Introduction

Legal due diligence is an indispensable procedure in the evaluation of potential risks and liabilities associated with business transactions, especially in the realms of mergers and acquisitions (M&A), investments, and financing transactions. This process requires a thorough assessment of a target entity or asset from a variety of legal perspectives to facilitate well-informed decision-making. The skills necessary for conducting comprehensive legal due diligence are sophisticated and vital for lawyers, trainees, and paralegals, yet they are often not covered in the curricula of law schools or legal practice courses in Vietnam.

Preparation Steps

The significance of the preparation phase is frequently underestimated by legal practitioners as they embark on the process of legal due diligence. A prevalent mistake is the assumption that due diligence on similar targets necessitates an identical set of skills, knowledge, and expertise. This often leads to starting from past due diligence report precedents under the false impression that they will be adequate for the current transaction.

Even when target entities in separate transactions exhibit similarities in operational size, business opportunities, and corporate structures, the due diligence findings can differ significantly due to various factors.

By rigorously adhering to the following preparation steps, legal practitioners can enhance their due diligence effectiveness, mitigating the risks and optimizing the outcomes of the proposed transactions.

  1. Identifying the Purposes of Legal Due Diligence: This requires an in-depth review of the term sheet, information memorandum, and any additional materials that provide context regarding the parties involved, the target, and the structure of the transaction.
  2. Determining Key Focus Areas: Once the purposes of the legal due diligence are identified, legal practitioners should outline the specific aspects requiring attention during the investigation. This strategic focus will be discussed more extensively in subsequent sections.
  3. Preparing an Information Request List: The information request list should target areas pertinent to the identified objectives of the legal due diligence, ensuring the investigation remains concentrated and efficient.

Identifying the Purposes of Legal Due Diligence

The findings of legal due diligence can vary significantly depending on the specific purposes driving the due diligence process. For the same target entity, the risks associated with providing financing may be materially different from the risks pertinent to acquiring the entity. Similarly, within analogous acquisition transactions, the risks pertinent to a minority stake acquirer can differ from those faced by a majority stake acquirer.

Typically, prior to commencing the due diligence process, preliminary information is available, including: (i) the information memorandum (IM) prepared by the seller, which provides an introductory overview of the target entity or asset; (ii) a signed or draft indicative offer, which includes a non-binding term sheet; and (iii) pertinent communications exchanged between the seller/borrower and the buyer/lender concerning the proposed transaction.

While the information provided in these preliminary materials is not exhaustive or definitive—being subject to variation or modification upon completion of the due diligence process—it is instrumental in focusing the due diligence on critical areas.

To effectively identify the purposes of legal due diligence, the following key questions should be considered:

  1. Nature of the Transaction: What type of transaction is being contemplated (e.g., lending transaction, acquisition of assets, acquisition of shares)?
  2. Parties to the Transaction: Who are the parties involved? Are they individuals or legal entities, and are they domestic or foreign?
  3. Sale Asset: What constitutes the sale asset (e.g., a minority stake or majority stake in a company, operational assets, immovable or movable assets, intellectual property rights)?
  4. Size of the Transaction: What is the scale or monetary value of the transaction?
  5. Implementation of the Transaction: Will the transaction be executed overseas or locally? What is the expected closing timescale of the transaction? How will the payment or disbursement be made?

By addressing these questions, legal practitioners can tailor their due diligence efforts to align with the specific objectives and nuances of the transaction at hand, ensuring a thorough and focused investigation.

(To be continued)