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International Due Diligence: Obtaining Corporate Information and Common Challenges

By: Pushkala Sivaramakrishnan, COGENCY GLOBAL on Thu, Jun 13, 2024

What this is: Due diligence is crucial in business, helping to assess risks and make informed decisions about a target company or a group involved in certain commercial transactions. Public record due diligence involves gathering information from various public sources and analyzing that information to support their decision-making process. 

What this means: In the modern world, businesses operate internationally, necessitating a tailored approach to mitigate risks across jurisdictions.

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Public Record Due Diligence: Sources of Information 

The due diligence process is a critical step in many business contexts, particularly in mergers and acquisitions, venture capital, private equity, real estate transactions and corporate partnerships. Its importance stems from its role in helping the parties involved in a transaction assess risks, uncover hidden issues and make informed decisions. Public record due diligence involves researching and gathering information from publicly available sources to assess risks, validate information and gain insights into a company, individual or asset.  

Public record due diligence often involves examining a wide range of public records, including legal documents, court records, financial filings, regulatory reports, etc., as detailed below:  

Corporate Records  

Reviewing corporate records helps establish the legal existence and structure of a business entity. This may include checking business registration, articles of incorporation, bylaws, shareholder agreements and annual reports. This process ensures that the company is in good standing and compliant with corporate governance requirements. 

Financial Filings  

In the US, publicly listed companies are required to file financial reports with regulatory bodies like the Securities and Exchange Commission. Analyzing these filings (e.g., 10-K, 10-Q, 8-K or annual reports) can provide insights into a company's financial health, profitability, cash flow and liabilities. It also helps identify any significant financial risks or irregularities. Internationally, many countries require even private limited companies to file their financial statements with the corporate registry.  

Legal and Court Records  

Reviewing legal and court records can reveal litigation history, pending lawsuits, judgments, bankruptcies or liens. This step is crucial for assessing legal risks and understanding a company's exposure to litigation or financial claims. 

Regulatory Filings and Compliance  

Depending on the industry, companies may be subject to specific regulatory requirements. Examining regulatory filings and reports from bodies like the Environmental Protection Agency, Occupational Safety and Health Administration or industry-specific regulators can help assess compliance with regulations and identify any violations or penalties.  

Intellectual Property Records  

Searching patent, trademark and copyright databases can provide information on a company's intellectual property (IP) portfolio. This step helps assess the value and strength of the company's IP assets and identifies any potential disputes or infringement issues. 

Real Estate and Property Records  

For real estate due diligence, examining property records, deeds, title searches, zoning information and environmental assessments is crucial. This helps validate property ownership, assess any encumbrances or restrictions and understand local zoning regulations. 

Public Safety and Environmental Records  

Checking public safety and environmental records can reveal any safety violations, environmental hazards or compliance issues. This is particularly important in industries with high environmental and safety risks. This is a very technical assessment and should be entrusted with experts in the industry.  

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The International Due Diligence Process and its Biggest Challenges 

In the current globalized environment, companies often have business interests outside of their domestic jurisdictions of incorporation. For instance, many companies have subsidiaries or branches or investments outside the US. Therefore, the risks for a US company are not limited to its activities in the country. Rather, they extend to all jurisdictions that it operates in, and the due diligence process needs to cater to this expanded scope. However, it is important to not only expand the scope but also customize it to the type of business and the complexity of the foreign jurisdictions it will cover.  

Here are some of the challenges that an international due diligence process must address:  

Legal and Regulatory Differences  

Different countries have different legal systems, regulatory frameworks and compliance requirements. Understanding and navigating these differences requires specialized legal expertise and localized knowledge. This can impact the ability to assess compliance, identify legal risks and ensure the legitimacy of transactions. 

Language and Cultural Barriers  

Language differences can complicate the due diligence process, requiring translation of documents and effective communication with local stakeholders. Cultural differences can also affect how information is presented, understood and negotiated. Misunderstandings or misinterpretations can lead to errors in the due diligence process. 

Data Accessibility and Reliability  

Access to accurate and reliable data can be challenging in some international contexts. This includes obtaining financial records, legal documents or business performance metrics. Some jurisdictions have less transparency or lack robust systems for maintaining records, complicating the validation of information. 

Local Business Practices and Norms  

Business practices vary across cultures, and what is considered acceptable in one country may not be in another. This can include practices related to corporate governance, employee relations, environmental standards and even corruption or bribery. Understanding these practices is crucial for assessing risks and ensuring compliance with international regulations, such as the Foreign Corrupt Practices Act or the UK Bribery Act. 

Geopolitical and Economic Risks  

International due diligence must account for geopolitical risks, such as political instability, government changes or trade tensions, which can affect business operations and future prospects. Economic risks, including currency fluctuations, inflation or economic downturns, can also impact the valuation of international assets or companies. 

Time Zones and Logistical Complexity  

Coordinating due diligence activities across different time zones can be challenging, leading to delays and communication issues. Additionally, travel restrictions (especially in the context of global health crises like the COVID-19 pandemic) can make on-site inspections and face-to-face meetings difficult. 

Intellectual Property and Data Protection  

IP rights and data protection laws vary by country. Ensuring compliance with these regulations, especially regarding data privacy and security, is critical. Different jurisdictions may have varying levels of protection for IP, impacting the assessment of risks and opportunities.

Other Reads You Might Enjoy  

What is an example of information you might find when conducting a British Virgin Islands (BVI) company search in the public record? 

Register of Charges: A simple company search will reflect mortgages and charges. ("Charge," a term more commonly used in UK law, denotes any form of a security interest over property registered to the entity on the public record.) Under the law, BVI companies are required to create and maintain an internal register of charges. These charges are often recorded in the company’s registry, but not always. To learn more about this topic, read our article, BVI Company Search: Due Diligence in the British Virgin Islands. 

What are some of the benefits of choosing English law in cross-border business transactions? 

Some of the more obvious reasons for choosing English law include the wide prevalence of the English language as lingua franca, London’s cosmopolitan character, as well as the comfort level its legal professionals have in dealing with international commercial disputes. To learn more, visit our article, The Benefits of Choosing English Law in Cross-Border Financial Transactions. 

This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Article 9 Filing, Searching and Due Diligence, International Corporate Services, Intellectual Property Due Diligence