The legal due diligence (DD) process is the stage in which the Buyer typically engages counsel to investigate and assess the Seller or the target company in company acquisitions (M&A) or share purchase transactions. Conducted in depth, DD involves a substantial amount of work; the author briefly summarizes several points below.
In practice, DD is not conceptually difficult, but it demands care, meticulousness, and subject-matter expertise. There are numerous issues to watch for, documents to review, and tight timelines to meet. Working late into the night and into the early morning is common; there are days when colleagues arrive at the office looking exhausted from lack of sleep. A “fast” DD can take roughly 1- 3 months, and often longer, depending on the size of the deal and the workload.
Effective DD requires good-faith cooperation between both sides. Information from the Seller to the Buyer may be provided via hard copies, email, data files, questionnaires, interviews, and discussions with officers and employees.
Lead counsel will assign discrete workstreams to individual team members or sub-teams. Typical streams cover the company’s key legal and compliance aspects, including: review of business lines; capital contributions and ownership structure; charter and governing documents; labor and employment matters; environmental compliance; intellectual property; checks for pending or threatened disputes and litigation; the company’s formation and governance; whether “sub-licenses” or sectoral permits are required and actual compliance status; material contracts entered into with counterparties; assets and financing arrangements, and more.
Overall, a thorough DD spans legal, tax, accounting, and financial dimensions. It is a critical step that gives both the investor and the enterprise confidence before completing any transaction.
