Legal due diligence is a key process in corporate mergers and acquisitions. The proper execution of due diligence processes is pivotal to protecting the interests of purchasers and investors. For this reason, it’s extremely important to understand exactly what ‘legal due diligence’ entails and to work with legal experts who are able to carry out the necessary processes effectively and thoroughly. In this brief guide, we explain the ins and outs of legal due diligence, giving a basic overview of the process, and explaining the responsibilities of both the buyer and seller.
What is Legal Due Diligence?
Due diligence is a key investigate process in which a buyer or investor in a company or business carries out an audit of the target’s financial, legal, and commercial profile ahead of proceeding with a transaction such as an acquisition, investment or merger. The processes should uncover all matters on which the investor or buyer might need additional information or be able to use to leverage to renegotiate the price. Ultimately, due diligence aims to reassure the buyer or investor that the target is indeed a solid investment and that they have all the relevant information needed to make an informed decision.
Due diligence is a key stage of any acquisition, investment or merger process. Both accountants and legal advisers work on these processes because they need to carry out a full and forensic legal and financial audit. Under English law, the principle of caveat emptor (let the buyer beware) applies. This means that the onus is on the purchaser to carry out thorough due diligence ahead of completing a transaction.
Legal tech & due diligence
With the digitalisation of the legal sector, due diligence processes have become more refined and streamlined following the introduction of legal tech tools. Indeed, legal tech is set to revolutionise the way due diligence is carried out, with 64% of EMEA dealmakers believing that the due diligence process will take less than a month by 2025 compared to one to three today because of new tech.
Virtual Data Rooms (VDR) or ‘deal rooms’ have created a secure, consolidated and remote way to gather, share, and review key documentation during the due diligence process. VDRs have also helped to speed up the timeline for due diligence, meaning that large M&A transactions can be completed in shorter amounts of time.
Integrated artificial intelligence and machine learning features within VDRs have facilitated the automation, for example, of document verification and review which previously had been identified as the leading reason for delays during due diligence processes.
What happens during due diligence in M&As?
The due diligence process is carried out by the buyer or investor and their legal team. The purchaser’s legal representation will typically request key documentation, information and data from the target company, as well as send round a form of due diligence enquiries . This will include documents such as customer and supply contracts, licenses, and requests for information surrounding the business’ assets, liabilities, intellectual property, and tax.
The time it takes to complete legal due diligence depends on the target company in question and the value of the transaction. The culmination of a due diligence process is a report which states the main findings of the investigation.
If the due diligence process exposes potential issues, the buyer or investor may be able to leverage this to renegotiate price or to build in additional appropriate protections to the purchase agreement, or even sometimes to abandon the deal altogether where management have concluded the risks outweigh the potential risks and associated costs.
Due diligence checklist
Legal due diligence is a complex process that can be lengthy depending on the size and nature of the target entity. According to LexisNexis, some preliminary key questions to ask when carrying out legal due diligence include:
- Where the target company does business and whether this means foreign law applies to their operations
- The amount of risk that the business carries
- Whether there are any political liabilities or risks associated with the business
- If there are any existing or likely legal cases or liabilities
What are the different types of due diligence?
Legal due diligence is a complex process that examines all aspects of a business. Some main area that the process will look at include:
- Accounting
- Tax
- Employment
- Property
- Insurance
- IT
- IP
- Environment
- Financial
What does the seller do in due diligence processes?
The party that is selling the target company or asset is responsible for gathering and sharing the relevant information with the buyers legal team. Due to the bureaucratic and administrative nature of this task, getting everything together can take some time.
Additionally, the seller may find that certain documentation or information is party to a non-disclosure or confidentiality agreement with a third-party. For this reason, the seller must always seek the relevant third-party’s explicit permission before sharing any confidential documents. The seller should also ensure to remain compliant with relevant data compliance regulations.
Conclusion
Watertight execution of legal due diligence processes is absolutely essential to ensure buyers are well-informed about the company or entity they are considering for purchase. That’s why it pays to work with an expert team that is able to carry out the key processes quickly and thoroughly. If you are in need of corporate legal advice, whether you’re buying or selling, get int ouch today to speak with one of our expert legal team.
FAQs
How is due diligence done?
Due diligence is carried out by one of the transacting parties’ legal advisers. They conduct a thorough audit of the target entity’s business affairs by requesting key documentation and information, reviewing and assessing all the evidence, and producing a report of their findings.
How long does due diligence take UK?
It depends, due diligence typically takes between 1 – 3 months but can vary depending on the specific circumstances.