12 Aug Why Legal Audits are Crucial for Company Acquisitions
One of the most critical aspects of acquiring a company is the legal audit, also known as “Due Diligence” or legal certification. This process involves a thorough investigation and analysis before acquisition to understand the company’s situation, assets, and legal realities, as well as potential risks and contingencies.
The primary goal of a legal audit is to help commercial entities avoid transforming their business transactions into a legal minefield. Additionally, it ensures legal reliability when acquiring a company.
Legal audits are essential for all types of company acquisitions, whether they involve the purchase of shares, social quotas, assets, liabilities, or structural modifications aimed at facilitating the acquisition process.
In the Dominican Republic, specific regulations or well-defined procedures for legal audits are lacking. However, certain best practices have emerged to guide the different phases of the process. Initially, setting objectives and determining materiality criteria are crucial, as the buyer needs to inform the lawyers about the most relevant aspects and concerns regarding the potential acquisition. Following this, an engagement letter for the lawyers and confidentiality agreements between the seller and potential buyer are typically prepared (Beltrán Sánchez).
Next, a comprehensive list of documentation and information to be requested from the seller is established, and a “data room,” either physical or virtual, is organized. Determining the relevant information is key, with commonly requested documents including corporate law documents, financing contracts, insurance policies, movable and immovable property, intellectual and industrial property, and information on ongoing and potential litigation, administrative law issues, environmental, and tax aspects (Tortuero). The information is then reviewed, meetings are conducted between the management teams and representatives of both parties, and visits to the company’s facilities are carried out.
The outcome of the audit is detailed in a report issued by the lawyers or legal advisors who performed the compilation, review, and processing of the information.
Enrique R. Segura Quiñones
enriquesegura@seguralegal.com