What Is Legal Due Diligence And Why Is It Important In M&A Transactions?

What Is Legal Due Diligence And Why Is It Important In M&A Transactions?

Along with the fact that Vietnam is opening up the market and encouraging investments from foreign countries, the environment for business and investment in Vietnam is gradually being influenced by the practices and requirements of foreign investors. Accordingly, one notable example therein is the legal due diligence process performed on target companies prior to the commencement of investment projects.

1. Origin & Interpretation of legal due diligence

Legal due diligence first appeared in the US after the passage of the Securities Act 1933 which regulated that securities dealers and brokers were responsible for fully disclosing material information about the instruments that they are selling for the buyers to consider.[1] Due diligence – understood as the request for disclosure of material information for the buyers’ consideration and assessment before the transaction is conducted, was also gradually applied in other fields and became popular all over the world.

Depending on specific demands, due diligence can be performed in various aspects: technical, financial, legal, etc. Legal due diligence can be simply interpreted as the examination, consideration and assessment of factors with regard to the legal aspect of a matter.

Legal due diligence in M&A transactions usually focuses on inspecting the target company’s compliance with the law and assessing potential risks that the investor may encounter should they choose to invest in that enterprise.

2. The necessity of legal due diligence in M&A transactions

Assessing legal issues within a company in general and within an M&A transaction in particular is a necessary task. From the viewpoint of the company, legal due diligence helps the owner be aware of the company’s compliance with the law from its establishment through to the whole duration of its activities, identify errors and omissions in the process of operation so that the appropriate adjustments can be made. Legal due diligence also helps complete an enterprise’s legal portfolio and creates advantages for enterprises’ owners in the process of calling for investment and negotiating M&A transactions.

From the viewpoint of the investor, legal due diligence is the process in which lawyers of the investor (usually the buyer) collect, study, analyze, review and assess information on the target company or a specific subject in the M&A transaction to point out legal issues that may affect the project and provide suitable recommendations. By legal due diligence, the investor can acquire relevant information about the target company/ subject of the transaction that the seller may provide insufficiently or intentionally conceal. This is a necessary task that helps the investor to evaluate and take actions to avoid potential risks before officially conducting the investment.

[1] Due Diligence Definition & Uses for Stocks (investopedia.com) – Accessed on August 15th, 2021

Disclaimer: This article is for general information only and is not a substitute for legal advice. Apolat Legal is a Vietnamese law firm with experience and capacity to advise on matters related to M&A. Please click here to learn more about our services and contact our lawyers in Vietnam for advice via email info@apolatlegal.com.

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