What purchasers’ legal counsel look out for in M&A due diligence on contracts

Due Diligence

When conducting legal due diligence on contracts entered by a target company in an M&A transaction, the following are some of the provisions to look out for in the contracts:

1. Whether the counterparties may unilaterally terminate the contracts or terminate the contracts upon certain events triggered by the M&A transaction, such as change of control or shareholding provisions.

2. Whether the target company or the counterparties may terminate the contracts without cause.

3. Whether there are any liquidated damages, penalties, uncapped liability or indemnity, or service level clauses which may lead to loss-making contracts.

4. If the target company provides deliverables (e.g. reports) to its clients, who owns the intellectual property right in the deliverables.

5. Whether there are any covenants and exclusivity provisions in the contracts which will restrict how the target company conducts its business.

6. Whether there are any extension or renewal clauses.

7. Whether the counterparties have the right to assign the contracts to third parties without consent from the target company.

8. Whether there are other onerous provisions which may affect the business or financial position of the target company.

What would you add to the list if you are acting for purchasers?

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This post was first posted on Linkedin on 29 April 2022.

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