Legal due diligence


Due diligence: Analysis of companies, contractors, business, transactions, real estate, projects and facilities.

Before buying a business and making a decision on attracting investments or other decisions regarding the company’s future development, as well as in many other cases, a comprehensive analysis of the company's standing (due diligence) is carried out.

The analysis is carried out on three main levels:

- financial;

- production (if available);

- legal.

The analysis results in a document which describes the analyzed documents, the general state of affairs, the existing risks, as well as ways and means of minimizing risks and recommendations for the near future.

In any case, the accuracy of the analysis depends on the completeness of the provided documents, data and other information that the customer has. In some cases, it is necessary to request documents from government bodies (for example, extracts from theUnified State Register of Real Estate Rights and Transactions).

The main difference between due diligence and financial audit is the way it is carried out. The procedure and, consequently, the depth of analysis is not regulated by law, as well as its mandatory character and frequency. In addition, it is a comprehensive view of the business, while the financial audit only touches upon financial stability and the data completeness in the financial statements.

Further legal due diligence, its specificity and the most common types will be considered.


Due diligence: when it is needed?

When buying a business, regardless of whether it is large, medium, small or micro due to the fact that the business purchase is an investment, and to make it reasonable and profitable the acquired business should be examined.

When investing in a company regardless of the method: depositing funds or property into the authorized capital, concluding a loan agreement, providing a production line for rent and other investment methods.

When making a decision by business owners regarding the future development of the company and, possibly, its sale.

When the company or several companies are reorganized (merger, separation, transformation, etc.).

The above-mentioned cases describe the analysis in relation to the business as a whole. However, the analysis can be carried out in relation to its separate issues or assets:

- with regard to real estate;

- with regard to the legal claim;

- with regard to the compliance with a particular branch of law (labor, corporate, intellectual property law, etc.).


The due diligence scope and depth

If the business is considered as a whole, the analysis scope and depth are maximum: it is necessary to identify and describe the company standing in general, the assets structure, the number of litigations and other aspects important for decision making.

The analysis results in the conclusion. As a rule, it is a voluminous document, which describes in detail the company’s current legal status. However, the average version of the document is not excluded which briefly describes the state of affairs, highlights the main points and provides the main conclusions. Also, a short version is possible which contains the main conclusions on the object analyzed.

If necessary, the conclusion is drawn up in two or more languages: Russian and the language of the investor or another customer. Also, a preliminary analysis can be prepared, and then - the main one. Preliminary analysis can show whether to carry out the due diligence or not.

Due diligence is carried out in a similar manner with respect to certain aspects of the business (real estate, claims and other).

In some cases, as well as when conducting the business evaluation, due diligence should be carried out with the involvement of several companies, since it is necessary to look at the controversial aspects of the business from different angles.


Timing of business transactions due diligence

As a rule, the due diligence period for business is at least two weeks. The larger the business is, the longer the term is needed due to the fact that the volume of documentation and assets is greater.

Deadlines can be shifted if the documents are requested from both government bodies and counterparties, former owners and other persons.

It is worth noting that there is no possibility to complete due diligence quickly: often at the beginning documents and facts are discovered that require a thorough examination and special thoroughness in developing recommendations.


Due diligence documents

As a rule, scanned originals are provided according to the list. However, the originals or notarized copies of documents are the most reliable.

Some companies, in addition to the list of documents, offer to fill in the tables under the developed forms: such tables are designed to structure information and facilitate analysis. As a rule, when filling in the tables, the situation becomes much clear to the customer.

In some cases, documents from other countries are needed: if the owner or counterparty is a foreign citizen or a foreign company.


The main sections of the final report

- Description of the company’s standing;

- Risks;

- Short-term forecast.

The main description of the company includes an analysis of its constituent documents, management system, office management and the degree of asset protection. It also analyzes payables and receivables, litigation and enforcement proceedings.

The risks include all current business risks.

The short-term forecast includes all risks of changes in legislation both worsening and improving the company’s position.


Due diligence in relation to business. Key points to check

- Constituent documents;

- Decisions of general meetings and Boards of Directors;

- Permits (licenses, SRO approvals and others);

- Balance sheet;

- Control system;

- System of delegated authorities;

- Assets (real estate, intellectual property and others);

- Compliance with the legal requirements in relation to the documentary support of the business;

- Contracts with major counterparties;

- Contracts with other counterparties;

- Resource agreements (electricity, heat, water supply and drainage, telephony);

- Contracts in the field of intellectual property;

- Payables and receivables;

- Legal proceedings in the courts of all categories (courts of general jurisdiction, arbitration courts);

- Enforcement proceedings;

- Analysis of conflict situations with contractors or employees.


Due diligence regarding business aspects. Key points to check

In case of completing due diligence concerning the real estate objects, these are the documents of title, technical documentation and the analysis of lawsuits and claim correspondence.

With regard to the legal claims, these are all documents constituting the contractual relationship between the parties, complaint correspondence, and judicial acts.

In relation to the compliance with the industrial law, these are the constituent documents and documents that the company has under specific laws.


Business intelligence as part of due diligence

In addition to the documents provided, due to the fact that the unfamiliar business is difficult to assess, business intelligence is obligatory: information from open sources is collected in frames of it. Then the collected information is structured and analyzed, and the results are compared with the documents and information provided for the initial analysis.

Business intelligence is completed for each business aspect if it can be conducted using open source information.

The analysis will be incomplete without business intelligence activities which means that some risks, including significant ones, may not be taken into account.


The most common risks

Risk of rights disputing: property rights, rights for the business as a whole, rights to the business share, intellectual property rights, other rights.

Risk of the assets retirement due to its illegal acquisition provided that its validity has not been expired.

Risk of lack of authorities among the main contracts signatories.

Risk of disputing decisions of business owners’ general meetings (participants, shareholders, including foreign ones), decisions of Boards of Directors.

Risk of labor disputes.

Risk of judicial proceedings in an arbitration court (if the examined person had no information about it before), in a court on the territory of a foreign country with the application of its laws or other laws but not Russia’s one.

Risk associated with the illegal use of intellectual property.

Risk of the company or its large counterparties’s bankruptcy.

Risk of significant financial claims in the near future.

Risk of adverse changes in Russia’s legislation (tightening regulation, for example).

Risk of business’s unreasonable overvaluation.

Risk of significant costs for the settlement of controversial issues on the real estate cadastral registration, its engineering support (network), the establishment of water use boundaries.


January 29, 2019

David G.



Our Law Firm provides different kinds of legal services in many Russian cities (including Novosibirsk, Tomsk, Omsk, Barnaul, Krasnoyarsk, Kemerovo, Novokuznetsk, Irkutsk, Chita, Vladivostok, Moscow, Saint-Petersburg, Ekaterinburg, Nizhniy Novgorod, Kazan, Samara, Chelyabinsk, Rostov-on-Don, Ufa, Volgograd, Perm, Voronezh, Saratov, Krasnodar, Tolyatti, Sochi).


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