China: Fraud Investigation and Practical Solutions in the Acquisition Process

Last Updated: 4 January 2011
Article by Mark Schaub Mergers and Acquisitions (M&A in China) is not simply win-win for owners and companies. It's also about win-win or win-lose for local governments. For example, small manufacturers provide jobs, taxes and gifts to local officials. If a larger manufacturer acquires a small one, jobs will move along with it. This is the main reason the industry is so spread out. No one wants to let go of jobs in their district. So what's your opinion on dealing with the local government in an M&A case?

Mr. Schaub: I think 95% of the projects, you know, the approval of authorities would be provincial or local governments. It's the first thing to remember. I think many foreign companies fail to properly engage with the local government. So it is very important before the projects to tell the governments why the project is happening, who you are, what you are doing. And you know, of course here in Shanghai, the local government doesn't care so much except for the very big projects. But if you are somewhere less developed they get very excited about any project. I think if a foreign company has a bit of a relationship with the local government, then if you have some problems with the work force, or you have a problem with the environmental authorities, or you have problems with other things, they can help you to resolve the problem smoothly. But if you only go to the local government when you have a problem, it may be a little more difficult, they will probably still help you but it is easier if you know them beforehand. People should try to build the relationship before you need them. The Ministry of Industry and Information Technology (MIIT) is drafting policies on mergers and acquisitions currently. The goal is to create a legal environment that encourages large scale M&A in the Chinese auto market. What' s the potential impact on M&A in China? Will it help to control the risk for the buyers?

Mr. Schaub: I don't think so. I don't know about these MIIT regulations. We' ve done some deals in automotive including major automotive transactions. Normally the NDRC (National Development and Reform Commission) is the main authority involved in the drafting policy. And the NDRC has set for quite a long time that China should consolidate its auto industry. So I don't know what happens to protect the foreign investors but I think basically the NDRC would like to see fewer but stronger Chinese automotive companies. I think the local government will be the loser in the consolidation, you know, if a Shanghai company takes over a major company in Nanjing you can guess which local government will be happy. I guess consolidation is definitely needed not just in automotive industry but also in other main sectors of the economy, so I think it is good for the Chinese economy if the government helps to consolidate. And a few clients not in automotive area but in other industries also want to consolidate the market because nobody can make money in the Chinese market if you have thousands of companies competing with each other. If you have five or six big ones then you will have the scale. If you look at the NDRC auto policy there has been a long term trend making it harder and harder for small companies to extend their production. I think they really want to help the big become bigger, I think that's the idea. There is going to be a lot of M&A activities over the year, especially in automotive industry. The 12th five-year plan on the automotive industry, the government encourages a lot of companies to do the M&A to make the big company bigger and stronger as you' ve mentioned. In the new wave of M&A initiatives, what are the main challenges in the M&A due diligence?

Mr. Schaub: In relation to Chinese state owned companies I think they have a different form of due diligence far from what the foreign investors do. It is more a political due diligence. They are mostly large state-owned companies. I don' t think I can really add too much on how they do the due diligence. If a private Chinese company acquires another Chinese private company, it is similar to a foreign company buying when it comes to doing due diligence. But if we are talking about big state-owned companies being consolidated, I don' t know how the due diligence process works. After the economic crisis, Chinese companies will buy more. One has to look at the the growth of Chinese investment on overseas markets. Maybe 20 years ago, there was virtually no foreign investment , nowadays 50 or 60 billion US dollars a year. So it is a rapidly growing development. But if you look it as a percentage of the world foreign investment, it's still only like 1% or something so it is important not to overstate but it is an interesting trend. You can see that the most of the investments today have been done by very big state-owned companies. So it's not like they are doing lots of 5 million dollar company acquisitions. These big companies are buying very large scale natural resource companies or rights. When the next level down in size of Chinese state-owned companies and private companies go overseas then I think it will be vital for law firms and lawyers to be involved. I think that at present having mostly very big deals like Geely's Volvo purchase is not great for lawyers except for those directly involved. You know, if we had a hundred smaller deals rather than one big deal then everybody can have a few deals. It is nice.

Overseas M&A for Chinese companies still present some challenges and I think it will take a little bit more time for Chinese companies to get used to implementing such deals. Often big projects are interestingly enough is easier to do than a small project. Because in a big project, there will be re people involved who know what they are doing. If it is a small project, there many not be resources available for the necessary expertise. That's one of the problems.

Another issue for Chinese companies is whether they currently really have human resources available to manage an American technology company? It is going to take some time. It will happen, but it won't happen next year. As for the fraud and risk management in M&A, such as the risks of informal arrangements and non-compliance in labor, tax, licenses and IP etc. here in China, are there common problems in other countries? What kind of suggestions you want to give for the Chinese companies as a seller to get a win-win business deal or as a buyer to bid for a successful outbound M&A case?

Mr. Schaub: China deals with private entrepreneurs there may be a higher rate of tax evasion and lack of payment of social contributions than most countries. You probably will not have such problems in Germany. However, in relation to fraud it is more difficult for me to judge, because you hear about foreign companies always talk about having zero tolerance. But when you look at the really huge kickback cases, it is not Chinese companies involved but rather large Western multinationals paying bribes throughout the world. So I don't think corruption is a problem just in China, I think it's a worldwide thing. What kind of suggestions you want to give for the M&A case for the Chinese companies as a seller to get a win-win business deal? And on the other hand, what are your suggestions on the Chinese companies as a buyer?

Mr. Schaub: First I want to advise that I do not believe there is a win-win in a M&A deal. Whatever, I pay more, you win and I lose, so I don' t think win-win can exist in acquisitions. If we take Chinese company as a seller, I think Chinese sellers will get a much bigger premium, if you would do your own due diligence in advance, have everything well-organized, and any obvious problems on non-compliance that you have, you explain upfront to the buyer. You know, even a very bad lawyer will find non-compliance on the social contributions or taxes. It will be better to disclose upfront maybe not full details, but you could give people what you do for due diligence and prepare your own documents. If you do the draft due diligence, the first draft, you will get to frame how the company looks. So I think that would be something useful for a vendor to do although I have never seen anyone do it yet I think it would be beneficial. I would guess you have a chance of a bigger premium because that makes people trust you immediately. It is much better to say: "We have these issues. Why do we have these issues? It is the standard local practice. All companies do this. We will be happy to introduce you to the local labor bureau and they can tell you it is not the law, but it is the practice and the case will not be a problem. And if you move towards compliance they will be happy".

That kind of approach would increase the chance of the deal happening greatly but you could also get a higher price you could imagine. I think the other thing is the focus on the contract. If I was a Chinese seller, I would only focus on one or two things. One thing is the price, and the payment terms. I would want to get as much as possible early on and I would try very hard to get 80% percent or more upon approval. Many people focus on representations and warranties and that is a wrong focus for a seller. I think it's really the payment and the payment terms. That's what I will be first interested in. And I would really insist on the share deal if possible, because the assets deal will make the transaction much more difficult. You will likely have much more taxes as well so I would imagine I would really insist on a share transfer if I was a Chinese seller.

Regarding on the Chinese buyers buying a company overseas, I think there should be three things. What I would be most worried about are the same things we tell foreign companies who come to China.

The first thing we should work out who they are. If you want to buy a company in France, you should work out firstly are you able to buy a company in France? You might have the money but do you have the ability to deal with a couple of hundreds of French workers - I don't know. Do you have the ability to implement the whole process or can you find people to help you? That would be my first question.

The second question will be look at the jurisdiction and try to get some people who are familiar with France to give advice. Of course the danger is always is if you have got people very familiar with the country, they may be too sympathetic to the country, and they cannot be very objective as to the county's shortcomings. So I think you need to have a very objective analysis of the county. Then I guess the third thing is, it is not just about the M&A deal, or the acquisition in buying a company, but about the real things that will follow. After I buy the company, what happens then? Do I have somebody to be sent there? Who do I send there? Do I have a French guy to send there? Or among the French staff at this moment, who will stay there? Now China has become the No.1 automotive market in the world. Do you think there will be large and increased M&A case or business trends?

Mr. Schaub: Actually No.1 automotive market doesn' t mean suddenly you get a prize or something. Obviously it is a world big market for the automotive industry. To tell you the truth I have less automotive transactions in the last couple of years. It seems to me that automotive was one of the first big waves of acquisitions or establishments by foreigners in China. That was back to be like early 90' s and mid 90's. It seems to me, every second deal we did was with the automotive components suppliers. I would guess, it has slowed down compared to other industries, because I guess a lot of the suppliers are already now in China. I think consolidation will happen among the big Chinese companies'. Because if you are a person making mufflers and you have a wholly foreign owned enterprise, I don' t think you will often buy a Chinese muffler company. If you are already here in China it may be easier for you to extend your factory than to buy a Chinese competitor, I would guess. I should mention new energy on batteries in automotive industry is an area where there is a lot of interest. That is one area we have seen many people talking about Chinese companies going overseas and people coming here, people doing batteries for cars. This seems to be a very hot area at present

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.