Legal Due Diligence

Introduction

The process of gathering and evaluating all of the legal records and data pertaining to the target organization is known as legal due diligence. Before finalizing the transaction, it offers both the buyer and the seller the option to carefully review any legal issues, such as lawsuits or intellectual property specifics. Both parties can decide on an investment with confidence if they are aware of the target company and any potential liabilities.

Generally speaking, legal due diligence is carried out when someone wants to buy or sell or invest in a company. It is occasionally also carried out on purpose as a regular audit of the Company's legal affairs. In order to identify any legal risks and give the buyer a thorough understanding of the target company's legal affairs, legal due diligence entails examining all or particular portions of all of the target company's legal issues. While performing legal due diligence, the buyer's negotiating position is strengthened, and this results in a guarantee that the appropriate safety measures are implemented with regard to the firm being entered.

It’s an investigation process for providing the desired comfort level about the potential investment and minimizes the risks such as hidden uncovered liability, poor growth prospects, price claimed, for the prospect investment being on the higher side, etc. It’s also ensuring that there are no onerous contracts or other agreements that could affect the acquirer’s return on investment.

Area of Investigation

1. Intellectual Property Rights (IPR)
2. Legal Structure
3. Contracts & Agreements
4. Tax implications and Liabilities
5. Applicable compliance
6. Suites and Litigation

Intellectual Property Rights:

The term "intellectual property" refers to copyright, trade secrets, trademarks, and patents. The Target Company's licences, contracts, and ongoing legal disputes involving intellectual property have all been examined.

The following are included in intellectual property due diligence:

• A complete list of all patents, trademarks, service marks, and
• Copyrights possessed or sought.
• A list of the IP component's creator(s).
• A list of each employee's patents, trademarks, and other intellectual property rights,
• Any other affiliations used by the target, such as shareholder, director, etc.
• A list of relevant trade secrets.

Legal Structure:

The target company's organizational structure should be known to the purchaser. To learn more about the corporate and legal structure of the target company, the Memorandum of Association (MoA) and Articles of Association (AoA) are examined. The investors check the structure of the company before investing in it, and analyse the changes which may required after the investments.

Contracts and Agreements:

The Investor’s Company's commercial contracts are examined to determine the risks associated with them. Vendor agreements, service agreements, leasing contracts, employment Agreement etc. are all included in commercial contracts.

Tax implication and Liabilities

A Target Company's deferred tax liabilities are examined to check for any inconsistencies. If there are any tax-related obligations, the acquirer will face substantial liabilities in the future.

Following information are demanded for Tax diligence:

• All the tax receipts and acknowledgement of paid tax liability
• May be login credentials of the tax portals

Applicable Compliance:

The Investing Company needs to check the applicable compliance on the target company for making the best decision.

Area of diligence under this:

• Company law compliance
• RBI compliance
• FEMA compliance
• SEBI compliance
• Labor Law compliance
• Sectoral applicable compliance

Suites and Litigation

All of the Target Company's legal disputes—past and present—are examined. To prevent any future issues, even potential litigation is being examined. Litigation may be brought by employees, clients, suppliers, or the government.

Process of Diligence

Step1. Plan & preparation:

The Company has established goals and priorities for performing legal due diligence. There are several minor goals and one major goal to consider. A professional may occasionally be recruited to prepare for the inquiry process. The checker makes the plan for the diligence and specifies the area of scrutiny and execute for the same.

Step2. Research and Analysis

The acquirer engages experts to gather information and documentation on the target company while the inquiry is ongoing. The professionals will be able to determine whether the acquisition of the Target Company will be advantageous or disadvantageous for the Acquirer by analysing these facts and documents.

All of the legal paperwork, including licences, permits, articles of incorporation, and shareholder warrants, will be looked into. Following this, all of the litigation involving the Target Company will be looked into as the investigation process moves to the next stage. It is important to look into the Target Company's assets and liabilities. The list of former and present personnel, as well as the current pay, should be carefully examined.

The size of the Company affects how long this process takes. Depending on the size of the Company, this process can take a few days to many months to complete. Once the purchaser has properly examined all the Target Company's weaknesses and is satisfied. Before making any first agreements with the target company, the acquirer should finish the legal due diligence procedure.

Step3. Out Come

At the conclusion of the investigation, the experts present the findings. The results should be conveyed as briefly as possible. The findings should highlight the most significant findings. Following the test, the results may be communicated verbally or in writing. The buyer needs to let the pros know what are important to them and what they hope to get out of the agreement. The primary issues of the acquirer should be highlighted in the outcomes reports by giving them top importance.

Step4. Presentation

The attorney or advisor who conducts the investigation must also present the buyer with the results of the legal due diligence. The report should be provided in the simplest and most user-friendly manner possible because the customer won't be familiar with legal jargon. Smaller deals should preferably be provided verbally, but larger deals requiring greater financial resources should have the legal due diligence findings delivered in the form of a memorandum that lists all the papers examined, the major problems identified, and the suggested fixes.

Advantages

1. Helps in Negotiation

The investor learns about all the ongoing legal disputes, personnel factor, labour agreements, intellectual property information, etc. of the Company while examining the structural, financial, and operational aspects of the Target Company. This study provides the acquirer with a solid foundation on which to bargain with the target company. As a result, this will aid in establishing a reasonable price for the investor.

2. Identification of Risk

The Target Company's ongoing legal battles will be a huge headache for the buyer. After the acquirer has acquired the target company, these lawsuits will decrease its worth. The procedure will assist in identifying present-day hazards and removing them.

3. Analyzing the Target Company

Every legal document is examined when Due Diligence is carried out within the Company. Before making a purchase, this aids in comprehension of the Target Company and its processes.