In the third quarter of last year, a single private equity firm commissioned four separate legal due diligence reports in Colombo that totaled 842 pages of text, including 112 pages of appendices. These reports covered a telecommunications infrastructure company, a regional logistics provider, a garment manufacturer with three factories in the Gampaha District, and a boutique hotel chain with properties in Galle and Weligama. The total legal fee for these documents exceeded eleven million rupees.

The meeting room on the thirty-fourth floor of the Colombo tower had glass walls that faced the Indian Ocean. Outside, the monsoon rain fell in grey sheets, blurring the line between the sea and the sky. Inside, the air conditioning was set to nineteen degrees Celsius. On the mahogany table sat a stack of documents bound in black plastic combs. Anders, the deal lead for a Scandinavian private equity fund, sat at the head of the table. He had a fountain pen in his hand and a yellow highlighter tucked behind his ear.

He had printed the executive summary of the logistics provider’s report. It was nineteen pages long. On the top right corner of the cover page, he had circled the number 147 in red ink. Beside it, he had written the word “thorough!” in capital letters.

The Virtual Data Room

Sanjeevani sat across from him. She was the senior associate who had spent the last twenty-four nights reviewing the virtual data room. She knew the contents of the 1,402 files stored in that digital space. She knew that folder 4.2.1 contained a scan of a land registry entry from 1974 that was partially obscured by a tea stain. She knew that folder 7.8 contained three hundred and twelve employment contracts, of which forty-four were missing the employee’s signature on the final page.

She also knew that item 88 on the list of 147 findings was the only one that truly mattered to the future of the transaction. Item 88 was marked in amber. It concerned a change-of-control clause in the company’s primary operating license issued by the Board of Investment. The clause stated that any change in ownership exceeding twenty-five percent would require the written consent of the Board, or the license would be subject to immediate revocation. The logistics provider could not operate its primary bonded warehouse without this license.

Anders did not want to talk about item 88. He wanted to talk about item 12, which was marked in red. Item 12 concerned an unregistered lease for a small satellite warehouse in Kelaniya. The lease had expired three years ago. The rent was being paid on a month-to-month basis to a landlord who lived in Melbourne.

“This is a major compliance gap. If the landlord decides to sell, we lose the facility. Why isn’t this rectified?”

– Anders, Deal Lead

Sanjeevani looked at the rain. She thought about the warehouse in Kelaniya. It was 4,000 square feet. It had a leaking roof and was used primarily to store broken wooden pallets and three rusted forklifts that had not been started since the end of the previous administration. It represented less than point-four percent of the target company’s total floor space.

“The Kelaniya lease is a procedural irregularity,” Sanjeevani said. Her voice was flat. “The landlord has accepted rent for thirty-six consecutive months without objection. Under Sri Lankan law, this creates a periodic tenancy. It is a risk, but it is a manageable one. However, the change-of-control clause in the BOI license-“

“But it’s red,” Anders interrupted. “Red means high priority. The list has 147 items, and 22 of them are red. We need to go through all 22 before we move to the ambers.”

The report had been structured to satisfy the buyer’s desire for volume. In the world of cross-border mergers and acquisitions, the thickness of a due diligence report is often used as a proxy for the quality of the investigation. If a law firm produces a ten-page report that identifies three fatal flaws, the client often feels cheated. They feel that the lawyers have been lazy or that they have missed the ‘minor’ details that build a complete picture of the target.

If the firm produces a two-hundred-page report that lists every missing fire extinguisher and every clerical error in the company’s secretarial records, the client feels they have received value for their money. This creates a perverse incentive for the advisor. A buried finding is merely a formatting choice, a matter of where it sits in the hierarchy of a list. An omitted finding, however, is a liability.

If a lawyer decides that a missing stamp on a minor contract is not worth mentioning, and that contract later becomes the subject of a dispute, the lawyer is blamed. If the lawyer includes the missing stamp as item 142 in a list of 147, they are protected. They can point to the page and say they raised the alarm.

Marchello, a forensic accountant I worked with during a restructuring project in 2016, once told me, “A man will always buy a heavy book before he buys a correct one.” He was referring to the way boards of directors interact with risk registers. They want to see a dense grid of color-coded boxes. They want the comfort of knowing that everything has been counted, even if nothing has been weighed.

In my own work, I have found myself falling into this trap. I spent ten minutes this morning practicing my signature on a yellow legal pad, trying to make the ‘B’ more cursive and less of a jagged spike. I wanted the signature to look authoritative, to look like it belonged to someone who never missed a detail. I have also, on more than one occasion, spent hours arguing with a counterparty about a stamp duty discrepancy of 9,840 rupees while ignoring a litigation footnote that threatened the company’s intellectual property. I did this because the stamp duty was a concrete fact I could fix, whereas the litigation was an abstract cloud I could not.

Beyond the Transaction

Bailey L.-A., who works in refugee resettlement, deals with a different kind of volume. She once explained to me that the files for the families she assists are often hundreds of pages long, filled with dental records, character references, and copies of utility bills from cities that no longer exist.

“People think the more paper there is, the safer the person is to admit. But the paper is just a distraction from the only two things that matter: where they are coming from and what they are afraid of.”

– Bailey L.-A., Refugee Resettlement

When an international investor looks at a market like Sri Lanka, the fear of the unknown often leads them to demand an exhaustive catalog of every local nuance. They want to know about the Companies Act No. 7 of 2007, the nuances of the Colombo Stock Exchange listing rules, and the specific requirements for Environmental Protection Licenses.

This is where the heritage of a firm becomes a double-edged sword. A firm like D. L. & F. De Saram, founded in 1898, has an institutional memory that spans four generations. They have seen the transition from colonial law to the modern corporate framework. They know which issues are part of the daily weather of the Sri Lankan business environment and which ones are the storm that will sink the ship.

The challenge for such a firm is to convince the client that the storm is more important than the weather. The client, arriving on a flight from London or Stockholm, sees the weather first. They see the unregistered lease. They see the missing signature on a non-disclosure agreement from 2019. They see the amber light on item 88 and assume it is less dangerous than the red light on item 12.

The Toyota and the Water Discharge

The report for the garment manufacturer was even longer. It contained a list of every vehicle owned by the company, including eighteen delivery vans and a 1994 Toyota Corolla that was currently being used as a coop for three chickens behind the factory in Biyagama. The lawyer had noted that the Toyota’s revenue license had not been renewed since 2012. This was item 64. It was marked in green.

Anders spent twenty minutes discussing the Toyota Corolla. He wanted to know if the presence of the chickens constituted a breach of the health and safety protocols required by the international brands that purchased the factory’s shirts. He did not ask about the fact that the factory’s water discharge permit was contingent on a communal agreement with a neighboring paddy farmer that was never reduced to writing. That was item 102. It was also green.

The cost of this noise is not just the legal fees. It is the exhaustion of the client’s attention. Attention is the scarcest resource in any transaction. Every minute spent discussing a rusted Toyota is a minute stolen from the analysis of the terminal value of the business. By the time the meeting reaches item 88, the participants are tired. They are looking at their watches. They are thinking about the dinner reservation at the Dutch Hospital Shopping Precinct. They see the amber color and their brains categorize it as ‘secondary.’ They move on.

The Price of Thoroughness

The transaction for the logistics provider eventually closed. The Kelaniya lease was rectified. The landlord in Melbourne was tracked down, and a new agreement was signed and registered. It cost four hundred dollars in legal fees and sixty hours of management time.

Three months after the closing, the Board of Investment sent a letter to the company’s new directors. They had noted the change in control in the local newspapers. They informed the company that the primary operating license was being suspended pending a full review of the new ownership structure. The bonded warehouse was closed for eleven days.

Sanjeevani was not surprised. She had the report on her desk, open to page 114. She had underlined item 88 with a pencil. She had not used a highlighter.

When the signal is buried in the noise, the advisor is no longer a guide; they are a cartographer of the irrelevant. They map every pebble on the road while the bridge ahead is washed away by the rain. The goal of diligence should not be to find every problem, but to find the problems that change the answer to the question: “Should we do this deal?”

In Colombo, the rain stopped at 6:15 p.m. The air was thick and smelled of salt and wet asphalt. Anders left the tower with his 842 pages of reports tucked into a leather briefcase. He felt secure. He felt that he knew everything there was to know about his new acquisitions.

He did not know about the paddy farmer, and he did not know about the BOI letter, but he knew exactly what had happened to the 1994 Toyota Corolla. He had reached the end of the list, and in his world, the end of the list was the same thing as the end of the risk.

He walked to his car, stepping over a puddle that reflected the neon signs of the city, oblivious to the fact that his thoroughness was merely a well-documented form of blindness.