Chinese economy has been rapidly growing in the past three dacades and now China has the second largest economy in the world. China has the best mergers and acquisition opportunities, however it  is well known China is also the difficult region to conclude a deal. One reason is that China has special business environment with its own "characteristc". Foreign investors often find the targeted companies can not  provide accurate or complete information within an agreed time. Usually,this is because the company does not maintain a good documentation system, or even key information is simply not kept for certain reasons.

During M&A, due diligence upon the targeted companies is not only necessary but also important to acquirors. Definitely comprehensive due diligence increases the chance of successful integration and reduce the risks in the business to be acquired. During due diligence, it is not uncommon for investors to find out that the targets entered into short and simple contracts with informal or side arrangements. Such contracts expose the target company to serious legal liabilities or drag them into troublesome contractual disputes.

The acquiror should not simply rely on the transferor's responses,which are usually much simple or even no such documentsm. Acquiror or the counsels should sit down with the transferor explaining what is required and why it is important.Prudent acquirors should talk with the  managers at all levels of the target companies to piece together a full and complete picture. Interviews with lower-level business personnel are usually more helpful because they may be more open to discussing the situation and confirm how the contracts were concluded and performed.

The acquiror should assess whether informal arrangements are acceptable from both a legal and a business perspective. If the informal arrangements do not constitute legally binding obligations upon the parties, enforceable under applicable law or otherwise not acceptable from a business perspective, the acquiror can insist on having a covenant clause under the transaction agreement. The covenant clause imposes an obligation on the target company to conduct business according to law and not maintain informal arrangements with counterparties. This is coupled with an indemnification clause against the seller, should the target company fail to comply.

However,if informal or side agreements could not be fully identified,representation and warranties and indemnification clauses pcould be of help. The representation and warranties clause should specify that contracts, as set out in the disclosure schedule prepared by the transferors, encompass all the material contracts the target company is party to and has remaining actual or contingent liability. The clause should also ensure the seller provides true and complete copies of all such contracts. An indemnification provision should specify that the transferor should indemnify the acquiror for any losses, claims, costs, expenses and penalties arising or resulting from the breach of such representation or warranty made by the transferors.