M&A legal due diligence: Comprehensive guide for public and ...
Due diligence is the heart of a successful merger or acquisition. Legal due diligence involves a comprehensive review of a target company’s business, legal, financial, operational, and other relevant details to evaluate its suitability for acquisition. The process is intended to identify any potential risks or liabilities that could impact the transaction. The process can be costly; it can be time-consuming and frustrating. But it’s absolutely essential. Diligence is how lawyers help ensure that a deal that looks good on paper delivers on its promised value and benefits.
Organizing the Due Diligence Team
Before you craft your diligence review, start with the basics: analyze the deal itself. What type of merger is it — a reverse merger? Is it a hostile takeover or more a merger of equals? Among the other information you will need to know:
- Once the team is organized, determine how workflow will be handled.
- Determine how results will be communicated to attorneys conducting merger negotiations.
- Decide whether local counsel is needed, and if any specialist counsel will be required.
Information Gathering
As there is much to process during diligence, your team should focus on finding relevant information pertaining to deal negotiations. This includes understanding the target’s management/ownership structure and identifying potential impediments to the deal closing.
In a public deal, the target’s SEC filings are critical to diligence review. A team should assess all publicly available materials via the SEC’s EDGAR system. Public companies are also subject to Sarbanes-Oxley compliance requirements which must be evaluated during due diligence.
Private Deal Considerations
In a private deal, the diligence team may not have access to resources like the SEC's EDGAR system. Instead, they will require access to privately-held financials and ownership documents. Due diligence summaries and reports are essential in both public and private deals to keep track of reviewed materials and document findings.
Technology in Due Diligence
Technology plays a vital role in modern due diligence processes. Artificial intelligence systems can automate document identification and extraction of relevant clauses, transforming the efficiency of the due diligence process.
For a more detailed M&A due diligence checklist, you can refer to this sample M&A due diligence checklist.
It's crucial for diligence teams to stay organized and focused throughout the process to ensure a successful outcome.
