Legal Due Diligence

In a business, whenever a buyer buys a company, he automatically buys the legal reputation of the company. Hence, the buyer needs to be aware about the legal state of the company and the possible legal risks the company might face in the near future. So, comes the legal due diligence which can be described as a process of complete investigation, collection and analyzation of the legal risks of the particular company.

The buyer talks to the associates and customers, go through the documents and agreements, understand legal obligations of the company and ensure about legal potentials of investors as well as the company, to make up his mind before making the crucial decision of proceeding with the transaction.

Legal due diligence plays vital role in many areas which include: Business Transactions and deals, Merger and Acquisitions, Assessment of Supplier Quality, Business and Company law affairs, Commercial Property Dealings, Capital Markets, Commercial and Corporate Finance, Hedge Funds, Sale of Intellectual Property.

Objectives And Significance Of Legal Due Diligence

The goal of Legal Due Diligence is to understand the current status as well as the future consequences of the deal or agreement.

The main objectives of this process are:

• To assess the working conditions and capabilities of the company, employees, associates as well as customers
• To reveal the hidden legal risks, assess them and look for viable solutions.
• To get the idea of the expectations from the company and how it serves them.
• To have a greater look into all the agreements and contracts signed, know about the partners and understand other obligations.
• To draft a good negotiating agreement after getting complete knowledge.

Thus, Legal due diligence is must before acquiring a company because the buyer must know in what is he investing and with what he will be rewarded.

Legal Due Diligence Process And Report

A preliminary evaluation is done on basis of the areas and data that needs to be collected. Then a managing team is made, including all the members need to keep a track of the course, which usually comprises of a representor of the acquirer, a legal counsel, a statistics expert, technical consultants and bankers and other advisors as per the requirement. Then a detailed investigation is processed in each of the area with the expertise and the data is collected and hence may emerge the issues of facts and figures, liabilities, weaker management and control, non-compliance with some legal provisions. All the information is disclosed by the target company and a final report is made by the team.

The report contains all the information of the company, its assets, accounts, shares and capitals, contracts, taxation, insurance, exports and imports, obligations and liabilities, legal proceedings and compliance and non-compliance with the statutes and provisions, third party rights, its shareholders, customers etc.

After the report is made all the data is analyzed the buyer takes opinion and advice of the lawyer and other consultants and hence finals the deal accordingly.

Legal Risk Analysis

Most businesses are prepared for operational and strategical risks and good understanding of system but still remain unaware of the loss they can suffer due to the Legal Risks. The term legal risk refers to the financial harm or some other damage that may occur in a business if the company or the individual does not comply with the laws related to his business. These risks affect the income, image and reputation of the business very seriously.

Once a legal suit is filed and the business starts to lose its customers and other contacts. Legal risks can either be caused due to misunderstanding of the laws or negligence of the owner or company. Due to the different causes, there are different legal risks involved in a business.

Some of the major risks are:
Contractual risk:
Contracts play an important role in all business deals but if the terms of the contract are not kept there may arise legal disputes leading to loss of the both the parties. Contractual risks may also arise if heed is not given to the proper laws while framing the agreement and the contract may be then turn out to be void. These risks can be avoided if proper attention is given to the laws while documenting the contract and all the deadlines and terms decided are met accordingly by both the parties.

Compliance and regulatory risks:
Compliance Risk arises due to non-compliance with statues, policies or other laws.  Regulatory risk is caused due to the changing laws and policies that affect the market and the business. Non-compliance can cause huge economic loss to the companies. The risk can be prevented by working according to the latest laws and ensuring that all the members also work according to the set standards and policies.

Structural legal risks:
These risks arise from the sources other than those of Compliance and Regulatory risks i.e it arises due to the underpinnings of the of the industries or big investment companies. This time of risk is not common as it involves the effects of market values and anti-trust litigation etc which can alter the relationships and consumptions of big industries. It is both positive and negative. 

Non-contractual obligation:
It includes certain risks like Intellectual Property rights, trademark or copyright infringement committed unknowingly during the course of business. Some other risks include negligence, misrepresentation, fraud etc committed by the staff. The company or the business owners must remain careful and keep keen eye on their staff as well.

Dispute and reputational risks:
Disputes may arise between the two business co-heads of the company or company with its customers or among the partners. The disputes must be tried to be sorted without going into litigation and methods like arbitration, negation and mediation be preferred to prevent incurring of huge bills of Advocates.

Going into litigation or breaching the contractual obligation lowers of the image of a company; so, this risk must be prevented to maintain the level of the company or business.
Frauds: Frauds include data theft, misrepresentation of assets, accounting frauds, bribery and corruption. Such frauds can put the business in great danger and legal obstructions.

Legal Outsourcing

Legal Outsourcing is the practice of contracting third-party organization (some external law firm) for obtaining legal services. Though outsourcing can be domestic, overseas outsourcing (offshore legal process outsourcing) has gained momentum in last few years. When the LPO (Legal Process Outsourcing) provider is outside the country, all the activities are outsourced except the activities that require physical presence like court hearings and face to face recognition whereas when the provider is in the same country such exceptions does not exist.

Plethora of services are provided by the LPO firms which can be broadly categorised as Manpower Intensive Functions which includes legal coding and decoding, translation, document conversion, legal transcription, document review, etc which requires skilled paralegals and experienced lawyers and High Value Services which include legal research, patent and copyright assessment, statutory and case laws research, contract drafting, statistics and analysis of mergers and acquisitions, etc which requires experts and specialists along with appropriate databases.

Advantages Of Legal Outsourcing:

Cost Effective: Maintaining a highly skilled efficient team is not easy and also requires lot of money. Outsourcing the legal services helps the companies to escape from the monthly expenditure of these specially appointed people. Based on the type of services required the company can choose a relevant firm and negotiate the price according to the work.

High Quality Legal Support: The firms are specialised in their fields and has a team that conduct their business with expertise. These experts start the work immediately and facilitate the completion of the projects within short duration efficiently and with good skills.

Reduced load and resources: Outsourcing the legal work to other firms reduces the workload of the companies hence time and resources could be spent on other works. The companies do not need to invest in legal databases or spend time drafting their contracts, everything will be done by the outsourcing firm in set time limit with due diligence and expert help.

Disadvantages Of Legal Outsourcing:

Confidentiality:
One of the major concerns with outsourcing is the potential breach of trust of client whose information for sake of the completion of legal work is outsourced to a third party. Confidentiality becomes increasingly dangerous when the data is transmitted over the online networks where there are enough chances of hacking and stealing of personal information.

Local Laws:
One of the hindrances in offshore outsourcing is the different local laws of the different countries. Due to different privacy and legal provisions, the agreements and contracts deals may differ. Moreover, the liability of the company and the firm is also affected in case of business laws. Different time-zones can further complicate the matters.

Handling Disputes:
Settling of disputes is again a major issue in offshore outsourcing. If a buyer wants to file a suit against the service provider the case has to be fought where it is filed. thus, it may cause a problem in the latter stage and hence a proper agreement has to be made beforehand to prevent the subsequent issue of place of case if any.

Conclusion
Diligence must be taken while this process as well as there are some common mistakes like not having enough resources or appropriate team, biasness, incomplete reports, hidden data etc. and hence this may disrupt the actual result and may cause loss in future which defeats the purpose of the process. Thus, a proper Legal Due Diligence is must to ensure a better yield and escape the legal risks while buying a company and it must be done under guidance of a good lawyer.

Large business and Companies also affect the economy of the nation and hence must take proper care of Legal risks while their business course to prevent themselves as well as the nation from legal setbacks. So, they must ensure proper functioning, follow set standards, work with diligence and the employees too should be guided to work responsibly.

Legal outsourcing is the new developing field. It has both pros and cons but according to the current need and more benefits it is growing worldwide. This process helps the companies and provides with efficient legal services International firms help each other grow subjected to some cons which must be taken care beforehand according to the companies and firms dealing so as to get maximum benefit out of this process.

References:

1. http://www.globaljurix.com/legal-due-diligence/
2. https://www.upcounsel.com/legal-due-diligence
3. https://www.mondaq.com/india/operational-performance-management/17241/legal-due-diligence
4. https://www.berkmansolutions.com/articles/risk/how-to-measure-and-manage-legal-risk
5. https://www.kochiesbusinessbuilders.com.au/understanding-and-managing-legal-risk-what-every-business-needs-to-know/