Legal Due Diligence Process

Due Diligence can be widely defined as a broad spectrum of investigative procedures in relation to an acquisition of a company's shares or of assets in a commercial context, a joint venture project, a financing transaction, the issue of securities and other general pre-contractual inquiries. (Kumar & Mathur, 2002) If you are the owner of a company, the time to start thinking about due diligence is now. Every decision that you make, test it against the question "how will this look when someone comes along asking hard questions?

" Every company is going to have to go through due diligence someday, when you are acquired, seek outside investment, or go public, unless you intend to remain small and family-owner forever. Doing business in an emerging market involves more risk. One of those risk is that the very process designed to minimize risk – due diligence – does not always reveal reliable information or all the information that a company needs. Conducting legal and financial due diligence before making an investment or starting a new business relationship may not be enough.

Many companies now regularly retain specialists to supplement that process with "business" or "investigative" due diligence. (Economist Intelligence Unit) Investigative due diligence is meant to answer questions that official records and financial accounts cannot. For example what about the people managing the company? Do they engage in risky or illegal practices? The business of investigative due diligence is more mundane that might be imagined, an exercise in thoroughness and common sense. (Economist Intelligence Unit)

A prospective buyer or investor investigates and gathers all possible information about a seller company and its business/assets. The purpose is to decide whether to proceed with the transaction on initially discusses terms, establish areas of risk that need particular attention and if justified withdraw from the proposed investment, Representations s and warranties by the seller are no substitute for the due diligence process. (www. globallawreview. com) It is imperative that an investor understands the key drivers of business performance and the issues which could impair or enhance that performance.

The due diligence process includes the gathering, analysis and interpretation of financial, commercial and legal information. It may include a review of trading patterns, financial projections, markets, products, customer base, asset management, cash flows, taxation, HR, accounting, and information systems. (KPMG Professional advice) Conducting the legal due diligence process will vary depending on the type of business, the size of the business and the complexity of the overall organizational structure.

At a minimum, the buyer should ask for copies of, or get a written explanation of, the following items: 1. Basic firm information – including brief history, structure, size, lines of business, registrations, personnel turnover, and the like. 2. Financial information – Audited statements and business plans. 3. Compliance systems – Relevant laws, regulatory issues, and compliance requirements; including manuals, training and officers. 4. Internal procedures – Company policies and guidelines, including a code of ethics.

5. Principal service providers – Lawyers, accountants and consultants. 6. Significant business relationships – Suppliers, vendors, customer base. 7. Material contracts and agreements – Finance relationships, leases, material correspondence, employment agreements. 8. Warranties and insurance coverage. 9. Any pending litigations – Inquiries an investigations. 10. Taxation – Income tax returns, assessments or company liabilities. 11. Patents and copyrights, and other intellectual property-related documents.