DUE DILIGENCE: Importance In Acquisition
Posted: Mar 18, 2020
We can list numerous corporations who rushed into professional marriages without performing legal due diligence or reviewing the corporate structure and relevant documents of the company. An acquisition transaction is one of the most appropriate decisions taken by a company which frames the future of any organization. Thus, careful due diligence into the financial reports of the target company holds utmost importance.
Legal due diligence of a corporate entity is often a lengthy and a cumbersome task, which can significantly impact the timeline of the project. In any merger or acquisition, parties are usually concerned about the time frame and desire to finish the transaction at the earliest. The Corporate Lawyers of UAE will highlight certain important aspects of due diligence in any merger or acquisition transaction under UAE laws.
Epitome of Due-Diligence
In any Merger or Acquisition transaction, it is advised to evaluate the strengths and weaknesses of the project as well as the target company and its sister companies prior to finalising the deal. The objective of the concerned exercise to obtain all relevant and up-to-date information of the target entity and to understand the significant shortcomings of the company which were earlier not apparent. It can further assist in understanding the financial or legal consequences that might hinder the future growth of the company or can impact the return on investment.
Legal due diligence mostly conducted by Corporate Lawyers of Dubai will comprise of financial and legal review of the targeted company. Wherein, the financial analysis is usually performed by financial experts, and qualified Corporate Lawyers undertake the legal review. In any legal due diligence, lawyers tend to review structure of the company, corporate documents, trade licenses, management structure, power of attorneys, corporate agreements, financial liabilities, employment contracts, outstanding debts, internal policies, insurance agreements or policies, movable and immovable assets, mortgages, loans, corporate and commercial litigation and list goes on. As mentioned above, the ultimate objective of this exercise to prevent the acquiring company from any future casualties post taking over the target company.
The scope of due diligence exercise vary in each transaction, and it will rarely be general and covers all aspects of the company related to the sale. It is less likely that the due diligence review will be limited in scope as it involves review of all significant issues pertaining to the company which might impact the merger or acquisition transaction. It further depends upon the organization structure and the business of the target company that can either be retail, construction, telecommunication or any other activity. In each of the companies, the lawyers have to review the business structure, assets in order to determine the shortcomings of the company and how to improvise such deficiencies. There is a direct nexus between the size of the company and the extent of due diligence review as for a small acquisition transaction does not require extensive due diligence review. However, in a significant acquisition transaction, a thorough investigation of documents is required for in-depth knowledge of target-company.
For instance, in an acquisition transaction between companies providing professional services, the due diligence review will entail reviewing the competence of employees and their contract, determining the licenses obtained by the company, goodwill in the market, intellectual property registration, contracts entered by the company. Whereas, if the target company is sale oriented then it is likely to review the goods purchased and sold, outstanding debt in the market, movable and immovable assets of the company, machinery, factories, additional permits and licenses.
The target company in an acquisition transaction is obliged to provide every relevant document of the company which can affect the acquisition transaction or which is necessary for acquiring the company to review before finalising the deal. The seller will create a data room either online or physical through which they can offer all the relevant documents to the company or their legal representatives. It is essential for the target company to provide all documents otherwise the process and timeline will unduly increase delaying the transaction unnecessarily.
Timeline for Review
The schedule for finishing any due-diligence review is directly correlated to the size of the transaction and the number of documents made accessible for the survey. The seller will either required to provide copies of all documentation or create an information room and give adequate access to it to the legal advisors, bookkeepers and different experts surveying the literature for the buyer. The seller ought to likewise provide answers to inquiries raised by the buyer's consultants amid the survey that emerges out of the documents submitted. In such circumstances, the process can be completed within a standard time frame. The course of events will undoubtedly be expanded where a seller isn't adequately helpful and is hesitant to give materials, and data asked for or neglects to do as such quickly. For giant acquisition transaction, parties split up the review into several stages where each stage entails an analysis of specific documentation. Accordingly, the parties can fix a timeline for each step and all the stages can be either co-dependent on each other and can be separated at the same time.
Legal due diligence offers an opportunity to the party to determine the assets, liabilities, market standing, internal structure, management of the target company before finalizing the deal in order to understand the future legal and financial repercussions. It is most beneficial for the purchasing company to determine the current status of the target company and the amount of further investment required in the company. On the basis of the due diligence report, the buyer will be able to analyze the transaction completely and will be able to understand the advantages and disadvantages of acquiring the company. It also opens an opportunity for the buyer to check whether the price offered for the acquisition is up to the standards of the company or will there be a room for negotiations.
It further allows the seller to provide an opportunity for the buyer to remedy if there is any deficiency prior to the transaction. It is always prudent to conduct the due diligence review before the transaction to have complete information prior to signing the deal.
Legal Due diligence in an acquisition transaction is a pivotal step which evaluates the risks involved in the transaction by reviewing the relevant corporate documents of the target company. The exercise will aim to inform the buyer about the true features of the company targeted which subsequently guarantees that necessary precautions are taken while arranging and finalizing the acquisition transaction. As of late, there has been a pattern increasingly more towards gatherings acquiring guarantee insurance to alleviate the dangers related to M&A transactions. Subject to specific prohibitions, this protection will safeguard the parties against costs related to defaults in the due diligence procedure by either party failing to provide relevant documentation. Nevertheless, due diligence review is of the most important part of an acquisition transaction, if carefully undertaken by best Corporate Lawyers in UAE.
Dr. Hassan Elhais is a legal consultant in Dubai, specializing in the drafting of all statements of claim, memos and consultation on litigation of all manner.