DUE DILIGENCE: Importance In Acquisition

Mergers and Acquisitions (M&A) can be as critical as it seems
exciting for any entity's growth and development. If successful, it can
assist both the companies to gain a significant share in the market and
earn profits. If not successful, it can lead to a different story
altogether. 

We can list numerous corporations who
rushed into professional marriages without performing legal due
diligence or reviewing the corporate structure and relevant documents of
the company. An acquisition transaction is one of the most appropriate
decisions taken by a company which frames the future of any
organization. Thus, careful due diligence into the financial reports of
the target company holds utmost importance.

Legal due diligence of a corporate entity is often a lengthy and a
cumbersome task, which can significantly impact the timeline of the
project. In any merger or acquisition, parties are usually concerned
about the time frame and desire to finish the transaction at the
earliest. The Corporate Lawyers of UAE will highlight certain important
aspects of due diligence in any merger or acquisition transaction under
UAE laws.

Epitome of Due-Diligence

In any Merger or Acquisition transaction, it is advised to evaluate
the strengths and weaknesses of the project as well as the target
company and its sister companies prior to finalising the deal. The
objective of the concerned exercise to obtain all relevant and
up-to-date information of the target entity and to understand the
significant shortcomings of the company which were earlier not apparent.
It can further assist in understanding the financial or legal
consequences that might hinder the future growth of the company or can
impact the return on investment.

Legal due diligence mostly conducted by Corporate Lawyers of Dubai
will comprise of financial and legal review of the targeted company.
Wherein, the financial analysis is usually performed by financial
experts, and qualified Corporate Lawyers undertake the legal review. In
any legal due diligence, lawyers tend to review structure of the
company, corporate documents, trade licenses, management structure,
power of attorneys, corporate agreements, financial liabilities,
employment contracts, outstanding debts, internal policies, insurance
agreements or policies, movable and immovable assets, mortgages, loans,
corporate and commercial litigation and list goes on. As mentioned
above, the ultimate objective of this exercise to prevent the acquiring
company from any future casualties post taking over the target company.

The scope of due diligence exercise vary in each transaction, and it
will rarely be general and covers all aspects of the company related to
the sale. It is less likely that the due diligence review will be
limited in scope as it involves review of all significant issues
pertaining to the company which might impact the merger or acquisition
transaction. It further depends upon the organization structure and the
business of the target company that can either be retail, construction,
telecommunication or any other activity. In each of the companies, the
lawyers have to review the business structure, assets in order to
determine the shortcomings of the company and how to improvise such
deficiencies. There is a direct nexus between the size of the company
and the extent of due diligence review as for a small acquisition
transaction does not require extensive due diligence review. However, in
a significant acquisition transaction, a thorough investigation of
documents is required for in-depth knowledge of target-company.

For instance, in an acquisition transaction between companies
providing professional services, the due diligence review will entail
reviewing the competence of employees and their contract, determining
the licenses obtained by the company, goodwill in the market,
intellectual property registration, contracts entered by the company.
Whereas, if the target company is sale oriented then it is likely to
review the goods purchased and sold, outstanding debt in the market,
movable and immovable assets of the company, machinery, factories,
additional permits and licenses.

The Procedure

The target company in an acquisition transaction is obliged to
provide every relevant document of the company which can affect the
acquisition transaction or which is necessary for acquiring the company
to review before finalising the deal. The seller will create a data room
either online or physical through which they can offer all the relevant
documents to the company or their legal representatives. It is
essential for the target company to provide all documents otherwise the
process and timeline will unduly increase delaying the transaction
unnecessarily.

Timeline for Review

The schedule for finishing any due-diligence review is directly
correlated to the size of the transaction and the number of documents
made accessible for the survey. The seller will either required to
provide copies of all documentation or create an information room and
give adequate access to it to the legal advisors, bookkeepers and
different experts surveying the literature for the buyer. The seller
ought to likewise provide answers to inquiries raised by the buyer's
consultants amid the survey that emerges out of the documents submitted.
In such circumstances, the process can be completed within a standard
time frame. The course of events will undoubtedly be expanded where a
seller isn't adequately helpful and is hesitant to give materials, and
data asked for or neglects to do as such quickly. For giant acquisition
transaction, parties split up the review into several stages where each
stage entails an analysis of specific documentation. Accordingly, the
parties can fix a timeline for each step and all the stages can be
either co-dependent on each other and can be separated at the same time.

Advantages

Legal due diligence offers an opportunity to the party to determine
the assets, liabilities, market standing, internal structure, management
of the target company before finalizing the deal in order to understand
the future legal and financial repercussions. It is most beneficial for
the purchasing company to determine the current status of the target
company and the amount of further investment required in the company. On
the basis of the due diligence report, the buyer will be able to
analyze the transaction completely and will be able to understand the
advantages and disadvantages of acquiring the company. It also opens an
opportunity for the buyer to check whether the price offered for the
acquisition is up to the standards of the company or will there be a
room for negotiations.

It further allows the seller to provide an opportunity for the buyer
to remedy if there is any deficiency prior to the transaction. It is
always prudent to conduct the due diligence review before the
transaction to have complete information prior to signing the deal.

Concluding Remarks

Legal Due diligence in an acquisition transaction is a pivotal step
which evaluates the risks involved in the transaction by reviewing the
relevant corporate documents of the target company. The exercise will
aim to inform the buyer about the true features of the company targeted
which subsequently guarantees that necessary precautions are taken while
arranging and finalizing the acquisition transaction. As of late, there
has been a pattern increasingly more towards gatherings acquiring
guarantee insurance to alleviate the dangers related to M&A
transactions. Subject to specific prohibitions, this protection will
safeguard the parties against costs related to defaults in the due
diligence procedure by either party failing to provide relevant
documentation. Nevertheless, due diligence review is of the most
important part of an acquisition transaction, if carefully undertaken by
best Corporate Lawyers in UAE.