Due diligence - an integral part of the company's M&A process. Further, we will review the main nuances of the legal due diligence of the M&A deal subject matter.
The companies, in the course of their activities, carry out various international deals, which include mergers and acquisitions, private investments, joint ventures or strategic alliances. Comprehensive due diligence review or due diligence is carried out when a company is considering a potential purchase or the possibility of making a particular deal. Due diligence is aimed to verify and analyze a potential deal with the purpose of determining possible risks and benefits, as well as confirming all relevant facts and financial information. In the course of due diligence process, a significant amount of information is collected in all areas of business. Namely, due diligence requires an analysis of past and current results, confirmation of the accuracy of reports, an assessment of the viability of the deal (for example, M&A).
Purposeful counterparty due diligence is critical to effective research, assessment and the successful conclusion of sophisticated dealings, including international ones. At the moment, this issue is becoming more relevant than ever due to the growing atmosphere of uncertainty and new unpredictable threats to business. As the evidence from practice shows, the conduction of a comprehensive due diligence check when concluding deals is one of the necessary conditions for a positive result.
In the period of development of cyberspace, Fintech and other areas of business, which use advanced technologies, the legal assessment procedure is especially relevant, since it can also cover intellectual property items and other aspects. It is important to understand that it is much more difficult to carry out the assessment of the IP company's assets in the post-industrial space than to determine the material value of the company's assets, its real estate and other physical property items.
Due Diligence and legal due diligence of deals allows a buyer during M&A to confirm previously undisclosed information about the financial performance, contracts, personnel & customers of the selling company. I.e., the buyer will get a complete picture of the business to be acquired. In addition, this due diligence of deals will provide objective information about a potential client in relation to:
Due diligence is directly related to the investor’s corporate strategy. Legal, financial and administrative due diligence will determine whether the deal meets the objectives set within the strategy.
In case of M&A, the following types of due diligence are carried out:
The financial information that will be considered during financial due dilligence:
During legal due diligence the following is usually checked:
Tax due diligence involves the examination of taxes applicable to a business with regards to the jurisdiction in which it is located. It is important for buyers to conduct a comprehensive tax due diligence in M&A for a number of reasons. First and foremost, to identify potential tax breaches.
A comprehensive tax due diligence of businesses allows you to assess the overall tax liability of a company and the level of tax compliance, including the check of documents such as tax returns, checking information related to tax audits and agreements with tax authorities.
Tax due diligence process:
Operational comprehensive due diligence covers all major operations of the target company and examines all of its manufacturing facilities and processes. In M&A deals, operational comprehensive due diligence evaluates two points:
Operational due diligence is a type of due diligence that examines the business model and operations of the goal object in order the buyer to be able to make the decision about the acquisition of the company overseas.
This may include an overview of:
The company's environmental due diligence is a type of complex check that examines environmental risks and issues affecting commercial property.
This may include an overview of:
IP due diligence involves an in-depth assessment of the IP assets, which are owned by the target company. As part of IP due diligence not only the existence of IP rights is assessed, but also the extent of their protection.
Information to be reviewed includes:
Commercial due diligence (also called market due diligence) is aimed to assess the market size, market share, competitors, and potential profit in future. Commercial due diligence is also involves the assessment of the financial viability of the deal and the likelihood of its benefit.
IT comprehensive verification is an audit of a company's IT infrastructure. This type of due diligence allows the buyer to assess the existing IT structures of the purpose of the deal and to identify any potential risks in the field of protection of confidential information.
Although the due diligence procedure does not have one common system, usually there are two forms. So-called Anglo-Saxon methodology, which represents comprehensive legal and financial assessment, ensuring full disclosure of information before signing an agreement. The relevant documents detail the verification procedure, as well as the rights and obligations of the parties.
On the contrary to previous methodology, majority of countries in the world use preliminary finance and legal due diligence in a less strict order with limited disclosures. Already after the preliminary deal is concluded, a more rigorous common law due diligence process follows, which results in the conclusion of a basic agreement reflecting the business relationship.
Usually, the beginning of the due diligence process is characterized by an identification stage, in which key information is requested from a potential client or third party. Schematically the process is following:
In order to conduct due diligence of a legal entity it is necessary to get from seller:
At this stage, due diligence under English law may also require notarization of company documents.
Verification of a private entity usually requires the provision of:
Afterwards, company names, the names of private entities and the names of non-profit organizations will be verified by the global sanctions lists. At the same time, an additional due diligence check can be carried out with the lists of law enforcement agencies and regulators about known criminals, banned or disqualified companies and individuals.
Also, at this stage, lists of politically exposed persons (PEP) are checked to identify government or official relationships. This process is usually automated and processes thousands of records simultaneously. Based on the information obtained during the identification process and the results of the checks of the above lists, an assessment of the respective risks is carried out.
Due Diligence is a comprehensive assessment, the process of investigating or auditing a potential deal to confirm all relevant facts and financial information.
Due Diligence of a merger deal includes the following types of due diligence:
If you intend to agree on a merger deal, you can contact IncFine and get legal advice on conducting a security screening of the company. We can provide you with the required information and support in due diligence for M&A deals.