Due diligence documents are those relating to a company’s assets, operations and liabilities. This review is typically performed prior to any merger, acquisition or other business deal and is vital in determining the worth of the company. This review can help identify possible risks by examining contracts and agreements as well as any restrictions or encumbrances on assets.
In addition to looking at the physical assets of a target company, lawyers typically look at financial information such as state and federal tax returns and bank statements as well find as credit reports. They also will look at the company’s contracts, employment benefits, payroll and organizational structure. Legal due diligence can take between 30 and 60 days. The duration of the process can increase in more complex transactions.
Attorneys also will review regulatory issues, such as concerns about compliance and antitrust analysis(opens in a new tab). They may also look at the legal landscape of the company, including any litigation that involves the target company or its officers.
The most important aspect of a legal due diligence investigation is determining the possibility of liability for a transaction. It is common for attorneys to recommend obtaining representations and warranties and liability insurance(opens in new tab) to protect the purchase. This is important, especially in the event that the buyer isn’t familiar with the background of the company in question. It is a way to protect the seller from inaccurate assertions or claims made by the buyer. In addition lawyers can look over any documents related to the company’s policies for employees like golden parachutes, severance packages(opens in a new tab) which could be affected by changes in ownership.
