LEGAL DUE DILIGENCE IN MERGERS AND ACQUISITIONS ACTIVITIES

Mergers and acquisitions activities, also known as Mergers and Acquisitions (M&A), refer to transactions in which control over part or all of a target company is obtained through an investor’s ownership of part or all of the target company. However, in order to successfully carry out “billion-dollar deals” prior to entering into intensive negotiation stages, the parties cannot overlook the step of “legal due diligence.” This is a crucial step before the parties proceed to negotiations and the execution of high-value contracts.

1. Legal Due Diligence

Legal due diligence (LDD) is the process whereby the Buyer (typically the Buyer’s legal counsel) collects, reviews, and evaluates information relating to the target company. The purpose of this process is to enable the legal counsel to promptly identify legal issues that may affect the M&A transaction.

Legal due diligence assists the Buyer in clearly determining certain essential information regarding the target company, including:

• The legal status of the target company being pursued by the Buyer, such as whether it is operating, temporarily suspended from business, no longer operating at its registered address, undergoing bankruptcy proceedings, etc.

• Helping the Buyer answer the subsequent question: whether it should continue to pursue the target company.

• Subsequently, the Buyer must consider certain conditions proposed by the Seller, including contracts, loans, sub-licenses, specialized business licenses and conditions, management decisions of the company, intellectual property rights, etc.

• Finally, one issue that the Buyer will strongly negotiate in order to maximize its own value is the purchase price.

2. Key Issues Commonly Reviewed in the Legal Due Diligence Process

2.1. Establishment and Management Organizational Structure

• Verification of whether the establishment and operation of the company are lawful.

• Determination of the management model of the target company, and the roles, powers, and authorities of each management body and executive personnel.

2.2. Business Lines

• The lawyer determines the principal business lines of the target company and the proportion of revenue generated from such business lines in the total revenue of the target company.

• Business conditions applicable to foreign investors under national laws and international treaties.

• Identification of key conditions and material contracts related to such business lines.

• Determination of whether the business lines require sub-licenses or conditional business licenses.

2.3. Capital Contribution and Ownership Structure

• The lawyer reviews information such as registered capital, actual contributed capital, types of assets forming the charter capital, and ownership ratios among shareholders in order to assess the ownership structure of the target company.

2.4. Charter

• Understanding the organizational structure, authorities of each body and shareholders, profit distribution principles, and any internal conflicts or disputes within the target company.

• Assessment of the rights that the Buyer will have upon acquiring a certain number of shares in the company, as well as provisions on restrictions on the transfer or disposition of shares.

2.5. Sub-licenses and Specialized Business Conditions

• The Buyer’s lawyer reviews whether the Seller fully satisfies the business conditions applicable to conditional business lines, particularly in sectors subject to strict State management such as insurance, pharmaceuticals, banking, etc.

2.6. Material Contracts

• To verify whether the contracts entered into by the target company are in compliance with legal regulations and the conditions applicable to the company’s business lines. In addition, the lawyer identifies any obligations or risks arising from such contracts that may be detrimental to the Buyer.

2.7. Management Decisions

• To review whether resolutions issued by the Board of Directors, Members’ Council, or General Meeting of Shareholders are in compliance with legal regulations and the company’s Charter.

2.8. Loans

• The lawyer reviews loans to determine which assets are pledged, mortgaged, or otherwise secured for which loans, the rights and obligations of the parties under such loans, the possibility of enforcement against secured assets, etc., which will serve as a basis for determining the purchase value.

2.9. Assets

• The lawyer reviews certain high-value assets that are essential to the company’s operations, as well as assets that are leased, borrowed, pledged, mortgaged, or acquired under deferred or installment payment arrangements.

2.10. Intellectual Property Rights

• Verification of whether intellectual property assets are subject to registration requirements; if so, whether they have been duly registered; and whether such assets are lawfully owned or used.

• Determination of whether such assets belong to the company or are licensed from third parties; if they belong to the company, whether the company has licensed them to any other party or whether there are any outstanding obligations.

2.11. Labor

• The lawyer examines whether labor contracts and internal labor regulations are contrary to applicable laws, and whether the company has in practice properly implemented employee entitlements in accordance with the law (minimum wages, overtime payments, compulsory insurance, etc.).