In many cases, the outcome of the legal due diligence process can serve as a basis for investors to make a decision on whether to proceed with or abandon the M&A deal. Depending on the type of M&A transaction, whether it involves asset acquisition or shares acquisition, investors need to pay attention to important legal issues that are crucial and decisive prior to undertaking the M&A transactions.
When conducting legal due diligence, the advisory team and relevant parties will conduct a comprehensive review of all legal aspects related to the target company. Subsequently, a detailed legal due diligence report is compiled, referencing each document, highlighting findings, proposing solutions, and categorizing the level of risks. For large enterprises, the due diligence report will encompass a wide range of content. Therefore, it is necessary to identify crucial legal issues for individuals or authorized departments to examine, evaluate, and make decisions.
Clearly identify the target object for due diligence
In addition to other common classification methods, M&A transactions can be broadly divided into 02 basic types:
- shares/contributed capital acquisition of the target company or
- asset acquisition.
Depending on the type of transaction, the legal issues to be considered can vary significantly. Specifically, for transactions involving shares/contributed capital acquisition of the target company, the legal considerations would revolve around the target company itself, including legal status, capital structure, ownership status, compliance with legal regulations, and more.
Meanwhile, if the focus of the M&A deal is a certain asset, legal issues need to be specifically considered, including the current status of the said asset, the legal status of the owner, and other relevant factors. Clearly defining the target object of the M&A deal will help all parties to save time and focus on the specific legal issues related to that target subject.
Assessing the legal feasibility of the transaction
Once the type of transaction and target subject for due diligence has been determined, one of the critical legal aspects that all parties must consider feasibility of executing the deal, ensuring that it meets the investor’s requirements while complying with current legal regulations. In particular, most investors seek specific objectives when initiating an M&A transaction, such as gaining control over the target company to carry out anticipated business activities or expanding into new markets.
In the case where the target subject is a specific asset, investors often have the desire to utilize that asset according to their plans after the completion of the transaction. However, it should be emphasized that, under present legislation, some limits will apply to the business activities that foreign investors are permitted to engage in when doing business in Vietnam.
For example, there may be restrictions on the ownership percentage of foreign investors in target companies operating in certain business sectors, such as advertising services, freight transportation, and others. Here, the investors need to consider the capital contribution/number of shares in the target company they want to acquire.
In addition, it is also necessary to mention business lines that foreign investment is not allowed to participate in, such as journalism, investigation, security activities, and others. In such cases, regardless of the investor’s level of interest in the market, executing the transaction in a formal manner may be infeasible.
Finally, it is also necessary to consider the case of M&A deals with the goal of ownership/use of a certain asset, the most common of which is a real estate project. Under current legal provisions, a foreign-invested real estate project is only allowed to carry out certain business activities such as building houses for living or for rent, etc. Therefore, the investors need to carefully consider this matter before deciding whether to carry out the deal or not or restructure the ownership structure to comply with Vietnamese law.
From the above analysis, it can be seen that depending on the target subject of the M&A deal, the legal due diligence process needs to identify and assess the corresponding feasibility of executing the deal to ensure compliance with the current legal regulations.
Notes on the scope of information to be provided
Due diligence and legal due diligence in particular are necessary because, in the context of Vietnam, a significant number of companies operate at under small and medium scales and subject to limited market supervision. There is also a lack of publicly available information for investors to assess and make decisions. Determining information that needs to be provided to perform due diligence can be based on the target subject that the M&A transaction aims to pursue.
As analyzed above, depending on the type of target subject (control of the target company or ownership/use of a certain asset), the matters to be considered during the due diligence process will vary–and consequently, information that needs to be provided. The fact that the seller provides all relevant information will help the legal due diligence process be carried out more smoothly and increase the authenticity of the appraisal report.
However, it should also be noted that in practice, sellers tend to hide or hesitate to provide adverse information regarding the target object that may affect the likelihood or value of the deal. In this case, the investor and related parties (lawyers, legal service providers) need to take appropriate measures to ensure that the information provided is sufficient to carry out the legal due diligence process.
Information confidentiality during legal due diligence
As analyzed above, information always plays a very important role in the due diligence process and legal due diligence in particular. Especially in the context, legal information is likely to contain sensitive elements and can have a great impact on the feasibility of the deal.
In addition to trying to gather as much relevant information as possible to conduct due diligence, the parties should also pay attention to the security of information, including the information provided and also the information learned during and after the due diligence process. In fact, many unsuccessful M&A deals have been recorded due to information security violations.
To ensure confidentiality, in addition to non-disclosure commitments agreed by the parties before the due diligence process is conducted. Parties should also pay attention to the method of providing and transmitting information, perhaps considering using Secure Virtual Data Room with limits on who and when access is allowed. It can be concluded that the more attention all parties pay to information security, the higher the likelihood of ensuring the success of transaction.
Legal due diligence always plays an important role throughout the entire of an M&A process. Focusing on key issues during this process helps the relevant parties to conduct the due diligence efficiently and with high quality. Through the above analysis, we hope to provide investors and businesses with some important legal considerations to take note during the implementation of legal due diligence for an M&A transaction.