Due Diligence on Foreign Transactions

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 especially important when dealing with companies in countries where things are often not what they seem and where the legal system is less than ideal.

Failing to undertake foreign company due diligence is usually a factor, if not the decisive factor, in losses suffered by companies doing business internationally. My firm’s international lawyers regularly encounter contracts signed with non-existent foreign 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. We see deals with companies that should never have been done. All these problems could have been avoided with foreign company due diligence research. By the time they came to light it was too late to fix them.

Pre-Deal Due Diligence is Key

Foreign company due diligence reports are an important part of due diligence. They can confirm whether the company exists and, if so, whether it is in good standing with all 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. It can often reveal whether the company pays its taxes.

Most importantly, properly conducted due diligence can usually provide a good sense of the assets owned by the company with which you are contemplating doing business. Is that foreign company a start-up with no assets or a big company with ten different properties and 43 trademarks and 14 patents? Clearly your financial risk will vary as between these two sorts of companies. You would be surprised — or maybe not — how often companies are shocked by what they find. Sometimes our due diligence even reveals there is actually no company at all on the other side and the whole thing is a scam.

So when things go wrong, don’t blame your foreign country counter-party if you never bothered to check things out.