Legal DD
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In the context of legal due diligence for an M&A transaction, how do you assess and address potential liabilities arising from ongoing or past litigation involving the target company?
Having a clear picture of the situation regardless of how ugly the situation is. Setting up a task force to assess the situation with an external legal partner, identify all possible solutions available for each situation (at least 3 solutions), decide the best decision per situation and next best for contingency planning.
Investigate the facts around the type of claim, the stage of proceedings, the merits of the claim and the defence, the liability exposure and the likelihood of the claim succeeding. These are typically investigated with the assistance of buyer’s counsel. If the claim is complex, it is common for the seller’s or target’s counsel to prepare a memo to help the buyer understand and assess the risk of litigation.
As the legal team
• Request a comprehensive list of all ongoing and past litigation involving the target company and obtain copies of all relevant documents related to litigation that the company is involved in.
• Understand the context and potential impact of each litigation case by considering the documents and having interviews with key stakeholders, such as legal and the C-suite.
• Classify the types of claims into categories, such as contractual disputes, employment issues, IP infringements, regulatory violations.
• Assess the defenses raised by the target company and their likelihood of success. For past litigation, review the outcomes, including judgments, settlements, or dismissals and the potential risk of appeal. Assess the financial and operational impact and exposure on the target company, including damages, legal fees, and settlement costs. Conduct this analysis separately for each matter.
• Check if the target company has set aside appropriate reserves for the potential liabilities and whether the company has insurance for legal action or legal outcomes.
• Make a recommendation as to how this risk should be addressed in the SPA, such as indemnities, warranties and representations, case management strategy, insurance, escrow options, or adjustment to the sale/purchase price.I think some of the elements of Legal DD should reflect such an extensive inquiry. It seems that it is in the seller’s best interests to disclose these. I agree with Zain on all the points made. Setting up appropriate reserves, funding the escrow accounts, and adjusting the purchase price are great suggestions to address these potential liabilities.
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