What Makes Share Acquisitions Risky Business?
When a company decides to grow by acquiring another company, it can either purchase the company’s assets or its shares. A share acquisition involves buying the ownership interests of the company, meaning the buyer steps into the shoes of the seller and inherits everything—both the good and the bad. That includes not just the assets, but also the debts, legal disputes, employee matters, tax liabilities, and regulatory issues. Because of this, a share acquisition carries greater risk. This is why legal due diligence becomes such a critical part of the transaction. It provides the buyer with a detailed understanding of what they are really getting into.
Why Legal Due Diligence Matters
Legal due diligence helps uncover risks that might affect the deal, such as breaches of law, disputes, or problematic contracts. It allows the buyer to make informed decisions, adjust the price if necessary, or even walk away from the transaction. Beyond identifying risk, due diligence also helps confirm that the company is operating within the law, its contracts are enforceable, and it holds proper title to its assets. In short, legal due diligence is about peace of mind—it ensures the buyer knows what they’re buying and is able to protect themselves against future surprises.
How the Process Works
The due diligence process typically begins once the parties have signed a letter of intent or term sheet. The buyer’s legal team works with financial and technical advisors to review the target company from every angle. This involves planning the scope of the review, requesting documents, and carefully examining everything from corporate records and contracts to employment agreements, property titles, litigation files, regulatory compliance, insurance policies, intellectual property, and tax filings. These documents are usually shared in a secure online data room. Once the review is complete, the legal team prepares a report that flags any significant legal issues. These may include deal-breakers, areas that call for negotiation or indemnities, and smaller concerns that can be dealt with after closing.
How the Findings Impact the Share Purchase Agreement
The due diligence report is a vital tool for negotiating the Share Purchase Agreement, or SPA. It gives the buyer the evidence needed to ask for contractual protections, such as representations and warranties, indemnities, and conditions that must be met before closing. For example, if the target company has an unresolved tax dispute, the buyer might insist that the seller covers any resulting liability through an indemnity or that a portion of the purchase price be held in escrow. The report may also justify adjusting the purchase price or inserting specific termination rights if critical issues are discovered.
What Are Representations and Warranties, and Why Do They Matter?
Representations and warranties are statements the seller makes in the SPA about the condition of the business. These are designed to protect the buyer from undisclosed problems. Common representations include confirming that the company is properly incorporated, that it owns the assets it claims to own, that its contracts are valid, that it is not involved in serious litigation, and that it complies with all relevant laws. The seller may also have to confirm that financial statements are accurate, taxes have been paid, employee benefits are in order, and intellectual property rights are secure. These representations give the buyer legal remedies if any statement later turns out to be false.
The Strategic Value of Legal Due Diligence
Legal due diligence is not just a box-ticking exercise. It plays a major role in shaping the deal and determining whether the acquisition is ultimately a success. By identifying legal risks early, it allows the buyer to plan for integration, negotiate stronger contract terms, and avoid disputes after closing. It also helps buyers understand how the target company is structured, what its obligations are, and whether it fits with the buyer’s business goals. In today’s fast-paced deal environment, being thorough during due diligence can make the difference between a smooth acquisition and a costly mistake.
Conclusion: Protecting Your Investment
Any company looking to grow through acquisitions must treat legal due diligence as a top priority. It provides crucial insights into the legal health of the business being acquired and helps structure the deal to manage and allocate risk. A well-informed buyer is not only better protected but also better positioned to negotiate and integrate the new business effectively. In the world of mergers and acquisitions, information is power—and legal due diligence is the key to unlocking it.