Legal Due Diligence in M&A Transactions

Introduction

Legal due diligence is a critical process in any mergers and acquisitions (M&A) project, aimed at identifying legal risks, liabilities, and potential deal-breakers. It supports reaching an informed valuation, strengthens negotiation positions, and lays the groundwork for a smooth post-deal integration. 

This guide explores what legal due diligence involves, what buyers should look for, and how Devonshires can support clients in navigating complex M&A transactions.

Beyond the Checklist — Understanding Legal Due Diligence

While many view legal due diligence as a checklist exercise, the most effective approaches are strategic and holistic. It evaluates risks across corporate, operational, regulatory, and contractual domains. Legal due diligence interacts with financial and operational analyses to create a comprehensive risk profile of the target. It typically occurs after heads of terms are agreed and ends before final contracts are signed.

We usually expect the process to include in-house legal teams, external counsel, and consultants to assist with sector specifics. The output for a buyer would include a red-flag report, full due diligence reports, and executive summaries for deal teams.

Key Areas of Legal Focus

The outputs from the above focus area enable you as the Buyer towards informed decision-making and provide the foundation for negotiating warranties, indemnities, and covenants in the sale and purchase agreement.

Due Diligence Tools, Checklists & Outputs

Legal due diligence is often supported by a range of tools and checklists that help buyers systematically assess risks and maintain deal momentum. A typical legal due diligence questionnaire includes queries on areas such as corporate governance documents, contracts, litigation records, employment terms, IP portfolios, regulatory compliance, and data privacy policies. The questionnaire is tailored depending on industry, size of the transaction, and the jurisdictions involved. If you’d like a sample, please do get in touch with us. 

From the response to our legal due diligence questionnaire, we would expect to tailor executive summaries for investment committees or boards and produce a full due diligence report covering all legal domains with analysis and recommendations. If you prefer, we can focus on just a red-flag report highlighting immediate risks or deal-breakers.

Many firms now use due diligence software to streamline the review process. Platforms like Ansarada, Firmex, Intralinks, and Datasite allow for secure document sharing, collaborative review, and audit trails. These tools can significantly reduce time spent gathering and organising documents and ensure version control. 

Common Pitfalls and Overlooked Risks

Going beyond the legal due diligence questionnaire can help with drilling into the parts of the business that may be overlooked. Expanding the lines of enquiry because of sector experience can be important. 

For example, overlooking cultural fit or staff integration issues is a key trap in a sector that depends on people to people relationships for business generation. M&A deals often falter post-completion due to internal resistance or poor talent retention, particularly if IR35 compliance or TUPE obligations were not thoroughly addressed.

Regulatory risks are also often underestimated. Failing to investigate licensing requirements, environmental liabilities, or GDPR compliance can delay closing or lead to regulatory enforcement.

Another frequent issue is conducting a superficial review, known as boilerplate due diligence. This approach misses context-specific risks, such as change-of-control clauses in key supplier agreements or IP ownership issues tied to third-party contractors.

Even experienced deal teams can overlook key areas during legal due diligence. A common pitfall is incomplete documentation — missing shareholder agreements, outdated employment contracts, or unsigned amendments can create post-deal uncertainty or lead to costly disputes.

How Legal Due Diligence Adds Value

It’s simple really, value is added as the process: 

1. reduces the deal risk;
2. supports better pricing and deal structuring;
3. facilitates board sign-off and investor confidence;
4. informs negotiation strategy (from price to the inclusion of indemnities and warranties); and 
5. facilitates smooth integration post-acquisition.

FAQs

What is legal due diligence in M&A?

It’s the process of reviewing legal aspects of a business to identify risks and validate deal assumptions.

What documents are essential in legal due diligence?

Corporate records, contracts, litigation history, employment terms, compliance data, real estate deeds, and IP assets.

What are the key deliverables?

Red-flag reports (with suggested ways to move forward), full DD reports, and executive summaries.

How long does the legal due diligence process typically take?

Typically 2–6 weeks depending on deal complexity, can be longer in cross border transactions.

Can a deal proceed without comprehensive legal due diligence?

Yes, but it greatly increases risk for the buyer.

What are the consequences of inadequate legal due diligence?

Undisclosed liabilities, legal disputes, poor integration, or financial loss. Usually leaving the buyer out of pocket. 

Who conducts legal due diligence in an acquisition?

Usually a mix of in-house counsel and external legal advisors.

Conclusion

Legal due diligence plays a central role in ensuring the success of M&A transactions. It supports informed decision-making, mitigates risks, and lays the groundwork for seamless post-deal integration. 

The Devonshires M&A legal team has deep experience guiding buyers and sellers through complex due diligence processes. Get in touch with Prasan Modasia and Helen Curtis to discuss your transaction today.

This article is part of our Legally FM article series, to read more from this series please click here.