Law & Licences: Legal Due Diligence

In a legal due diligence process, prospective buyers examine all legal issues. In particular, they will examine the ownership structure of the tangible and intangible assets for sale and the main existing contracts.

Interlocking relationships between shareholders and operating companies sometimes make it less obvious what the legal structures actually are. Prospective buyers will want to ensure that ownership of the assets necessary for the business being acquired is actually sold to them in a legally sound manner. Licensing agreements, such as leasing contracts and rental agreements, are also examined in a legal due diligence process. Depending on the intentions with the company, it may be important for prospective buyers to have long terms; but it may also be really important to be able to terminate contracts at short notice. As a seller, you cannot prepare for every scenario in advance of a sale.

Prospective buyers will look at and evaluate intellectual property rights (patents, protected design rights, trademark rights, etc.) and licenses that are needed for business operations to ensure that these property rights and licenses are transferred with the business. It is very important to include these rights that are necessary for business operations in the purchase agreement.

Prospective buyers will be particularly careful to check whether the company is involved in litigation. Although signs of legal disputes can be identified during legal due diligence, it is not really possible to cover all emerging legal disputes. In this field, legal due diligence dovetails with commercial due diligence, in which, for example, complaints can be identified, and with personnel due diligence, in which labor-documented legal disputes can be uncovered. As a rule, prospective buyers and sellers will draw up a list of existing and emerging legal disputes, and the prospective buyer will demand a guarantee from the seller that no further legal disputes exist or are identifiable. In the event that further litigation does arise, the buyer and seller will define and agree in advance on a compensation arrangement. For prospective buyers, proceedings relating to cartel agreements and corruption are also both a reflection of corporate culture, or at least of possible behavior, and an indicator of expected costs and reputational damage.

All ambiguities in contracts and all indications of future financial burdens from legal causes are usually deducted from the purchase price by prospective buyers.

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