Due diligence: Common issues in investee’s contracts

Due Diligence

At our firm, we are regularly engaged to carry out legal due diligence for investors seeking to invest into promising companies. Some of these investees/target companies are family-owned business and startups.

We frequently encounter situations where contracts have been entered into by an unintended or wrong corporate entity, creating potential pitfalls for the parties involved.

Consider these scenarios:

1. A founder owns several companies e.g. Company A and Company B. The founder intends for Company A to enter into contracts with customers and suppliers. In practice, business is carried out as though Company A is the contracting party. Company A deals with the customers and suppliers.
However, a discrepancy appears on paper. Contracts are executed under the name of Company B- a misalignment that raises legal concerns.

2. Another common issue is found on contract documentation. While the first page of a contract states Company A as the contracting party, the signing page oddly bears the name of Company B as the executing party.

Addressing these issues before the investors invest into the companies is important to ensure there are no unintended complexities and legal implications in the future.

This post first appeared on LinkedIn on 10 August 2023.

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