Imagine seeing your dream car at a secondhand car dealership. You've dreamed of purchasing that car for many years, and now you finally can. Would you take the risk of buying it without checking the registration papers or taking it for a test drive? Perhaps having your friendly mechanic carry out an inspection to determine if the vehicle is in a roadworthy condition?
The same principle applies to purchasing a business (acquiring shares), property, or assets owned by a person or entity. Legal due diligence is an important tool in an investor's arsenal, allowing for a thorough investigation into the "target." Does the owner actually own the target? Is the target fit for purpose? Has it received the necessary licenses and authorizations to carry out its objectives? Are there existing claims or restrictions issued against the target? These are just a few of the many important questions that must be answered when conducting legal due diligence.
Depending on the outcome of the legal due diligence, the investor can be armed with enough information to make an informed decision about the deal and can either:
- Exit the deal; or
- Proceed with the deal and:
- Ask for a reduction of the purchase price;
- Insert into the agreement: –
- conditions precedent(s) – certain conditions which are required to be met by a specific date in order for the sale to proceed (like securing a specific approval by an authority); and or
- warranties that the seller can make which the purchaser can rely upon.
Legal due diligence is often viewed as an unnecessary expense or merely a box-ticking exercise. However, by skipping this important step in the acquisition process, a purchaser may unwittingly agree to take on unwanted risks that could have been mitigated or avoided.
The need for legal due diligence is especially important in the UAE, where unlike other jurisdictions, government agencies and departments are more sensitive to property owners and shareholders' needs for confidentiality and where in most cases, a power of attorney will need to be issued by the owner/shareholder/manager to allow searches to be conducted by a potential purchaser with the relevant authorities. The regulatory environment in the UAE is in some cases quite unique in that, for example, if a business is carrying out a specific activity, the activity in question will need to be recorded in its trade license and for certain activities additional approvals by other government authorities may be required in order to legally carry out the activity in question. Another wrinkle commonly encountered in the UAE is that most of its residents are not permanent residents and it may be difficult to commence legal proceedings for recovery of any losses/damages as they may no longer be present in the UAE, and it may be difficult or very expensive to locate said individual and pursue legal claims against them in their home jurisdictions.
Without having undergone adequate legal due diligence, a potential purchaser may be exposing themselves to unwanted and unwarranted risk, which could result in purchasing an asset or a business which may not be fit for purpose and may result in litigation which could have been avoided, and which may not lead to a successful or adequate recovery.
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.
