如何写英文版尽职调查报告

M O R R I S O N&F O E R S T E R L L P

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, al so 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.

Preliminary Due Diligence Document Request List

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

Preliminary Due Diligence Document Request List

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 Fou r: 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)

1Background (4)

2Scope of Review (4)

3Source of Information (4)

II.EXECUTIVE SUMMARY (7)

1Overview (7)

2Legal 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)

1Corporate Status (10)

1.1Legal Form (10)

1.2Company History (13)

1.3Registered Capital and Shareholding Structure (14)

1.4Articles of Association and Promoters Agreement (15)

1.5Corporate Governance (15)

2Shareholders and Affiliates (19)

Preliminary Due Diligence Document Request List

2.1Shareholders (19)

2.2The Group (19)

2.3Other Shareholders (23)

3Material Contracts (25)

3.1Overview (25)

3.2Supplier Contracts (26)

3.3Sales Contracts (29)

3.4Connected Party Transactions (32)

3.5Loans Contracts and Guarantees (33)

3.6Other Material Contracts (34)

4Real Property (34)

4.1Land Use Right (34)

4.2Buildings (36)

4.3Mortgage Status (38)

5Business Assets (38)

5.1Production Equipment (38)

5.2Vehicles (39)

5.3Other Fixed Assets (39)

6Intellectual Property Rights (39)

6.1Trademarks (39)

6.2Technology (40)

7Human Resources and Employment (40)

7.1Employees (40)

7.2Labour Contract (41)

7.3Social Contribution (42)

7.4Trade Union (43)

8Environmental Protection (43)

8.1Pollutant Discharge Permit (44)

8.2Waste Water Treatment Plan (44)

9Litigation (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.

Preliminary Due Diligence Document Request List

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.

Preliminary Due Diligence Document Request List

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 redu ction 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 mat ters 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 com posed 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 manag ement 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;

Preliminary Due Diligence Document Request List

(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 plans and investment plans;

(3)Drafting plans on the establishment of the company’s internal management departments;

(4)Drafting the company’s basic management system;

(5)Formulating the company’s co ncrete bylaws;

(6)Proposing to hire or dismiss the company’s vice manager(s) and person in charge of finance;

(7)Drafting the rules of the company on employment salaries, benefits, rewards and punishments,

and deciding on the employment and dismissal of employees of the company;

(8)Recommending to the shareholders’ meeting and the board of directors the professional

advisors to be engaged by the company;

(9)Proposing to convene the interim meetings of the board of directors;

(10)Other powers authorized by the board of directors.

7.Board of Supervisors – The company shall set up a board of supervisors, which shall be composed of

5 supervisors. 2 supervisors shall be representatives of the employees of the company. The

supervisors shall serve a term of 3 years and may be re-appointed. The board of supervisors shall exercise the following functions:

(1)To check the financial affairs of the company;

(2)To supervise the acts of the directors, managers and other senior management personnel that are

in violation of the laws, regulations or the articles of association when executing their

duty-related acts;

(3)To demand any director, manager or other senior management personnel to make corrections if

his act has injured the interests of the company, and if necessary, to report such act to the

shareholders’ meeting or the relevant governmental authority in charge;

(4)To propose to call interim shareholders’ meetings;

(5)To present on the meetings of the board of directors;

(6)Other duties as set out in the articles of association or authorized by the shareholders’ meeting.

8.Profit Distribution – After payment of income tax, the profits of the company shall be distributed in

the following sequence:

(1)To cover losses carried over from previous years;

Preliminary Due Diligence Document Request List

(2)To allocate 10% as statutory common reserve;

(3)To allocate 5-10% as statutory welfare reserve;

(4)To allocate discretionary welfare reserve according to the resolutions of the shareholders’

meeting;

(5)To distribute to the shareholders

List of All Delivered Documents Be sure to make such a list as an important attachment, and let the investor know that which kind of documents you have read and examined for the report, and they may request some of the documents from you if necessary.

I also bring to you a formal DD Report, each of you can take a look at it, and then give it back to me after class.

Preliminary Due Diligence Document Request List

ATTACHMENT ONE

A Shortened DD Report for Reference

S T R I C T L Y P R I V A T E&C O N F I D E N T I A L

[ date ]

Legal Due Diligence Report

O N

[ ] Co., Ltd.

Preliminary Due Diligence Document Request List

Preliminary Due Diligence Document Request List Glossary of Terms and Abbreviations

Term Definition

ABC: Agricultural Bank of China

AOA: Articles of association of Sihai

BOC: Bank of China

Preliminary Due Diligence Document Request List

REPORT ON LEGAL DUE DILIGENCE

I.INTRODUCTORY REMARKS

1．Background

This legal due diligence is conducted by [ ] in view of the proposed investment from [ ] in [ ] Co., Ltd. (hereinafter “[]”)by equity investment and loan. [] is a company validly incorporated and existing under the laws of the PRC.

We have been requested to conduct a legal due diligence on [] in light of the above transaction, and this report summaries the results of the legal due diligence.

2．Scope of Review

The scope of our review in the legal due diligence is set out in our proposal dated [ ]. The scope of this Report covers the following aspects:

●General corporate status and company history

●Shareholding structure and general information about the shareholders

●Material contracts (including sales contracts, supply contracts, other long-term contracts)

●Status of land use rights and real property

●Title and ownership of business assets and existence of encumbrances

●Intellectual property rights

●Employment issues including pension and other social contributions

●Legal environmental compliance (i.e. whether the Company has required licenses)

●Any outstanding litigations or legal proceedings

3．Sources of Information

This report is prepared on basis of the following sources of information:

Documents

Preliminary Due Diligence Document Request List

A complete list of the documents provided to us is enumerated in Appendix 1. Copies of the documents may be provided upon request. [] did provide us with copies of most documents requested.

The major documents we requested but not provided by [] are as follows:

●employment contracts between [] and its management personnel;

●guarantee contracts between [ ] and ABC;

●documents and governmental approvals relating to the waste water treatment plant of [], except for

the filing certificate and turn-key contract.

To undertake our review and examination of the documents, we assume without further inquiry that 1) the copies of the documents submitted to us conform to the original versions of the documents; 2) no further amendments to such documents have been undertaken, unless otherwise provided; and 3) the signatures, chops and seals on all documents bearing signatures, chops or seals are genuine and were legally made.

Interviews with the Management

We visited [] on [] 200[] and had interviews with the following management personnel of [] during our field work and followed by a number of telephone conversations with [ ], the controlling shareholder and Chairman of the Board, and Mr. [ ], Executive Deputy General Manager.

The general impression we received from the management in the course of conducting the interviews was that they were keen to assist and forthcoming in relation to the information required.

Preliminary Due Diligence Document Request List

II.Executive Summary

1.Overview

[] is a joint stock company incorporated on [], but its history may be traced back to [] established in 1996.

It has a registered capital of RMB [] million. It engages in business of production and sale of [].

[] is a major-held subsidiary of [] Group, with Mr. [] being the ultimate controlling shareholder. Despite being a member of the [] Group, Sihai does not have many connected transactions. In fact, [] has a rather simple corporate structure with no subsidiaries or branches.

On the basis of the legal due diligence, [] is a fairly well-organised and functioning company. It has obtained the necessary licenses and approvals required to carry out its business. It is to a large extent compliant with legal requirements in its operation. The company’s long-term plan to achieve IPO has contributed to the high level of compliance.

Despite the overall legal compliance of [], we have identified a number of legal issues and risks in the due diligence. A summary of the major legal issues is as follows:

2.Legal Form

[] is organised as a joint stock company, which has higher thresholds for incorporation than those for a limited liability company according to the PRC Company Law. Any foreign invested joint stock company requires the approval from the Ministry of Commerce (“MOFCOM”). Accordingly, if [] participate in [], it will become a foreign invested joint stock company, so the approval from MOFCOM will be required. Generally it takes at least 2-3 months to obtain the MOFCOM approval.

3.The IPO Plan

Since its official formation in [], it has been the intention for [] to list its shares in a stock exchange.

Such intention has played an important role in shaping the company through out its history. At present [] has successfully passed the “guidance period”required by CSRC and has engaged financial and legal advisors working on the IPO. It has a timetable for the listing within [].

Such time schedule is of direct relevance to the transaction as the entry of [] must be completed before [] submits its IPO application. This will have direct impacts upon the negotiation process between the parties.

Preliminary Due Diligence Document Request List

If [] is unable to participate as planned, a post-IPO entry would be much more uncertain and complex because the legal requirements and procedures for foreign investment into a listed Chinese company are far more complicated. Naturally the IPO would also affect the price for [] to invest in the company.

If []conducts the IPO, the shares subscribed by [] before the IPO will be subject to a lock-up period of one year.

4.Loans and Guarantees

Based on our investigation, [] is a heavily indebted company. It has outstanding loans from a number of banks (main banks are ABC and BOC) with a total amount of RMB []. All loans will mature in [ ] so that [] has to refinance such loans.

The bank loans of []are secured by mortgages over assets and properties as well as guarantees from its shareholder [] Group and Mr. [ ]. In fact all the land use rights, buildings and a large part of the production equipment of [] are mortgaged to banks. The management were hesitant to disclose details as to guarantees provided by Mr. [ ] personally.

The bank loan conditions appear to be on a standard commercial basis. Almost all the loan contracts contain a clause that any restructuring or joint venture requires prior bank approval.

Accordingly [] shall obtain consent from its lending banks for the foreseen transaction.

Some contracts of [] with the key customers also contain similar clause.

5.Environmental Compliance

As we are not environmental specialists we do not conduct environment inspections but only requested [] to provide us environmental related documents and records.

[] generates waste water and waste gas during its production process, but it does not appear to fully comply with the environmental requirements. It does not hold a Pollutant Discharge Permit, nor does it pay discharge fees to the environmental authority.

[] has constructed a waste water treatment plant, which is still under inspection and final acceptance.

Preliminary Due Diligence Document Request List

6.Employment

[] has a total of [] employees as of [ ]. It has individual employment contracts with the employees, terms and conditions of which basically comply with PRC law. [] does not have any confidentiality or non-compete agreement with any of the employees, nor does the employment contracts contain such clauses.

It is noteworthy that [] only pays pension funds for its employees, but fails to pay the other legally required social contributions, including medical insurance, unemployment insurance and worker’s injury insurance. Failure to pay social contributions for its employees is not in compliance with the requirements of the Chinese labour law and may be subject to penalties by labour and social contribution authorities.

Nor does [] pay housing fund for its employees – its argument being that it has built and sold apartments to majority employees and the rest receives a monthly housing allowance.

According to law, however, the housing arrangement does not justify the failure of [] to pay housing fund for its employees.

7.Intellectual Property Rights

[] has not registered any patents. It has two registered trademarks, both of which were transferred to it from its parent [] Group. The trademark registrations are valid until [] and [] respectively.

One of the trademarks is no longer used by [] in its operation. Under Chinese trademark law, if a registered trademark has not been in use for three consecutive years, it may be revoked or cancelled by the Trademark Office. The other trademark is very similar to the one used by the [] Group. But there is no trademark license between the two companies.

Preliminary Due Diligence Document Request List

III.Review and Analysis

1.Corporate Status

1.1Legal Form

1.1.1Business License

We received a copy of the Business License of [], which contains the following information:

The Business License appears to be in the normal order and evidences that [] is validly established and duly existing under PRC law.

1.1.2Operation-related Licenses

(A)Sanitary License

(B)High-tech Enterprise Certificate and High-tech Product Certificate

(C)ISO 9001:2000

1.1.3Other Corporate Registrations

Preliminary Due Diligence Document Request List

In addition we received a copy of the following registration certificates of []:

●Organisation code certificate

●State tax registration certificate

●Local tax registration certificate

●Customs self-declaration registration certificate

The above registrations are required for a PRC company to conduct its business. We have reviewed these corporate registrations and confirm that they appear to be valid and in normal order. English translations of these certificates are attached hereto as Schedule 1.1.3.

1.2Company History

Shareholder Share ratio

[] Group

[]

Mr. []

1.3Registered Capital and Shareholding Structure

1.3.1Registered Capital

1.3.2Shareholding Structure

The shareholding structure of [] is set out in the following chart:

Shareholder Shares

Before Capital

Increase

Percentage

Before Capital

Increase

Shares

after Capital

Increase

Percentage

after Capital

Increase

Preliminary Due Diligence Document Request List

Total 99,000,000 100% 100%

1.4Articles of Association and Promoters Agreement

1.4.1Articles of Association

We received a copy of the articles of association (“AOA”) of [] and its amendments.

The original AOA was signed by all the shareholders at the incorporation of the company on []. Based on our review, the AOA is based on a standard form of articles of association for joint stock companies.

The AOA contains normal clauses and provisions typical of such documents and comply with Chinese laws and regulations.

The original AOA was amended by the shareholders on [] to reflect increase of the registered capital from RMB [] to [] million. A brief summary of the major clauses of the AOA and its amendment is attached hereto as Schedule 1.4.1.

1.4.2Promoters Agreement

We also received a copy of the Promoters Agreement dated [], which is an agreement among the five initial shareholders (i.e.promoters). The Agreement provides that the promoters subscribe all the shares issued by [] and any party failing to subscribe the shares shall be liable for the breach. The terms and conditions of the Agreement are fairly common in nature. We understand that the Agreement has been performed by the promoters and there are no claims or disputes related thereto.

1.5Corporate Governance

As a joint stock company, []’s corporate governance structure is composed of the following layers:

●Shareholders’ meeting

●Board of directors

●Board of supervisors

●Management

1.5.1Shareholders’ Meeting

Preliminary Due Diligence Document Request List

1.5.2Board of Directors

The board of directors is the decision-making authority for daily management and operation matters.

The board of directors is composed of [] directors, including 1 chairman and 1 vice-chairman. The chairman is the legal representative of the company. The directors shall serve a term of 3 years and may be re-appointed. Details of the powers of the board of directors are set out in Schedule 1.4.1.

Pursuant to the AOA, the initial board members shall be recommended by the promoters, subsequently the candidates shall be nominated by the incumbent board and elected by the shareholders’ meeting.

The chairman and vice-chairman shall be elected and dismissed by the majority of the board members.

A list of the current board members is as follows:

Position Name

Chairman Mr.

Directors* Mr

Mr.

Ms.

Mr.

Mr.

Independent Director Mr.

Mr.

Ms.

1.5.3Board of Supervisors

[] has a board of supervisors composed of 5 supervisors, including 1 chairman and 2 representatives of the employees:

Position Name

Chairman Mr.

Directors Ms.

Mr.

Ms.

Mr.