Note: This article describes Danish legal due diligence practice specifically.

Does the business actually own its own trademark? Can the most important customer agreement be terminated the day you sell? These are the kinds of questions legal due diligence asks — often before you've thought about them yourself.

Short answer: Legal due diligence is the legal part of the due diligence process, where the buyer's lawyer examines corporate matters, contracts, disputes, intellectual property, employment matters and compliance to uncover risks not directly visible in the accounts. See who typically carries it out in what does an M&A lawyer do?

Corporate matters

Ownership structure, articles of association and general meeting minutes are reviewed to confirm that what the buyer thinks they're buying genuinely exists and is valid. See also the significance of company structure.

Material contracts

Customer and supplier agreements are reviewed, including whether they contain "change of control" clauses that could be triggered by a change of ownership.

Change of control clauses: An overlooked trap

Many businesses' most important contracts (lease, licenses, major customer agreements) contain clauses giving the counterparty the right to terminate the agreement if the business changes owner. Thorough legal due diligence uncovers this kind of clause early, so it can be handled in the negotiation — instead of being discovered after closing.

Disputes and lawsuits

Pending or threatened cases can trigger a future obligation affecting the price or requiring a specific indemnity.

Intellectual property

Trademarks, patents, copyright and domain names are reviewed to confirm they genuinely belong to the business — and not, for example, to a former owner or a freelance developer personally.

Employment matters

Employment contracts, non-compete clauses and compliance with the Transfer of Undertakings Act are reviewed, see HR due diligence.

What happens with what's found?

Concrete, identified legal risks typically end up either as a specific indemnity in the transfer agreement, a price adjustment, or — in rarer cases — as a showstopper for the whole deal, if the risk is deemed too great.

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