can the risk of the acquirer be greatly reduced.
The liabilities of the target company will undoubtedly increase the liabilities of the acquirer, and contingent liabilities may not appear during the merger, but there may be government penalties and court proceedings in the near future, which will bring uncertainty to this legal liability. Although these liabilities are unavoidable, they can be deducted from the money payable to the seller as a weight after clarification or the seller can provide corresponding guarantees to reduce the potential risks of the acquirer.
The lawyer's legal risk assessment is to understand the debt situation of the target company, its repayment period, interest rate, liquidated damages and the unlimited requirements of creditors by reviewing a series of known debts and potential debts of the target company. Understand the tax payment and environmental protection of the target company, so as to know whether there is or may be legal responsibility in this respect.
X. Major litigation or arbitration
Whether the target company has litigation or arbitration procedures may affect the future fate of the target company. Litigation and arbitration mentioned here include procedures that have happened, are about to happen or may happen. How many lawsuits or arbitrations are there? How big is the target? How's it going? What are the possible outcomes, and so on. Lawyers evaluate and review these issues not only because of the uncertain legal responsibilities and legal fees involved, but also because it may shift the management's energy to unproductive activities. Of course, a reasonable number of lawsuits can also be regarded as a normal business state. However, sometimes lawyers' legal risk assessment shows that some claims may lead to huge expenses, such as environmental pollution, product liability or employer liability. In this case, it is necessary for the acquirer to seriously consider whether to continue the merger through the legal risk assessment report.
XI。 Necessary approval documents
In China, the transfer of state-owned shares must obtain the consent and approval of the State-owned Assets Administration Bureau in advance. Then, all mergers and acquisitions involving the transfer of state-owned shares need to check whether the target company has been approved in advance and whether the approval is true, legal and effective. Without this approval, mergers and acquisitions will be unsustainable.