Business competitiveness among rivals in similar industries is fierce and demanding. The current trend of business expansion is for stronger and financially healthier corporations to merge, acquire, and take over other corporations. Over the past few years, we have heard merger and acquisition (M&A) news or proposals on a daily basis. However, we do not hear as much about the details that make an M&A successful, especially when it comes to due diligence.
Most businesspeople are familiar with the general concept of due diligence, but many have questions about precisely what it entails and why it is vitally important for corporate transactions. Legal due diligence has a variety of definitions, depending upon the context. Generally, due diligence refers to the conduct and judgment that a person would take to carry out their duties. In a corporate context, due diligence is more of an analytical and investigative exercise, typically involving the feasibility of a major transaction.
Before any intended merger or acquisition is completed, financial due diligence on the target is required in order for the acquirer to decide whether or not the acquisition of the target is commercially and financially viable. Legal due diligence on the target is also an important task to identify any legal discrepancies or liability on various matters, which the legal team may discover during their legal due diligence on the target. The acquirer would not complete the deal without their legal team conducting due diligence on the target.
For the acquirer to carry out the due diligence, sincere cooperation from the target is needed, as many documents are not publicly available. The acquirer must therefore rely on the target to submit documents per a due diligence checklist provided by the acquirer (or its legal team). During the due diligence process, the legal team will attempt to confirm many legal issues, including: the legitimacy of the issued shares to be sold to the acquirer; whether or not the target is legally authorized to conduct their business with proper/required licenses; whether or not the shares or businesses to be sold are validly existing with a legitimate structure; terms and obligations of material commercial contracts and employment agreements with key management personnel; and, most importantly, whether or not there is any pending litigation filed by or against the target and/or their management, or even a bankruptcy or reorganization filings.
A legal due diligence report by the legal team will provide a finding of facts and information uncovered during the due diligence. From our experience, depending on the size of the target and the value of the deal, due diligence can take 7 to 30 days to complete. Supporting documentation for each fact would be attached to the due diligence report. This information will be reviewed by the acquirer’s management team, who may then wish to consider possible adjustments of the sale price, provisions on representations and warranties by the target or responsible management of the target, amendments of any discrepancies before the M&A concludes, and continuation or minimum employment period of the key employees.
Due diligence materials can be annexed as schedules to the main report for disclosure by the target and can be used to obtain approval of the deal from the Board of Directors and/or shareholders of both parties.
Apart from the above, other determining factors can be uncovered through the legal due diligence process that may eventually make or break the deal. Examples of such determining factors include noncompliance and violation of laws and regulations, restriction on foreign ownership, restriction on share transfers, encumbrances on major assets, change of control provisions or any provisions which would restrict the contemplated acquisition contained in contracts entered into by the target, breach or potential breach of contract or termination or potential termination of material contract, etc.
Although these due diligence findings must be carefully considered by the acquirer’s management, it is important to recognize that there are certain limitations when performing legal due diligence review.
First, Thailand does not yet have a centralized recording system of pending nationwide court suits to arrange for litigation searches. Generally, jurisdiction over the case rests with the court located at the place of domicile of the defendant or the place where the debt occurred. Independent litigation searches have to be conducted at each major court in Bangkok—the Central Bankruptcy Court and the Business Reorganization Office, Civil Court, South Bangkok Civil Court, Intellectual Property and International Trade Court, Central Labor Court, Criminal Court, and Central Tax Court. If the target is located in another province outside Bangkok, litigation searches at that provincial court also have to be arranged.
Another limitation is that Thailand does not yet have a centralized asset registry. Real property searches have to be arranged at the relevant Land Office where the target’s real property is situated. Copies of the land Title Deeds would, however, serve to facilitate the conduct of these property searches.
Finally, any encumbrances on shares can only be verified by vetting the Register of Shareholders, which is maintained solely by the target and is not in publicly available records.
Despite these limitations, due diligence exercises can reveal crucial information. Although there are no specific statutory requirements in Thailand for legal due diligence to be conducted during the course of an M&A deal, due diligence reviews are now widely seen as an essential step when moving forward with a transaction. All companies involved in significant transactions should carry out legal due diligence review, whether limited or in full, prior to entering into any M&A deal in order to prevent or mitigate future liability.