Usually a legal due diligence process has the purpose to analyze the main legal documents and information of a target company before the parties involved therein enter into transactions, such as mergers, acquisitions, issuance of new stock or other securities, project finance, securitization, etc.
The most important goal of a due diligence is to find out any liabilities, contingent or materialized, and so minimizing any risks that could result therein.
The due diligence could involve investigation into the business, tax, financial, accounting and legal aspects of a target company.
The legal due diligence mainly consists in the review of documents to identify potential legal issues that may present risks and/or impediments to the (i) transaction or (ii) in the general operations of the target, that could in a certain way affect the value or consideration in connection with the transaction.
Therefore, issues related to structure and documentation, as well as legal and contractual impediments shall be identified.
The due diligence is also crucial to confirm the representations and warranties provided in the agreements.
Under a due diligence process, not only the issues shall be identified but also suggestions and solutions to deal with the issues should be presented to the client. Usually the client does not appreciate when lawyers only expose the risks without presenting any solution to deal with such risks. That is why the lawyers nowadays must be more creative to handle different issues that appear during the course of the due diligence and negotiation of the agreement in order to make the deal succeed.
Depending on the risks identified, lawyers should be able to place the client in a better position to negotiate and, for instance, to ask for adjustment of the purchase price or even tailor the warranties and indemnities.
The data room can be virtual or physical. Depending on the specifics of each case, one or the other could be more convenient (for instance, if there is more than one potential buyer, a virtual data room is usually more appropriate).
Considering that the risk of having any legal impact is very high in all major transactions nowadays, it is crucial to have a very complete legal due diligence checklist in order to minimize the risks of leaving some important issue behind. Some overlap with checklist prepared by other professionals is common, mainly because there are some documents that should be analyzed by different professionals.
In addition to the review of the documentation available in the data room, a meeting with the management or key employees of the target could help a lot to get some answers to pending items.
The scope of a due diligence typically depends on the nature of transaction. However, the scope of a due diligence could also depend on the instructions given by the client, whether a complete review shall be carried out or only a restricted review limited to certain matters, such as litigation, labor, etc.
A complete legal due diligence would usually cover the following areas: corporate, contracts, labor, insurance, regulatory, real property, environmental, intellectual property and litigation (tax, labor, social security and civil).
In conclusion, the due diligence has the main purposes of:
(i) identifying and mitigating risks in light of market practice and legal requirements;
(ii). defining the structure of the transaction;
(iii). implementing any price adjustment or hold-backs;
(iv) creating conditions precedent;
(v) confirming representations and warranties;
(vi) verifying the disclosures made by the target;
(vii) negotiating indemnity provisions; and,
(viii) establishing post closing conditions and obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.