This article examines how you can get the most out of your M&A legal due diligence. It provides practical tips on how to approach legal due diligence, how to manage the due diligence process and how to use the results of legal due diligence in the negotiation of transaction documents.
Why are you doing legal due diligence?
The traditional answer to this question is ‘caveat emptor’ or ‘buyer beware’. In most common law jurisdictions, a seller of shares or a business is not under any general duty to disclose all relevant information to the buyer. It is the buyer’s responsibility to conduct its own investigation. The general law does not, in the absence of any fraud or misrepresentation, provide protection to a buyer who later discovers that the business it bought is not what it had understood it to be. Due diligence gives the buyer a degree of comfort about what it is buying and how much it might be worth.
What are you buying?
If it is a complex business, understanding what you are buying requires a good deal of investigation and analysis. At a basic level, the purpose of due diligence is to investigate or confirm whether what you are buying is what you expect.
Are you buying what you think? To answer this question, you may need to understand the material legal contracts, assets, licenses and permits, compliance history, intellectual property rights, employees and business practices of the business and any potential challenges.
What are the liabilities of the company you are buying? You will need to understand the actual, potential and contingent liabilities of the company which may arise from, for example, material contracts, financial instruments, taxes, employees, pensions, litigation and disputes.