Business Acquisition & Sale: Legal Due Diligence Checklist

What Is Legal Due Diligence in a Business Acquisition or Sale?

Legal due diligence is the process of examining a business’s legal records, contracts, ownership, and liabilities ahead of an acquisition or sale.

What the Buyer is Looking At and Checking Off Before Completing the Transaction?

• Business ownership and incorporation documents.
• Existing contracts and commercial agreements.
• Pending litigation, legal notices and potential liabilities.
• Licences, registrations and statutory compliance.

Why the Seller Should Prepare Their Papers in Advance?

• Keep legal and corporate documents organised.
• Ensure accurate information is provided to build buyer confidence.
• Highlight and address any compliance gaps or missing documents.
• Minimise delays and ease transaction negotiations.

What Company & Corporate Documents Should Be Reviewed?

• Certificate of Incorporation: Verify that the company is legally incorporated and confirm its registered details.
• MOA and AOA: Review the company’s objectives, internal rules, and authority to undertake the proposed transaction.
• MCA filings and statutory records: Check required filings with the Ministry of Corporate Affairs and identify missing or delayed submissions.
• Board and shareholder resolutions: Confirm that relevant business decisions and approvals were properly authorised and recorded.
• Shareholding and cap table: Verify the ownership structure, share distribution, and rights attached to different share classes.
• Previous investment and financing documents: Review past investment agreements, funding terms and obligations that may affect the acquisition.

What Contracts Should Be Checked Prior to Buying a Business?

• Customer and vendor agreements: Review key commercial terms, payment obligations, service commitments and termination rights.
• Supplier and distribution agreements: Check supply obligations, exclusivity terms, pricing arrangements, and restrictions on transferring the agreements.
• Lease and rental agreements: Verify the lease duration, rent, renewal terms and whether the transaction requires the landlord’s consent.
• Loan and financing agreements: Examine outstanding debt, repayment obligations, security interests and any restrictions triggered by the acquisition.
• Franchise, licensing and partnership agreements: Review operating conditions, licence rights, profit-sharing terms and consent requirements for ownership changes.
• Change-of-control and termination clauses: Identify contracts that may be terminated, renegotiated or require approval when the business changes ownership.

How Should the Buyer’s Team Review Intellectual Property?

• Trademarks, patents and copyrights: Verify ownership, registration status, renewal requirements and any existing disputes.
• Domain names and digital assets: Confirm ownership and control of domain names, websites, social media accounts and other business assets.
• Software and source-code ownership: Check whether the business owns its software or has valid rights to use and modify it.
• IP assignment agreements: Review agreements confirming that employees, founders and contractors transferred relevant intellectual property rights to the business.
• Third-party licences: Check licence terms, usage restrictions, renewal conditions and whether rights can continue after the acquisition.
• Pending IP disputes: Identify ongoing litigation, infringement claims, opposition proceedings or disputes concerning intellectual property ownership.

Also Read: How to claim Intellectual property rights

What Employee & Labour Documents Should Be Reviewed?

• Employment agreements: Review employee contracts, notice periods, confidentiality and restrictive covenants, termination rights and obligations.
• Salary and benefits: Confirm unpaid salaries, bonuses, incentives, leave encashments, and other benefits owed to employees.
• ESOPs & benefits: Scrutinize employee stock option plans, equity grants, rights that may potentially vest or lapse on the deal.
• Consultant agreements: Evaluate consultant agreements, payment terms, IP ownership, and nature of the relationship.
• Employee disputes: Uncover pending litigation, harassment complaints, disciplinary cases, or other employee grievances.
• Labour law compliance: Check registration norms, labour laws, statutory obligations, and other requirements.

What Tax & Regulatory Issues Should Be Checked?

• GST and tax registrations: Confirm applicable tax and GST registrations are in place, as well as any issues with the registration details.
• Tax returns and assessments: Examine tax returns, assessments, or any issues with the filings already made by the business.
• TDS compliance: Confirm that any tax was deducted, deposited, and reported as and when required.
• Tax demands/notices: Check for any demands, notices, assessments due from the taxpayer, and pending litigation.
• Licences and permits: Confirm the licences and permits currently in place as well as industry-specific regulations.

What Litigation & Legal Risks Should a Buyer Investigate?

• Pending litigation: Uncover threatened or pending litigation against the business and issues with it.
• Legal notices: Check notices issued to or received by the business and if there are any issues with them.
• Regulatory investigations: Determine if there are any investigations or orders from regulatory agencies against the business.
• Contract disputes: Discover if there are any disagreements with customers, vendors, lenders, or other business partners.
• Employee claims: Check employee-related disputes, claims, and other issues with employment contracts.
• Material liabilities: Identify major liabilities, guarantees, and other contingent liabilities on the deal.

What Should Be Checked Before Signing the Sale Agreement?

• Structure of the transaction: Understand if it is an asset sale, share sale, or something else.
• Consideration and payment: Set the consideration, its payment method, and any adjustments to consideration.
• Representations and warranties: Describe the representations and warranties of both parties buying and being sold.
• Indemnities: Explain indemnities with regard to the losses, liabilities, and damages arising from the agreement.
• Conditions precedent to closing: Clarify conditions precedent to the transaction, including any approvals and consents needed.
• Closing requirements: Understand what all is required to complete the closing procedure, such as documents, payments, and other requirements.
• Non-competition, non-solicitation: Non-competition and non-solicitation covenants and any other restrictions needed.

Business Acquisition Legal Due Diligence Checklist

What Legal Risks Can Delay or Stop a Business Acquisition?

• Incomplete or Disputable Ownership: Ownership records or asset distribution might be subject of disputes or incomplete transfers.
• Hidden Liabilities: Additional liabilities such as guarantees and contingent payables might be discovered
• Material Litigation: Significant disputes may arise during the transaction or negotiations.
• Lack of Licenses or Approvals: The necessary licenses or approvals may be missing or may not be transferable.
• Change of Control Default: A controlling party may be entitled to terminate a contract upon a change of control.
• Intellectual Property Ownership: Ownership of trademarks, computer software, and other intellectual property may be disputed.
• Tax or Regulatory Liabilities: Tax or regulatory liabilities may substantially affect the transaction.

What Papers Should a Seller Present During Legal Due Diligence?

• Corporate Records: The corporate documentation should be presented along with shareholding-related papers, board resolutions, and constitutional documents.
• Financial and Tax Records: Financial statements, tax returns, and GST details should be made available for review along with any notices of demand.
• Material Contracts: All contracts and agreements with third parties, including customers and suppliers, should be presented. This also includes financing, licensing, and leasing agreements.
• Employee Records: Payroll, employment agreements, benefits, ESOPs, and any employee-related disputes should be made available.
• IP-Related Documents: Trademarks, patents, copyrights, and other intellectual property-related records, including software and assignments, should be presented.
• Litigation History: Litigation-related documents, including notices, court pleadings, dispute settlements, and any other claims should be reviewed.
• Licenses and Approvals: Business licenses, permits, and approvals should be presented for review.
• Financing and Security Agreements: Any financing-related agreements, guarantees, and security interests should be reviewed.

Conclusion

Legal due diligence is an essential step in any business acquisition or sale, helping identify potential legal risks before the transaction is completed. Reviewing corporate records, contracts, intellectual property, employee obligations, tax compliance and pending disputes helps buyers make informed decisions. Sellers should also organise their documents and address potential issues in advance to avoid unnecessary delays.

Disclaimer: This blog is for informational and educational purposes only and should not be construed as legal or professional advice. Laws are subject to change, and therefore, it is recommended to consult an experienced Corporate Lawyer before taking any action or entering into any agreements.