When planning an investment transaction, an investor often needs to make sure that the alleged investment object has no history of violating the law. The object of investment here can be both a legal entity (LLC, JSC, PMC) and other objects of rights (real estate, intellectual property). Therefore, we cannot talk about a legal audit in the classical sense, when there is no scope for investment, for example, when conducting a legal examination of the supply contract itself. At the same time, due diligence is of interest not only to the participants of investment transactions, often the initiators of this procedure are business owners who want to make sure that their offspring is not in danger due to illegal actions of hired management (other employees).
First of all, the customer of due diligence should be interested in the absence of violations of those legal norms that can cause negative legal consequences in the future. For example, an intellectual property object may be created by a person whose legal relations are improperly formed, or the current owners of the enterprise (real estate) themselves acquired it with gross violations of the law, and the statute of limitations has not yet expired. Thus, the task of a lawyer conducting due diligence is not only to identify violations of the law, but also to assess them from the point of view of law enforcement practice, which requires not only knowledge of the law, but also significant experience in monitoring the work of law enforcement agencies.
Due diligence is a complex procedure consisting of several stages (steps). Let's try to consider them.
This stage is the most important because not everything here depends on the law firm conducting due diligence. The task of lawyers here is to provide an approximate list of documents that they need. The customer's task is to provide the maximum number of documents that will make the verification the most voluminous. However, often the customer is a potential investor, and the seller, who is not interested in identifying violations, is engaged in providing documents. Therefore, often the work on legal audit includes not only checking the submitted documents, but also visiting the location of the enterprise, interviewing its employees.
According to the results of the selection of documents, an act of acceptance and transfer is drawn up. It is this act that will be important when evaluating the work of consultants conducting due diligence. After all, those documents that were not transferred and cannot be checked properly. Consequently, the law firm will not be responsible for the fact that the documents that were not submitted contained important information for the report.
Due diligence involves the study of documents on certain sections of legislation that are important for a commercial organization. In the case of an express audit, compliance with legislation can be studied only in key areas of law - corporate, labor, contractual and some others. In the case of a full-fledged audit, the audit also affects compliance with environmental legislation, labor protection legislation, and other sections of legislation under which it is possible to hold the customer accountable.
A full audit also involves the involvement of non-lawyers, including auditors certified by the Ministry of Finance. Since lawyers cannot independently assess the correctness of the organization's payment of taxes and fees, accounting. At the same time, certified auditors do not always have in-depth knowledge of contract law, intellectual property legislation. They cannot assess the prospects for invalidation of transactions, the prospects for resolving legal disputes on the recognition of intellectual property rights.
Express audit can be sufficient only when buying simple investment objects of low cost. In other cases, the use of express audit can be justified only by the tight deadlines for closing the transaction, when the investor takes a risk without getting the whole picture. After all, only a full-fledged due diligence can guarantee the absence of risks for the investor.
The result of due diligence is a report prepared by the contractor of audit services. In the case of a full audit involving both lawyers and financial auditors, there may be two reports, one will relate to the right audit, the second report will affect the correctness of the calculation of taxes and fees, as well as accounting.
The structure of the report on the results of the right audit is not regulated from the point of view of legislation. But many law firms have internal standards that they follow. Usually the report consists of an introduction, sections devoted to a specific branch of legislation, and a conclusion. Each section devoted to one of the branches of legislation also has its own introductions and conclusions. Conclusions are conclusions that often contain recommendations for the elimination of identified violations or stating the impossibility of their correction. In the latter case, a description of responsibility for such a violation is necessarily given, indicating the possibility of minimizing it, based on current law enforcement practice.
Legal audit has long been of interest to investors all over the world. But this opportunity is often neglected in Belarus. This approach leads to the fact that problems are acquired together with the business, which can affect the solvency of the enterprise and the investor even many years after its purchase.
Especially in recent years, the interest of foreign investors in acquiring Belarusian IT companies has been increasing. And here a special emphasis will be placed on the due diligence of intellectual property (IP due diligence). Therefore, we advise owners of IT companies planning such transactions in the near future to conduct IP due diligence right now. After all, no one guarantees that a potential investor will give you time to correct the identified violations and will not take into account the identified risks in the transaction value.