Legal Due Diligence
In a business, whenever a buyer buys a company, he automatically buys the legal
reputation of the company. Hence, the buyer needs to be aware about the legal
state of the company and the possible legal risks the company might face in the
near future. So, comes the legal due diligence which can be described as a
process of complete investigation, collection and analyzation of the legal risks
of the particular company.
The buyer talks to the associates and customers, go through the documents and
agreements, understand legal obligations of the company and ensure about legal
potentials of investors as well as the company, to make up his mind before
making the crucial decision of proceeding with the transaction.
Legal due diligence plays vital role in many areas which include: Business
Transactions and deals, Merger and Acquisitions, Assessment of Supplier Quality,
Business and Company law affairs, Commercial Property Dealings, Capital Markets,
Commercial and Corporate Finance, Hedge Funds, Sale of Intellectual Property.
Objectives And Significance Of Legal Due Diligence
The goal of Legal Due Diligence is to understand the current status as well as
the future consequences of the deal or agreement.
The main objectives of this process are:
- To assess the working conditions and capabilities of the company,
employees, associates as well as customers
- To reveal the hidden legal risks, assess them and look for viable
- To get the idea of the expectations from the company and how it serves
- To have a greater look into all the agreements and contracts signed,
know about the partners and understand other obligations.
- To draft a good negotiating agreement after getting complete knowledge.
Thus, Legal due diligence is must before acquiring a company because the
buyer must know in what is he investing and with what he will be rewarded.
Legal Due Diligence Process And Report
A preliminary evaluation is done on basis of the areas and data that needs to be
collected. Then a managing team is made, including all the members need to keep
a track of the course, which usually comprises of a representor of the acquirer,
a legal counsel, a statistics expert, technical consultants and bankers and
other advisors as per the requirement. Then a detailed investigation is
processed in each of the area with the expertise and the data is collected and
hence may emerge the issues of facts and figures, liabilities, weaker management
and control, non-compliance with some legal provisions. All the information is
disclosed by the target company and a final report is made by the team.
The report contains all the information of the company, its assets, accounts,
shares and capitals, contracts, taxation, insurance, exports and imports,
obligations and liabilities, legal proceedings and compliance and non-compliance
with the statutes and provisions, third party rights, its shareholders,
After the report is made all the data is analyzed the buyer takes opinion and
advice of the lawyer and other consultants and hence finals the deal
Legal Risk Analysis
Most businesses are prepared for operational and strategical risks and good
understanding of system but still remain unaware of the loss they can suffer due
to the Legal Risks. The term legal risk refers to the financial harm or some
other damage that may occur in a business if the company or the individual does
not comply with the laws related to his business. These risks affect the income,
image and reputation of the business very seriously.
Once a legal suit is filed and the business starts to lose its customers and
other contacts. Legal risks can either be caused due to misunderstanding of the
laws or negligence of the owner or company. Due to the different causes, there
are different legal risks involved in a business.
Some of the major risks are:
Contracts play an important role in all business deals but if the terms of the
contract are not kept there may arise legal disputes leading to loss of the both
the parties. Contractual risks may also arise if heed is not given to the proper
laws while framing the agreement and the contract may be then turn out to be
void. These risks can be avoided if proper attention is given to the laws while
documenting the contract and all the deadlines and terms decided are met
accordingly by both the parties.
Compliance and regulatory risks:
Compliance Risk arises due to non-compliance with statues, policies or other
laws. Regulatory risk is caused due to the changing laws and policies that
affect the market and the business. Non-compliance can cause huge economic loss
to the companies. The risk can be prevented by working according to the latest
laws and ensuring that all the members also work according to the set standards
Structural legal risks:
These risks arise from the sources other than those of Compliance and Regulatory
risks i.e it arises due to the underpinnings of the of the industries or big
investment companies. This time of risk is not common as it involves the effects
of market values and anti-trust litigation etc which can alter the relationships
and consumptions of big industries. It is both positive and negative.
It includes certain risks like Intellectual Property rights, trademark or
copyright infringement committed unknowingly during the course of business. Some
other risks include negligence, misrepresentation, fraud etc committed by the
staff. The company or the business owners must remain careful and keep keen eye
on their staff as well.
Dispute and reputational risks:
Disputes may arise between the two business co-heads of the company or company
with its customers or among the partners. The disputes must be tried to be
sorted without going into litigation and methods like arbitration, negation and
mediation be preferred to prevent incurring of huge bills of Advocates.
Going into litigation or breaching the contractual obligation lowers of the
image of a company; so, this risk must be prevented to maintain the level of the
company or business.
Frauds: Frauds include data theft, misrepresentation of assets, accounting
frauds, bribery and corruption. Such frauds can put the business in great danger
and legal obstructions.
Legal Outsourcing is the practice of contracting third-party organization (some
external law firm) for obtaining legal services. Though outsourcing can be
domestic, overseas outsourcing (offshore legal process outsourcing) has gained
momentum in last few years. When the LPO (Legal Process Outsourcing) provider is
outside the country, all the activities are outsourced except the activities
that require physical presence like court hearings and face to face recognition
whereas when the provider is in the same country such exceptions does not exist.
Plethora of services are provided by the LPO firms which can be broadly
categorised as Manpower Intensive Functions which includes legal coding and
decoding, translation, document conversion, legal transcription, document
review, etc which requires skilled paralegals and experienced lawyers and High
Value Services which include legal research, patent and copyright assessment,
statutory and case laws research, contract drafting, statistics and analysis of
mergers and acquisitions, etc which requires experts and specialists along with
Advantages Of Legal Outsourcing:
Cost Effective: Maintaining a highly skilled efficient team is not easy and also
requires lot of money. Outsourcing the legal services helps the companies to
escape from the monthly expenditure of these specially appointed people. Based
on the type of services required the company can choose a relevant firm and
negotiate the price according to the work.
High Quality Legal Support: The firms are specialised in their fields and has a
team that conduct their business with expertise. These experts start the work
immediately and facilitate the completion of the projects within short duration
efficiently and with good skills.
Reduced load and resources: Outsourcing the legal work to other firms reduces
the workload of the companies hence time and resources could be spent on other
works. The companies do not need to invest in legal databases or spend time
drafting their contracts, everything will be done by the outsourcing firm in set
time limit with due diligence and expert help.
Disadvantages Of Legal Outsourcing:
One of the major concerns with outsourcing is the potential breach of trust of
client whose information for sake of the completion of legal work is outsourced
to a third party. Confidentiality becomes increasingly dangerous when the data
is transmitted over the online networks where there are enough chances of
hacking and stealing of personal information.
One of the hindrances in offshore outsourcing is the different local laws of the
different countries. Due to different privacy and legal provisions, the
agreements and contracts deals may differ. Moreover, the liability of the
company and the firm is also affected in case of business laws. Different
time-zones can further complicate the matters.
Settling of disputes is again a major issue in offshore outsourcing. If a buyer
wants to file a suit against the service provider the case has to be fought
where it is filed. thus, it may cause a problem in the latter stage and hence a
proper agreement has to be made beforehand to prevent the subsequent issue of
place of case if any.
Diligence must be taken while this process as well as there are some common
mistakes like not having enough resources or appropriate team, biasness,
incomplete reports, hidden data etc. and hence this may disrupt the actual
result and may cause loss in future which defeats the purpose of the process.
Thus, a proper Legal Due Diligence is must to ensure a better yield and escape
the legal risks while buying a company and it must be done under guidance of a
Large business and Companies also affect the economy of the nation and hence
must take proper care of Legal risks while their business course to prevent
themselves as well as the nation from legal setbacks. So, they must ensure
proper functioning, follow set standards, work with diligence and the employees
too should be guided to work responsibly.
Legal outsourcing is the new developing field. It has both pros and cons but
according to the current need and more benefits it is growing worldwide. This
process helps the companies and provides with efficient legal services
International firms help each other grow subjected to some cons which must be
taken care beforehand according to the companies and firms dealing so as to get
maximum benefit out of this process.