Potential buyers/ investors who want to acquire companies should consider conducting legal due diligence on the target companies before their investments.

One key aspect of legal due diligence are material contracts of the companies. Legal due diligence on material contracts allows the potential buyers/investors to assess the business, liabilities and potential liabilities of the target companies.

The materiality of the contracts may be determined by the nature and value of the contracts, the impact of the contracts on the target companies, or a combination of other factors.

The legal due diligence on material contracts should include the following:

1. Whether there is any right of the counter party to unilaterally terminate the contracts or to terminate upon certain events triggered by the proposed transaction, such as change of control or shareholding provisions.

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

3. Whether there are any covenants and exclusivity provisions in the contracts which will restrict how the companies conduct their business.

4. Whether there are any extension or renewal clauses.

5. Whether there are other onerous provisions which may affect the business or financial position of the companies.

6. Ask the potential buyers/investors on their objective for the acquisition and focus the due diligence based on the objective. For example, if the potential buyers/investors are acquiring the target companies because of the latter’s customer base and contracts which are revenue generating, check whether the payment under the contracts is subject to conditions or restrictions.

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This post was posted on LinkedIn on 29 February 2024.