1. Understand the scope of legal due diligence and work backward to establish what needs to be verified or reviewed. Sometimes, clients may decide on the scope of legal due diligence. For corporate exercises which require regulators’ approvals, the scope of legal due diligence must meet the requirements under the relevant guidelines such as the Prospectus Guidelines in the case of IPO.

For example, if the scope of legal due diligence is to verify all shares in the target company have been duly allotted, the due diligence steps should include reviewing the following documents:

• shareholders’ and directors’ resolutions passed for allotment of shares under sections 75 and 76 of the Companies Act 2016 of Malaysia.

• notice of shareholders’ approval for allotment of shares which should be lodged with the Registrar of Companies within 14 days from the date of the shareholders’ approval (section 76(2) of the Companies Act 2016).

• return of allotment which should be lodged with the Registrar of Companies within 14 days from the date of allotment (s78(1) of the Companies Act 2016).

• register of members which should be updated to register the allotment of shares within 14 days from the date of the allotment (section 77(1) of the Companies Act 2016).

• notification to the Registrar of Companies of the changes in the particulars in the register of members within 14 days from the date of the changes (section 51(1) of the Companies Act 2016).

2. Identify the issues based on the scope of legal due diligence and provide solutions for the issues. The solutions could be in the form of obtaining indemnity, appropriate representations and warranties, or certain undertakings from the sellers (in the case of M&A transactions).

3. Always keep in mind the purpose of the legal due diligence exercise.

For example, the purpose of conducting due diligence for an M&A transaction is to identify issues in the target company which may affect the transaction or influence the purchaser’s decision to acquire the target company. Therefore, when reviewing agreements entered by the target company, look out for change in control provisions. In addition, look out for terms which are onerous on the target company such as clauses which require the target company to bear liquidated damages or uncapped liability. These clauses may affect the value of the target company and the purchaser’s investment in the target company.

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This post was first posted on Linkedin on 22 April 2022.