WE BOUGHT A COMPANY - Due Diligence

Posted by: 8. 8. 2024
Update: 17/5/2025

Do we have a goal? Let's explore it in detail…

In previous parts, we dealt with various aspects of acquisitions, from strategic approaches to the possibility of its financing. The choice of the target company is up to you, but we will try to get closer to you one of the most important steps in the acquisition process: due diligence or legal background check. Its implementation is necessary to assess the viability of the target company, possible risks and the overall potential of the company from the buyer's point of view. Therefore, in this article, we will emphasize the importance legal due diligence and its key aspects.

1. What is “due diligence”?

Due diligence is a process that involves a comprehensive review of all legal aspects related to the target company - a legal due diligence. Hers the aim is to identify potential legal risks, liabilities and obligations that could affect the value or viability of the acquisition. This process helps the buyer make informed decisions and negotiate better terms to mitigate identified risks.

2. The structure of the company and its history

Understanding the target company's structure and governance is key. This means that we must focus in particular on:

Founding documents and articles of association: reviewing the company's founding documents to understand its legal framework and specific provisions that may affect governance.
Ownership structure: verification of current ownership, including shareholders, capital distribution and any outstanding stock options or warrants.
Board meeting minutes and adopted resolutions: reviewing board meeting minutes and resolutions to understand past decisions, management practices and significant corporate actions.

3. Contracts and Agreements

A thorough review of all significant contracts and agreements is necessary to identify existing (or former) obligations, rights and potential risks. Key areas in this due diligence section include:

Contracts with customers and suppliers: analysis of main contracts with customers and suppliers in order to assess their terms, conditions of renewal and especially possible termination clauses.
Employment contracts: review of contracts with key employees, including remuneration, benefits, non-competition clauses and severance conditions.
Lease agreements: review of leases for property and significant equipment, noting terms, renewal options and any restrictions.
Credit agreements: assessment of existing debt obligations, including repayment terms, interest rates, their extension and possible sanctions for breach of terms (especially pay attention to the so-called change of control clauses).
Partnership and joint venture agreements: reviewing agreements with business partners or joint ventures to understand the scope of cooperation, commitments and profit sharing agreements.

4. Intellectual Property

The protection of intellectual property (intellectual property, abbreviated as IP) is essential for many businesses due to the nature of their assets. Key areas to review include:

Patents: verifying the existence, validity and ownership of patents and assessing any potential infringements of rights/obligations or disputes.
Trademarks: confirmation of registration and protection of trademarks, including logos, brands and slogans.
Copyright: reviewing copyright and user rights registrations for any original works such as software, publications or media content.
Business secret: Review of company policies and measures to protect trade secrets and confidential information, including non-disclosure agreements with employees and partners.

5. Litigation and Disputes

Identifying ongoing or potential legal disputes is essential. It includes:

Current lawsuits: a review of any current litigation in which the Company is involved, including the nature of the litigation, potential liabilities and their stages.
Historic lawsuits: reviewing litigation history to understand any recurring legal issues.
Threatened litigation: it is certainly advisable to ask the seller about any potential disputes (whether initiated by the target company or business partners/customers) and to request the handover of relevant documents for this purpose.
Regulatory Investigations: assessment of any ongoing or past investigations by state or EU regulatory authorities, including imposed fines, other sanctions and/or orders/bans.
Conflict solving: reviewing the company's dispute resolution policies, including arbitration or mediation clauses used in contracts.

6. Compliance

Ensuring compliance with relevant regulations is key to avoiding unpleasant friction with state regulatory authorities. Although program compliance settings it is part of the subsequent integration of the target company, so there is no harm in starting to think about the area of compliance (and related corporate governance) even before the purchase. It is therefore advisable to think in particular about the areas below with regard to the target company. However, we are dedicating a separate section to this topic so that we can focus on it in more depth.

Industry specific regulations: assessment of compliance with industry-specific regulations, such as environmental laws, health, safety or financial regulations.
Licenses and Permissions: verification of the existence and validity of the necessary licenses and permits required for the company's operation.
Protection of personal data and privacy: assessing the compliance of the company's internal regulations with laws on personal data protection and privacy, including GDPR and other relevant regulations (for example, the NIS2 regulation on cyber security is current today).
Employment Laws: reviewing compliance with employment laws, including wage rules, anti-discrimination regulations and workplace safety standards.
IS G: correctly set principles of the so-called Environemntal Social Governance should contribute to a more sustainable business and socially and ecologically responsible operation of the company.

záver

Due diligence is a key part of the acquisition process, which provides a comprehensive understanding of the legal status of the target company, its obligations and potential risks associated with the acquisition of the target company. By thoroughly reviewing company structure, contracts, intellectual property, litigation, regulatory compliance, buyers can make truly informed decisions about acquisitions and negotiate better terms. At the same time, thanks to her, the buyer he will get an idea of the future steps that will have to be taken for the successful integration of the target company.

And we will deal with it in the next part "shareholder's agreement" (abbreviated as SHA), i.e. by company/shareholder agreement. This is now a traditionally used tool used not only in company acquisitions with the aim of establishing relations between business partners and presenting the basic parameters on which the company should stand.

Do you need advice or representation at purchase of the company? Do you have any questions about our series or due diligence? Contact us! We have many years of experience in buying companies!