How to Create a Comprehensive M&A Legal Due Diligence Checklist
In any significant mergers and acquisitions (M&A), the buyer conducts due diligence of the target company prior to entering into any binding commitment.
What is M&A Legal Due Diligence?
Before acquiring a company, a buyer or investor will typically conduct a thorough investigation into the financial, structural, and operation aspects of the business, and use this information to ensure that they’re making a sound commercial investment. This process of collecting, understanding and assessing all the legal risks associated during an M&A process is known as legal due diligence.
In addition to determining whether the purchase or investment is a good idea in the first place, due diligence can help the buyer or investor evaluate the price point to ensure that they are not overpaying and provide negotiating points and properly evaluate legal risks.
During this process, the seller (or target company) must provide extensive documents and other information to the buyer or investor. Just as the buyer or investor should be represented by an M&A lawyer, so should the seller. Without an attorney by their side, the target company will find it difficult to focus on running the business while satisfying the constant requests for documents and other information.
What to Include on Your M&A Due Diligence Checklist
Although no two M&A transactions are the same, certain aspects of the process are common to most transactions. We have listed some of these key considerations for you below. A due diligence inquiry should establish the following key information about the target business:
· Confirm that the seller has good title to the stock or assets of the target company
· Investigate potential liabilities and risks
· Confirm the value of the target company
· Learn more about the operations of the target company
· Identify any impediments to transaction, such as third party consents, a required stockholder vote or prohibition on transfer or change of control of the company.
Company Structure
Review the company’s corporate structure and organizational matters, including:
• Articles of incorporation and corporate bylaws;
• Organizational structure;
• Stock option agreements;
• Board and shareholder meeting minutes;
• Financial information, including income statements, balance sheets, projections, liabilities, and credit agreements;
• Press releases issued by the company;
• List of all subsidiaries; and
• Any business sales or purchase agreements.
Generally speaking, M&A lawyers will review this information going back five years.
Tax Implications
Review of:
• All tax returns filed, including federal, state, local, foreign, and sales;
• Audits;
• Tax sharing agreements;
• IRS settlement documents; and
• Any correspondence with tax authorities.
As with the corporate structure and financial documents above, your M&A attorney will likely review the past five years of tax documents and related correspondence.
Assets and Leases
Review of:
• Schedule of fixed assets and real estate;
• Leases of equipment;
• Real estate leases, deeds, mortgages;
• Technology; and
• Research and development.
Securities Issuances
Review of:
• Shareholders and number of shares held;
• Stock options;
• Equity financings;
• Debt financings; and
• Any agreements related to the company’s sale of securities.
Material Contracts and Commitments
Your lawyer will review the target company’s contracts and commitments to look for any change of control issues and other terms that would materially affect the M&A:
• Accounts receivable and payable;
• Supplier and customer contracts;
• Non-compete agreements;
• Loans, credit agreements, and guaranties;
• Settlement agreements;
• Partnership or joint-venture agreements;
• License agreements;
• Schedule of any insurance policies in force; and
• Employment contracts.
Intellectual Property
To determine valid ownership of target company’s IP and potential liabilities, it’s crucial to review all:
• Patents, trademarks, and copyrights;
• Trade secrets;
• Domain names;
• Licenses; and
• Any IP claims, litigation, or lien’s on the company’s IP.
Legal Issues
Your M&A attorney will investigate any potential legal liabilities, as well as settled litigation, arbitration, and any regulatory and compliance issues. One of the key considerations in this part of the process is assessing the antitrust implications of the transaction.
Is it a Good Fit?
Determining whether the target company will align with your current company requires extensive consideration of the following:
• Human Resources;
• Marginal costs;
• Technology;
• Work culture;
• Company management; and
• Employee base, including employee contracts, policies, and benefits, and any potential employee issues.
Work with an Experienced M&A Attorney
It is vital to have M&A attorney’s legal support and guidance to perform truly comprehensive M&A due diligence. Your lawyer will create a comprehensive checklist which you must work through together before finalizing any type of agreement. Whether you are the buyer or seller, completing this process will allow you to enter into any transaction or investment with full confidence that the deal is in your best interest.
Beyond Standard Due Diligence
The checklist above provides a guideline of some of the key considerations involved in the M&A process, but it is far from exhaustive. Furthermore, the scope and depth of your M&A process will vary widely based on multiple factors. In addition to the above information, it may be in your best interest to also review: internal and external studies of the company or its products; EEO, DOL, OSHA, and EPA inquiries; and public record information and news coverage.
Speak to a Pasadena M&A Lawyer Today
At Parsus Law, our dedicated M&A team will help you develop an effective and well-defined M&A strategy to achieve your desired outcome in the most seamless manner possible. We have experience in all forms of M&A, including cross-border and complex transactions. From tax analysis to employment matters, we will guide you through all aspects of the process. Contact the M&A team at Parsus Law to learn more today.