Legal due diligence is a process where attorneys hired by a buyer review documents and conduct interviews to determine the validity and value of a potential acquisition. It includes legal, financial, and operational reviews and can take up to 18 months. The process results in a written memorandum of assessment.
Legal due diligence is a discovery process initiated by a company interested in acquiring another company. Attorneys are hired by the buyer to review documents and conduct interviews with key officers and directors to arrive at a legal conclusion regarding the validity of the transaction and the overall value of the business. The process typically results in a written memorandum presenting the attorney’s legal conclusions to the buyer.
Due diligence is a standard of care that must be exercised by a buyer to demonstrate that every effort has been made to ascertain the legitimacy and value of what was being purchased. The term refers to the thorough investigation of all parts of a sale. In the context of corporate acquisitions, due diligence has multiple components, including legal, financial, and operational reviews, which are performed by various professional advisers.
A licensed attorney or law firm typically handles the legal due diligence portion of a corporate acquisition, especially for major corporate transactions. The investigation begins soon after the deal is announced and can take up to 18 months or more to complete. Lawyers hired by the buyer will typically set up an area in the offices of the target company and request documents to be reviewed and people to be interviewed on site to make the investigation as convenient as possible.
There is a process for conducting legal due diligence that has developed as a best practice for corporate transactions. Attorneys will generally go through that process, supplementing the standard industry due diligence checklist with additional inquiries that follow unique circumstances. Many items, including financial documents, audits, organizational documentation, important contracts, employment documents, evidence of pending lawsuits, and permits and licenses will form the major part of document output.
Lawyers also interview key officers and directors to determine if there is anything the buyer should know about the company that will affect its value. This part of the investigation can delve into the personal backgrounds of owners and employees to determine if there are conflicts, areas of concern regarding reputation or integrity, or past legal issues that may have future implications. While this may seem intrusive, it is as important to determine the legitimacy of the people involved in the transaction as to evaluate the company itself.
Legal due diligence enables attorneys to reach a professional conclusion about the company’s condition and provide an estimate of its value that takes into account any legal issues that may arise in the future. Such professional advice is often provided in a memorandum of assessment. In smaller transactions, the attorney’s conclusions may be presented orally. The buyer will rely on the conclusions presented both written and oral and will appeal to lawyers if the investigation has not met the appropriate standard of care.
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