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Determining Key Focus Areas in Legal Due Diligence

A pivotal element of legal due diligence is the capacity to swiftly and accurately analyse extensive information. Legal practitioners are tasked with the examination of contracts, financial statements, compliance documents, and other pertinent records. Proficient analytical skills are essential for identifying inconsistencies, potential legal risks, or obligations not immediately apparent. To ascertain the key focus areas pertinent to the proposed transaction and the client’s interests, the following questions should be considered:

1. Core Business Activities of the Target: Understanding the target company’s or asset’s core activities is critical, as service and manufacturing companies are governed by distinct legal frameworks. For instance, service companies typically do not possess land use rights or real estate but rely significantly on intangible assets like intellectual property and personnel. In contrast, if the target is involved in manufacturing, a comprehensive review of documents related to real estate, construction, and environmental compliance is essential.
2. Transaction Type and Structure: The nature and structure of the transaction heavily influence the focus areas of legal due diligence. For example, if the goal is to identify red-flag issues for a foreign lender contemplating a convertible loan to a Vietnam-based borrower secured by shares and assets, priorities should include foreign exchange controls, corporate law, foreign investment regulations, and security transactions. Employment and intellectual property, while important, may not take precedence.
3. Development Status of Existing Projects: The stage of development of a target company’s projects dictates the scope of the legal due diligence. If a company is in the early stages of a specific investment project, focusing on approvals, land compensation, recovery procedures, and construction contracts is paramount. Conversely, concerns related to operations such as employment, customer, and supplier agreements become relevant only as the project progresses towards operational phases.

Preparing an Information Request List (IRL)

Upon defining the objectives of legal due diligence and identifying key legal areas, practitioners must craft an initial IRL tailored to the specific transaction. It is a common oversight for law firms to deploy a generic IRL template across varied transactions without considering the purpose and focused areas of due diligence.

The IRL’s aim is to facilitate the collection of essential information and documents from the target, seller, or borrower. A broad IRL can be counterproductive, causing undue preparation time for the responding party. Conversely, an overly narrow IRL risks omitting critical areas, necessitating extensive follow-ups.

Therefore, a well-crafted, transaction-specific IRL ensures that legal due diligence is both cost-effective and time-efficient, allowing for a thorough examination aligned with the unique considerations of the deal at hand.

(to be continued)

Understanding the Legal Due Diligence Skills (Part 1)