HowtoWriteaDueDiligenceReport如何写尽职调查报告.docx

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1、morrison & foerster llpPreliminary Due Diligence Document Request ListHow to Write a Due Diligence Report for Investment PurposesThe Most Popular Drafting Model for Memos and DD ReportIn the United States legal education or practices, IRAC structure is the most used writing process for each and ever

2、y legal document. It is efficient, and very easily to be grasped.I-issueR-rules and cases, backgroundA-analysis C-conclusionWe can compare this structure with our Chineses classical writing methods: qi(起), cheng（承）, zhuan（转）, and he（合）.The Investment ModelAn international investor wishes to put some

3、 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 trans

4、ferring 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

5、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.DefinitionA due di

6、ligence report, also called DD Report, is a widely used legal document in todays 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 ke

7、y and basic information about a target companys 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 t

8、he 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

9、 describe one dish in detail if I attend my friends 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

10、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

11、, 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

12、ReportGenerally, 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 CompanyAt this step, we shall produce a Documentation Request List

13、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 companys structure, and management system.Step Two:

14、 Review the Documents and Produce a Question ListAt 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 som

15、ewhere 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 reg

16、istered, 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 docum

17、ents.Step Three: Onsite Interview with the Officers of the CompanyIf 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 mu

18、ch 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 compa

19、ny. 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 ReportUsually the first three steps will take us about one or

20、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 foll

21、owing table of contents summarizes the basic structure of the DD Report for a typical international investment.Table of ContentsI.INTRODUCTORY REMARKS41Background42Scope of Review43Source of Information4II.EXECUTIVE SUMMARY71Overview72Legal Form73The IPO Plan74Loans and Guarantees85Environmental Com

22、pliance86Employment97Intellectual Property Rights9III.REVIEW AND ANALYSIS101Corporate Status 101.1Legal Form101.2Company History131.3Registered Capital and Shareholding Structure141.4Articles of Association and Promoters Agreement151.5Corporate Governance152Shareholders and Affiliates192.1Shareholde

23、rs192.2The Group192.3Other Shareholders 233Material Contracts253.1Overview253.2Supplier Contracts263.3Sales Contracts293.4Connected Party Transactions323.5Loans Contracts and Guarantees333.6Other Material Contracts344Real Property344.1Land Use Right344.2Buildings364.3Mortgage Status385Business Asset

24、s385.1Production Equipment385.2Vehicles395.3Other Fixed Assets396Intellectual Property Rights396.1Trademarks396.2Technology407 Human Resources and Employment407.1Employees407.2Labour Contract417.3Social Contribution427.4Trade Union438Environmental Protection438.1Pollutant Discharge Permit448.2Waste

25、Water Treatment Plan449Litigation46Just 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

26、is the analysis part, giving the report in detail.Problems needed to be NoticedResearch 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

27、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 s

28、o 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. Dont 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

29、 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 fi

30、guratively, 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 cont

31、racts, 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 t

32、o the investor are such key terms. I give you one example here.Summary of an AOAA 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 t

33、o 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

34、 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 month

35、s after the last fiscal year. The shareholders meeting shall exercise the following functions:(1) Determining the companys operational guidelines and investment plans;(2) Electing and changing the directors and deciding the matters relating to their remuneration;(3) Electing and changing the supervi

36、sors 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 plan

37、s and final account plans of the company;(7) Deliberating and approving the companys profit distribution plans and loss recovery plans;(8) Making resolutions about the increase or reduction of the companys registered capital;(9) Making resolutions about the issuance of corporate bonds;(10) Adopting

38、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

39、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

40、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

41、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

42、s annual financial budget plans and final account plans;(5) Working out the companys profit distribution plans and loss recovery plans;(6) Working out the companys plans on the increase or reduction of registered capital and the issuance of corporate bonds and other securities, as well as listing pl

43、ans;(7) Working out the companys plans on significant purchase, purchase of the companys shares or merger, split-up or dissolution;(8) Deciding on the establishment of the companys internal management departments;(9) Employing or dismissing the companys general manager, and, according to the nominat

44、ion of the general manger, employing or dismissing the companys 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 companys ba

45、sic 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 enter

46、prises 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;(

47、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 sh

48、all 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 companys annual operational pla