如何写英文版尽职调查报告.doc

morrison & foerster llp

Preliminary Due Diligence Document Request List

How to Write a Due Diligence Report for Investment Purposes

The Most Popular Drafting Model for Memos and DD Report

In the United States’ legal education or practices, IRAC structure is the most used writing process for each and every legal document. It is efficient, and very easily to be grasped.

I------issue
R-----rules and cases, background
A-----analysis
C----conclusion

We can compare this structure with our Chinese’s classical writing methods: qi(起), cheng（承）, zhuan（转）, and he（合）.

The Investment Model

An international investor wishes to put some capital money into a domestic company, we call it a target company, and after the target company earns enough profits, for instance, the company can make an IPO in China securities market, then the investor may withdraw it investment, plus the premium interests or profits from the company, by transferring the shares it has in the target company. It should be noted that in this process, the investor shall deal with the shareholders of the target company. At current China financial market, probably all the shareholders wish to go to the public market to attract more investment, so dealing with these shareholders is not a major problem. The major problem is how to avoid the legal and the financial risks in the investment. What if the investment has some legal obstacles that prohibit it from withdrawal? This is the key issue and the most important concern in the DD Report.

Definition

A due diligence report, also called DD Report, is a widely used legal document in today’s legal practice. Especially in international investment activities, DD Report can help the investor to make the right decision for its investment strategies.

What is a DD Report? We can define the legal document as the key and basic information about a target company’s finance and management. The information can show the risks or the benefits for the investments. Before taking any actions, a rational investor, of course including all the experienced ones, generally will retain a law firm or an accounting firm to do the report.

We can compare a DD Report with your personal diary. I write all the activities I did in one day into my diary, and for most of times, I only give a short summary of the most important things I had in this day. For instance, I do not write what I eat in a common day in my diary, but I will describe one dish in detail if I attend my friend’s marriage ceremony, if this dish impressed me so well. I mean whether it is very delicious, or it is very badly tasted. The reason is simple, it gives me some unusual experience, pleasant or unpleasant.

A DD Report shows us what we read and examined in the documents coming from the target company. We write what we saw in these documents and report them to our clients, just as we write what we experience in one day for our diary. Of course, since the documents are so big and we generally have to make most summaries for our writings. Occasionally, we just translate some of the key documents from Chinese into English and put them into our report.

Because I am a legal practitioner, I will explain the DD Report from a legal point of view. As a result, the DD Report for my client must show the most important investment risks.

Steps to Do the DD Report

Generally, if we wish to have a complete DD Report, the following four steps have to be followed. And a moderate DD Report usually will take us two to three weeks to finish.

Step One: Collect All the Information from the Target Company

At this step, we shall produce a Documentation Request List and ask the relevant legal documents from the company. I give you such an example as an attachment one. Let us go through the list very quickly, I am sure that after you have finished reading of this list, you can get a rough impression on a target company’s structure, and management system.

Step Two: Review the Documents and Produce a Question List

At this stage, we shall carefully read word by word, number by number, date by date, figure by figure, every of the delivered documents from the company, and ask questions in detail about the legality and clearness for them.

For example, if we see somewhere in one document is unclear because of the printing process, and then we shall request another clear copy of this document. The other example, if we miss one page of a contract, then we shall ask for the missing one from the company. Another example, if one certificate needs to be annually registered, and it is not for the past year, then we should ask when the certificate will be registered or examined this year.

Kindly remind the company to deliver the missing documents in a reasonable time. This process is very time-consuming. We shall keep alert on every suspicious point in the documents.

Step Three: Onsite Interview with the Officers of the Company

If the documents are complete and very sound, I mean, they can answer every question or solve the legal issues for the investment, this step can be deleted, or can be conducted through a telephone call. Although this doing can save much time for us, I personally and strongly recommend doing such an onsite interview. Not only may we promote or just establish better connections with the company as a future potential client for other deals, but we can personally see the whole process of the production or the management of the company. And we can get a rough impression on the fixed or other assets listed on the delivered documents.

Finally, we may also experience some local business culture, or just have a new taste of local foods.

Step Four: Draft and Produce the DD Report

Usually the first three steps will take us about one or one and a half week to finish, for a complex project, it may cost a month, or months. After we have finished the preparation process----I call the first three steps together----we can begin to draft and produce the report.

Although different law firms have different formats for different projects, the following table of contents summarizes the basic structure of the DD Report for a typical international investment.

Table of Contents

I. INTRODUCTORY REMARKS 4
1 Background 4
2 Scope of Review 4
3 Source of Information 4
II. EXECUTIVE SUMMARY 7
1 Overview 7
2 Legal Form 7
3 The IPO Plan 7
4 Loans and Guarantees 8
5 Environmental Compliance 8
6 Employment 9
7 Intellectual Property Rights 9
III. REVIEW AND ANALYSIS 10
1 Corporate Status 10
1.1 Legal Form 10
1.2 Company History 13
1.3 Registered Capital and Shareholding Structure 14
1.4 Articles of Association and Promoters Agreement 15
1.5 Corporate Governance 15
2 Shareholders and Affiliates 19
2.1 Shareholders 19
2.2 The Group 19
2.3 Other Shareholders 23
3 Material Contracts 25
3.1 Overview 25
3.2 Supplier Contracts 26
3.3 Sales Contracts 29
3.4 Connected Party Transactions 32
3.5 Loans Contracts and Guarantees 33
3.6 Other Material Contracts 34
4 Real Property 34
4.1 Land Use Right 34
4.2 Buildings 36
4.3 Mortgage Status 38
5 Business Assets 38
5.1 Production Equipment 38
5.2 Vehicles 39
5.3 Other Fixed Assets 39
6 Intellectual Property Rights 39
6.1 Trademarks 39
6.2 Technology 40
7 Human Resources and Employment 40
7.1 Employees 40
7.2 Labour Contract 41
7.3 Social Contribution 42
7.4 Trade Union 43
8 Environmental Protection 43
8.1 Pollutant Discharge Permit 44
8.2 Waste Water Treatment Plan 44
9 Litigation 46

Just as I said in the beginning of this lecture, we can divide the DD Report into four parts, see the table of contents, Part I is the issue and rule part, Part II give a short version of the DD Report, a summary or conclusion of all the key legal issues, Part III is the analysis part, giving the report in detail.

Problems needed to be Noticed

Research online or on other resources Please be noted that during the drafting process, we shall conduct the relevant legal research on the legality of one document or practice of the target company. Take one example, is it legal that the company does not need special waste water permit for its discharge of the waste water?

It is true that for a joint venture company, the foreign investor shall at least owns a 25% of the shares of the company?

Opinion v. Fact Avoid to give your personal opinion unless you have to do so in the DD Report, this would help you not to get trouble on professional issues. Try your best to write the report as a fact-finding process. Don’t not use such terms as “We think, I opine, or I am of opinion that…”

We are advised that If something missed in the documents, and it is important for the report, for instance, there may be some confidential information that the company does not wish to disclose to you, then you use “we are advised by Mr…..” or just say that this is a private or confidential information.

Charts and Tables Charts and tables can describe the documents very directly and figuratively, so make sure that you use them as possible as you can. Especially for the same kind of information, for example, for all the sales contracts, or for all fixed assets, the use of tables can save you a lot of time.

Key Terms’ Summary For important contracts, especially sales or purchase contracts, and loan agreement, certainly including the AOA---articles of incorporation, we need to summarize the key terms of them in the report. One may wonder which terms are the key terms.

We need to read these documents very carefully, theoretically to say, all the terms that may bring the legal risk to the investor are such key terms. I give you one example here.

Summary of an AOA

A brief summary of the major clauses of the AOA and its amendments is as follows:

1. Operational Term – [] has an indefinite operational term.

2. Establishment Mode – []was established by way of promotion. The promoters subscribe to all of the shares that should be issued by the company. Upon approval of the relevant governmental authorities, the company may be changed to be a company established by way of stock floatation.

3. Shares of the Company – All shares to be issued by [] shall be registered common shares. The shares of the same class shall have the same rights and benefits.

4. Shareholders’ Meeting – The shareholders’ meeting is the highest authority of the company. The shareholders’ meetings include annual meetings and interim meetings. The annual meetings shall be convened once a year and shall be convened within 6 months after the last fiscal year. The shareholders’ meeting shall exercise the following functions:

(1) Determining the company’s operational guidelines and investment plans;
(2) Electing and changing the directors and deciding the matters relating to their remuneration;
(3) Electing and changing the supervisors assumed by representatives of the shareholders and deciding the matters relating to their remuneration;
(4) Deliberating and approving reports of the board of directors;
(5) Deliberating and approving reports of the board of supervisors;
(6) Deliberating and approving annual financial budget plans and final account plans of the company;
(7) Deliberating and approving the company’s profit distribution plans and loss recovery plans;
(8) Making resolutions about the increase or reduction of the company’s registered capital;
(9) Making resolutions about the issuance of corporate bonds;
(10) Adopting resolutions about the merger, split-up, dissolution and liquidation of the company;
(11) Amending the articles of association of the company;
(12) Other matters that should be decided by the shareholders’ meeting pursuant to laws and regulations.

5. Board of Directors – The company shall set up the board of directors, which shall be responsible for the shareholders’ meeting. The board of directors shall be composed of 9 directors, including a chairman and a vice-chairman. The initial board composition shall be recommended by the promoters. The candidates for the later board shall be nominated by the previous board and elected and dismissed by the shareholders’ meeting. The chairman and vice-chairman shall be elected and dismissed by a majority of all the board members. The chairman of the board shall be the legal representative of the company. The directors shall serve a term of 3 years and may be re-appointed. The board of directors shall exercise the following functions:

(1) Convening the shareholders’ meetings and reporting thereto;
(2) Implementing resolutions of the shareholders’ meetings;
(3) Determining the operational plans and investment plans of the company;
(4) Working out the company’s annual financial budget plans and final account plans;
(5) Working out the company’s profit distribution plans and loss recovery plans;
(6) Working out the company’s plans on the increase or reduction of registered capital and the issuance of corporate bonds and other securities, as well as listing plans;
(7) Working out the company’s plans on significant purchase, purchase of the company’s shares or merger, split-up or dissolution;
(8) Deciding on the establishment of the company’s internal management departments;
(9) Employing or dismissing the company’s general manager, and, according to the nomination of the general manger, employing or dismissing the company’s deputy general manager(s), financial controller and chief accountant, and deciding on their remuneration and punishment;
(10) Employing or dismissing the secretary of the board of directors of the company;
(11) Working out the company’s basic management system;
(12) Working out amendments to the articles of association of the company;
(13) Listening to work report of the general manager of the company and supervise his work;
(14) Appointing directors and other senior management personnel which shall be dispatched by the company to enterprises to which the company is the controlling shareholder or a shareholder, or to the branches of the company;
(15) According to the needs of the company, the board of directors may authorize the chairman of the board to exercise part of the powers of the board of directors during its close period;
(16) Other functions as specified in the articles of association, laws and regulations and as authorized by the shareholders’ meeting.

6. General Manager – The general manager shall be responsible for the daily operation of the company and be responsible for the board of directors. The general manager shall serve a term of 3 years and may be re-appointed. The general manager shall have the following scope of authorities:

(1) Taking charge of the management and operations of the company, organizing the implementation of the resolutions of the board of directors;
(2) Organizing the execution of the company’s annual operational pla