Legal due diligence is a process which involves collecting and assessing all the legal documents and information relating to the target company. It gives both the acquirer as well as the target company a chance to scrutinize legal risks before finalizing the deal. Legal due diligence is primarily conducted to identify any legal risks associated with the business of the target company that could affect the outcome of acquisition.
Importance Of Legal Due Diligence
Conducting legal due diligence is crucial for the acquirer as it helps identify potential legal risks ensuring that the acquirer can address the identified issues before closing the deal. If the due diligence is conducted diligently, the acquirer is in a position to negotiate better terms and also avoid expensive, unwanted legal disputes post-acquisition.
What Is Acquisition Of A Company?
Acquisition is a process wherein one company purchases a portion or an entire company. The target company is acquired by the acquirer in order to either collaborate and carry out business collectively or to expand its business. There are various ways for acquiring a business viz., asset acquisition, stock acquisition, etc.
Checklist/Things To Consider While Conducting Legal Due Diligence Of A Target Company For Acquisition
- Documentation of target company:
Reviewing the documents such as Articles of Association, Memorandum of Association, Incorporation Certificate, Vendor Agreements, Employment Contracts, Internal policies, financial statements of the companies, reviewing details pertaining to loan(s), if any.
- Compliances to be adhered by the target company:
It needs to be ascertained that compliances with regard to local, national and international laws are compiled by the target company. Such compliance shall also include laws relating to labor laws, environmental laws, and industrial regulations.
- Intellectual Property belonging to target company:
Search to be carried out of all the intellectual properties of the target company including copyrights, patents, trademarks and trade secrets. Acquirer to check if all the registrations and licenses pertaining to the intellectual assets are in place as required by law.
- Pending cases filed by/against target company:
Obtaining list of cases pending against or filed by the target company. Gather information with regard to prospective litigation in the near future to be initiated by or against the target company.
Corporate Compliance And Legality Of Various Processes
It needs to be ascertained as to whether the target company has complied with the regulations as required under various laws such as the Companies Act, Income Tax Act, SEBI Act rules and regulations, labor laws, other business-related laws, law of land, etc.
Ascertaining whether the compliance under various contracts have been adhered to by the target company, being compliances with customers, employees, internal policies, grievance redressal policies, suppliers, etc.
- Requisite Approvals/ Licenses
It needs to be checked if requisite approvals/licenses have been sought from concerned departments, Ministries for running the business. To ensure that the permit/requisite license has been obtained for accessing and storing confidential information available on online portals to deal with sensitive data by the target company.
To check if all the registrations as required by the members of the Board/Directors and the target company are in place.
To ascertain if the Intellectual property (if any) is registered and renewed on a timely basis. To ensure that all the license fees are paid in a timely manner. To ensure that there is no penalty levied by the department and check for ongoing litigation or probable dispute to be initiated against the target company.
To seek information pertaining to policies with respect to the premises wherein the business is being carried out, stocks, etc. depending on the nature of business of the target company.
Process/Steps for Conducting Due Diligence Of Target Company
To initiate the legal due diligence, one should first prepare a checklist as per the industry standards requirements to be met by the target company. The checklist shall aid in the efficient and proper conduction of due diligence of the target company.
- Obtaining requisite documents from target company
Relevant documents to be obtained from the target company or concerned departments pertaining to contracts, licenses, compliances, court cases, etc.
The documents obtained need to be reviewed thoroughly to ascertain the assets and liabilities of the company.
- Issues and risks to be identified
Upon reviewing the documents, the subsisting issues and potential risks are to be identified which may include ongoing litigation, pending applications, etc. The risks to be identified which may help the acquirer to take an informed decision at the time of finalizing the deal.
- Detailed due diligence report
Prepare a detailed report comprising of the opportunities, issues and risks involved if the target company is acquired by the acquirer.
Timeframe For Conducting Due Diligence
The time required for conducting due diligence may vary depending on the size of the target company. It shall depend on the nature of business and areas of operations of target company. The time required for conducting such due diligence may take a few weeks to several months.
Conclusion
In view of the above it is important for the acquirer as well as the target company that due diligence is conducted before acquisition which helps in identifying the financial position of the target company in the market, helps identify potential risks involved, details pertaining to legal cases are collated in the process, the liabilities of the target company are identified. The due diligence report helps the acquirer to take an informed decision, aids better negotiation with the target company, enables the acquirer to protect itself financially with regard to litigation expenses, liabilities, penalties, etc.
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