Lesson 1: What is due diligence?

First, understand what due diligence is, and why it is performed.

Legal due diligence (or ‘LDD’) is the process of reviewing documents and assessing the legal risks, liabilities, and compliance issues associated with a target company or asset that might affect the proposed business transaction.

The main reasons why LDD is performed are:

1. helps uncover any potential legal risks, lawsuits, disputes, or regulatory issues that could impact the target company or asset. This includes reviewing contracts, intellectual property rights, employment matters, and pending litigation.

2. evaluates whether the target company or asset is compliant with relevant laws, regulations, and industry standards. This may involve reviewing corporate governance documents, licenses, permits, and adherence to environmental, labor, and tax laws.

3. aims to identify any undisclosed liabilities, such as outstanding debts, liens, or legal judgments against the target company or asset.

4. verifies the accuracy of legal representations made by the target (or its management), such as ownership of assets, validity of contracts, and compliance with laws.

5. helps structure the proposed transaction in a way that mitigates identified legal risks and ensures compliance with applicable laws and regulations.