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Legal Risk Control in Corporate Investment and Financing Projects

Investment and financing activities are important means for companies to realise group and scale development, with engagement based on the expectation of future development and potential return of projects.

However, market uncertainty may either bring benefits or cause great risks to the company’s investment and financing projects. Establishing a legal risk control system to ensure the paths of projects are legal and compliant is therefore a key priority of companies and their actual controllers, especially amid economic downturn.

Basic compliance management

Wen Junqi, DOCVIT Law Firm
Wen Junqi
Senior partner

A project’s investment and operation information should be accurate and regularly reviewed to ensure the company’s name and information on legal representatives, top executives and other key personnel are accurate and complete.

Additional attention should be paid to the background and strength of the investment project, to avoid investment risks arising from a project’s exaggerated background and association with leading companies in the industry.

Close attention must also be paid to the operational status of investment projects, to effectively exercise the investor’s authority and understand the project’s organisation, personnel, financial and material conditions. If a project incurs losses or other situations, the rectification or revitalisation plan proposed by the project company must be feasible.

For underperforming investment projects, the binding agreement and measurement of expected return on investment should be strengthened, and future development of the project company, market prospect, policy support and profit and loss should be fully assessed to balance expectations.

If the investment project enjoys local government financial support or incentive policy, additional attention should be paid to performance of the project agreement.

A dynamic regulatory system must additionally be formed for the rectification and revitalization, and subsequent handling of all problematic projects to ensure prompt detection of project anomalies, assessment of project development trends, and initiation of legal recourse procedures.

It is also important to ensure the project and claims and debts it involves are not deprived of the possibility of judicial protection due to the statute of limitations when resolved through judicial channels.

Compliance issues in the disposal of risky projects should also be examined and reviewed in conjunction with external law firms, including review of terms of supplementary agreements, retention of evidence in the project negotiation process, and examination of the timing of litigation.

Dynamic regulatory system

Establishing a project patrol system. Project patrol management measures should be prepared to further promote the whole-process management of investment projects. Relevant positions can be set up within the group or company – or external third-party organisations can be commissioned – to conduct regular visits to the project.

Visit reports can be prepared according to requirements to understand the operational status of the project, facilitating timely discovery of early risks to the company and project, and dealing with them. For example, a company on the verge of bankruptcy should plan to make a declaration of claims to avoid missing the deadline for declaration.

Establishing an early warning mechanism for operation and management at a later stage. It is recommended to set up early warning indicators for the company and project operation in terms of finance and progress. Providing timely feedback on matters below the indicators can form an early warning report with risk prevention responses to different early warning indicators, and prevent investment risk through legal or management means at an early stage.

Establishing a regular reporting system. To promote projects, the company should establish an on-site or off-site reporting system to regularly analyse the project operation status and provide feedback on issues. This facilitates an understanding of company needs and the injection of more resources to jointly promote the project and form a new growth point.

Establish a link between control indicators and contractual default clauses. Remedies for acts triggering early warning indicators should be set in default clauses. Contractual default clauses can be designed to increase the cost of breach of contract, urging parties to solve problems in project operation through their own resources and methods to achieve management efficiency.

Source must be legal

Since bank loans are the main means of project financing for many companies, loans must be legal and compliant to avoid the crime of obtaining bank loans by deception. When used to promote project development and construction, companies need to ensure loans are fully compliant with the law, and also ensure the use of funds is in line with regulatory requirements.

In cases where poor project management or financial issues hinder the repayment of bank loans, banks will intensify their end-to-end monitoring of project loans and detect whether there is any illegal behaviour in the process through penetrating the capital flow.

Bond financing is also an important way for companies to raise funds, and corporate bond issuance must be legal and compliant to avoid bearing joint and several liability for false publicity.

In the face of a sluggish bond market, certain enterprises might resort to misleading promotions during the issuance of bond products, encouraging their employees to invest in them.

Cases have shown that when bond products cannot be paid on time, courts will require the companies to bear joint and several liabilities due to their false publicity or improper description.

When companies raise funds internally, through partnership or equity incentive mechanisms, they must also clearly inform employees of the legal risks. As ordinary workers, employees generally lack legal concepts and canny awareness of investment.

When a company carries out internal financing through partnership or equity incentive mechanisms, it must clearly explain to employees the mode, rules, benefits, risks and exit options.

If the project is in trouble or deadlock, employees, as irrational investors, may choose ways other than litigation to demand reimbursement of investment funds from company executives or controlling stakeholders, especially if there was misleading information in the initial stages.

Wen Junqi is a senior partner at DOCVIT Law Firm

56/F Fortune Financial Center
No.5 East Third Ring Middle Road
Beijing 100020, China
Tel: +86 10 8586 1018
Fax: +86 10 8586 3605-8006


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