Due Diligence Services in Hong Kong

Before investing in a business or starting your venture in Hong Kong, we advise you to conduct due diligence on the company or entity. Due diligence is usually used in complex transactions in business. The term due diligence is a commonplace in M & A (Merger and Acquisition) transactions and dealings which involve the sale of a company. Due diligence services are required for an investor in Hong Kong. Due diligence services would provide a detailed overview of the possible risks involved in the transaction to the investor.

A third-party consultant usually conducts due diligence services. There are different forms of due diligence services carried out by an investor before investing in Hong Kong. As Hong Kong is a new place for foreign investors, it would be advisable to consult a third-party for carrying out due diligence services.

Why are Due Diligence Services essential in Hong Kong?

Due Diligence services are essential to be conducted in Hong Kong due to the following reasons:

It provides an overview of the activities conducted by the business. Corporate due diligence is carried out to find if there are any forms of flaws in the investment or corporate entity.
A due diligence report will provide a comprehensive overview of the investor and the amount of risk present in the investment.
Depending on the risk present in the investment, the investor will either go ahead with the transaction or find out an alternative option to carry out the investment.
Due Diligence determines how effective the transaction is for an investor. A comprehensive check of the financial activity, the business activity, and other activities will be given in the due diligence report.
Due diligence acts like a SWOT analysis: Strengths, Weaknesses, Opportunities, and Threats. A potential investor would get an overall picture of the business risks.

Where are Due Diligence Services Predominately Used?

Mergers and Acquisitions (M&A)

There are different parties involved in an M & A transaction. Depending on the type of transaction, the parties commonly use third-party consultants to carry out due diligence services. In M & A transactions, the company history is reviewed in-depth to understand its financial standing, turnover, assets, and lawsuits filed against the company.

Initial Public Offerings (IPO)

Initial Public Offerings are a primary offering in the securities market. In Hong Kong, the securities market's primary regulator is the Securities and Future Commission (SFC). Under the Securities and Future Ordinance (SFO), companies are allowed to list their securities in a public stock exchange in Hong Kong. When a company wants to list its securities in a stock exchange, it is required to take expert advice from a third-party consultant on the transaction. The third-party consultant will conduct due diligence services to find out the risk involved in the transaction.

Investing in a new venture

When a potential investor seeks to invest in a company in Hong Kong, prior due diligence must be conducted to understand the company's risk. Thorough due diligence will provide an overview of the problems associated with the company. Through this, an investor can ensure to mitigate a specific amount of risk.

Types of Due Diligence Services Carried out in Hong Kong

Administrative Due Diligence

Administrative due diligence will be conducted to understand the procedures of informing the entity in Hong Kong. An investor planning to invest in Hong Kong will have to know the administrative formalities before commencing it. Administrative formalities can include securing the correct visa for carrying out the business or opening a bank account in Hong Kong. As per the Companies Ordinance in Hong Kong, an investor planning to invest in a Hong Kong company has to satisfy specific requirements. For example, for opening a corporate bank account in Hong Kong, the investor or entrepreneur has to satisfy the following criteria:

All the requisite Paper works for opening a corporate/business bank account in Hong Kong and professional certification, such as a solicitor or a chartered accountant is required.
Business accounts in Hong Kong require a minimum deposit.
Some business bank accounts require more information when it comes to foreign companies.

Apart from this, the Government of Hong Kong has made it mandatory for the physical presence of a representative of the foreign company to open a bank account. If this is not possible, a foreign investor can get consent from the local bank in the home country of the foreign investor in the presence of a witness.

Corporate Due Diligence

Corporate Due diligence services are carried out to understand the company's present position or potential asset, which is going to be acquired. In corporate due diligence, the following is conducted:

If corporate filings have been made as per the Companies Registry.
If compliances have been followed regularly by the company.
The amount of governance and transparency present in the organization.
Whether the company has maintained compliance as per the requirements of the Hong Kong Companies Ordinance.
Corporate due diligence will also govern the ownership aspects of the company's records, whether the company has carried out all the administrative requirements and corporate filings as required by the law.
Corporate due diligence will also go back into the company's history: if the company has had any form of mergers and acquisitions in the past, any form of divestments or entered into any form of strategic partnerships with any other companies

Human Resources Due Diligence

For your investment to be profitable, you must carry out Human Resources Due diligence. This form of due diligence services must be carried out by the organization to conduct prior background checks on the candidature. Human Resources due diligence would depend on various aspects, depending on the company's requirements. The following would come under Human Resources Due diligence:

Whether to consult an outsourcing provider or use the skill and capabilities of employees in-house.
The salary scale which has to be paid to employees residing in Hong Kong.
Conducting Criminal and Back Ground Checks on the employees living in Hong Kong. The above process would take a considerable amount of time. However, it is essential to conduct criminal background checks for the organization.
Current employees, workforce, and culture that is followed in Hong Kong.
Senior employee contracts such as directors- Termination agreements, Blue Pencil Clauses, Garden Leave clauses for non-solicitation of clients from the previous organization.
Non-Compete clauses which can be imposed on senior-level executives of the organization. The level of reasonableness on the non-compete clause. Whether geographical and jurisdictional factors would come under the purview of the Non-Compete Clause.
Legal suits on any former employees in the organization.
Whether the organization has to provide any form of ESOP (Employee Stock Options) and the compliance for the ESOP.
If the company is planning to recruit foreign candidates, then they must look at the requirement of sponsoring the candidate. A valid work visa is required for the candidate to work in Hong Kong. For this, the company has to show that the candidate possess a specific skill set that could not be found in local candidates after advertising the job specifications in employment websites and portals. The Government of Hong Kong will provide a limited number of sponsorship positions to the organization to sponsor different candidat

Accounting and Financial Due Diligence

This form of due diligence would comprise of complying with the relevant financial authority in Hong Kong. The primary financial authority in Hong Kong is the Hong Kong Monetary Authority (HKMA). Apart from the HKMA, the Securities and Futures Commission (SFC) regulates the securities market in Hong Kong. Compliance has to be maintained as per the relevant guidelines issued by the above authorities. The following has to be conducted under accounting and financial due diligence in Hong Kong:

The organization has met the requirements for financial Statements- Whether compliance in submitting up to date financial statements to the relevant authority.
Holding Annual General Meeting- the Company has to hold annual general meetings to ensure that financial statements have been vetted and signed by the directors and shareholders of the company.
Budgetary reports have to be prepared by the company, and the directors have the approve the same at the beginning of the financial year.
Expenditure Plans- What is the estimated expenditure for the company? Does the expenditure cover long term goals of the company, or does it also involve present plans and objects which are likely to be carried out by the organization?
Company Financial statements include the audited financial statements as well as the unaudited financial statements.
Quality of Assets owned by the company- If the company is formed to manufacture specific products, quality control would be required for the organization to understand the usage cost and depreciation on the assets of the business. Quality control mechanisms would also be used to understand the wastage costs of the assets in the company.
Financial Projections of the company- Under Financial due diligence, the investor or entrepreneur must be aware of the predictions carried out to understand the financial investments made in the company.

Legal/Compliance Due Diligence

This form of due diligence is carried out to find out the compliances which have to be carried out by the company to operate without any form of legal risks. A company that is formed has to be registered under the Companies Registry of Hong Kong. Along with this, the company or entity must comply with the relevant provisions of the Companies Ordinance of Hong Kong. The following requirements have to be carried out by an investor before investing in Hong Kong.

Procedure to comply with the registration requirements of a company under the Hong Kong Companies Ordinance.
Submitting relevant necessary papers for company formation. The following necessary papers have to be submitted to the relevant authority for legal, due diligence services in Hong Kong:

a) Information for registering the company with the Companies Registry.

b) Information on the objects carried out by the company- Such as the main products and the services offered by the company.

c) The company's main objects will be included in the Memorandum of Association of the company (MOA).

d) Articles of Association are also known as the AOA, which represent the main form of bye-laws which the company has entered into. An article of association must be differentiated from a shareholder's agreement. There must not be any conflict between these two necessary papers.

e) Pre-Incorporation Contracts, which the company has entered into with third-party service providers and suppliers.

f) Meetings conducted by the company in compliance with the companies’ ordinance of Hong Kong.

g) Any form of the loan agreements, shareholder agreements, and redemption agreements are entered into by the directors of the company.

h) Operation of the legal system in Hong Kong- Due diligence services would also require the investor to know the process of how laws work in Hong Kong. For example how the court system works in Hong Kong would be relevant for the investor.

Operational Due Diligence

When an entrepreneur is investing in a company, operational due diligence must be carried out to understand the company's operations. If the entrepreneur understands the operations carried out in the company, he can rethink the investment options available. Hence, it is crucial to carry out this form of due diligence before investing in an entity. When carrying out due diligence services, the entrepreneur must focus on the following:

Knowing the financial condition of the company.
Have an in-depth analysis of the risk profile of the company.
Current objectives and goals of the company.
Objectives of the Management of the company.

If the investor has information on the above, then the maximum amount of risk can be mitigated.

Customer/ Client Due Diligence

When an investor is incorporating a new entity, it is important to understand that customers play a pivotal role in the company's operations. The profits earned by the company would depend on the type of customer base present in the company. Hence Due diligence services on customers are crucial for the operations of the company. Under customer due diligence, the following has to be carried out:

Simplified Due Diligence

Simplified due diligence is normally a term that is used in business transactions such as Mergers and Acquisitions. However, when a new customer is introduced to the company or requires a company's services, the Anti-Money Laundering and Know Your Client (KYC) compliance has to be carried out by the company. For example, when a bank opens an account for the client, simplified due diligence is carried out. If the customer is a foreign national, the bank will require the customer to submit necessary papers such as the passport. Similarly, a company dealing with clients regularly has to follow the policies as per the Government of Hong Kong. The respective ordinance that deals with money laundering the Anti-Money Laundering Ordinance (AMLO).

Enhanced Due Diligence

Enhanced due diligence is carried out on customers who come from high-risk profile countries. Under the Financial Action Task Force (FATF), countries are divided based on the amount of risk. Enhanced Due diligence must be carried out on high-risk profile countries. For example, according to information of the FATF, Iran and North Korea are high-risk countries. These countries are greylisted when it comes to carrying out anti-money laundering and terrorist financing. Therefore, enhanced due diligence must be carried out for customers coming from high-risk profile countries.

Tax Due Diligence

An investor would consider carrying out tax due diligence under due diligence services in Hong Kong. Due diligence services for tax in Hong Kong would comprise complying with the respective tax regimes in Hong Kong. The following will be applicable under tax due diligence:

Assessing the financial year for the enterprise to be taxed according to the requirements.
Filing the correct amount of corporation tax (profit) tax for the entity within the financial year i.e., 16%.
Understanding the forms of tax chargeable in Hong Kong.
Annual Filing as per the required authority in Hong Kong. (Inland Revenue Authority in Hong Kong).

Intellectual Property Due Diligence

IP due diligence is a form of legal due diligence to understand the intellectual property regime followed in Hong Kong. Hong Kong primarily follows the common law system. Hence the regime for intellectual property enforcement would be straightforward. However, the following considerations have to be taken for understanding the intellectual property regime followed in Hong Kong:

Types of Intellectual property laws such as Trademarks, Patents, Copyrights in Hong Kong.
Intellectual property enforcement in Hong Kong.

Enterslice Advantage

At Enterslice, we have expert professionals who can assist you in developing your business globally. Our professionals have expert knowledge of carrying out due diligence services in Hong Kong. Using our due diligence services can provide you the following benefits:

We will assist you in the procedure for carrying out due diligence services in Hong Kong.
We also offer Paper works support services.
We will provide you with a comprehensive due diligence report, which will cover all aspects of investing in Hong Kong.
We have a multifaceted team of professionals comprising of Chartered Accountants, Company Secretaries, and Lawyers.
We provide end-to-end customer satisfaction.