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What is legal due diligence? Why needs legal due diligence?

legal due diligence

What is legal due diligence? Why needs legal due diligence?

In period that merger and acquisition has been more and more growing as current, the related services have increasingly developed to meet the needs of the market. One of the services associated with merger and acquisition (M&A) that cannot be ignored is legal due diligence service. If the auditing of an enterprise is conducted by the auditing firms to inspect financial situation, tax declaration of such enterprise, the legal due diligence service will focus on verification of legal compliance of that enterprise and is conducted by law firms that provide this service.

The terminology of “legal due diligence” has been appeared for a long time in the world and recently, it has been more and more popular and developed in Vietnam’s market, along with M&A transactions’ strong development by foreign investors. In M&A transactions, the purchaser or the investor (collectively referred to as the Investor) who invests in a Target Company will be specifically interested in financial situation and legal compliance of the Target Company. These matters are deemed as prerequisite basics for the Investor to decide as to whether or not to purchase an enterprise, conditions for purchasing and  the price of transaction (if the Investor decides to purchase). In order to clarify these matters, the Investor shall verify the Target Company’s financial and legal situation to obtain a panorama on the “health” of the Target Company. As you may aware, legal due diligence that is specialized activity requires an extensive knowledge on relevant laws, skills and experience; the Investor therefore will use the legal due diligence service provided by law firms to support them in this legal due diligence.

The legal due diligence includes the comprehensive verification on legal matters such as establishment, capital contribution, organizational structure, legal compliance in business activities, legal matters with respect to assets, main contracts, agreements, labour matters, etc.. in the Target Company, in particular:

  • Establishment process: All information on the Target Company, from the establishment time, type of business, the operation term, head office and branches, representative offices, stores and business lines of the Target Company, shall be synthesized, analyzed and assessed by the firm conducting legal due diligence.
  • Capital and capital structure: registered charter capital, actual capital to be contributed, type of assets registered for capital contribution and actual type of assets to be contributed, the capital structure shall be inspected and verified for the clear understanding of the Investor.
  • Main contracts, agreements: the law firm conducting legal due diligence shall report main contents of important or high-value contracts signed by the Target Company. Accordingly, they will point out unclear issues and legal risks that the Target Company may face based on contracts/agreements’ terms and conditions, if any. Accordingly, the Investor will determine the existing legal rights and obligations that the Target Company has and legal agreements that are binding on the Target Company.
  • Assets: the Target Company’s high-value assets, such as land use rights, warehouses, workshops or other special assets (e.g. intellectual property or other assets) of which the ownership is required to be registered (e.g. cars, boats) shall be considered, assessed to determine whether or not the Target Company is legally possessing such assets, and whether or not these assets are being pledged, mortgaged or used as collateral in any agreement.
  • Law Compliance: in this aspect, the law firm conducting legal due diligence shall assess law compliance of the Target Company through whether or not the Target Company has obtained necessary licenses, whether or not the statutory conditions are met fully to conduct its business activities, whether or not the procedures required by competent authorities during business activities are implemented (including matters related to tax, labour etc..). If there is any non-compliance of the Target Company, the law firm conducting legal due diligence will point out such non compliances and simultaneously provide legal consequences that the Target Company may face due to these non-compliances.
  • Litigation and dispute dossiers: the law firm conducting legal due diligence shall consider and synthesize existing disputes and complains in which the Target Company is a related party. Accordingly, the verification shall concentrate to analyze the litigation dossiers of the lawsuits and assess the legal position of the Target Company in such lawsuits. The verification result shall show the legal position of the Target Company in lawsuits and the risks that the Target Company may face, if any, to the Investor.
  • In addition to the main matters as above, depending on the needs of the Investor, the law firm conducting legal due diligence will verify additional fields and other issues as requested by the Investor.

The result of legal due diligence will be a legal due diligence report in which provides the Investor with a panorama on legal status of the Target Company in each relevant matter, the legal risks that Target Company is facing or will face, the assessment of the law firm on risky level and these related issues that need to be considered when the Investor purchases or invests in the Target Company. Based on the legal due diligence report, the Investor will make appropriate decisions. With the benefits of legal due diligence as mentioned above, legal due diligence is necessary and important basis for implementing an M&A transaction.

Summary
Article Name
What is legal due diligence? Why needs legal due diligence?
Description
The terminology of “legal due diligence” has been appeared for a long time in the world and recently, it has been more and more popular and developed in Vietnam’s market, along with M&A transactions’ strong development by foreign investors
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Publisher Name
Phuoc & Parnters