due-diligence
Legal due diligence is the review of corporate title, contracts, litigation, employment, IP and regulatory standing so a buyer knows what rights it is actually buying and which consents it needs before closing.
Legal due diligence is the title search of a living company. Counsel confirms that the shares or assets can be transferred, that the corporate housekeeping matches the cap table, and that material contracts, licences, litigation, employment arrangements, data protection, financing documents and intellectual property will survive a change of control.
Findings do not stay in a memo. They become conditions precedent to closing, specific indemnities, escrow holdbacks, or walk-away rights in the SPA or APA.
On a share purchase agreement, the buyer inherits the legal entity — including unknown liabilities — so LDD is broader. On an asset purchase agreement, the buyer cherry-picks assets and contracts, so LDD concentrates on assignability, employees transferring with the business, and which liabilities are left behind.
A buyer is 10 days from signing. LDD finds a change-of-control clause in the top customer contract that allows termination on a share sale, and a pledge over IP in a forgotten bank facility. Neither item appeared in the teaser. The deal still closes, but only after a customer waiver, a release of the pledge, and a €400k escrow for a pending employment claim.
Buyers care because a beautiful EBITDA multiple is worthless if the contracts walk. Sellers care because late legal surprises destroy auction tension. Founders care because personal guarantees and related-party leases often surface here.
Uploading unsigned “final” contracts to the virtual data room. Assuming a group intra-company licence is assignable. Treating data-protection compliance as a policy PDF. Ignoring minority shareholders’ pre-emption when the cap table was last updated two rounds ago.
Legal diligence is documentary. It will not interview the customer who is about to leave. It is also scoped: “materiality” thresholds mean small contracts stay dark. Counsel is not a substitute for tax due diligence.
Legal Q&A explodes when the room is a pile of PDFs. When contracts sit in a structured layer next to the financials, due diligence questions become specific instead of archaeological.