At the Forrest Firm, we often represent clients as they negotiate and enter into strategic transactions with other companies, such as mergers and acquisitions, strategic alliances, and joint ventures and licensing. One of our most important jobs as corporate attorneys is guiding our clients through the process of due diligence associated with these types of transactions, especially regarding the mergers and acquisitions that occur between companies on a regular basis.
Our series of articles focusing on due diligence first discussed the big picture, taking an overall view of the process and its proper execution in the context of a strategic transaction. Next, we looked at due diligence with specific regard to assignment and change of control provisions, corporate records, and commercial contracts. Most recently, we discussed the importance of financing documents and intellectual property. This week, let’s take a look at the due diligence process as it relates to litigation.
Litigation is an obvious red flag when it comes to due diligence. The buyer may inherit liability and an obligation for legal fees, even if the target company is the plaintiff. It’s important to analyze the total amount of potential liability and the likelihood of prevailing in each lawsuit in order to determine whether there are any patterns that show recurring problems with the target company.
Pending or threatened litigation documents should be reviewed, as well as administrative proceedings and government investigations. Generally, target companies provide a schedule and status report of such matters, but the actual filings (complaints, orders, etc.) and correspondence should also be reviewed for material ongoing matters. For matters that have been resolved, settlement agreements should be reviewed, as well as any decrees, judgments, or orders that are binding on the target company or any of its directors or officers. Lastly, letters from the target company’s attorneys to the target company’s accountants (also called audit response letters) or regulatory authorities regarding material litigation may be relevant to review.
To get a full picture of the target company’s litigation, it may be productive to have a conference call with management of the target company to get background information and context that may not be available in the documentation.
If you’re looking for help with due diligence on your next strategic transaction, whether it’s a merger, acquisition, or joint venture, please feel free to contact me at the Forrest Firm. Look for our next installment of the series coming soon, where we’ll discuss when it’s prudent to have a practice area specialist involved with due diligence.