There is a broad range of motives and efforts that causes a potential buyer to carry out a due diligence of the target company, in particular a legal due diligence, but in general one can break it down to two key objectives: (1) analysing the inventory, and (2) identification of risks. The potential buyer’s objective is in general to answer two following questions: “Does the company have everything it needs?” and “What are the risks connected to an acquisition?” How such review can be carried out with legal certainty and which pitfalls have to be considered were the topics of a module of this year’s P+P Pöllath + Partners’ M&A training.
Data protection in focus
However, there are legal limits to the buyer’s, seller’s and target company’s implementation of the above-mentioned objectives. Already when providing information about the target company to the potential buyer, the seller and the buyer must ensure that personal data (such as information about employees, customers or suppliers) is only passed on to the buyer in compliance with the regulations set forth in the German Basic Data Protection Regulation (Datenschutzgrundverordnung). During our training we not only discussed concrete possibilities to protect data privacy, such as by anonymizing data, but also showed concrete case constellations that permit (non-anonymized) disclosure of personal data on the basis of a legitimate interest.
German corporate law sets rules to the balance of power between the selling shareholder of the target on the one side and its management on the other side and therefore also sets legal limits when implementing due diligence. Therefore our training dealt with the question, which is of practical relevance, whether and to what extent the selling shareholders of a German limited liability company (GmbH) or the stakeholders of a German stock company (AG) may instruct the management or the board to carry out due diligence or to provide the potential buyer withnecessary information on the target company. On the contrary, we dealt with the question of the management’s liability when providing information or refusing to provide information, in each case to the potential buyer, was against the law.
Structure and procedure
Precisely implementing inventory and analysing the acquisition’s possible risks also requires structured preparation and an organised due diligence process. Keywords such as “communication” and “coordination” are of particular importance in this context. Understanding the target company’s business model is at least as important as constantly exchanging results and findings amongst the various due diligence teams (“Financial“, “Tax“, “Commercial“), the investment bank and the client.
Legal due diligence should comprise everything that is relevant to the concrete business model of the relevant target company in order to make a statement as to whether “the company has everything it needs“. At this point, we outlined a legal due diligence’s main areas such as company law, financing, commercial and contract law, labour law, environment, IP and real estate as well as relevant legal issues attached to each field.
Legal due diligence panel discussion