Entity health checks: a due diligence must for global deals
ComplianceAugust 07, 2020

Entity health checks: A due diligence must for global deals

Much like a background check, an entity health check corroborates the status and pertinent vitals of a company within the jurisdiction in which it does business.

Especially for those clients who conduct business internationally, they are a useful tool to help verify the compliance standing of their entities or a target entity in the country they do business in and can help identify areas that require remediation. For attorneys involved in global deals, this proactive practice can help protect your clients’ timelines, avoid penalties, and helps them be prepared to mitigate any risks associated with entering a new business venture.

In this article, we explore how attorneys can use entity health checks and why they are a critical component of a due diligence process during global corporate transactions.

What is an entity health check?

An entity health check is an important exercise that provides an overview of a company’s fiscal and legal standing in the country in which it is registered. It helps confirm that all compliance requirements have been met, if there are any missing or pending compliance actions required and identifies if any outdated information or issues are being reported by local agencies for entities operating within a country's borders.

Health checks are compiled from sources external to the company such as local government agencies, regulators, credit bureaus, etc. Because of this, the details contained within an entity health check can vary greatly by country, as it will reflect the information available locally.

While the overall due diligence process during global deals aims to gather information from all aspects of a company’s operations (obtained mostly by internal sources) including organizational documentation, financial records, sales reports, operational guidelines, product information, human resources policies, assets, contracts, etc. – health checks provide attorneys working on global deals an additional layer of insight.

By examining a company’s legal standing within the country or market in which it does business, attorneys can better assess the risk factors their clients may face during or even long after a deal has closed.

How can a health check be used?

An entity health check can also be referred to as a corporate health check and can be pulled ad-hoc during the life of a global entity. By “auditing” the vitals of the entity, you can see if there are issues that can hinder the company’s ability to fully operate within a jurisdiction, which can lead to hefty penalties and reputational damage associated with such. Health checks are a recommended best practice and should be part of any organization’s ongoing entity compliance work.

Attorneys can use health checks to examine their client’s or potential client's legal or fiscal standing in each jurisdiction before an official engagement. It helps to visualize what preliminary work must be done or issues that need to be addressed. Common uses for attorneys would be during a global M&A transaction, corporate structure changes, or during a single entity acquisition. It can also be run before selling or dissolving an entity to ensure there are no issues down the line and international deals can continue without any setbacks.

Why is a health check important for attorneys working on global deals?

Health checks help mitigate the risks associated with the purchase, acquisition, or merging of a client’s business with another business by identifying any legal issues your clients may face during an international corporate transaction. Health checks help identify these areas to ensure there is ample time – early in the deal – to correct any issues and restore compliance. Even in situations where a company is being dissolved, running a health check can confirm that outstanding compliance tasks have been taken care of to avoid any future issues. For this reason, an entity health check should be the first step in any global deal – it’s the first logical step to ensure the transaction goes off without a hitch.

Think of a health check as an important tool that provides your clients the peace of mind that comes with full corporate compliance – whether of their own company or a target company. If a corporate transaction takes place before an entity health check, you could put your clients at risk, both as it relates to financial penalty as well as reputational fallout from the deal in the jurisdiction it was taking place.

Conclusion

Help your clients avoid any mishaps or penalties by taking proactive steps to understand the current state or “health” of their business or that of a company they intend to transact with – through the eyes of the local jurisdiction.

As you begin the process of a global corporate deal, it’s important to get support from an experienced partner with in-country expertise and boots on the ground that can help obtain entity health checks wherever needed and can aid in addressing any outstanding actions that may arise to get the deal done efficiently and on time. This is especially critical when deals involve international entities.

Learn more about how CT’s Global Transactional Services can provide the support you need on your next global deal – from running health checks to coordinating the complete due diligence process across multiple jurisdictions, to fulfilling on-demand document needs. Get in touch with a CT representative at (844) 322-6993 (toll-free U.S.).

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