What to look out in due diligence on material contracts

Due Diligence

Investors who want to subscribe for shares or acquire shares of private companies from another shareholder should consider conducting legal due diligence on the 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 investors to assess the business, liabilities and potential liabilities of the private companies.

The materiality of the contracts may be determined by the nature of the contracts, value of the contracts, impact of the contracts on the 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 subscription or acquisition of shares by the investors, 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.

Other than the above, what would you look out for in legal due diligence of material contracts? #malaysiancorporatelawyer



This post was first posted on Linkedin on 10 January 2022.

Linkedin Post
Five key steps for legal due diligence

Most lawyers are good at identifying issues, but legal due diligence shouldn’t be limited to merely reviewing documents and identifying issues. Here are my five steps for conducting legal due diligence: 1. Identify the issues based on the scope of legal due diligence as agreed with the clients. 2. Provide recommendations …

Linkedin Post
Begin with the end in mind: Post-completion integration

I once worked on an M&A deal that took more than a year to complete. While the deal was not inherently complex, it dragged on due to delays in finalizing the details of the transaction agreements for reason beyond my control. As the deal involved a larger corporation acquiring a …

Being a Corporate Lawyer: Why I Do What I Do

After years of demanding schedule and juggling simultaneous corporate exercises which take a toll on physical and mental health, it is not surprising that some corporate lawyers experience burnout. Unlike some legal practice areas, the work of a corporate lawyer may not seem immediately impactful or “make a difference” to …