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“Legal due diligence” is an indispensable survey for corporate M&A. We will explain the content, purpose, check items, etc. of legal due diligence, which is an important investigation for leading M&A to success.
Meaning of due diligence
Due diligence is a survey conducted when conducting M&A.It means that the acquiring company conducts a preliminary survey of the actual situation of the selling company at the time of the contract.We will explain the basic knowledge such as the types and contents of due diligence.
What is due diligence
Due Diligence is a word that translates directly into the meaning of "Due" and "Duty", and is abbreviated as "DD" and "Due Deli", and is also called "Takeover Audit" in Japanese. In conducting M&A, in order to make appropriate decisions regarding prices and transactions, we conduct thorough research from various angles, including the financial and business conditions of the target company and its IT environment.
Types of due diligence
There are multiple types of due diligence.We will introduce the main characteristics and differences of due diligence.
・Sell-side due diligence
Due diligence is generally performed by the buyer, but what is performed by the seller is called sell-side due diligence.It is a measure that maximizes the sale value and allows the M&A to proceed smoothly until the conclusion of the M&A. Owners themselves can grasp the issues of their company, which is useful for subsequent management.
・Business due diligence
Business due diligence is a survey to confirm the business model, transaction status, technological capabilities, competitor status, and potential in the overall market of the M&A target company. We evaluate the corporate value after M&A and the entire market that includes the company, and evaluate the validity of the transaction price.
・Financial due diligence
Financial due diligence is a survey of the financial valuation of a company based on its financial information, such as how much assets it has at market value, whether its financial statements represent the actual situation, and so on.Since the financial situation has a significant impact on M&A, it is necessary to conduct a thorough investigation even after the acquisition.
・Legal due diligence
Regarding legal risks, such as whether the contracts and transactions concluded by the target company are legally complied with, whether the licenses and licenses necessary for the business have been properly obtained, and whether patent rights, property rights, etc. are the subject of litigation. Legal due diligence is the investigation.The purpose is to grasp in advance whether there is any risk that will affect the business plan after the acquisition.
・Personnel due diligence
Personnel due diligence is a survey of personnel and labor affairs. We understand the risk of human resource outflow due to changes in remuneration and evaluation systems due to the completion of M&A, integration of personnel systems and organizations, and investigate whether operations can be continued smoothly after restructuring.
・IT due diligence
IT due diligence is to investigate the use of software, the status of IT investment costs, and the integration of management systems.It is a survey to grasp the overall picture of IT-related assets and IT strategies while understanding both the business and the system, and to connect it to the selection of the system to be used continuously and the plan for system migration.
What is Legal Due Diligence?
Here, we will focus on legal due diligence among many due diligence.I will explain its importance and purpose in detail.
What is Legal Due Diligence?
Legal due diligence is a type of due diligence that focuses on legal matters.Investigate the target company's shareholder relations, organizational status, contractual relationships with affiliates and business partners, assets and liabilities, approvals and licenses, etc.Check for any legal issues or obstacles, such as legal compliance and litigation risk.
Purpose of legal due diligence
Legal due diligence is an important process for the buying company to avoid the risks associated with the acquisition.M&A may be canceled if major legal issues are discovered.Even if you agree to an acquisition, it will be an important factor for considering price negotiations that take into account the legal issues that have come to light.
Main check items to be investigated in legal due diligence
Next, we will introduce the main investigations conducted in legal due diligence.
Contents of contract
We will check the contents of each individual contract and investigate whether there are any disadvantageous items or legal issues.In particular, pay attention to change-of-control clauses (COC clauses *conditions for contract changes or termination when there is a change in control).We conduct surveys with a view to post-acquisition business operations.
Details of assets and liabilities
Investigate business assets that will be used even after execution of M&A.Types of assets include real estate/movable property, intellectual property rights, financial assets, and systems.Regarding liabilities, we also grasp the status of borrowings and investigate whether there are any clauses that will be affected by M&A.
Legal compliance content
Violations of laws and regulations are important matters related to loss of corporate value.We confirm compliance with various laws and regulations, such as corporate law, tax law, and labor-related laws and regulations, in addition to business operations.The personal information protection law and the subcontracting law are also important items to check.
Contents about licenses and licenses
Depending on the type of business, it may be necessary to obtain a license. If the license cannot be inherited after the M&A is implemented, it will be necessary to reacquire it, but it will take a certain period of time from application to acquisition.It is important to investigate whether the license can be inherited because business continuity will be affected if the license cannot be reacquired smoothly.
Contents about labor
Employment will continue even after the M&A is implemented, so if there is a possibility of legal violations such as unpaid overtime, we will carefully investigate.Regarding personnel affairs and labor, we are also involved in personnel due diligence, but in legal due diligence, we confirm working environment issues such as employee working conditions and retirement / dismissal.
Flow of legal due diligence
We will explain how to proceed with legal due diligence, and explain the general flow and content step by step.
Document disclosure request
We will request disclosure of materials necessary for legal due diligence from the target company.Sellers do not actively submit information that is disadvantageous to their company in order to get them to buy as high as possible.Make a list of necessary materials in advance and request according to the items.
Confirmation of disclosure materials
Once the materials are disclosed, the buyer will confirm and analyze them.We scrutinize and examine the content from a huge amount of materials, request disclosure of additional necessary materials, and create a Q&A list for unclear points and questions.Make preparations for confirmation through interviews, etc.
Q&A with management and field survey
Conduct interviews and interviews with the management and employees of the target company.An important procedure for grasping information that is not available in documents, such as performance forecasts, management policies, and matters related to the company in general.By going to the head office and other locations, we check materials that can only be seen locally.
Interim/Final debriefing session
At the interim debriefing session, the findings from the investigations so far were reported, and the necessity of additional investigations was examined.After that, we will consider whether to respond and M&A implementation.Based on the content reported at the interim report meeting, the missing materials are analyzed and problems are sorted out, and the final report meeting is held among the parties concerned.
