When planning to acquire, be acquired or merge with a company, it is important for the legal experts involved to consider whether or not there is any legal reason that should prevent the merger from taking place and to take into account any risks involved therewith. Although this is not a requirement established by Maltese law, it is good practice to perform a legal analysis of the risks posed.
Legal Due Dilligence Process
Oftentimes, this process would begin by the purchaser requesting that such due diligence takes place, however it is also possible for the vendor to commence the process. One particular justification for purchasers being more likely to begin such a process is to ensure that the risks that come along with the company being acquired or merged with is within the risk appetite of the acquiring company. The circumstances which arise from such a request requires that the parties form a working relationship and begin to adjust to working together. This is also an opportunity for the parties to cultivate a healthy relationship between themselves to ensure the merger or acquisition takes place seamlessly.
As the due diligence process is intended to assess risk, it would go amiss not to consider the risks posed by such a process itself. Sharing of the relevant documents with another company in anticipation of a merger or acquisition naturally results in the sharing of valuable information. Therefore, it is good practice for the parties involved to execute a non-disclosure agreement to ensure that their information is adequately protected.
The legal due diligence process involves all elements of the legal functioning of a company, such as:
- A review of agreements entered into
- The status of any pending litigation
- Intellectual property rights
- Other licenses inter alia.
This therefore requires that the company collect all their contracts and other documents of relevance and forward these to the other party. The contracts are often divided into different types such as those relating to their employees, suppliers or financial transactions. Documents which are very specific such as those considering finance or tax are usually reviewed by accountants and other financial experts working in tandem with legal experts in order to provide a better examination of the documents. The duration of the legal due diligence process is dependent on a variety of factors, the most apparent factor being the size of the companies involved.
If one company is acquiring another company, the former is undoubtedly more at risk, however there are many aspects which may increase the risks posed to both parties, such as a cross-border element in the transaction. This is particularly prevalent in the case of franchise systems. Franchises are regularly acquiring and merging with companies internationally, and these must consider how the standards and requirements vary from country to country. Thus, it is an invaluable step for both the vendors and purchasers to recognise the risks associated with these transactions.
Nonetheless, this does not diminish the fact that small and medium enterprises are also at risk when conducting these transactions even on a local level where there is no legal obligation to do so. Oftentimes, the resources that may be allocated to such due diligence by small and medium enterprises does not compare to what may be allocated by international franchises some of which have experts for every category of contracts a company could execute.
It is still advisable to undergo a due diligence process as allocating the resources for due diligence may prevent unnecessary expenses in the future. One way in which small and medium enterprises may adapt to having less resources is to prioritise obtaining due diligence relating to legal issues which carry the most risk.
Possible Red Flags
Once these documents have been examined, the acquiring or merging company must then determine if there is any justification to stop the transaction from taking place and whether or not it falls within its risk appetite. Any red flags are therefore to be brought to the attention of the company requesting the due diligence for their consideration. If there are no red flags or the company wishes to proceed nonetheless, the parties will then execute the documentation for the merger or acquisition.
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