Trainee Talks: What Happens During Legal Due Diligence?
Legal due diligence is a core component of many corporate transactions, providing clients with a detailed understanding of legal risks and considerations, ensuring they make an informed decision before entering into a proposed deal.
For trainees, the due diligence process can provide a valuable insight into the practical application of commercial knowledge within a transactional context. From reviewing large volumes of documents to summarising important information, the due diligence process can help to develop vital, technical legal skills required for a trainee solicitor.
What is legal due diligence?
Legal due diligence involves the thorough investigation and analysis of a company’s legal, commercial and financial position to identify risks and liabilities before completing corporate transactions, such as mergers and acquisitions. It is an essential, systematic process which can enable businesses to mitigate risks, negotiate terms and avoid potential future disputes which would be both expensive and time-consuming.
What happens during legal due diligence?
The scope of legal due diligence can vary, depending on the nature of the transaction and the target company itself. Most commonly, the seller will provide information on the target company through a virtual data room which holds large volumes of documents and key information. These documents will be thoroughly reviewed by the other party’s solicitors, often the buyer, to ensure the target company is compliant with corporate laws and regulations, including the Companies Act 2006, and can also check for any clauses or circumstances which may potentially be harmful to the buyer, or which may have an impact on the transaction going through, for example, any existing or past litigation claims.
Any risks identified can be raised by the other party for further investigation and, in the event of any serious issues, may result in the renegotiation of terms or even withdrawal from the deal altogether.
The other party’s solicitors will usually collate their findings in a Due Diligence Report which, as well as highlighting any risks and liabilities, can include recommendations for the mitigation of risk and suggested contractual protections, such as warranties and indemnities. These can then be accepted or refused by the seller, or the transaction renegotiated.
Why is legal due diligence important?
From a buyers’ perspective, due diligence can prove to be a reality check, ensuring they understand the full nature of the company they are entering into the transaction with. It can clarify how the business operates, and whether the information that has been provided to them is consistent with the company’s underlying documentation. It ensures that the buyer is fully informed about the transaction they are entering into, and there are no surprises thereafter.
For the seller, due diligence can be a protection mechanism, protecting them against the risks of future liabilities and claims, as they have the opportunity to reveal any issues and all relevant documentation relating to the target company. This ultimately reduces the risk of future legal claims.
Failure to conduct thorough due diligence can result in legal disputes, financial losses and reputational damage, as well as the collapse of the transaction entirely.
A trainee’s perspective
For a trainee, assisting with due diligence can be a great learning experience, providing the opportunity to develop important legal and commercial skills:
- Whilst reviewing important company documents, such as commercial contracts, trainees can gain an understanding of how businesses operate on a daily basis, and can develop a greater, in-depth understanding of the legal frameworks underpinning operations.
- Trainees can develop their ability to critically analyse information; reviewing such a vast volume of documents can raise important questions, such as what is relevant to the transaction and whether this needs further investigation? As a result, these questions may provide the opportunity to develop legal research skills, assisting the solicitors whilst simultaneously making the transaction smoother and more efficient.
- Additionally, trainees may be required to assess the significance of a potential issue rather than just identifying that it exists. This can strengthen a trainee’s problem-solving skills, allowing them to consider what should or needs to be done in order to resolve the issue.
- Trainees can also develop valuable skills in condensing large volumes of complex information into a format that is accurate, appropriate and comprehensible to all relevant parties.
- Due diligence is often a highly collaborative process, involving experts from multiple areas of law. Depending on the transaction, this may require the advice from specialists in property, employment, litigation, tax and even intellectual property. Exposure to these different practice areas can significantly enhance a trainee’s knowledge, providing a broader understanding of various legal aspects of a business and the company’s governance as a whole.
An efficient and well-executed due diligence procedure provides the sound foundation for a successful corporate transaction; clear and transparent communication will protect and enhance strong commercial relationships. For trainees, due diligence offers a firsthand introduction to transactional work, combining legal analysis with commercial thinking and, as a result, can be an invaluable learning opportunity.