Legal due diligence is the process of finding out what you are actually buying before you own it, and its purpose is not to produce a report but to answer three questions: is there anything here that kills the deal, is there anything that changes the price, and is there anything the buyer must fix after completion. A due diligence exercise that generates a thousand pages and answers none of those has been done for the file rather than for the buyer.
Title and ownership: does the seller own what it is selling
The first question is whether the seller actually owns the shares or assets being sold, free of security and third-party rights. This means verifying the corporate chain up to the ultimate owner, confirming the shares are validly issued and unencumbered, and checking that no charges, options or pre-emption rights sit over them. In a share deal the buyer takes the company with everything attached to it, which is why the diligence differs from an asset purchase, a distinction we set out in our note on buying real estate through a share deal.
The material contracts
A business is a bundle of contracts, and the ones that matter are those the business cannot function without: key customers, key suppliers, financing, leases, licences. The critical thing to find is a change-of-control clause, which allows a counterparty to terminate or renegotiate when the company changes hands. A target whose largest customer can walk away on the acquisition is a different target from one whose contracts survive it, and that fact belongs in the price or in a condition, not in a footnote discovered later.
Diligence is not about producing findings. It is about answering three questions: does this kill the deal, does it change the price, or must it be fixed after completion.
Employment and the people
In most of Europe employees carry protections that a buyer inherits, and on certain transfers the workforce transfers automatically on existing terms whether the buyer wants it or not. Key-person dependence, unfunded pension or termination liabilities, and collective arrangements all belong in the review, because the value of many businesses is in people who may or may not stay, and the cost of many businesses is in obligations that do not appear on the balance sheet.
Litigation and contingent liabilities
Current and threatened litigation, regulatory investigations, product or environmental exposures, and tax positions that could be challenged are the contingent liabilities that turn a good acquisition into a bad one after completion. Due diligence should surface them; the transaction documents should then allocate them, through specific indemnities for known risks and warranties for the rest, as we describe in our note on warranties and indemnities in an acquisition.
Compliance and the regulatory perimeter
Whether the target holds the licences its activity requires, complies with the rules that govern it, and has met its filing and beneficial-ownership obligations is increasingly central, because a compliance failure can be both a liability and an obstacle to the buyer operating the business. This connects to disclosure regimes such as the one we cover in our note on the Dutch UBO register, and to the substance expectations set out in our note on Dutch substance requirements.
Turning findings into protection
Diligence is only useful if it changes the deal. Deal-breakers stop it; price issues reduce it; fixable problems become conditions or post-completion obligations; and unquantifiable risks become indemnities or, increasingly, warranty and indemnity insurance. A buyer who commissions diligence and then signs the original terms regardless has bought a report rather than protection, which is the most common and most expensive way to waste the exercise.
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This article is informational and does not constitute legal advice. The law differs by jurisdiction and the treatment of any matter depends on its facts. Each engagement is subject to scope and applicable regulation.