Compliance Due Diligence in M&A

Compliance due diligence in M&A is an important and indispensable step in the transaction process, helping to ensure transparency and legal safety for the parties involved. This is the stage where legal experts conduct a comprehensive examination and assessment of legal issues related to the target enterprise, thereby helping the parties make informed decisions and minimize risks. Conducting a thorough compliance due diligence not only protects the legitimate interests of the parties involved but also creates a solid foundation for the success of the M&A transaction. In the following article, Viet An Law will help you better understand this issue.

What is M&A transaction and compliance due diligence in M&A?

• M&A (Merger and Acquisition) activities can be considered a method of gaining control of a company or enterprise through mergers and acquisitions of that company or enterprise.
• Compliance due diligence in M&A is the process by which the buyer collects, researches, studies, reviews, and evaluates information about the target company to identify legal issues that are likely to affect the company purchase transaction and provide appropriate advice.
• During the Compliance due diligence process, the acquiring company can determine whether the target company has any ongoing proceedings and gain a clear understanding of the type of proceedings involved. Additionally, the acquiring company can investigate the target company’s contractual arrangements, any legal restrictions, intellectual property holdings, and the target market.

Why is it necessary to conduct compliance due diligence in M&A activities?

• In the context of increasingly complex M&A transactions, buyers face many challenges in accessing legal information. Thorough compliance due diligence will help buyers better understand the project, identify potential risks, and make appropriate strategic decisions.
• The main objective of compliance due diligence is to help the buyer assess the legality of the project and minimize legal risks during transaction negotiations.
• Litigation-related liabilities can affect the target company’s reputation as well as the purchase price, valuation, and profitability of the transaction.
• This due diligence also helps identify any issues that may hinder the completion of the M&A transaction. If all parties are aware of these issues, they can discuss potential solutions to ensure the transaction goes smoothly.

Some basic contents of compliance due diligence in M&A activities

Intellectual property appraisal

• This process focuses on examining and evaluating the target company’s intellectual property assets, including patents, trademarks, copyrights, and trade secrets.
• The objective is to assess the strength and legitimacy of the target company’s intellectual property portfolio and to identify potential intellectual property infringements or disputes. In addition, due diligence also reviews licensing agreements or contracts related to intellectual property.

Business appraisal

This section focuses on evaluating the target company’s business operations and financial performance, as well as other important factors to determine the overall value and potential risks of the business.

Financial and loan appraisal

• This is the process of examining the financial condition and operating performance of a target company, including reviewing the company’s financial statements, tax records, accounting systems, and internal control procedures.
• The buyer needs to check whether the target company has any loans related to the project or not, whether the project assets are mortgaged for these loans or not. In addition, the financial status of the project, taxes, and financial obligations to state agencies also need to be carefully considered.

Documents required for compliance due diligence

For the contract

It is necessary to review the contracts of companies and enterprises such as:

• Customer and supplier contracts;
• Operating contracts;
• A cooperation agreement or joint venture;
• Guarantees and credit agreements;
• License;
• Compensation agreement;
• Labor contract.

Internal documents

• Enterprise registration certificate;
• An investment registration certificate;
• Tax code registration certificate;
• Company charter, collective labor agreement, labor regulations, etc…
• List of shareholders, shareholder agreement;
• Minutes and decisions regarding hiring/appointment/other forms of recruitment/dismissal/dismissal/disciplinary action against business management and operations personnel.

Documents related to tax and accounting

• Annual financial reports.
• Value added tax declaration.
• Enterprise accounting books (General journal).
• Bank slip.
• Input and output invoices for each year.
• Receipts, confirmations, and notifications of completion of tax payment obligations for the years.
• Detailed statement of corporate debt.

Documents related to litigation

This includes documents relating to past and present legal issues that have the potential to affect the company, such as:

• Pending complaints;
• List and documents related to disputes of the Enterprise/Founding Shareholders/Founding Members. Lawsuits in court or arbitration, prosecutions or complaints related to the enterprise, whether completed, incomplete, or at risk of occurring;
• Minutes of the decision on administrative sanctions/inspections/examinations applied by competent state agencies to the enterprise and other relevant documents (if any).

The role of experts in compliance due diligence in M&A activities

Project compliance due diligence requires in-depth knowledge and practical experience of relevant legal regulations. Buyers should work closely with legal experts to ensure that due diligence is carried out comprehensively, helping to limit risks and ensure rights in M&A transactions.

Therefore, when there are experts knowledgeable in this field (such as Lawyers and legal experts), they will review and evaluate all legal aspects of the target company, including researching and verifying:

• The company’s operating license, such as enterprise registration certificate, investment registration certificate, legal documents to ensure that the company is qualified to do business in one or several conditional industries and professions;
• List of owners of the company and details of the amount of equity contributed to the company;
• The company’s physical assets, such as warehouses, machinery, equipment, factories, etc., and business secrets and technological secrets.
• Important contracts and agreements related to the company’s products/services are signed and issued during the establishment and operation process;
• Documents and papers related to the intellectual property rights of the company’s products/services;
• Documents and papers related to human resources activities within the company;
• Civil, commercial, and criminal disputes of the company that have occurred and are occurring;
• Issues related to owners and owners’ capital contributions;
• Products/services and transactions signed, cooperation, purchase and sale of products/services of the company comply with the law;
• The establishment and management of the human resource operation apparatus is carried out by the provisions of the Labor Code and related legal provisions;
• Legal risks present in business operations.

Above is the advice of Viet An Law on compliance due diligence in M&A. If you have any related questions or need in-depth legal advice, please contact Viet An Law for the best advice and support!