In M&A or investment transactions, a legal due diligence report is a key document to help the buyer or investor understand the potential legal risks. Presenting this report in a professional and effective manner not only helps to communicate information clearly to readers, but also shows the capacity and prestige of legal practitioners. In this article, we will give some important experiences for drafting and presenting legal due diligence reports to help improve the quality of legal due diligence reports of M&A transactions in the coming time.
1. Reasonable and clear report structure
A professional legal due diligence report needs to have a coherent and clear structure, making it easy for readers to grasp the content. First, the report should have an introduction that introduces the purpose, scope of work (Terms of Reference), and the context of the transaction. Immediately afterwards, a brief Executive Summary should present key findings and salient conclusions. Next, the report body is divided into sections of analysis according to topics such as: Corporate Legal and Governance, Commercial Contracts, Real Estate, Labor, Legal Compliance, Intellectual Property, Finance, etc. depending on the field of appraisal. Finally, the report may have an appendix that provides detailed data or further explanations for complex issues.
With this scientifically organized layout, readers, whether experts or non-legal experts, can easily follow the logical flow of the report and find the information they are interested in quickly.
In addition, heading and hierarchical numbering (e.g., 1, 1.1, 1.2, 2, 2.1,...) will help make the report clearer. Each main idea should correspond to a heading, and supporting small ideas are under the subheading. Investing in building a clear outline before writing a report and a coherent structure will be the "skeleton" that helps the entire report be presented in a way that is easy to understand and receptive to readers.
2. Present the risk section that is always tied to the recommendation
An effective due diligence report not only lists the legal issues/risks detected, but more importantly recommends the corresponding course of action or recommendations for each of those risks. Readers often expect a legal professional to not only point out the problem, but also advise them on what they need to do about it. Therefore, presenting each risk accompanied by recommendations will make the report more actionable and practical.
For example, the appraisal report should clearly state: recommend the buyer to request compensation clauses. These recommendations are clearly framed in the Project Summary and repeated in the item-by-item details. This is very useful for the buyer. Because they not only know there is a problem, but they also know how to handle or mitigate the risk. In terms of presentation, separating problems and recommendations will make it easier for readers to remember the action to take. We think this is a plus point about the consulting style of the appraisal report. Therefore, when writing a legal due diligence report, the writer can completely present each legal issue with recommendations in the form of: (1) Description of the problem/risk, (2) Possible consequences, and (3) Recommendation of solutions. This presentation helps readers not only understand the problem but also grasp the action orientation, increasing the practical value of the report.
3. The report should be focused on the point with a concise but complete presentation
The volume of legal information during due diligence can be huge, but not all of it needs to be included in the report. A professional report needs to be concise, concise but still full of important content. The art lies in distilling the really important points (the "red flags") to present, rather than spreading out every little detail. This helps readers not to be "overwhelmed" but still understand the main risks.
Although concise, the report still ensures that important content is not missed. Each area is reviewed at a level sufficient to detect problems if any. For example, in the appraisal of a commercial contract, if the majority of customer/supplier contracts are normal except for a few special contracts with adverse clauses, the report will only point out those "exceptional" contracts and explain why they are of interest. instead of listing all the contracts viewed. This concise way of writing not only saves reading time but also emphasizes the right place to press.
Report writers should prioritize quality over the amount of information in the report. Focus on risks that have a significant impact on a trade's or investor's decisions. Avoid getting bogged down in trivial details or repeating obvious information. Selective information doesn't mean ignoring the problem. Make sure all material risks are addressed, but briefly to the point. A brief but complete report will make a professional impression and help readers grasp the main message faster.
4. Clarify the scope and limitations of the due diligence report
In the process of legal due diligence, there are always certain limitations: it may be in terms of time, scope of documents, or access to information. Therefore, a professional report needs to clearly state the scope of the appraisal and the limitations (if any) to manage reader expectations and avoid misunderstandings about the level of assurance of the report.
The report should list the sources reviewed and imply that the conclusions are based on the scope of the document. More importantly, the report writer needs to be transparent in pointing out the limitations encountered, such as not having enough time to directly approach the Board of Directors of the target company to clarify external expenses without invoices. Instead of dodging, the report should frankly mention the restrictions on access to information, documents, and verification. This presentation helps the buyer understand that there is a risk due to a lack of information, and the reader also understands that the consulting team has done its best in the context of a tight time.
Highlighting the limitations of due diligence is also to remind the reader that the due diligence report is not an absolute guarantee. If there are areas that are not subject to in-depth scrutiny such as environment, taxation, etc. if they are outside the scope of the requirements, the person presenting the report should also state this. Setting due diligence limits helps prevent liability risks for the reporting party, and helps the reader decide where to be cautious so that they can consider further due diligence or accept the risk.
The transparency of the scope and limits of the due diligence in the report does not detract from the value of the report, on the contrary, it shows professionalism and honesty, helping readers to understand the correct and full context of the conclusions made.
Source: Firmroom
5. Honesty and transparency in reporting are always a priority
The legal due diligence report should be written in an honest, objective and transparent tone. This means: reflecting the true nature of the problem, not "pink" or hiding risks; at the same time, express in an objective and unbiased manner. Honesty and transparency helps build trust with readers, often customers and business leaders, that they are getting a true picture of the legal situation of the target.
Always maintain an honest and transparent tone in the report. Don't ignore or mitigate the level of risk for fear of "losing the heart" of customers or bad information. If a serious problem is found, make it clear with supporting facts. At the same time, keep an objective attitude: only present facts and evaluate professionally, do not use emotional or biased language. An honest report will help clients have more confidence in the recommendations of lawyers/law firms, and build a long-term reputation.
6. Understand who the appraisal report reader is
Not all readers of the due diligence report have a legal background. Often, the board of directors of the enterprise, the investor or the finance department will be the recipient of the due diligence results. Therefore, the ability to communicate clearly with non-legal readers is an important skill. Reports should be written in easy-to-understand language, limiting overly in-depth legal jargon, or if used, explaining. The goal is to convey the legal implications without confusing the reader.
Firstly, the report should have a definition of terms and abbreviations from the beginning (usually in the Terms of Reference section or Appendix), listing abbreviations and definitions with clear explanations. This ensures that throughout the report, the reader is not confused about the technical concepts mentioned.
Secondly, writers should add appendices that explain background knowledge for complex problems. For example, there should be an Appendix summarizing the situation of insolvency and change of control. This "background explanation" appendix helps non-professional readers understand how the pension fund will be affected if the company goes bankrupt. This shows the reader-oriented orientation of the report that not everyone understands the law by default, but actively provides information to fill the knowledge gap for readers.
Third, the language in the report is kept direct, clear and easy to understand. The sentences are relatively short, avoiding circular expressions. When it comes to a legal or contractual clause, the report should interpret the meaning rather than criticize the verbatim wording. For example, instead of simply stating "Article 5.2 of Contract X provides for the right to terminate the contract", the report may interpret: "Contract X allows the counterparty to unilaterally terminate if event Y occurs, this is a risk for the buyer because...". This interpretation helps people who are not familiar with the law also understand the core issue.
Finally, the presentation also supports communication: the report should use multiple headings, numbering, bullet points, tables, and diagrams to visualize the information. Tables such as the "risk matrix" presented in columns such as: Problem – Risk – Solution – Comment will make it easy for readers to follow and compare the main points. This is a very effective way of presenting to the manager, helping them at a glance to grasp the main idea.
In conclusion, drafting a professional and effective legal due diligence report requires a combination of solid legal expertise and excellent presentation skills. Legal due diligence reports, after all, are the bridge between in-depth legal knowledge and business decisions. Presenting the report in a professional and effective manner will help business leaders make decisions based on clear information and with specific solutions. That is the greatest value that a quality legal due diligence report brings.
Lawyer Nguyen Van Phuc
HM&P Law Firm
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