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Legal Due Diligence in the Scope of Mergers and Acquisitions

Due Diligence is a concept commonly used in mergers and acquisitions. This concept is defined as an activity or behavior that is prudent, careful, continuous and attentive, as can be expected from a reasonable and cautious person in the presence of similar conditions, provided that each event is evaluated according to its specific conditions and characteristics. In a merger or acquisition process, the Due Diligence procedure is of great importance, starting with the submission of the non-binding offer and between the submission of the binding offer, the conduct of the negotiations and the completion of the process.

Due Diligence includes a detailed and comprehensive examination and evaluation of the company and/or its assets in a merger or acquisition transaction. This procedure enables the acquisition of legal, financial and tax information and also helps to identify risks. The data obtained as a result of the Due Diligence procedure constitutes the most important factor affecting the decision of the party intending to invest or purchase, whether to continue the transaction or not. It also provides guidance on how to proceed with negotiations and how to create transaction documents.

Today, the Due Diligence process is mostly seen as "Pre-Sales Due Diligence". In this process, examinations are made on the information and documents provided by the seller after the signing of the confidentiality agreement. In addition, publicly available information is also used. With the development of technology, information and documents are uploaded to digital data systems and presented to be examined within the framework of high security in environments called "data room".

Types of Due Diligence

  • Legal Due Diligence:

Legal Due Diligence is a detailed examination of all legal aspects of a target company. This examination includes the examination of corporate documents such as incorporation documents, company books, representation documents, shareholding agreements, if any, annual reports and auditor reports, starting from the legal status of companies. This review provides an assessment and risk analysis within the framework of company law.

Another important issue to be considered in the Legal Due Diligence procedure is permits, licenses and licenses. In mergers and acquisitions, the target company is generally desired to be taken over because of its operations in the commercial area and the profitability it derives from these operations. In order for the target company to continue these operations, it may be required to have certain permits, licenses or licenses as required by the legislation. In regulated markets such as energy, healthcare and logistics, permit and license requirements are strict, and if the target company examined within the scope of Legal Due Diligence operates in these markets, it is of great importance to determine whether it fulfills these requirements.

Another issue that needs to be examined in the Due Diligence process is contracts. Contracts such as business, customer, supply and confidentiality agreements, especially loan agreements to which the target company is a party, are examined and important provisions such as termination, penal clause and control change are determined and action is taken accordingly. Legal examination of the assets of the target company focuses on issues such as the status of movable and immovable assets, restrictions on them, determination of inventory and fixtures.

Environmental issues are tightly regulated in Turkey. Determining the compliance of the target company with environmental regulations within the framework of the market in which it operates is one of the objectives of the Due Diligence procedure. In cases where environmental regulations are not complied with, high level of administrative fines can be applied and minimizing the risk depends on the determinations made at this stage.

Another issue to be considered within the framework of the Due Diligence procedure is the litigation and enforcement proceedings to which the company is a party. In particular, a risk assessment should be made by determining the litigation and enforcement proceedings to which the company is a creditor and debtor. At this point, in litigation and enforcement proceedings, not only monetary risk analysis, but also tax-related litigation and enforcement proceedings and litigation and enforcement proceedings regarding the responsibility of the board of directors, members of the board of directors and company executives are also important for the continuation of commercial activities.

It is also important to evaluate the intellectual and industrial property rights of the target company within the framework of the Due Diligence procedure. In this context, the ownership of the rights, whether they are the subject of disputes, and especially the examination of the brands and patents owned by the target company or used under license agreements are the factors affecting the investment decision of the potential investor.

  • Operational Due Diligence:

This is a review to evaluate the company's business processes, operational structure and efficiency. Operational areas such as production processes, sales and marketing activities, and customer relations are examined.

  • Financial Due Diligence:

This is the examination conducted to evaluate the financial situation and performance of the company during the merger and acquisition process. Financial data such as the company's financial statements, income and expenses, assets and liabilities, tax status are examined.

Ensuring Success in Mergers and Acquisitions with Due Diligence

The Due Diligence procedure is a critical factor in the success of mergers and acquisitions. This procedure must be carefully followed to anticipate risks, accurately identify value, identify opportunities and challenges, ensure compliance, and create value. In this way, businesses can make more informed decisions and succeed in mergers or acquisitions.

The information obtained as a result of the examination conducted by the Due Diligence experts, and especially the risks, is presented in the form of a report called the "Due Diligence Report". This report plays an important role in the healthy completion of the transaction and the protection of the interests of the potential investor. The obtained data is frequently used especially in the transaction documents and share/asset sales agreements to be drawn up between the potential buyer and the seller. In these documents, various mechanisms are established to eliminate the risks identified in the Due Diligence report.

The Due Diligence procedure is a critical tool to anticipate these risks and reduce uncertainties in the trading process. Thanks to this process, businesses can take informed decisions by evaluating financial, legal, operational and strategic risks.

Due Diligence plays a key role in the strategic evaluation of mergers or acquisitions. A detailed examination of factors such as the target company's financial performance, asset and debt status, market position, and customer relations ensures the correct determination of the transaction value. In this way, a fair agreement can be reached between the parties.

Due Diligence procedure is of great importance in identifying opportunities and challenges that may arise in mergers or acquisitions. Businesses can anticipate potential post-trade gains or challenges by carefully analyzing the target company's activities, market, customer base, and competitive situation. This strengthens strategic planning and increases post-processing success.

In addition, the Due Diligence procedure provides an opportunity to increase the success of the investment in mergers or acquisitions. A detailed review and analysis process enables businesses to make better decisions, minimize risks and create post-transaction value. Successful implementation of Due Diligence increases trust between parties and supports cooperation.

As a result, the Due Diligence procedure is a critical factor in the success of mergers and acquisitions. This procedure must be carefully followed to anticipate risks, accurately identify value, identify opportunities and challenges, ensure compliance, and create value. In this way, businesses can make more informed decisions and succeed in mergers or acquisitions.

As Nergiz Law Firm, we provide legal consultancy to our domestic and foreign clients, private and publicly traded companies, as well as privately-owned funds, in mergers and acquisitions in different parts of Turkey and the world. We offer the service.

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