M&A/Legal Due Diligence Germany

In order to detect unforeseeable risks in advance and to determine the acquisition price, it is indispensable to comprehensively analyze the target company regarding its legal, economic and tax situation.

This process is called M&A due diligence or legal due diligence. Especially the decision-makers of the acquiring company, such as

• the managing director,
• the management board members and
• the supervisory board members

must, in order to exclude their personal liability, display the care of a diligent merchant in such a far-reaching business decision as the acquisition of another company. Comprehensive due diligence in mergers and acquisitions also serves this purpose.

There is no single standard approach for an M&A due diligence. Whereas big transactions typically require an in-depth analysis of the target's legal situation, medium-sized M&A deals oftentimes, not only for costs reasons, require a quick and cursorily due diligence approach which identifies the most important risks. Such a due diligence is called a red flag legal due diligence. Mostly, a red flag due diligence makes sense at the beginning of a transaction at a time when it is still uncertain whether the interested buyer will indeed buy the target or whether he decides to stop negotiating with the vendor. Such a red flag legal due diligence usually identifies the most risky issues (dealbreakers) which have a strong impact on the purchase price.

In contrast, a full scope legal due diligence goes much deeper into details. It intends to identify and to comment on all relevant tax risks. Typically, a full scope legal due diligence ends in a comprehensive full scope legal due diligence report, whereas the results of a red flag legal due diligence are written in a more concisely manner most often.

In any case, a useful legal due diligence report should not only identify risks but also propose practicable solutions on how to minimize the risks for the buyer. Such a report will also enable the buyer to conclude the deal regardless the remaining risks identified.