Why conduct Legal Due Diligence?

Conducting due diligence is a common practice in today’s business environment and is mostly conducted for pre-M&A procedures or audits for parent companies. But what about legal due diligence? In what ways do legal due diligence differ from general due diligence? And why do companies need due diligence as a separate form of supervision?

When legal due diligence is conducted as part of a financial audit, it allows checking whether :

• all statutory documents are duly completed and duly reflect the company’s current shareholders, share capital, commercial activities, beneficiaries, etc.; 
• the company’s activities are properly carried out;
• all required licenses and permits are available;
• commercial activities are performed in line with the company status. This is extremely important for the representative offices of international companies which do not provide commercial activity in Ukraine. Because, there is a risk to be recognized as taxpayers and thus be required to pay tax in Ukraine;
• labor relations have been duly organized;
• concluded contracts could give rise to risks with counterparties and/or tax authorities.

 All the above actions are completed for the benefit of shareholders so that they have a clear picture and can be confident that their Ukrainian businesses are run properly. 

If due diligence is conducted for M&A purposes, the following actions are usually added:

• detailed analysis of corporate documents for strict compliance with procedures, with no delays and inconsistencies;
• disclosure of all possible liabilities and verification of the history of contractual failure and other default;
• finding out information about past or potential litigation;
• checking property rights to determine whether property is pledged, mortgaged or subject to any other kind of encumbrance;
• checking intellectual property, including trademark protection;
• verifying compliance with health and safety regulations and environmental protection (optionally).

Performing all the above actions allows:

• the company owner  to be sure that its company is doing well and able to grow further;
• any future investor to have an accurate picture of the target company with all material facts and potential liabilities. This is, in turn, should allow assessing risks and making a well-informed decision about the target company;
• the company itself to better understand its own business, weaknesses, as well as what can be done to minimize or eliminate any risks associated with the company’s activities.

Legal due diligence together with accounting and financial due diligence are the best and only way to provide current and potential business owners and managers with reliable and complete background information about the company under review so that they can make informed decisions about whether to go forward with their business actions.

Accountor highly qualified professionals have gained extensive experience conducting legal due diligence of various types of companies ranging from representative offices to factories. 

We look forward to sharing our experience with you!