Practical Guidance
M&A Due Diligence Issues Reporting Template
The sample below is a due diligence issues report for a mergers and acquisitions (M&A) transaction. The acquirer’s legal counsel may prepare an issues report, sometimes called a “red flag” report, for the acquirer to summarize key issues or actions following the counsel’s due diligence of the target company. Issues reports are not intended to cover every document reviewed or issue discussed during due diligence, but rather to provide a succinct explanation of key legal issues that the acquirer should be aware of and may need to address as part of their contract management process. This sample issues report assumes the target company in an M&A transaction is a corporation and assumes that the transaction will be structured as a stock purchase.
[Download this sample due diligence issues report as a pdf.]
Sample due diligence report cover letter
Due Diligence Issues Report
[Project Name]
[Date]
Dear [Client]:
This report (the “Report”) has been prepared by [Law Firm LLP] (“Firm”) exclusively for [Client, Inc.], a [[State] corporation] (“Client”), in connection with its proposed acquisition[, through its wholly-owned subsidiary [Acquirer, Inc.], a [[State] corporation] (“Acquirer”),] of all of the issued and outstanding capital stock of [Target, Inc.], a [[State] corporation] (“Target”). This Report is for the exclusive use of Client in connection with Acquirer’s proposed acquisition of Target (the “Acquisition”) and may not be used or relied upon for any reason by any other person or party.
In consultation with Client, we have limited our review to information made available by Target and its advisers in a virtual data room through [date of review] [and [describe non-data room material reviewed, such as “information in certain lien and judgment searches identified herein”]] (collectively, the “Materials”).
As requested by Client, this Report does not provide a summary of all information that we have reviewed in the context of the Acquisition. Rather, this Report highlights legal issues we identified during our review of the Materials and our judgment and analysis of the proposed method to remedy or address such issues. Specifically, our review has been focused on [list areas]. We specifically excluded from our review the following areas, which Client has advised us will be reviewed by other advisers: [list areas]. [Include any other exclusions or limitations of the Report].
We conducted our review in light of applicable U.S. federal, state, [and municipal] laws, which include the laws of the [States/Commonwealths] [and [insert municipal laws]]. [Additionally, we reviewed certain Materials with respect to [insert specific non-U.S. or international jurisdictions], as specifically noted in our Report.
As previously discussed and agreed to with Client, for review of [certain of] the Materials, we have relied upon [name of virtual data room platform] [and [name of other due diligence review technology]] to assist with our review.]
We recommend that Client review certain issues further, as noted below in the fourth column of our Report.
For more information on the contents of this Report, please contact the undersigned.
Kind regards,
[Lawyer] for
[Law Firm]
[Download this sample due diligence issues report as a pdf.]
What to include in a due diligence issues report
Generally, materials reviewed during due diligence fall into the following categories, which can be used to organize issues flagged within the report:
- Corporate formation and charter documents.
- Stock certificates and ledgers.
- Corporate records, meeting minutes, written consents, and other authorizing resolutions.
- Officers and directors; elections of the same.
- Management structure and shareholders agreements.
- Financial records.
- Tax matters.
- Loans and debt obligations.
- Covid-19 impacts, PPP loans, and loan forgiveness.
- Real property.
- Leased property.
- Equipment leases.
- Personal property.
- Intellectual property.
- Material contracts, including subcontracts, key customers, vendors, and suppliers.
- Government contracts, if applicable.
- Pending or threatened litigation.
- Lien and judgment searches.
- Regulatory matters, audits, and investigations.
- Employees (full- and part-time), independent contractors, and consultants.
- Employee handbooks, manuals, and other employment policies.
- Employee benefits, labor, and other employee matters.
- Pending or threatened employment litigation.
- Environmental matters.
- Data privacy and security issues, cybersecurity policies and procedures, and data privacy or cybersecurity incidents.
- Other issues/red flags.
Many of the categories can be updated to apply to another type of target entity, like limited liability companies (LLCs) and limited partnerships (LPs), and the contents of the report can be updated to apply to a different transaction structure, like asset purchases.
For each legal issue that you flag for the acquirer, include a short description of the following, as applicable:
- Legal issue/discussion item.
- Next steps/action items.
- Supplemental diligence requests.
Download our M&A due diligence issues reporting template for a ready-to-use format that covers all the topic areas above.
A smarter, faster approach to contract management
Thorough due diligence is imperative to M&A transactions because it gives corporations the opportunity to independently and objectively spot “red flags” and address legal risks before a contract is finalized. But conducting meaningful and effective due diligence can be a complex, time-consuming, and labor-intensive part of the contract management workflow.
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