Reflections from an energy and petrochemical M&A transaction: why the value of due diligence lies not in the number of risks identified, but in how effectively those risks are translated into transaction advantages for the buyer.
I recently completed a legal due diligence (“LDD”) report for an energy and petrochemical M&A transaction.
While the experience is still fresh, I wanted to capture a few reflections — not only as a personal record, but also in the hope that they may be useful to fellow lawyers, investors, and professionals involved in M&A transactions.
This was one of the larger due diligence projects I have independently led to date. The target company operated in a highly regulated, asset-intensive industry, with an estimated valuation of several billion RMB. The scope of review covered a wide range of areas, including land use rights, manufacturing facilities, production equipment, hazardous chemicals operations, environmental compliance, workplace safety, financing arrangements, and other operational matters.
One key takeaway from this project is:
The value of legal due diligence is not measured by the number of risks identified, but by how effectively those risks can be translated into transaction advantages for the buyer.
As buyer’s counsel, I believe that every dollar spent on legal fees should contribute to a better investment decision. In many cases, protecting a client’s interests does not start at the negotiation table — it starts with identifying the right issues early and presenting them clearly in the due diligence report.
Below are a few observations from this project.
1. BEFORE LOOKING AT PROFITABILITY, ASK WHETHER THE BUSINESS CAN CONTINUE OPERATING
When evaluating an acquisition target, buyers often focus on financial performance, revenue, profitability, and growth potential. These factors are undoubtedly important.
However, for businesses operating in highly regulated industries such as energy and petrochemicals, one of the first questions legal counsel should consider is not financial — it is operational: can the business continue operating in compliance with applicable regulations after closing?
In reviewing the data room, one of the first areas I typically examine is the company’s licenses and permits, including:
- Work safety permits;
- Hazardous chemicals operation licenses;
- Pollution discharge permits;
- Special equipment registrations;
- Major hazard source filings.
However, holding a valid permit today does not necessarily mean the business can continue operating without issues in the future. Key questions include:
- Has the company expanded production capacity without updating relevant approvals?
- Have manufacturing processes changed?
- Has the company experienced environmental penalties or safety incidents?
- Are critical licenses approaching expiration?
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