Legal Due Diligence is the process of examining and evaluating the legal standing of a specific object, based on the desired outcome sought by the performer or requester. In an M&A transaction, the due diligence of legal issues related to the target object or company is always a crucial focus that the Buyers need to focus on and implement.
When do the Buyers need to conduct Legal Due Diligence?
Once the target object or company has been identified, the Buyers will need to carry out some due diligence activities, including legal due diligence.
The evaluation of the legal status of the target company aids the Buyers in determining the ability to conduct the M&A transaction, the “health” of the target company, and the existing or potential legal risks that may be present when making decisions on whether to conduct an M&A transaction or not, transaction form and structure, negotiation strategy, and post-M&A plans.
Neglecting and ignoring Legal Due Diligence may result in heavy economic and legal consequences for the Buyers.
What notes for the Buyers when performing legal due diligence?
Legal Due Diligence, as mentioned above, is a complicated process to examine and evaluate the legal status of the target company. This process is usually carried out by the Buyers with assistance from a team of highly experienced legal professionals and other relevant skills. Sometimes the Buyers need to combine both internal and external resources for optimal legal due diligence. In addition, it will be necessary for the Buyers to pay attention to the following issues:
Firstly, approaching the target company
In order to achieve the desired effect of the Legal Due Diligence process, it is crucial to have proper access to the target company. The internal information, materials, and documents of the target company are confidential and are usually provided and shared only after both parties have established a confidentiality commitment or a mutual agreement for performing M&A transactions.
It could be important to note that there are multiple ways to approach the target company. Relying solely on the information, records, and documents provided by the target company may not be sufficient to produce a comprehensive legal due diligence report. Sometimes, the target company may conceal information that could potentially affect their interests.
However, reaching and exploiting the information of the target company through unofficial or illegal channels can lead the Buyers to unforeseen legal consequences. Therefore, it could be great for the Buyers to consult legal experts before implementing this action.
Secondly, identifying decisive legal issues
Depending on the Buyers’ purpose when performing the M&A deals and relevant laws, the Buyers need to identify the legal issues that are decisive to the success of the M&A deal.
Accordingly, the conditions and requirements of relevant laws such as the subjects entitled to contribute capital to the target company, the percentage of foreign investors’ ownership in the target company is sufficient to gain control or not, the form and structure of the M&A transaction may be the things that the Buyer needs to clarify before diving into the assessment of the legal status of the target company. It is very necessary for the Buyers to have a detailed legal assessment plan and roadmap to avoid risks that may arise in the future.
Thirdly, mitigating undisclosed transactions
Mitigating the risks arising from undisclosed transactions is always an important consideration when the Buyers conduct legal due diligence. Hidden transactions often do not appear on official records and legitimate documents provided by the sellers, yet their impact can hinder the Buyers from achieving the objectives of the transaction, and even lead to future complications and challenges.
Fourthly, the commitments of the Sellers in post-M&A phase
A true success of an M&A transaction is sometimes not determined at the time of signing the contract but rather after going through the post-M&A phase, where the establishment of a new order and position for the business takes place.
It would be a mistake if the Buyers do not require the Sellers to provide long-term commitments and compliance as well as related responsibilities after the completion of the M&A transaction. The ultimate goal of M&A transactions is still profitability along sides other objectives such as social goals. Therefore, anticipating risk scenarios and implementing responsive solutions should always be a concerns for the Buyers.
In conclusion, when performing Legal Due Diligence in M&A transactions, the Buyers need to have a general overview as well as a detailed plan and roadmap to ensure the optimal use of resources and limit risks that can happen. The outcome of the Legal Due Diligence process is truly valuable and beneficial for the Buyers when the Buyers correctly identify the focal points of legal issues that need to be addressed, approach them in a scientific and professional manner, and at the same time, implement measures to mitigate legal risks.
