What is Legal Due Diligence?
Legal due diligence is an examination into a business by re-viewing documents and interviewing employees. Legal due diligence is completed when a company or interested party is looking to buy or invest in a business. The potential investors do thorough research and a deep dive into the company commonly known as due diligence.
The hope is that any potential liabilities are brought to light during legal due diligence. All of the data that is collected is analyzed so that the investor can be as informed as possible in their decision making.
Why is legal due diligence necessary?
Legal due diligence is a necessary investigation that can assess the potential risks and benefits of the business. By looking at the business’ assets and the current status of the business, investors can whether or not buying or selling is worth their time and money.
Finding out the status of business also helps to determine the overall value and the business’ potential.
Why is legal due diligence important?
The most important reason to complete legal due diligence is that it helps all companies involved to make informed and strategic decisions.
While legal due diligence is often one company investigating another, it can also be done within your own company.
Having an investigation into your own company can help you to understand the true value and worth of your company. When another business comes to you to make an investment offer, you can negotiate for a better sale.
The legal due diligence process
The process for legal due diligence is fairly straightforward. While it can be completed in three simple steps from beginning to end, it can be pretty time-consuming. There is a lot of digital paperwork that needs to be collected and organized to keep everything orderly and efficient.
Preparation is the first step in completing legal due diligence. This is when goals and priorities are set. Due to limited time and budgets, it’s always important to make sure that the goals and priorities of your company are set first so that you can stay on target and be as efficient as possible with your time and investigations.
During an investigation, lawyers collect facts and documents to analyze. The results that they receive from their data analysis is what forms a legal opinion on whether or not the sale, purchase, or investment of a company is worth it.
The lawyer's job is to create a full picture and to be as thorough as possible in the investigation.
At the end of the investigation, the results are collected and a formal presentation of the data will happen. Lawyers will show everything they found through a summary where they point out all of the important factors that arose during the investigation. They’ll also be able to give their opinion on the sale and whether or not it is beneficial to your company.
Legal due diligence checklist
Having a checklist in place helps to keep everyone organized and on-task during due diligence.
Legal due diligence typically has three subcategories
- Intellectual property due diligence
- Business due diligence
- Accounting due diligence
The following are some examples of what you can expect to see in a checklist during legal due diligence.
There are a lot of documents involved in a due diligence process and can include any of the following:
- A list of all direct and indirect company subsidiaries
- The company's capital, including the number of authorized shares, outstanding shares and record owners for a series of stock.
- The certificate of incorporation
- Company bylaws
- The minutes from previous meetings including the stockholder meetings, the board of directors meetings and committee meetings from within the past 3 years.
- The stockholder agreements that relate to the management, ownership, and control of the company stock.
- Any documents that relate to the finances and equity issuances of the company.
- Correspondence between the company and the directors if it relates to indemnity, employment, loans or advances.
- The books, transfer ledgers and other records pertaining to the stock records.
- Addresses and lists of any land or buildings owned by the company.
- Agreements that the company is a part of, including the state, federal and local levels.
You can find legal due diligence checklist questions here
After a deal is complete, you will also need to complete legal integration. Check out DealRoom's Legal M&A Integration Checklist.