Acquiring an SME without surprises? Carry out at least a due diligence light!

A comprehensive legal due diligence is not always possible or feasible. This may be due to a limited acquisition budget, tight timing or the size of the transaction, which may not always justify a full review. However, with a targeted ‘due diligence light’, you can often already identify the main legal risks and avoid unpleasant surprises afterwards.

The points below give you a quick view of the key legal risks and how you can address them in an acquisition.

Ownership and free transferability of shares

Check the share register and verify whether the seller is indeed the owner of the correct number of shares.

Also check whether the shares can be transferred freely and are unencumbered. The articles of association may contain restrictions, such as approval clauses or pre-emption rights. Third parties may also hold rights to the shares, for example in the form of a pledge or purchase option. In that case, the consent of a third party is usually required, or certain encumbrances must be lifted no later than at the time of transfer.

Material contracts

Identify the company’s most important contracts, such as agreements with key customers and suppliers, distributors, strategic partners and financiers (e.g. banks). Is there no written agreement? Then at least request a description of the existing contractual relationship and the arrangements made.

For each contract, map out the key terms that may have an impact before and after the acquisition, such as the term, fees, termination options and any penalty clauses. Also pay attention to provisions that may restrict future activities, such as non-compete, exclusivity or minimum purchase obligations.

Point of attention: pay particular attention to change of control clauses. Such clauses are frequently found in credit agreements and important commercial contracts and may be triggered when control over the company changes. As a result, the contracting party may, for example, obtain the right to terminate the agreement early or renegotiate certain terms.

By screening these contracts, you avoid crucial agreements falling away or continuing under less favourable conditions after the acquisition.

Real estate

Does the company own real estate? If so, check the ownership situation and the related encumbrances. Review the title deed and notarial deeds, with particular attention to any easements (e.g. rights of way) or other restrictions on use. Also request a recent mortgage statement to check whether any securities or seizures are registered on the property.

In addition, collect the relevant certificates, such as the asbestos certificate and soil certificate. Verify whether the necessary permits are in place and whether the real estate complies with urban planning regulations. Pay attention to any infringements, regularisations or remediation obligations that may lead to future costs or restrictions on use.

Is the real estate leased? Then also review the lease agreement and its main provisions, such as the term, rent and termination options.

Personnel

Does the company employ personnel? If so, request at least an overview of the workforce, including role, seniority and remuneration.

Also request the standard employment contract and work regulations to gain insight into the main contractual arrangements and employment conditions that apply within the company.

Pending disputes

Check whether the company is involved in any pending or threatened disputes, such as court proceedings, arbitration or discussions with customers, suppliers or public authorities.

Assess the potential impact of such disputes, both financially (e.g. damages and litigation costs) and operationally (e.g. disruption of commercial relationships).

Conclusion

A targeted ‘due diligence light’ quickly gives you insight into the main legal risks that may affect the value or continuity of the company.

Keep in mind that in a share transfer, you acquire not only the company’s shares, but also the risks that may exist within that company. For matters that could not be examined, or only to a limited extent, it is therefore advisable to provide appropriate contractual protection through representations and warranties from the seller, possibly supplemented by additional security mechanisms such as a vendor loan, bank guarantee or escrow.

This allows you to combine a pragmatic approach with the necessary protection, without having to fall back on a time-consuming and costly full legal due diligence.

Get advice from our Legal experts

Every acquisition is different and requires a tailored approach. Our Legal experts help you identify legal risks in good time and put the right protection in place. Contact us for personal advice.

This article was written by Jasper Caby and Michiel Coppens.