Links to Legal Due Diligence in China at the bottom of this article.
How to get the Most out of your Investment Down Under
If you are considering investing in Australia, acquiring a company for your branch office, a joint venture, a merger, or even a “greenfield” operation it is important to be aware of every aspect of your potential new investment. This ranges from the basic financials to the legal status of its contracts and even the broader industry context. It is therefore essential to perform proper due diligence to ensure the information you obtain from a vendor is correct to avoid nasty surprises further down the track. This article will focus on the performance of legal due diligence, which will necessarily encompass other areas such as financial and corporate due diligence.
What is legal due diligence?
Due diligence generally is the checks conducted on a company by a responsible investor before any settlement is reached and binding contracts signed. It is very much driven by the idea of ‘caveat emptor’, let the buyer beware. Legal due diligence has at its heart a business’s compliance with Australian and international law. As such, it gives a clear picture of the type of company you are investing in. Legal due diligence will generally focus on litigation, contracts and obligations of a company, and intellectual property rights. It will also overlap with other areas such as a company’s corporate structure, operations, and finances.
What you need to look for
Generally a contract for the sale of a business will contain guarantees and warranties of certain facts; however it would be irresponsible to simply rely on the information of the vendor. By investigating all areas of the business thoroughly, you may be able to negotiate the addition of the new information to your contract. This will give you greater protection if the contract is breached.
In order to perform proper legal due diligence there are a wide number of areas which will require investigation. As mentioned, some of the areas listed below will overlap with other forms of due diligence.
The main areas which will require investigation are as follows:
Incorporation
It is important to check that a company is properly incorporated and up to date in its reporting to the Australian Securities and Investments Commission (ASIC). This will include checking a company’s share structure, documentation appointing its board and members, and its financial reports to ASIC.
Contracts
This will include sales contracts, distribution contracts, and any sub contracts a company may have. Check that they are valid, exactly what they entail, their duration and if they can be terminated. It is important to know which contracts will be ongoing liabilities once the company is acquired, and which can be renewed or renegotiated with another party. This area will also cover any contractual debts a company may have; the validity of these contracts should be examined in addition to recording them as part of a company’s finances.
Employees
It is advisable to investigate the management team of your target company, how long they have been employed and what their performance has been like.
Employment contracts of all staff should also be checked as they may need to comply with the Fair Work Act 2009 (Cth) depending upon when they came into force. Also check that occupational health and safety standards are being complied with.
Finances
It is important first and foremost to know how a company is and has been performing financially. This is something which will most likely be covered by financial due diligence undertaken by accountants. From a legal due diligence viewpoint what is important is that a company is not trading while insolvent or in any other way breaching its requirements under the Corporations Act 2001 (Cth). It is also necessary to look at a company’s debts and other financial liabilities and check when these become payable.
Real Property
It is essential to check that the company owns all of its property, or has validly leased it. Property in Australia is dealt with at state level so it will be necessary to check title to any property with the requisite state authority. Also check for any mortgages, equitable claims, or charges that may exist against the property.
Intellectual Property
This will include any patents, trademarks, copyright and design registrations a company owns or is licensed to use. It is important to check whether or not a company has registered its intellectual property, making it more valuable if it is part of contract. If intellectual property is registered make sure your target company is the owner or licensed user of it; you do not want to be the one dealing with unexpected litigation over IP infringement after you have invested. This can all be undertaken through IP Australia. Also if a company’s IP comes from a licensing agreement check its validity, and its duration. Will the license continue after your investment or if a new agreement will need to be drafted?
Litigation
Knowing what litigation a company has been involved in gives you a very good idea just what type of company it is. Are willing to be litigated against or fined rather than doing things right in the first place? Are there any past prosecutions from government agencies? It is important to look out for ASIC prosecutions of the company or its directors as this may have led to increased scrutiny by ASIC in the present. Legal due diligence should also, as far as possible, look for any potential future litigation a company may face. This will help you either avoid it, or weigh up whether your investment is worth the risk.
Operations
This area covers the structure of a company, its logistics, suppliers and any outsourcing. It is also a good idea to look at the industry in general to see how the company is doing compare to its competitors. This is less legal due diligence and more corporate or business due diligence.
Taxation
Check that a company has paid tax. However, the issue of whether or not a company has paid the right amount of tax is something again to be covered by financial due diligence.
Insurance
It is also advisable to check that the company is insured, and not underinsured. Also if possible it is sensible to find out what recent claims have been made and if future premiums may be higher as a result of consistent claiming.
Environmental Issues
This area will cover a company’s compliance with environmental law and planning regulations. You should check to see that the company is fulfilling its environmental management obligations under current legislation. Also check that any buildings they own or operate have planning approval and are built in correctly zoned land (industrial or commercial).
Why is it necessary?
Legal due diligence will reveal the problems a business has encountered, and has at present. This will allow you to make an informed decision about whether or not to risk investment. Legal due diligence is therefore a vital component of risk management. Without performing legal due diligence you may not get the business you paid for.
Who should perform legal due diligence?
To ensure that legal due diligence is not simply supplying you with the surface information you could have obtained in your vendor’s guarantees it is advisable to get a specialist firm to undertake a legal due diligence report. A professional firm will make sure you not only find all the information but that you understand its implications. This will ensure that you are seeing the whole picture of your investment, and thus getting the most out of your move into the Australian market.
For further information on the conduct of legal due diligence in Australia, please contact us on info@inveiss.com.
Other Legal Due Diligence articles:
PDF Disclaimer: The above information provided by Inveiss Legal Pty Ltd is intended only as a guide. The impact of laws can vary widely based on the specific facts of each case. Further, given the changing nature of laws and the inherent speed of electronic communication, there may be inaccuracies in the above information. As such, this information is provided on the understanding that Inveiss Legal Pty Ltd is not rendering any legal advice or services. The information contained herein is not a substitute for qualified, independent legal advice and the same should be sort prior to engaging in any activity relating to the above subject-matter.
Although we have made every effort to ensure the information has been obtained from reliable sources, Inveiss Legal Pty Ltd is not responsible for any errors or omissions. In no event will Inveiss Legal Pty Ltd, or its directors, agents or employees, be liable for any decision made, or withheld, in reliance of the information contained herein.
