Due diligence is an investigation of a business or person prior to entering a contract. It often involves a comprehensive appraisal to establish assets and liabilities or to evaluate commercial potential. Though due diligence is important anywhere, it is doubly so in China where things are often not what they seem.
A failure to undertake due diligence is usually a factor, if not the decisive factor, in losses suffered by foreigners in their dealings with Chinese businesses. My firm’s China lawyers regularly encounter contracts signed with non-existent Chinese companies. We see deals with companies that are not owned or controlled by the people who handled the negotiations or made the promises. We see deals with companies that can never lawfully do what they promised to do. All of these problems could have been avoided with a basic company search report. By the time they came to light it was too late to fix them.
China company search reports are an important part of due diligence. They can confirm whether the Chinese company exists and, if so, whether it is in good standing with all of its annual filings up to date. Critically for enforceable contract formation, search reports confirm the full name and registered address of a company. A company search report will identify the individuals with effective control over the management and operations of the company. It will identify the stockholders. It will confirm the business scope, i.e., the business activities in which the company may lawfully engage. Depending on the relevant industry or business activity, lawful operations may require a number of other permits or licenses. These too can be found as part of the search process. In many cases, company search reports can garner other useful information published by the authorities.
Most of the important records are publicly available at the State Administration of Industry and Commerce (SAIC) or the AIC offices in the municipality or the province where the relevant company is registered. The search process is relatively straightforward for anyone with the expertise and language skills. Searches should only ever be based on publicly available records but the information revealed should nonetheless be regarded as sensitive. Particular care should always be taken to ensure that captured information could not be regarded as secret.
So when things go wrong, don’t blame your Chinese counter-party if you never even bothered to check things out. China has a good system in place for anyone who cares to use it. In our experience, reputable Chinese businesspeople are untroubled by company searches and will readily provide key documents and information to make your search faster and easier. All you need to do is ask politely at the right time.