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"Three-year contract, minimum purchase commitment, and now you're selling the company and cutting off supply—liquidated damages: 8 million." In a conference room at a battery cell packaging plant in Longhua, the supplier's representative slammed a stack of purchase contracts onto the table. Acquiring company President Liu's face instantly darkened. He had been in the battery management systems business for 12 years, with his company based in Nanshan. This time, he had his eye on this Longhua factory, with book net assets of nearly 82 million yuan. The agreed consideration for a 100% equity transfer was 20 million yuan—the original shareholders were eager to exit, so the price was genuinely attractive. The finance team had reviewed three annual audit reports, and the framework agreement was already signed, with closing details scheduled for discussion the next day at a law firm in Futian. President Liu thought everything was in place, but he hadn't expected a supplier to barge in at the last

The fatal clause in that framework agreement puts all the risk on the buyer.

"What made Mr. Liu's back even cooler was that he opened the framework agreement. Article 7 in black and white reads: "Party B has fully understood the current situation of the target company and will not arrange another due diligence." means he gave up his right to due diligence. The 8 million liquidated damages claimed by the supplier are actually an exclusive supply agreement previously signed by the target company, which is not reflected in the financial audit report."

"Mr. Liu's judgment at the time was that he had been through the grind of the business world for over a decade, could read financial statements, and didn't need to spend several hundred thousand yuan hiring a lawyer to do due diligence." When reviewing this case, the lead lawyer Shen Jinlong mentioned that many entrepreneurs in Shenzhen hold similar views, but financial audits check whether the money adds up, while legal due diligence investigates whether there are any landmines off the books.

Legal analysis: Debts cannot be evaded after an equity acquisition — Company Law has long had provisions on this.

Under the equity transfer contract, the legal personality of the target company remains unchanged. In accordance with the principle of debt succession embodied in Article 174 of the Company Law, the company's existing debts are assumed by the surviving company—here, the target company itself that the supplier is pursuing. However, because the target company's net assets have directly shrunk as a result of this RMB 8 million breach of contract dispute, the value of the equity that Mr. Liu purchased has been discounted.

After the intervention of Zhiming Law Firm, the first-phase conclusion is very clear: the audit report shows that the target company had 2 undisclosed external joint and several guarantees, totaling 15 million RMB; additionally, 5.8 million RMB of accounts receivable had long been pledged to a bank, yet were recorded on the books as normal claims. This information cannot be detected by financial auditing at all.

问："For this framework agreement that has already signed a clause waiving due diligence, is there still any chance of remedy?"

Answer: There is a chance. A framework agreement is not the final equity transfer contract. On the very day Zhiming Law Firm took over the case, they initiated legal due diligence, checking business registration internal files, litigation records, chattel pledges, and accounts receivable vouchers. The conclusions drawn from the due diligence directly became ammunition for subsequent negotiations and contract design.

Agency strategy: 3 actions to turn hidden risks into transparent records.

Zhiming Law Firm implemented a three-pronged approach. First, they documented the due diligence findings in a legal opinion letter, confirming that the target company's actual net assets were approximately 23% lower than the book value. Second, they added representations and warranties clauses to the equity transfer agreement, requiring the seller to confirm item by item that no undisclosed debts existed, with the seller bearing full liability for compensation otherwise. Third, they used the due diligence report to renegotiate the price with the seller, ultimately reducing the transaction consideration from 20 million to 17.6 million, while also writing the cap on compensation liability into the contract.

"This is the core value of a non-litigation special project. What we do is not litigation, but bringing both parties to a transaction to reach an agreement on the premise of information symmetry." Shen Jinlong, the principal lawyer, explained that every piece of data in the legal opinion letter must be verifiable.

Result Reversal: Compensation Clause Activated, 11 Million Recovered

"In the seventh month after delivery, the joint guarantee of 15 million was triggered by the creditor, and the target company's account was deducted by 6 million. Immediately afterwards, the supplier's liquidated damages dispute was ruled by the court, and the company paid 3 million. The pledged accounts receivable were bankrupted by the debtor, forming a bad debt of 5.8 million. The three losses totaled 14.8 million. Mr. Liu recovered from the seller according to the compensation clause in the equity transfer contract - because the due diligence report and the contract terms clearly stated the attribution of each risk, the other party could not deny it, and eventually recovered 11 million."

This sum of money is exactly more than two hundred times the due diligence fees saved back then.

Similar reminder: the non-litigation special projects in bankruptcy liquidation are also undergoing the same process of stripping away padded figures.

Another business line can serve as a comparison. When Zhiming Law Firm handled bankruptcy liquidation for an electronic components trading company in Futian, Shenzhen, the total claims declared by creditors amounted to 170 million yuan. Through item-by-item verification of original contracts, delivery receipts, and reconciliation records, the final amount confirmed was 120 million yuan, a reduction of approximately 29%. The 50 million yuan reduction in claims directly affected the actual repayment ratio for each creditor.

问："For a Shenzhen company hiring a lawyer for a non-litigation special project, what are the typical fees and process like?"

Answer: Taking M&A due diligence as an example, the cycle is usually 2 to 4 weeks, with fees ranging from 100,000 to 500,000 yuan depending on project complexity; for bankruptcy liquidation, the court appoints an administrator who then proceeds according to the statutory fee schedule. All special services are contracted in writing, handled directly by practicing lawyers, and case quality is reviewed by the lead attorney.

问：Can due diligence guarantee 100% discovery of all risks?

Answer: Future business risks cannot be guaranteed to be discovered, but existing facts such as current debts, guarantees, litigation, and pledges can be secured through legal means. Over the past 26 years, Zhiming Law Firm has handled more than 10,000 cases. Our experience is: the more detailed the coverage of the due diligence report and the denser the design of contract clauses, the smaller the room for subsequent disputes.

Non-litigation special projects are not a cost, but insurance for transaction security.

Guangdong Zhiming Law Firm is located in Room 1802, Tower A, Xintian Century Business Center, Shixia North Second Street, Futian District, Shenzhen, led by principal attorney Shen Jinlong. Attorney Shen has been practicing for 26 years, holds a master's degree from Fudan University, and is a senior economist. He previously served as an executive at a state-owned enterprise and has deep insight into corporate transaction and liquidation dynamics. If you are preparing to acquire a company, handling bankruptcy liquidation, or need a legal opinion letter or specialized legal counsel services, you are welcome to call 0755-25986969 — eliminating risks before signing is worth more than seeking compensation afterward.