LEGAL DUE DILIGENCE for a Business Acquisition

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Legal due diligence in a business acquisition entails the investigation of the target company's legal status, compliance, and potential liabilities. As such, legal due diligence seeks to verify the seller's representations and warranties, identify hidden risks, and ensure there are no legal obstacles to the transaction. This process is essential for making an informed decision about whether to proceed with the acquisition and, if so, at what price and on what terms.

A thorough legal due diligence review typically involves scrutinizing the following areas, among others, based on the specifics of the target company:

• Corporate Records & Structure: The buyer's legal team reviews the company's organizational documents, including its articles of incorporation, bylaws, and minutes from board and shareholder meetings. The goal is to verify the company's legal existence, its ownership structure, and whether the seller has the proper authority to enter into and complete the transaction. This also includes examining share ledgers and any shareholder or partnership agreements.

• Contracts & Agreements: This is a crucial area, where lawyers should be engaged to review all "material contracts", being those contracts that are essential to the business's operations. This includes customer and supplier agreements, real estate and equipment leases, loan agreements, and employment contracts. The purpose is to identify any unfavorable clauses, such as change-of-control provisions that could be triggered by the acquisition, or termination rights that would allow a key customer or supplier to walk away from the deal.

• Litigation & Disputes: The due diligence team investigates any past, pending, or threatened lawsuits, claims, or government investigations. They review court records, legal correspondence, and settlement agreements to assess the potential financial impact and reputational damage of these disputes.

• Intellectual Property (IP): For many businesses, intellectual property is a primary asset. Legal due diligence in this area focuses on confirming the ownership and validity of all patents, trademarks, copyrights, and trade secrets. This includes reviewing registrations, licensing agreements, and any history of IP infringement claims. The buyer must ensure that the company owns or has the legal right to use all the IP necessary for its operations.

• Regulatory & Environmental Compliance: This review assesses whether the business is in compliance with all applicable federal, state, and local laws and regulations. This is particularly important for businesses in highly regulated industries, such as finance, healthcare, or energy. The review also checks for any environmental liabilities, such as a history of contamination or improper waste disposal, which can lead to significant future costs.

• Employment & Labor Law: The buyer's lawyers examine employee contracts, non-compete agreements, and any history of labor disputes. This also includes checking for compliance with labor laws regarding wages, working conditions, and benefits. The review aims to identify any potential liabilities from wrongful termination claims or collective bargaining issues, and ensure compliance with the applicable employment standards legislation.

Legal due diligence is all about uncovering potential risks and liabilities that could affect the value of the deal. Common findings (that should be addressed in advance of completing the transaction) include:

• Undisclosed liabilities: These could be anything from unpaid taxes to an ongoing lawsuit that the seller failed to mention.

• Breach of contract: The seller may be in breach of a material contract, which could result in a costly legal battle for the new owner.

• IP ownership disputes: If the seller can't prove clear ownership of its IP, the buyer may be purchasing a business with a huge vulnerability.

• Failure to comply with regulations: Non-compliance can lead to massive fines or even the suspension of business operations.

• Inadequate corporate governance: The discovery of improperly maintained corporate records could indicate a lack of proper management and oversight, which can lead to legal complications.

By identifying these issues, the buyer can either negotiate a lower purchase price, demand that the seller resolves the issues before closing, or walk away from the deal entirely if the risks are too great.

When it comes to the legal component of corporate mergers & acquisitions, beginning with legal due diligence, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when you are seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.