Legal Due Diligence

Legal due diligence reviews the legal situation of a target company. This includes contracts, ongoing disputes, ownership rights, and permits. This allows the buyer to identify legal risks that may affect the deal or the price. Its scope is usually organised by topic. Corporate matters cover the shareholder list, articles, resolutions and an unbroken chain of share transfers. Material contracts with customers, suppliers and distributors are reviewed for terms, termination rights and change of control clauses. Further areas are employment law, intellectual property and licences, real estate and leases, public law permits, insurance, financing agreements and their security, and pending and threatened litigation.

Two points carry particular economic weight. First, change of control clauses, because a key customer or licence agreement terminable on a change of ownership directly affects the value of the business and regularly becomes a condition precedent. Second, the chain of share transfers, because a formal defect in the past, such as missing notarisation, can call the seller's ownership into question.

The report is often prepared as a red flag report concentrating on material findings. The results translate directly into the warranty catalogue, into indemnities for specific risks and into the conditions precedent of the purchase agreement.

Setting materiality thresholds below which contracts are not reviewed individually is customary for managing effort. Without them the work grows disproportionately at mid-sized companies with many small contractual relationships. The handling of gaps in documentation also needs settling, because oral arrangements or outdated contract versions are common in the mid-market. The review then ends not with a finding but with a recommendation to complete the documentation before completion. The review additionally covers the completeness of shareholder resolutions, existing powers of attorney and whether the actual position matches the entries in the commercial register.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.