In the context of the mergers & acquisitions (M&A), due diligence simply means an investigation process that provides a purchaser or investor with an opportunity to obtain as much information as possible about the business of a company he wishes to acquire.
In Malaysia, lawyers are typically appointed to conduct the legal due diligence process on behalf of their clients (potential purchasers) in addition to the preparation of the transaction documents.
By undertaking due diligence, the purchaser or investor will be made aware of potential risks that he can take measures to mitigate. These measures may include a reduction of price or the incorporation of contractual provisions to account for the risks.
Scope of Due Diligence
Generally, the scope of due diligence covers corporate information, labour and employment, licenses and permits, litigation, material contracts, land and properties, banking and finance, intellectual property and insurance but may vary depending on factors such as the industry in which the target company operates and time constraints.
Among other things, due diligence will impact the following two critical aspects of any M&A transactions.
- Whether to Transact
The purchaser’s decision to acquire is ultimately based on a range of factors, however, due diligence will assist the purchaser to make informed decisions about whether to transact at all.
Obtaining the necessary financial information and business advice to be comfortable with the financial viability of the business will be critical, particularly if you are seeking to acquire by way of bank borrowing using your personal assets as security.
2. Contractual Terms
Due diligence will impact and efficiently identify the terms that need to be negotiated and set out in any contracts.
One of the key advantages of undertaking a thorough due diligence process is that it provides both the vendor and purchaser with the ability to deal with potential issues at the outset. This means that a number of potential risks can be mitigated, if not, eliminated entirely.
If the report reflects negative findings, the parties can take necessary measures to account for these findings. For instance, the price may be adjusted or concessions are made in specific areas to account for certain risks. In extreme cases, the entire M&A may even be cancelled.
It is common for a satisfactory due diligence to be included as one of the conditions precedent in any M&A transactions. This often allows a purchaser to terminate any purchase if the due diligence findings turn out to be unsatisfactory.
Identifying and dealing with critical issues at the outset is often far cheaper with better prospects of an outcome, compared to commencing court proceedings or other forms of dispute resolution to enforce rights. Purchasers should at least identify their due diligence plan and a budget for executing it. An experienced lawyer can advise you on the specifics you should take into account based on your individual circumstances.
Authored by Chin Kah Wei, Gavie
Managing Partner from JR Ng & Chin | JC Law. You may contact him at email@example.com
If you have any queries on corporate due diligence in Malaysia, please do not hesitate to contact the author.
The contents of this publication are given as general information for reference purposes only and do not constitute the firm’s legal advice. For any specific matter or legal issue, please do not rely on this publication but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.