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Legal due diligence checklists
This section includes legal due diligence checklists for a company purchase, including a template legal due diligence request list and a standard form of legal document review.
A prospective buyer of a company will carry out due diligence on the company and its business and operations. This process usually covers commercial, financial (including tax) and legal due diligence.
Legal due diligence usually begins with the buyer issuing an information request list, also known as a due diligence questionnaire, for the seller to answer and provide copies of requested documents.Â
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What is legal due diligence?
Potential buyers of a company carry out due diligence on the company and its business, covering investigations into commercial, financial, tax and legal matters.
The due diligence required for the acquisition of a company is likely to be more extensive than the due diligence for a business acquisition. A company acquisition will mean that the buyer, through the acquired company, will take on all the liabilities of the target company, including both known liabilities (for example, obligations to perform contracts or to provide employee benefits) and unknown liabilities (for example, unpaid tax and liability for past breaches of contracts or legal requirements). In the case of a business acquisition, a buyer is more able to choose whether or not to assume responsibility for the obligations and liabilities of the business and assets being transferred.
In legal due diligence, the buyer (or its advisers) presents the sellers with a set of inquiries for them to answer and to provide requested or supporting documents. The buyer will then ask any necessary follow-up questions.
The buyer typically looks for warranties in the SPA covering the accuracy and completeness of the answers and documents provided during the due diligence process. Care should be taken in answering the requests, to avoid potential claims for breach of warranty and misrepresentation.Â
The replies and materials provided should also serve as the basis for the specific disclosures to be made by the sellers under in the disclosure letter which will accompany the SPA.
How are issues arising during due diligence dealt with?
Issues identified during the due diligence process can be addressed in several ways:
- renegotiation of transaction terms: this may involve adjusting the purchase price or holding back some of it until an issue has been resolved
- pre-conditions to transaction: the buyer may require the seller to complete certain actions before the sale, such as transferring unwanted assets and liabilities out of the target company or obtaining necessary legal consentsÂ
- warranties or indemnities: the SPA may be changed to include specific warranties or indemnities covering the relevant matter, allowing the buyer to claim damages or losses if they are breached
- withdrawal: if the issue is significant and cannot be resolved satisfactorily, the buyer may decide to withdraw from the transaction
