Legal Due Diligence

Question 1

What practice areas are involved in legal due diligence?

Answer 1

Corporate
Finance
Employment
Property
IP
Litigation

Question 2

What is the role of corporate in DD?

Answer 2

Corporate will investigate the constitutional documents of the target (ie certificates of incorporation, articles of association) to identify whether:

1) the target has authority to sell,
2) if there are any restrictions on shareholders transferring shares
3) if an asset purchase, any restrictions on directors selling assets

Question 3

What is role of finance in DD?

Answer 3

1) Has target borrowed money and if so are there assets which are subject to a charge (ie secured against a loan)? These need to be discharged.

2) If SPA, there is often a change of control clause, so we need to check loan documentation to ascertain the consequences of clause (ie will the lender accelerate the loan)

3) How many lenders does is the target subject to?

Question 4

What is the role of employment in DD?

Answer 4

1) who are the employees?

2) what is the pension situation?

3) is the target complying with employment legislation?

4) are there key managers we want to stay with the company?

Question 5

What is the role of property in DD?

Answer 5

1) is property in good state - does it need repairing?
- we might need to conduct site visits or survey to take place

2) has relevant legislation been complied with (ie EPA and planning legislation) because we can carve it out in the agreement

Question 6

What is the role of IP in DD?

Answer 6

1) often harder to transfer in APA so we need to check relevant documents to see if we can transfer those assets

2) we might conduct searches via Trademark Register to see what the target has in terms of IP

3) find out if there are any existing or threatened infringement actions

Question 7

What is the role of litigation in DD?

Answer 7

1) is there any existing or threatened litigation?

2) might also check correspondence that shows customers or employees unhappy to ascertain if future claims are a possibility.

Question 8

Interview Question

After completing DD, you discover a litigation claim could be brought potentially against the target. What do you do?

Answer 8

1) See if buyer can resolve before concluding agreement

2) Include CP that thorough DD is conducted and buyer is satisfied before concluding

3) Adjust consideration

4) Put money aside in escrow for the event that litigation does arise

5) Include warranties or indemnities (likely an indemnity because you have found a potential litigation claim)

6) Walk away if serious