Legal Due Diligence – Structuring Transactions Securely

How legal due diligence fits into the overall due diligence process is explained in the article on financial due diligence. This article focuses on the key legal questions – from contracts and warranty clauses to the role of SPAs, LOIs, and experienced M&A lawyers.

1. Key Contracts

The legal due diligence covers the review of all existing contracts and legal obligations of the target company. Depending on whether an asset deal or a share deal is being pursued, different areas may carry greater weight.

• Corporate Organisation and Compliance
  Review of the organisational structure: including departmental setup, powers of attorney, authority to issue directives, responsibilities, deputisation arrangements, communication channels, and more. Verification of compliance with legal obligations and regulations.
• Shareholders' Agreements
  If the business is not a sole proprietorship but rather a partnership or a corporation, the ownership structure and the associated rights (and obligations) are of critical importance. This is especially true when only equity stakes are being transferred. Key topics include: transfer restrictions, profit distribution arrangements, voting rights in general, exit and compensation provisions (in particular in cases of share redemption and death), and much more. Depending on the outcome, it may be (urgently) advisable to amend the articles of association to reflect the new circumstances.
• Ownership, intellectual property and IP rights

General analysis of ownership, possession and usage rights. This point is closely linked to company valuation, as IP rights often have a significant influence on the purchase price. What are the key patents, trademarks and software rights, and who owns them? Are all rights properly registered and transferred, or are there disputes or gaps in licensing? IP is frequently a central value driver – unclear ownership structures can put the entire transaction at risk.

• Employees

Without the right people, nothing works. Key topics include: age structure, length of service, qualification levels, key positions, completeness of employment contracts, salary structure, payment dates, unwritten special entitlements, outstanding holiday entitlements, and sick days. In addition: if a business transfer takes place, employment relationships are transferred accordingly — § 613a BGB (Germany). Developing an early awareness of cultural and personnel risks makes post-acquisition integration considerably smoother.

• Lease agreements

Are the terms of the property lease agreements favourable? Are there notice periods, special rights, or hidden cost risks? Long-term, inflexible contracts can become a burden – particularly if the business model changes.

• Supplier and Customer Contracts
  Are there critical dependencies on individual suppliers or customers that could jeopardise operational continuity? What termination rights, change-of-control clauses, or exclusivity agreements are in place?
• Loan agreements, liability relationships
  If loans are being assumed – whether third-party liabilities (bank, supplier) or shareholder loans – the loan terms and conditions are relevant. The same applies to any existing guarantees, warranties, and similar obligations.
• Insurances
  Is the business adequately insured? Or are there cases of over-insurance?
• Tax risks, a special topic
  Are all tax assessments available? From which point are the assessment years final and binding? Are the tax provisions sufficient?
  The purchase agreement should establish a risk balance.

Best Practice
A systematic review of primary and ancillary contracts is essential. Assess any ongoing and potential legal disputes in terms of both opportunities and risks!

• Scope of Warranties
  The seller guarantees the existence and accuracy of certain facts (e.g. ownership, possession and usage rights, disclaimers of liability).
  The broader and more detailed the warranties, the better for the buyer.
• Limitations and Exclusions
  It is in the seller's interest to restrict the scope and duration of warranties. Pay close attention to time limits, liability caps, and exclusions for "known" risks.
• Indemnification Clauses
  Indemnities cover identified and unidentified risks (e.g. contamination, unknown claims, and much more) and oblige the seller to provide compensation in the event of a loss.
• Risk Management
  Negotiate clear, enforceable warranty and indemnification clauses. If the seller's representations are vague or incomplete, insist on additional security measures (e.g. escrow account, partial retention of the purchase price).

• Letter of Intent (LOI)
  The LOI outlines the key parameters and intentions of both parties prior to the start of detailed due diligence. It is typically non-binding, but provides a framework for the review and negotiations whilst signalling serious intent. Important: clearly define which elements are binding (e.g. exclusivity, confidentiality) and which are not.
• Share Purchase Agreement (SPA)
  The SPA is the binding contract that governs the sale and transfer of shares or assets. It sets out all material terms: purchase price, payment arrangements, closing conditions, warranties, indemnities, and post-closing obligations. The quality and level of detail of the SPA are critical to avoiding disputes.

Best Practice
Negotiate the LOI with care, but invest the most legal attention in the SPA – it is your real insurance policy.

• Systematic assessment of circumstances, risks and opportunities
  (A structured approach prevents gaps in the review)
• Drafting and negotiation of LOI, SPA, and ancillary agreements
• Conducting legal due diligence and identifying risks
• Classification of the legal status of assets
• Effectiveness in drafting individual clauses and the contract as a whole
• Advice on optimal deal structure (asset vs. share deal), regulatory requirements and compliance
• Support during negotiations and ensuring all legal requirements are met at signing and closing

Best Practice
Choose lawyers with proven M&A and sector-specific experience.
Early involvement accelerates the process and strengthens your negotiating position and confidence.

A professional legal review is not a formality — it is your insurance against unpleasant surprises and disputes after the deal. Only those who systematically examine all relevant contracts, negotiate robust warranties, and rely on experienced M&A lawyers will make well-informed, secure decisions and lay the foundation for a successful acquisition. Our article on deal structure in business acquisitions shows you how to combine legal and financial elements to best effect.

The business acquisition checklist gives you a concise overview of all areas to review – legal, financial, and strategic.