CONTRIBUTOR: BETSEABASI ASUQUO
INTRODUCTION
Mergers and acquisitions (M&A) are strategic and important concept in the business expansion. It involves combinations between established companies as well as acquisitions of emerging businesses. An increasing number of companies have continued to consolidate their assets and resources through mergers and acquisitions in an effort to redefine the competitive landscape. Businesses relentlessly pursue opportunities for growth and expansion, looking to mergers as a viable means to streamline costs and increase market share. In broad terms, a merger involves the voluntary combination of assets and resources from two or more distinct and independent companies, resulting in the creation of a legal entity that can leverage economies of scale to effectively navigate new markets.[1]
A merger occurs when two companies with separate legal identities come together to form a joint corporate entity having a new identity or taking up the identity of one of the merging companies. It helps the two companies combine their forces in ensuring the expansion of their business and the fulfilment of their objectives.
Acquisition on the other hand involves a larger company taking over all the interest and liabilities of a smaller company. In acquisition, a new company does not emerge when interest is acquired rather in most cases the acquired company ceases to exist and its assets become a part of the acquiring company or the acquired company becomes a subsidiary of the acquiring company.[2]
In other to fulfil the goals businesses seek to achieve through merger and acquisition, then the foundations (which are investigations, the preparation of all necessary documents, and legal advice) must have been duly, properly and legally laid. Therefore it is imperative that any legal practitioner involved in the process of merging and acquisition ensure to carry out legal due diligence.[3]
WHAT IS LEGAL DUE DILIGENCE?
Legal due diligence is the process of collecting and assessing all of the legal documents and information relating to the target company. It gives both the buyer and seller the chance to scrutinize any legal risks, such as lawsuits or intellectual property details, before closing the deal.
By understanding the target company and any potential liabilities, both parties can make an informed decision in the merger and acquisition transaction, and ensure the target company is accurately evaluated.[4]
It is Important a legal practitioner deal competently[5] and diligently[6] with any matter brought to him therefore all necessary preliminary investigations should be done to ensure the target company is fit for Merger or acquisition. The liabilities of the target company must be examined, and any agreement between both companies must be well drafted capturing the intentions of both parties. The legal practitioner must ensure compliance with the law and ensure all required notices are filled to the appropriate agencies.
Any act or omission amounting to negligence in the process of facilitating mergers and acquisition of businesses can prove to be vital and render such process invalid or cause further litigation. Therefore, legal due diligence is important in:
- Identifying potential risks and liabilities
- Informing negotiation and deal structuring
- Ensuring compliance with laws and regulations
- Protecting against future disputes and litigation
KEY AREAS OF FOCUS IN LEGAL DUE DILIGENCE
To perform legal due diligence at the initial stage, the following will need to be scrutinized:[7]
- Contracts and agreements (customer, supply, operating and employee contracts and licenses)
- Leases
- Pending and potential lawsuits
- Intellectual property
- Property and tax liabilities
- Regulatory compliance
- Environmental laws
- Representations and Warranties
- Organizational documents (company by-laws, limited liability agreements, stockholder agreements)
BENEFITS OF LEGAL DUE DILIGENCE
- It reduces the risk of unexpected liabilities as all preliminary investigations would have been carried out.
- It improves negotiation position, knowing what and how to negotiate
- It enhances deal value
- It ensures better post-merger integration as all necessary documents and filing would be done at the required agencies.
WHO IS RESPONSIBLE FOR CONDUCTING LEGAL DUE DILIGENCE?
The party who would lose more as a result of any negligence should ensure the acquisition is done diligently. The prospective purchaser or investor will conduct legal due diligence, using the information and documentation provided by the seller. A team of legal professionals, including corporate lawyers, will thoroughly examine the legal aspects of the potential investment or acquisition.
CHALLENGES AND LIMITATIONS
- Time and cost constraints
Some businesses neglect legal due diligence due to its high cost. Businesses evade important taxes to be paid and fail to make necessary returns. The volume of documents to be reviewed within a short period of time can result in hastiness which can also hinder legal due diligence.
- Limited access to information
Target businesses sometimes intentionally delay or ignore the production of necessary documents. Government and regulatory agencies also delay the approval for inspection of necessary documents related to the acquisition.
- Complexity of target company’s operations
Some target company’s operations appear too complex or not properly documented and therefore frustrate all efforts to thoroughly inspect and understand the operations of such company.
CONCLUSION
Legal due diligence is a non-negotiable procedure of merger and acquisition of businesses due to the vital implications of any act or omission which constitutes negligence in the process of acquisition.
REFERENCE
- An overview of mergers and acquisitions in Nigeria available at https://www.dentonsacaslaw.com/en/insights/articles/2024/april/15/an-overview-of-mergers-and-acquisitions-in-nigeria – accessed on April 2025 ↑
- MERGER AND ACQUISITION IN NIGERIA – THE LEGAL PROCEDURE available at https://www.resolutionlawng.com/procedure-for-merger-and-acquisition-in-nigeria/ – accessed on April 2025 ↑
- Rule 14 rules of professional conduct. ↑
- What Is Legal Due Diligence & How To Do It available at https://www.ansarada.com/due-diligence/legal – accessed on April 2025. ↑
- Rule 16 rules of professional conduct ↑
- Rule 14 rules of professional conduct ↑
- What Is Legal Due Diligence & How To Do It available at https://www.ansarada.com/due-diligence/legal – accessed on April 2025. ↑
