This article focuses on legal due diligence exercises (“LDDE”s) in the context of acquisitions (shares or business) and investments (debt or equity) among private companies limited by shares incorporated in Malaysia. If not managed efficiently, LDDEs may be disruptive to the target company’s daily operations.
There are varying degrees of control which the attending company officer may exercise to manage a LDDE. On one end of the spectrum, the most tightly managed LDDE might involve a virtual data room; the lawyers can only review (not download or print) selected documents disclosed via an online viewing software for a limited period. On the other end of the spectrum, photocopied documents might be provided to the lawyers for review back at their office. In between, the variables include:
Review window: How long the documents are open for the lawyers’ review, each day and throughout the LDDE period; if documents (or copies) are not allowed to be carried out of the target company’s office, the lawyers might be permitted to review the documents only during certain hours of the target company’s workday.
Availability: Whether the documents (or copies) are shown online only, may not be removed from the target company’s office, or may be taken back to the lawyers’ office.
In considering how access is to be granted to the lawyers, the company officer must bear in mind that generally, the more restrictive the target company is, the less able the lawyers would be in properly assessing a potential risk item. As lawyers tend to err on the side of caution in LDDEs, the result could be that the item would be categorised as risky and the LDDE report could cast a gloomy picture of the target company. This is usually not in the best interests of the vendor of shares in the target company (unless the situation is a hostile takeover) or the target company as an investment recipient.
Here are a few tips to help the company officer manage an LDDE smoothly:
Schedule a kick-off meeting. Before allowing the lawyers access to the target company’s documents, it would be more helpful to all parties to meet first.
The main purposes of this meeting are for: (i) the working group to introduce themselves; this would usually comprise the key personnel in the target company (e.g. relevant heads of department, if necessary) and each lawyer in the team; (ii) the target company to explain its LDDE policy; (iii) the lawyers to discuss their LDDE approach with the target company in light of the latter’s policy; and (iv) the lawyers to explain in detail, the LDDE requisition list so that legal jargon is eliminated and the target company understands the scope of the LDDE and the type of documents requested in that list.
Assign a single point of contact. All queries and requests from the lawyers should be compiled, instead of given piecemeal, and channeled through a single person in- charge (in case of absence, plus a back-up person) of the LDDE, from the target company. This person should parcel out the specific queries and requests to the relevant resource people within the target company. The person-in-charge should then compile the responses to transmit back to the lawyers.
This streamlined approach affords several advantages for the target company: (i) the lawyers are not left to wander through the organisation structure looking for the correct people; (ii) the person-in-charge has the opportunity to frame the queries and requests appropriately to the correct addressee as well as to filter the responses (rewording to avoid the wrong impression; omitting confusing background information; etc.) before onward transmission to the lawyers; (iii) friction within the organisation is reduced as the person in- charge should be more familiar, and friendlier, to the resource persons; and (iv) as a result, the responses gathered this way would be more illuminating for the lawyers.
Resist fishing expeditions. The target company’s person-in-charge should review the LDDE requisition list and subsequent queries and requests. If the person-in-charge is not clear about why a particular query is posed, or a certain document is requested, then the lawyers should be asked to clarify the underlying purpose and concern. If the person-in-charge finds the reason irrelevant for the LDDE objective, it is alright to refuse to answer or to deny the document request.
On a related point, sometimes a requested document contains sensitive information as well as other data which are important to be revealed to the lawyers. In this case, consider redacting the sensitive information when disclosing the document, rather than to deny divulging the entire document. If redacting such parts is not practical, then an executive summary of the document may be released instead of the original contents.
Be honest and straightforward. In an LDDE, the more helpful the target company is in providing as much accurate information as possible, the more doubts it would help clear in the lawyers’ (and ultimately, their client’s) minds. The cause of any refusal or delay to furnish information, or conflicting responses, should be explained reasonably to prevent the appearance of being evasive or dishonest. If an identified liability is disclosed to the lawyers, the person-in-charge must delineate clearly the exposure involved (from the lawyers’ client’s perspective) in terms of the business realities and emphasise the steps being taken by the target company to address the issues. This is damage control to ground the risk in context and dispel alarm.
Not all the points above are applicable in all situations. The way a LDDE is managed varies depending on circumstances, e.g. how much time is allocated for the LDDE; whether the transaction to which the LDDE is a prelude, is large in value or small; etc. In any LDDE, the company officer must carefully consider the legal and commercial impact on the target company, of any information disclosed. The company officer should also give thought to the corporate communications aspect to manage expectations and impressions.
Both the lawyers conducting the LDDE and the company officer need to co-operate closely to balance their respective priorities: the lawyers need to dig deep in order to properly assess their client’s potential risk, whereas the company officer is anxious to preserve sensitive business data. Being forthright about, and understanding, each other’s concerns would help smoothen the LDDE.
Written by: Anthony Azad Tan Chien Liang