What is due diligence and when is it worth doing?
Due diligence is the legal review of a company before you acquire it or invest in it. What is reviewed and what comes out of it.
Due diligence is the legal review of a company before you acquire it or invest in it. The aim is not to find a company without problems, as such companies rarely exist, but to find out what problems it has and how serious they are before the price and terms are set.
The review makes sense when you are acquiring shares, taking over significant assets, coming in as an investor or financing a company against security. In a small transaction the review may be shorter, but it should not be skipped.
The review usually covers: who owns the company and with what rights; whether the corporate documents are in order; which material contracts it has and what happens to them upon a change of ownership; whether there is litigation or debt with legal consequences; who owns the trademarks and copyright in use; which permits are required and whether they are in place; and what the employment relationships look like.
The result is a report setting out risks and recommendations. A risk identified may lead to a price adjustment, a protective clause, a condition precedent to signing or, sometimes, to walking away from the transaction.
If you have a transaction ahead, start by clarifying your objective and the timeline. We then agree what will be reviewed and in what order.
The information in these articles is general. Your specific situation requires a review of the documents.
Alina PufuAlina Pufu is a corporate and commercial lawyer in Bucharest (sole practice: Alina Pufu Law Office). She works on commercial contracts, M&A transactions, due diligence and intellectual property.