A legal due diligence is scrutiny of all, or specific parts, of the legal
affairs to the target company depending on the purpose of legal due diligence
which may be merger, acquisition or any major investment decision, with a view
of uncovering any legal risks and provide the buyer with the extensive insight
into the company's legal matter.
Legal due diligence is an art of managing a risk of undertaking a major business
transaction. The documents that is to be checked during legal due diligence may
be financial information, statutory information, organization matters, employee
matters etc. The process of legal due diligence involves various steps such as
entering of MOUs, preparation of questionnaires and checklists, interview with
target company's personal, interaction with regulatory authorities, preparation
and discussion of preliminary report, finalization of report and arriving of
decision. The legal due diligence covers various laws such as Companies Act,
Income Tax Act, other business laws etc.
Objective and Scope of Legal Due DiligenceSome of the common objectives in most of the cases would be as follow:
- Gathering of information from the target company.
- Uncovering of the risks of Target Company through SWOT analysis.
- Improving the bargaining position.
- Cost benefits analysis.
- Effect of risk and liability on the cost of the transaction.
- Mapping of compliance requirement of the target company and the actual
The Scope of due diligence depends on the purpose and objectives of due
diligence and may vary from case to case. However, certain mandatory issues that
should be covered in any type of legal due diligence are as follow:
- Regulatory Compliance:
Compliance requirements of the company.
- Contractual Compliance:
Compliance by the company under various material contracts by the company
with suppliers, customers, employers etc.
- Compliance under Intra Corporate aspects:
Compliance of MOA, AOA, Corporate Policies, Procedures, Code of Conduct etc.
- Financial Aspects:
The financial obligations of the company, penalties paid for violations of
laws in the past etc.
- Non-Financial Aspects:
Reputation and Goodwill of the company.
- Cultural Aspects:
Epically in case of cross border transactions, compatibility and
adaptability of corporate cultures are to be analyzed to eliminate the
problems that may arise out of cultural difference.
Legal Due Diligence Process
There is no definite process of a legal due diligence. The investigation aspects
as well as Legal Due Diligence process varies depending upon the scope of work
dictated by the client, the focus, special areas of weakness, the types of
In General, The Following Process Involved In Legal Due Diligence:
General Documents/Aspects to be covered
- Entering of Memorandum of Understanding between the transacting parties
along with confidentiality agreement.
- Determination of scope of Legal Due Diligence
- Calculation of time frame
- Drafting of various questionnaire and checklist
- Obtaining of access to records and data room arrangement
- Interaction with regulatory authorities for independent check
- Checking of regulatory and contractual compliance.
- Analysis of financial and non financial information
- Investigation of material issues
- Drafting of preliminary report
- Discussions with the management of the target company
- Finalization of the report
- Determination of Strategy
The following aspects would give a rough figure on the aspects/documents to be
looked into the process of legal due diligence. However, this is not an
Possible Hurdles In Carrying Out A Due Diligence:
- Organizational and internal Aspects
- Financial Aspects
- IPR/Patent/R&D Details
- HR Aspects
- Environmental Aspects
- Material Contracts
- Other aspects- (i) Copies of any governmental licenses, permits, or
consent, (ii) Any correspondence or documents relating to any proceeding of
any regulatory agency, (iii) A list of all existing products or services and
products or services under development, (iv) Company's purchase
policy/credit policy/, (v) Details of largest customers, (vi) Details of
company's competitors and (vii) Press release relating to the company.
- Non availability of information: On many occasions, when a person
carries out due diligence, the required information may not be available or
sufficient to drive a complete picture.
- Unwillingness of Target Company's personal in providing the complete
information: Non-co-operation of Target companies personal may also prove to
be a major hurdle during the due diligence process. Sometimes, the available
information would be pretended as not available.
- Providing of incorrect information: Providing of incorrect information
by the target personnel also acts as a major hurdle in the due diligence
- Complex tax policies and hidden liability: Complex tax policies and
structure may create a number of hidden tax liabilities, which may not be
easy to track,
- Multiple Regulations and their applicability: Owing to the new and
emerging legislations, it is difficult to interpret whether specific
legislation is applicable for business and get a legal opinion on the same.
- Absence of proper MIS: Due Diligence process would become difficult if
there is no proper MIS in the company.
- Follow up questions/actions.
- Ask several people the same question.
- Polite persistence
- Independent check with regulatory authorities
- Developing an MIS.