Due diligence is a process of comprehensively appraising the business operations, assets, finances, goodwill, capacity and performance of the target company before the parties officially enter into an M&A transaction. Thereby, this will help the buyer to determine his requirements and obligations when: conducting the transaction; the nature and extent of the target company’s liability; the problems of the contracts and the risk of disputes and litigation and issues to relating intellectual property issues. The Due diligence is necessary because most companies in Vietnam existing under small and medium scale are not much subject to market supervision and there are very few public sources of information for the buyer to assess. This article will mention the Legal Due Diligence (LDD), including the Due Diligence of the: establishment process, capital and capital structure, management organization structure, key personnel, material contracts, customer group and other areas depending on the activities of the target company and the buyer’s needs.
In this area, the buyer can check the seller’s compliance with respect to the type of enterprise, operation duration, head office and branches, representative offices, business locations as well as its business sectors. Precisely, the buyer will check the following documents:
- Enterprise Registration Certificate;
- Certificate of operation registration of branch/representative office/business location;
- Investment Registration Certificate;
- Charter and the appendices to the Charter;
- Certificate of seal sample use.
Ergo, the buyer has the grounds to review and evaluate whether:
- The seller operates under the type of enterprise is legally permitted to operate;
- The operation’s duration is consistent with the issued license/certificate and
- The branches, representative offices and business locations are granted the right certificates..
In addition, the buyer also considers whether the business sectors are on the list of prohibited business sectors or on the list of conditional business sectors. For the conditional business sectors, the buyer will check the compliance with applicable conditions such as standards, regulations, permits, certificates, etc.
Capital and its structure
The buyer will inspect and assess the:
- Registered amount of capital contribution;
- Actual amount of capital contribution;
- Type of assets registered for capital contribution and the type of actual contributed assets;
- Capital structure of capital holders (members or shareholders) and the percentage of capital contribution.
Precisely, the buyer will check documents such as the: bank confirmation on capital contribution, capital contribution minutes, confirmation on capital contribution, financial statements and the register of members/shareholders to consider whether the completion of capital contribution of existing members/shareholders in the target company is in fact on time and reflects the registered amount, assessing whether the type of assets contributed is legally allowed. Therefore, the buyer can determine the risks arising related to the financial obligations and enforcement obligation against the target company’s non-compliance.
Management organization structure and key personnel
The buyer will check the list of persons holding key positions in the target company such as members of the Members’ Council/Board of Directors, Directors, heads of departments and the respective appointment decisions. Accordingly, it is necessary to consider whether these key positions meet the standards and conditions prescribed by the Enterprise Law as well as whether they are allowed to establish and hold the management positions; whether any penalty may be applied in case of violations in the company’s management organization.
Material contracts and group of customers
The buyer will check the material contracts of great value signed by the target company. Accordingly, the buyer will review the terms of the exclusive agreement (limiting competition); the conditions for contract termination in the case of a change in the company’s management structure; approvals of contracts of great value or contracts concluded with relevant persons affected by the decision-making authority of the Members’ Council/General Meeting of Shareholders/Board of Directors; unclear issues and (if any) risks that the target company may be encountered based on the terms of the contracts/agreements. Thus, the buyer can determine the legal rights and obligations of the target company as a contracting party and the legal agreements binding the target company.
The buyer will check the certificate of lawful ownership and/or certificate of lawful use rights for assets owned and used legitimately by the target company such as land use rights, warehouses, factories, or special properties such as intellectual property or other properties requiring registration of ownership such as cars and boats. Moreover, for intellectual property that does not need or cannot be registered for a protection title (such as business secrets, copyright, and related rights), the buyer will check whether the target company meets the conditions to be considered as the owner of these intellectual property rights. Thus, the buyer can consider whether the ownership or the use of the target company is lawful and whether these assets are in dispute over ownership and/or use rights or are pledged, mortgaged or used as a collateral in transactions.
The buyer will review and summarize the disputes and complaints that have happened and are happening in which the target company is involved as a party to the dispute, complaint or as a related party. Accordingly, the assessment will focus on analyzing the case file (position of the target company in the dispute i.e. the claimant, defendant or person with related interests and obligations; dispute resolution and settlement terms; claims threatening the reputation, rights and interests of the target company; arbitration issues) and the legal position of the target company in the case of settlement of such dispute or complaint.
In addition to the above main areas, depending on the needs of the buyer and the specific activities of the target company, the buyer can assess compliance in those areas and issues.
In conclusion, the results of the Due Diligence will provide the buyer with a complete picture of the target company’s legal status in each related field; the risks and the level of risks the target company is likely to face and other notable issues. This will allow the buyer to reach the right and appropriate decisions based on this results.