Legal due diligence in Russia

Legal due diligence is necessary and one of the most important stages of a serious transaction.

There is a distinction between legal due diligence for the purpose of selling and legal due diligence for the purpose of purchase. Both in one and in another case legal due diligence is carried out in similar ways, but pursues different goals.

Legal due diligence for the purpose of selling discovers the various risks accumulated by the business during its existence and provides recommendations for their elimination.

Legal due diligence for the purposes of purchase protects the buyer from acquiring a problem business or a business that does not possess the resources, assets, and advantages that the buyer wishes to acquire.

The purpose of legal due diligence is to identify legal risks, assess their materiality and influence the value of a business.

Risks that are subject to legal review and affect the value of a business can include the following risks:
• risks of challenging a business purchase and sale transaction;
• risks of seizure of property;
• risks of legal claims;
• risks of improper registration of property rights or lease on the property sold by the seller within the business;
• the risk of bankruptcy;
• risks of liquidation of the business being sold;
• the risk of tax, administrative or criminal liability;
• risks of improper registration of rights to trademarks and other intellectual property;
• risk of non-receipt or revocation of permits, licenses, etc.

In some cases, the risks identified in the course of legal due diligence make it impractical or impossible a transaction itself to acquire or sell a business. As a result of legal due diligence, the seller receives a complete picture of the legal status of the business being sold, recommendations for eliminating problem and weaknesses. Eliminating legal impracticalities, the seller not only increases the value of their business, but also significantly increases the chance of selling it.

For the buyer, the results of legal due diligence are the basis for making a decision on the purchase of a business. After conducting a legal due diligence of a business for the purposes of a purchase, as a rule we usually give the client one of three recommendations:
• buy a business;
• buy, subject to elimination of deficiencies;
• refuse to acquire a business.

Legal due diligence includes:
• signing a confidentiality agreement that you provide to us for legal due diligence;
• obtaining information and documents, the list of which is determined in each individual case and depends on the industry sector and business specifics;
• directly conducting legal due diligence;
• preparation and provision to the Client of a conclusion of the legal review on the results of legal due diligence. The conclusion contains a detailed description of legal risks, the degree of their impact on the business and its cost, as well as ways to eliminate or minimize these risks.

During legal due diligence, as a rule, the following are subject to inspection:
• authority of the seller for sell the business;
• constitutive corporate documents of the legal entity being sold;
• rights to real and personal property;
• licenses, certificates and other permits;
• rights to trademarks and service marks, commercial designations and other intellectual property;
• leased property rights sold as part of a business;
• employment contracts;
• conditions of business contracts;
• loan agreements;
• existence of grounds for filing legal claims related to the implementation of the business being sold.

In case of detection of serious legal risks, the law firm “Madrokc” will provide you with recommendations for their elimination or, if you wish, we will eliminate them ourselves.