Authorized due diligence for M&A functions in Georgia – company/business regulation


Legal due diligence for M&A purposes in Georgia

December 07, 2021

GRATA International

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Legal due diligence is one of the critical parts of the legal work prior to merger and acquisition transactions. Due diligence is a process of examining a target company’s business prior to a potential investment. Due diligence reports prepared by lawyers allow interested parties, mostly potential acquirers, to obtain confirmation of facts related to the target company’s corporate structure, material contracts, employment relationships, IP and property rights, pending and potential litigation, etc.

It is also common practice for the owners of the target company to hire external lawyers to carry out the transaction. This can attract potential investors and speed up a sale of the target company.

1. Scope of Legal Due Diligence

The scope of legal due diligence depends on various factors, such as: B. the type of business, corporate structure, jurisdictions in which the target company is incorporated or conducts its business, etc. The scope of legal due diligence is agreed in advance with an interested party. as in some cases limited due diligence might be preferred.

As part of the due diligence, an information checklist is agreed between the lawyer and the interested party, buyer or seller.

The checklist is a list of documents and information to be checked by the lawyers and mainly covers the following points:

  • capitalization and shareholder structure;
  • organizational structure;
  • rights of the target company to its real estate;
  • intellectual property rights of the target company;
  • potential or ongoing bankruptcy/insolvency proceedings;
  • Permissions, permits, licenses enabling the target company to conduct its business, compliance of the target company’s goods and services with applicable regulations;
  • Litigation – a list of potential, pending and resolved commercial disputes, arbitrations, regulatory investigations or disputes with government agencies;
  • essential contracts;
  • Transactions with related parties;
  • Financing;
  • Insurance;
  • Compliance with mandatory labor law and employment contract obligations.

2. Access to Information

In practice, information for lawyers is provided by an interested party via virtual data rooms. Strict confidentiality requirements may only allow access to the paper copies of the document without permission to make copies of the target company’s documents or information of any kind.

Before being granted access to the data room, lawyers must sign a non-disclosure agreement which obliges them to maintain confidentiality.

Part of the information, such as the corporate and shareholder structure of the target company or real estate rights, is obtained by researching publicly accessible sources.

In Georgia, this information is available through the National Agency of Public Registry (NAPR) electronic databases:

  • land registry;
  • Register of legal entities of entrepreneurs and non-entrepreneurs;
  • register of economic activity;
  • Register of Public Restrictions and Tax Liens and Mortgages.

The following information may also be available through the publicly available database of the Accounting, Reporting and Audit Oversight Service:

  • Company financial and management reports;
  • Information about the group of companies;
  • Information about the entity’s auditors;
  • Profile information about the entity.

3. Legal Due Diligence Report

The structure of an opinion depends on the level of due diligence agreed between the lawyers and an interested party. However, in most cases, the full due diligence report is structured as follows:

1) The introductory section generally includes:

  • disclaimers, liability limitation clauses;
  • general information about the target company: name, area of ​​its business, legal organizational structure, jurisdiction(s) in which the business of the target company operates, overview of the general business environment of a country in which the target company is based or carries out its activities;
  • scope of a due diligence report;
  • Sources from which information about the target company is obtained: data room, management of the target company, publicly available sources, etc.

2) Definitions – This part of the due diligence report defines all terms and abbreviations used later in the document.

3) Summary includes the key findings and risks identified during the due diligence study.

4) The detailed due diligence report provides an overview of information and documentation on the scope of the due diligence agreed with the acquirer or any other interested party.

5) Legal Advice on the Proposed Transaction – upon request of the acquirer or any other interested party, the due diligence report may include a description of the steps and procedures to enter into and complete the Proposed Transaction.

6) Annexes and annexes to the due diligence report:

  • a list of documents received from the target company;
  • a list of documents obtained from publicly available sources through independent research conducted by lawyers;
  • a list of the real estate assets of the target company;
  • a list of the company’s intellectual property rights;
  • a list of current or potential litigation by the target company.

The content of this article is intended to provide a general guide to the topic. Professional advice should be sought in relation to your specific circumstances.

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