In today’s corporate world, where a ton of transactions takes place at high speed, the degree of uncertainty achieves its peak form. As in our country, no one knows how our government policies will change and what will be the effect of this change on the Company. Hence, to avoid this, every Company should conduct Legal Due Diligence. The Company should always be prepared for any surprises before entering into any business. In this article, we will discuss the scope, objectives, advantages and process followed while conducting Legal Due Diligence in Company.
What do you mean by Legal Due Diligence?
Legal Due Diligence is generally performed when someone want to buy or sell a Company. Sometimes, it is also conducted on purpose as a routine check of legal affairs in the Company. Legal Due Diligence consists an examination of all, or specific parts, of all legal affairs of target Company with a view to discover any legal risks and provide the buyer with an extensive insight into Company’s legal matters. The bargaining position of the buyer is improved while conducting Legal Due Diligence and this lead to an assurance that necessary precautions are taken regarding the business to be entered.
What are the Areas Covered in Legal Due Diligence?
The Legal Due Diligence process, when conducted in Company, investigates the following areas:
- Intellectual Property
The Intellectual Property includes patent, trademark, trade secrets and copyright. The analysis of licenses, contracts and pending litigations of Target Company related to Intellectual Property is done.
- Corporate and Legal Structure
The acquirer should understand the structure of the Target Company. The Memorandum of Association (MoA) and Articles of Association (AoA) are analyzed to get information regarding Corporate and Legal Structure of the Target Company.
- Commercial Contracts
The Commercial Contracts of Target Company is analyzed to identify the risks involved in these contracts. Commercial Contracts includes vendor contracts, service contracts, rental agreements, etc.
- Employee Contracts
To understand the risks and liabilities towards the employees, the Employee Contracts of the Target Company are analyzed. Employee Contracts include wages and salary, employment terms, employment duration, pension plans, etc.
- Tax Liability
The deferred Tax Liabilities[1] of a Target Company are analyzed to look into any discrepancies related to it. If there is any liability related to tax liabilities, then in future there will be enormous liabilities for the acquirer.
- Regulatory Compliance
The Target Company should be doing everything in adherence to the law and Regulatory Compliance of the Company.
- Litigations
The Litigations of the Target Company, whether past or current all are looked into. Even the future Litigations are also being looked into to avoid any problem in future. Litigations can come through employees, customers, vendors and government.
- Health and Safety Standards
The compliance with Health and Safety Standards of Target Company is checked. The workplaces these days should be secure for working. The employees are more concerned about their health. There should be a check on the safety gear and proper ventilation in the office of the Target Company.
- Environment Laws
Compliance with environmental laws has become a vital issue nowadays. The acquirer should check for any matter related to non-adherence of Environment Law.
Read our article:Financial Due Diligence: A Complete Checklist
What is the Process followed to Conduct Legal Due Diligence in Company?
Legal Due Diligence process takes place in three stages. The three steps are as follows:
- Preparation
The goals and priorities are set to conduct Legal Due Diligence in the Company. There is a number of small goals and one central goal to analyze. Sometimes, a professional is hired to plan for the process of investigation.
- Analysis
While the investigation is going on the professionals are hired by the acquirer, collect facts and documents related to the Target Company. The analysis of these facts and documents will help the professionals to analyze whether the purchase of Target Company will be positive or negative for the acquirer.
The legal documents, which includes the licenses, permits, incorporation document, shareholders warrants all these will be investigated. After this, the process of investigations will move on to the next step, where all the litigations concerning the Target Company will be investigated. The assets and liabilities of the Target Company should be investigated. The current salaries and the list of past and present employees should be appropriately scrutinized.
The duration of this process depends on the size of the Company. It can take from a few days to several months to complete this process depending on the size of the Company. Once, the acquirer is satisfied thoroughly and has analyzed all the loopholes of the Target Company. The acquirer should complete the process of Legal Due Diligence before entering into any initial agreement with the Target Company.
- Results
The professionals present the results at the end of the investigation. Results should be presented in the most concise way possible. The most important discoveries should be pointed out in the results. The results after the examination may be provided in written format or verbal conversation. The acquirer should convey to the professionals about his/her priorities and expectations from the deal. The results reports should highlight the main concerns of the acquirer by keeping them as a priority.
What are the Advantages of Legal Due Diligence?
The main advantages of Legal Due Diligence is as follows:
- Understand the Target Company
Whenever Due Diligence is conducted in the Company, all the legal documents are scrutinized. This helps in understanding the Target Company and its operations before the purchase.
- Helps in Determination of Fair Price
While analyzing the structural, financial and operational aspects of Target Company, the acquirer finds out about all the pending litigations, employee factor, labor agreements, intellectual property details, etc. of the Company. This analysis gives the acquirer a strong base to negotiate with the Target Company. Hence, this will help in determining a fair price for the acquirer.
- Identification of Future Legal Risks
The pending litigations of the Target Company will cause a major problem for the acquirer. These litigations will lead to a negative value of the Target Company after the takeover by the acquirer. The process will help identify future risks today and eliminate them.
Conclusion
It is becoming more prominent these days to seek extra protection while entering into any new business. Legal Due Diligence is an investigation of the business of Company that whether the Company will be worthwhile or not in future. It helps you take an informed decision regarding the Company and also provides an insight into the new Company. We at Corpbiz have competent and skilful professionals to help you in the process of Legal Due Diligence. Our professional will direct you and aid you in getting through the process. Our professionals will plan faultlessly and will make sure the successful completion of the process.
Read our article:Due Diligence: A Complete Run-Through
