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Due diligence is all about having a detailed investigation of the target company.
It is to identify any risk involved in closing the potential deal. Legal Due Diligence is essential for the buyer/ investor to know about the financial health and legal information of the target company.
it is an essential part of the process as it assesses all the legal documents regarding the target company, which makes it easy for buyer/investor to enter into an agreement.
Table of Content:
What is Legal Due Diligence
Legal due diligence is an investigation by viewing, collecting and assessing the documents and information of the target company. It’s the process to assess the legal risk of the target company during the M&A process.
It acts as an icebreaker between legal counsel of both the parties, buyer and the seller and it helps them work together to close the potential deal suitably.
Intention behind this investigation is to understand the future legal problems attached with it, if the acquisition takes place.
Legal Due Diligence Checklist
Whenever we perform any process a proper checklist is important so we don't miss any step in the process.
Before starting the legal due diligence process we must create a checklist to better know what things to add in the investigation.
This checklist will guide Legal Due Diligence services provider through the process and make the process easy and efficient.
The legal due diligence checklist consist of these points-
- Tax liabilities: The buyer/investor tries to find out the red flags. Includes any pending government litigations or deferred tax liabilities. There is also Tax Due Diligence Services available to beter understand the tax related thing about the company.
- Employee Contracts: Investigates the employee contracts to understand the risk involved and future liabilities of the target company.
- Commercial Contracts: Analysing the commercial contracts of the target company to identify the risk involved in it.
- Pending and potential lawsuits: The current, pending even the future ligations if arises are looked into.
- Intellectual Property: Contracts, licence and any other document which is necessary related to Intellectual Property of the target company are to be analysed.
- Environment laws: Must also check the pending litigations to the environment laws of the target company.
- Regulatory Compliances: The buyer/ investors make themselves sure that the target company is doing everything to adhere to regulatory compliance.
- Health and Safety standards: The buyer tries to understand the compliances related to health and safety of the target company.
- Organisational documents: Verify the company’s by laws, certificate of incorporation. It is to know who owns the company’s equity.
These are all the important points which you must add in your checklist but it’s not all the points.
The due diligence process can contain more points and it depends on the Legal Due Diligence services provider and how detailed and thorough the investigation is.
So you can add all the important points before starting the investigation to cover all the important areas of the target company.
Legal Due Diligence Process
Legal due diligence is the process in which the buyer investigates all the legal documents of the acquiring company.
It’s a very important and time consuming process, although its process takes time it gives you all the necessary details to avoid any future legal risks.
When we talk about the process of legal due diligence it consists of the following processes.
1.Plan and Research: Buyer and seller, both need to cooperate together to understand and have a successful legal due diligence process. This stage is to set goals and priorities. Professionals are hired to plan for the process of legal due diligence.
2.Analysis: Professionals are hired by the buyer/ investor to collect and investigate the documents and facts of the target company. In this stage, professionals are needed to analyse all the findings in a genuine way. Legal documents like, licence, permits, shareholders warrants etc.. are investigated in the process. The buyer should complete the legal process before entering into any agreement.
3.Results: The professionals are needed to present the result to the buyer/investor at the end of the investigation. Important findings should be highlighted in the results along with the solutions. The result must highlight the discoveries which are important for decision making in M&A.
Importance of Legal Due Diligence
When a company plans to acquire another company there are many risks involved in this process.
As we know once the agreement is signed there is no turning back so to overcome risks involved in the acquiring process certain methods are available.
But if you want a detailed analysis of the acquiring company before making any financial transactions you must do a proper due diligence investigation on the company or hire Legal Due Diligence service providers.
Where Financial due diligence gives you a detailed report about the Valuation and other financial details, the same Legal Due Diligence gives you information about the legal risks associated during a M&A process about the company.
Legal due diligence helps the buyer to understand the legal compliance of the company to help in obtaining the reliable information about the company and uncover any facts or circumstances that have been attached to it, to influence the decision of the buyer/investor.
Legal Due Diligence Report
After a thorough investigation the report of legal due diligence is created in which all the findings of the investigation are mentioned.
This is a short summary of the investigation in which all the important findings of the investigation are mentioned.
Legal Due diligence report summarises all the information gathered during the process in a systematic way. This process covers mainly the legal aspects of a transaction.
If there are any irregularities, this report will tell you so you can make a better decision.
Scope and length of the report depends upon the transaction, for which due diligence is performed.
Legal Due Diligence in M&A
Legal due diligence in M&A is an essential part of the process because it reveals any complexity to arise after the agreement of M&A on the target company.
It helps in assessing the risk of the target company before buyer and seller enters into any agreements.
It is important to confirm all the material facts related to the target company.
Legal due diligence helps to reduce the risk of post transaction. Identifies the areas which influence the deal of the transaction.
Legal Due Diligence Memorandum
Legal due diligence process is beneficial for both the buyer and the seller as it gives a proper report about the company.
To do so, the target company needs to provide all the required documents to the Legal Due Diligence service providers so the acquiring company can perform the due diligence process properly.
In short we can say the Legal Due diligence memorandum means documents provided by the target company to the buyer/investor in connection to the due diligence performed by the buyer/investor, and delivering any updates regarding those documents.
Legal Due Diligence of Property
It’s an investigation of property records which are relevant for sale, purchase, mortgage or lease of the property. This is for the purpose of making them aware about the risk involved, so that they can make informed decisions.
Like the legal Due diligence process in which we investigate the legal documents of the target company in property due diligence we verify the ownership of the property and any hindrance attached to the property.
Whenever we want to buy or acquire any property we must find the real ownership of the company.
Legal Due Diligence of Property is the process which protects the buyer from entering into the false agreement.
Whenever there is sale or purchase of another business, it is necessary to perform legal due diligence. It helps to verify legal documents and to identify any risk there.
The cost totally depends upon the size of the business. It varies from transaction to transaction of the target company.