Transactions whereby a company grows by merging with or acquiring another company are essential tools in any corporate growth strategy. Finding suitable targets is a the obvious first step, but verifying that the target actually suits the company’s growth objectives is where resources should be spend.
This is where the due diligence process comes into play. A good starting point is the financial due diligence (FDD), which includes an analysis of the financial status of the target as well as the potential economies of scale or other synergies of the transaction. In addition, a legal due diligence (LDD) is done to ascertain possible risks related to the transaction. The legal due diligence should also include an analysis of the most suitable type of acquisition to be used in the transaction taking, among other things, taxation issues into consideration. In general, a buyer has the option of acquiring the stock of an existing company or purchasing only the business.
From a business perspective, purchasing the entire stock of an existing company is an easy solution, since nothing changes in the operations of the business. Only the shareholding is passed from the seller to the buyer. However, from a legal perspective the buyer carries a substantial risk. This is due to the fact that risks existing upon purchase may affect the profitability of the transaction, if the risks materialise after purchase. Therefore, the legal due diligence focuses on assessing what kinds of risks exist upon purchase and the purchase agreement should include provisions on the division of this risk.
Compared to a share purchase, the purchase of the business has a greater effect on the day-to-day operations since the business will pass from one entity to another. Thus, existing agreements must be transferred to the buyer’s entity. However, this offers the buyer the possibility to pick and choose, which parts of the existing business to purchase, whereby the buyer can choose to purchase some assets and parts of the business, while leaving unwanted, perhaps non-profitable parts outside the transaction. The buyer’s risk is therefore substantially smaller when purchasing a business compared to a purchasing shares. Due to the above, the legal due diligence in a business purchase focuses on the transferability of the assets subject to purchase, i.e. ensuring that the business is legally transferable.
Financial and legal due diligences vary in scope depending on the target and type of transaction. In international transactions certain additional key elements require further attention. Attorneys at Law MK-Law has vast experience of both domestic and international mergers and acquisitions. Our team of experts is glad to assist in any transaction and together with our financial partners, we can offer our clients both financial and legal due diligences tailored to meet the demands of the transaction in question.