Legal due diligence in an M&A transaction will be carried out with many contents including: reviewing and assessing the legal compliance of the target company, potential risks such as administrative fines, disputes, legitimacy of the property…
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The reason why the seller should take the initiative in legal due diligence
The legal appraisal of the target company is mostly paid attention to by the buyer, because the buyer’s investment efficiency will be associated with the target company’s business activities in the future. However, the seller also needs to consider its internal legal issues during the operation, as well as before intending to sell assets / divest from the target company.
The fact that the seller himself understands its values, advantages and risks before making the business offering helps them overcome existing and potential risks, Set up a better legal status to the target company, thereby bringing advantages when negotiating transaction value, terms and conditions of transfer, as well as helping the negotiation process to go smoothly and quickly to complete the transaction. Or have a backup plan if the M&A transaction fails.
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What to note when the seller conducts internal legal due diligence?
First: Before making an M&A transaction
Before performing the M&A transaction, if the seller does not actively review its legal status, it may lead to the failure to provide the buyer with documents on the business’s operations. Or provide documentation that shows unresolved legal errors, risks.
Such incidents make the buyer have a lack of trust, do not appreciate the current activities of the target company and make a legal due diligence report with many disadvantages about the target company.
Therefore, before performing an M&A, the seller should note the following issues:
a. Capital contribution to the target company
The seller should carefully check the issues related to capital contribution and ownership ratio in the target company as follows:
- The members/shareholders of the company fully contributed capital, on time, with the right types of assets to the target company or not? This is the basis for determining the seller’s share of ownership in the target company
- The capital raising to increase charter capital carried out in the correct procedures or not?
This review helps to determine if the seller’s ownership in the target company is legal or not? Does the seller have the right to sell the property? The seller has the right to decide whether to raise more capital in the target company or not?
b. Target company’s business lines
According to current Vietnamese law, some business lines have certain restrictions on ownership and business rights for some investors.
Therefore, the seller needs to review the current business lines of the target company and which are conditional business lines. Then determine whether the buyer has met those business conditions or not? especially in case the buyer is a foreign investor to have a suitable solution.
c. Important assets
The target company will have many assets, the seller should classify each group of assets for legal review of ownership of those assets. For example:
- Real estate: is an asset of great value, ownership and use rights must be registered in accordance with the law. The seller should consider whether the real estate has been granted a certificate of land use rights, ownership of houses and assets attached to the land, property on land shown on the Certificate or not? building permits as well as documents showing the creation of the property, the full value of the property? How are assets recorded in the accounting books?
- Intellectual property rights: Intellectual property is an asset with potential commercial exploitation value, creating value for businesses. Therefore, the target company should check the intellectual property portfolio, license contracts, intellectual property design contracts, perform registration to protect the possibility of commercial exploitation, trade of intellectual property.
5. Other matters
Each target company is always different, and depending on the specifics of the business lines, the seller should review other issues that are considered important to its business. For example: legitimate and implementation progress of current real estate business projects; ongoing investment items; litigations in progress; Tax related issues such as tax refund, tax debt, etc.
Second: During the execution of M&A transactions
During the execution of an M&A transaction, the buyer often requires the seller to provide information and documents related to the target company’s business activities for them to evaluate and issue a legal due diligence report.
In addition, the buyer often requires the seller to commit to this information and document and take legal responsibility such as fines, compensation for damage if there is dishonesty. Therefore, the Seller should cooperate in providing honest and timely information and documents to limit its risks in the future.
