The buyer performs legal due diligence on the targeted firm as part of the due-diligence procedure during a merger or acquisition. Prior to a merger or acquisition, it entails studying and comprehending the legal risk connected with the target organization. An M&A deal might succeed or fail based on due diligence, particularly legal due diligence. It can help both the buy-side and the sell-side to discover potential obligations and comprehend any legal risks by doing a crucial legal analysis of the papers and data. Get your legal due diligence done by the best finance lawyer in Kolkata.
Here, we’ll go through the fundamentals of this kind of due diligence, including how the process takes and what data must be acquired. Whether you are on the buy-side or sell-side, we even offer a checklist to be completely prepared.
What is legal due diligence?
The process of gathering and evaluating all 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 litigation or intellectual property specifics. Both parties may make an informed choice in the M&a deal by having a thorough grasp of the target firm and any potential losses.
This could entail an examination of the following:
- Contracts (customer, supply, operating, and employee contracts and licenses)
- Current and upcoming court cases
- intangible assets
- Assets and tax obligations
- environmental laws
- Assurances and representations
- Organizational paperwork (company by-laws, limited liability agreements, stockholder agreements)
The best finance lawyer in Kolkata will ensure that all of these criteria are considered.
Sell-side legal due diligence
Legal due diligence is advantageous to both the buyer and the seller. It lets you, the seller, to assess your share profitability and get it ready for sale. This is especially important because problems discovered during the due diligence process account for approximately 50% of deal failures. Issues can be found and fixed before a purchaser or investor intervenes if the sell-side can conduct due diligence on their own business.
The procedure is simplified and less stressful for the buyer as a result. It frequently results in a deal with a higher value for the seller.
Buy-side legal due diligence
The advantages of this kind of due diligence are fourfold for the acquiring corporation. It first helps the buyer comprehend the target business and how it operates. This then helps the buyer create a robust M&A contract and identify a fair purchase cost.
Most importantly, you can make a well-informed judgment and stay out of trouble in the road if you are completely aware of the target’s possible legal risks and responsibilities.
Legal Due Diligence Benefits
The following are the top four benefits of conducting legal due diligence by the best finance lawyer in Kolkata :
Possibility to Learn About the Target Company
All legal documents are taken into account when determining whether to perform legal due diligence on the target firm. In-depth analyses are performed on papers such the Memorandum of Association, Articles of Association, Bylaws, Minutes of Past Sessions, Non-Disclosure and other Legal Agreements, etc. Before making an acquisition, this aids the acquirer in comprehending the target firm and its activities.
It helps Determine Fair Price
The buyer can get information which can help in determining the target company’s fair market value via legal due diligence, which is the second significant benefit of this process. It so occurs that the finer criteria, such as litigation against the business, employee and labor agreements, information about intellectual property, etc., come to light when we study the target organization’s financial, organizational, and operational features. This provides the buyer and the target business with a solid negotiation foundation. Additionally, this approach will guarantee both parties to negotiate a reasonable price for the M&A transaction.
Ensures a Strong M&A Contract is Prepared
A benefit of conducting legal due diligence is that it makes it easier to spot issues that can make it difficult to close the deal. When both parties are aware of potential sticking points, negotiations can be used to discuss and resolve them. By doing this, they guarantee that the transaction goes off without a hitch.
Determines Potential Legal Risks
In addition to the risks that could make it difficult to close acquisitions, the target firm itself may have risks that could cause issues after the merger. These risks could include ongoing legal battles, government liabilities like taxes and other debts, approval of pending intellectual property like patents and trademarks, etc. These risks can potentially result in serious issues down the road and decrease the value of the M&A acquisition. Today’s legal due diligence assists in identifying these potential hazards. These risks can be reduced or at the very least considered while conducting the transaction.
The deal between Dai-Ichi Sankyo and Ranbaxy can be used as an illustration of the significance of due diligence. Dai-Ichi Sankyo initially paid Ranbaxy $4.6 billion for 63% of its stake; however, the company later wiped off $3.6 billion of the acquisition’s worth. The explanation for this is that when Ranbaxy was requested to stop production of all pending and prospective drug applications from its Ponta Sahib factory in 2009, they were not fully aware of the scope of the Food and Drug (FDA) Inquiry into Ranbaxy. The biggest draw for Dai Ichi was the first-to-file atorvastatin, but it was rife with issues. Dai-Ichi suffered significant losses as a result of their inadequate due diligence.
Securities Exchange Board of India v. Nirma Industries and Anr, the Supreme Court ruled that an investment business must make sure that the proper due diligence is done over the target company before investing under Regulation 27 (d) of the SEBI, 1997. The claim of Nirma Industries’ ignorance of lawsuit and the risks of investing was rejected by the court since it was made clear that Nirma Industries was aware of several litigations.
How long does it take to do legal due diligence?
Due diligence checks take about one to two months. This is typically how long it takes the buyer to finish a comprehensive business analysis, considering all the legal considerations.
However, if the seller enters the deal unprepared, the process could be quick and smooth. For this reason, always being prepared is crucial to a deal’s success.
Any merger and acquisition transaction must undergo a thorough due diligence process to be successful. Due diligence’s primary goal is to verify presumptions on the detection and estimation of risks. You must choose the best finance lawyer in Kolkata for the same.