What is Due Diligence in Corporate Law Matters?

Most people have heard the term “due diligence”, but few know what it actually means. In a broad legal sense, due diligence refers to the level of care, judgment, or prudence of a person in a particular circumstance. For example, the duty of a doctor to his or her patient. But what about in specific terms? In this article, we discuss the question – “What is due diligence in corporate law matters?”

Due Diligence in Corporate Law Matters

As alluded to before, many areas of the law consider due diligence the act of a person given a certain circumstance or set of events. In corporate law, however, due diligence is more of a process than an action or reaction. Due diligence in corporate law refers to the process of investigating a corporation in advance of a sale, merger, or acquisition. This process includes several steps, including gaining a full understanding of the company, such as the following obligations:

  • Debts
  • Assets
  • Pending or potential lawsuits
  • Warranties
  • Leases
  • Long-term customer or vendor agreements
  • Employment contracts
  • Distribution agreements
  • Compensation agreements

In short, due diligence is a thorough investigation into a company to determine whether a sale, merger, or acquisition is the right choice.

When is Due Diligence Necessary?

In many ways, due diligence is part of many business strategies, even if they are not comprehensive investigations. Due diligence is particularly important in cases of a merger or acquisition to ensure that one or both parties are not entering into a contract under false or unknowing means. Obtaining information can help the buyer or parties to a merger do the following:

  • Understand the business, it’s structure, and market
  • Value the business, cash flow, balance sheets, and debts
  • Draft documentation for the process, which can help negotiate terms and disclosure agreements
  • Identify obstacles to closing or completing contracts
  • Avoid entering into a bad situation

Due diligence is often a lengthy process involving research and review. Many businesses and individuals find it helpful to have an attorney work with them through this process. This can help avoid pitfalls and ensure that the necessary information is available before getting into a contract.

Legal Guidance for Texas Businesses

Whether you are considering a sale, merger, or acquisition, get the legal guidance you need to make the right choices. Contact Daic Law today for help with your corporate or business law matter, or to learn more about the due diligence process. Call our office at (713) 808-5246, or email us at info@daiclaw.com.

Sources

https://www.stoel.com/legal-insights/article/a-guide-to-legal-due-diligence-the-target-company

https://definitions.uslegal.com/d/due-diligence/