Inside the Legal Due Diligence of M&A: A Seller’s Guide to Navigating the Process

Upon receiving the legal due diligence questionnaire, the seller should prepare and organise the required documents and information. This preparation phase is pivotal, as it sets the stage for a smoother due diligence process. It involves gathering financial records, contracts, employment agreements, property documents, and any legal history. Transparency is key during this phase. Providing comprehensive and accurate information can prevent potential disputes or renegotiations further down the line. Sellers are advised to work closely with their legal team to ensure that all documentation is complete, up-to-date, and readily accessible. This not only demonstrates the sellers' credibility but also helps in accelerating the due diligence process.

Key Areas of Inspection

1. Due Diligence Questionnaire

The due diligence questionnaire is a comprehensive document that asks detailed questions about every aspect of the company's operations. It covers everything from corporate structure and records to banking, business contracts, and trading. The questionnaire is designed to uncover any potential legal, financial, or operational risks associated with the company.

2. Corporate Structure and Records

This involves examining the company's formation documents, bylaws, minute books, and shareholder agreements. The objective is to understand the company's legal structure, its ownership, and the rights and obligations of its stakeholders.

3. Share Capital and Shareholders

The buyer will want to know who the shareholders are, their rights, and any agreements in place. This includes understanding the types and number of shares issued, outstanding options, warrants, or convertible securities.

4. Accounts and Reports

A thorough review of the company's financial statements, auditor's reports, and internal financial reports is conducted. The aim is to assess the financial health of the company and identify any financial risks.

5. Banking

This involves a review of the company's banking relationships, loan agreements, guarantees, and security interests.

6. Business, Contracts, and Trading

All significant contracts (like customer contracts, supplier agreements, and lease agreements) are reviewed. This helps to understand the company's business operations, its obligations, and any potential risks.

7. Intellectual Property

The company's intellectual property (IP) assets like patents, trademarks, copyrights, and trade secrets are evaluated. This is vital as IP can be a significant part of the company's value.

8. Information Technology

This involves reviewing the company's IT systems, agreements with IT service providers, data privacy, and security measures.

9. Insurance

A review of the company's insurance policies is carried out to ensure adequate coverage for potential risks. A history of claims and notifications will be required.

10. Regulatory, Compliance, and Consents

The company's compliance with applicable laws and regulations is assessed. This includes environmental, health and safety, and employment laws.

11. Litigation

Any ongoing or potential litigation involving the company is reviewed. This could include disputes with customers, suppliers, employees, or regulators.

12. Employment

Employment contracts, employee benefit plans, and disputes are examined. This helps to understand the company's obligations towards its employees and any potential liabilities.

13. Retirement

Retirement plans and pension obligations are reviewed.

14. Property

If the company owns property, it is inspected for potential issues such environmental issues, restrictions on trading, and lease agreements.

15. Environment

The company's compliance with environmental laws and potential environmental liabilities are reviewed.

16. Health and Safety

The company's health and safety policies, procedures, and records are reviewed to ensure compliance with relevant regulations.

During the legal due diligence process, any deficiencies are identified, rectified where possible, or highlighted as a gap. These gaps could potentially affect the terms of the transaction, including the purchase price. So it's important to ensure your company record-keeping is as tidy as possible and any potential issues are flagged early in a sale process.

Drafting of the Share Purchase Agreement (SPA)

Whilst the due diligence process is completing, a simultaneous step is the drafting the SPA. The SPA is a legally binding contract that outlines the terms and conditions of the sale, including the purchase price, closing date, and representations and warranties made by the seller.

In conclusion, legal due diligence is an essential process in any M&A transaction. It allows the buyer to make an informed decision about the purchase and helps prevent unforeseen liabilities post-acquisition. Therefore, it's crucial for both parties to approach this process diligently and thoroughly.

Undeniably, the process of legal due diligence can be labour-intensive and occasionally complicated, requiring meticulous attention to detail and comprehensive understanding of various aspects of a business. But you don't have to navigate these complexities alone. At Branta, we are committed to standing by your side throughout this process. As a team, we can approach your corporate transactions with confidence, peace of mind, and impartiality. The preparation phase is pivotal, as it sets the stage for a smoother due diligence process. It involves gathering financial records, contracts, employment agreements, property documents, and any legal history. Transparency is key during this phase. Providing comprehensive and accurate information can prevent potential disputes or renegotiations further down the line. Just make contact if you want to discuss any issues around a M&A transaction: info@branta.co.uk