Legal risk management of corporate investment and financing

By Wu Fangyong, DOCVIT Law Firm
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The combination of investment and financing is a relatively young phenomenon in the domestic investment community. It aims for a win-win scenario through co-operation between investors and financiers, taking financing as the means and investment as the goal.

While the concept is sound, companies in practice often experience difficulties in achieving the objectives of both investment and financing, whether due to weak awareness of legal risk management or because of unsound internal management. It is therefore imperative to strengthen legal risk management in order to enhance corporate sustainability and reduce risks and costs.


Wu Fangyong, DOCVIT Law Firm
Wu Fangyong
Senior Partner

Corporate investment and financing, as the name implies, is a two-faceted activity. Investment refers to the enterprise positioning its internal assets to provide a good return in its ordinary course of business.

Financing refers to where an enterprise raises funds from internal or external sources after finding its working capital insufficient for operation. To the maximum possible extent, financing should meet an enterprise’s needs for working capital in the course of development, providing solid funding support for healthy growth.


Legal risks are often invisible, uncertain and complex, meaning many enterprises have a hard time identifying them to begin with, let alone applying proper prevention and control measures. While trading with other market players, enterprises inevitably engage in investment and financing activities. Therefore, the effective identification and prevention of legal risks that may arise in investment and financing is central to business sustainability.

  • Investment and financing entities.
    In investment and financing, problems may arise from illegal or unclear status of the investing and financing entity, or irregularities in the examination and confirmation of their qualifications. In these cases, companies may find their investing and financing activities in a disorderly state.
  • Contract management.
    An enterprise conducting investment and financing may find deficiencies or major loopholes in its executed contracts or agreements, leaving its investment and financing activities on the defence. Such problems include non-standard form or unclear validity of contract, unspecified method of financing, and lack of clarity in restrictive terms and conditions on the use of investment funds. As a result, the enterprise may see abnormalities in funding due to contract-related problems, which impair its normal business operations.
  • Security of funds.
    In the course of investment and financing, the guarantee provided by an investor may be found invalid, leaving the enterprise unable to repay loans when due or exposed to other liquidity problems.
  • Business operation and management.
    An enterprise may fail to change the business licence in accordance with the law, operate beyond the approved business scope, or lack a well-established organisational structure or policy system, which hinders its normal operations.
  • Risk warning mechanism.
    An enterprise may find its investment and financing interrupted by changes in the legal environment, or myriad other issues. Or the investors may suffer losses due to illegalities in the investment and financing activities. Many enterprises lack an early warning mechanism for such legal troubles.


A mechanism for legal risk prevention and control should be created. Prior to investment and financing, an enterprise should conduct research and analysis on the investing/financing entity, the intended method and other aspects, and have the legal and compliance work properly done for investment and financing details before proceeding with the proposal.

Enterprises should work out a reasonable plan for investment and financing while ensuring legality, reasonableness, compliance and security, taking into full account relevant laws, regulations and facts.

Before, during and after an investment activity, an enterprise should carry out standardised and systematic review and management to detect any legal risks that may arise in investment and financing and take precautions in a targeted manner.

A risk management body should be established. To effectively forestall and defuse risks, an enterprise should establish a legal risk management body or appoint full-time legal risk control staff equipped with necessary resources. Due to the great differences between sectors, it is necessary to make effective adjustments according to specific circumstances.

The duties of risk management should be clarified and relevant staff training should be organised to create a corporate mechanism for the delineation of duties, as well as checks and balances, thereby boosting the efficiency of legal risk control and the security of internal and external management.

A legal service partnership mechanism for investment and financing should be established. Enterprises can establish a legal service partnership mechanism with lawyers, engaging perennial legal advisers that provide a full package of legal services and supervision for their investment and financing activities including legal consulting, contract drafting and review, participation in negotiations and drafting of relevant documents.

In addition, law firms and relevant departments can work together to deal with important matters such as equity transfer, share capital increase, merger, spin-offs and enterprise liquidation.

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Investment and financing form an integral part of an enterprise’s business activities, so related risks should be well considered. Only by integrating legal risk management into the process of investment and financing, as well as the broader operation and management of an enterprise, can we identify, analyse and evaluate various legal risks in the activities, effectively prevent and resolve risks, and boost sustainability of the enterprise.

Wu Fangyong is a Senior Partner at DOCVIT Law Firm.

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