Legal Due Diligence

A crucial stage of any M&A transaction, an LDD is essentially a

legal review of documents and information on the target company
or assets.

Objectives
The primary goal of an LDD is to find legal risks. Then, to analyze,
assess, and describe those risks. Finally, to recommend mitigating
measures.

Setting up red flags is where the LDD does its best and gravest.
This is a factor that largely determines whether the deal would go
through or not. Specifically, the LDD may disclose a dealbreaker. If
unresolved, the latter may ultimately turn into a showstopper.

Timing
Depending on your deal structure, an LDD can precede or follow
conclusion of a sale-and-purchase agreement, be it a share deal or
an asset deal. If the LDD runs after the SPA, then the agreement
would be conditional on successful completion of the review.

Results
The LDD findings, risks, and recommendations ultimately find their
way into an LDD report. As a result, an LDD usually takes a lot of
time. That’s where the legal bill becomes quite hefty.

The LDD results turn into the SPA representations and warranties,
disclosure schedules, and indemnities. Those provisions usually
involve hot bargaining.

Who needs an LDD, especially given that it is normally so costly?

An LDD is paramount for both seller and buyer.
Buyer’s LDD
For a buyer, it allows to check the target. If it’s worth less than what
the seller asks, the LDD can help the buyer reduce the purchase
price or even avoid unfavorable deal at all. The LDD thus allows to
buy for less.

Seller’s LDD
For a seller, on the other hand, the LDD helps prepare business for
sale. In particular, the LDD enables the seller to clean up the house
for the guest, namely the target for the buyer. The LDD hence
allows to sell for more.

Arrangement
To conduct a legal due diligence for the buyer, the seller has to
arrange for the target to provide relevant documents and
information to the buyer. In the modern day and age, the LDD
materials are usually provided online in a data room.

The Buyer then has a certain period of time (for example, a month)
to review, analyze, and assess the documents and information. By
the result, the buyer determines how to proceeds with its purchase.

To run an LDD for itself, the seller merely demands similar

documents and information from its target.