How can investors benefit from quality legal due diligence?

Legal due diligence is a comprehensive legal study of the investment object aimed at identifying risks for the investor. The two key questions that lawyers must answer are as follows:

  • Is the investment safe?
  • Do legal aspects affect the price of the investment?

Legal due diligence may require a lawyer to enter into detailed examination of all areas of law: from checking corporate matters to analyzing the correctness of registration of intellectual property rights. Below we will tell you about the benefits investors receive from legal due diligence in Ukraine.

How an investor bought a plant at a discount

An investor intends to purchase a paints and varnishes production complex in Ukraine and ordered a legal due diligence of the main aspects of its economic activity. The investor wanted to be sure that he would be able to operate smoothly after becoming the owner of the plant.

Lawyer’s note: An industrial facility can be purchased in different ways, for example, by acquiring real estate and non-current assets under a sale and purchase agreement, or by acquiring a share in the authorized capital of the legal entity which owns the whole complex. A plant can be purchased as a single property complex: with property, rights and liabilities. The scope of legal due diligence depends on all these factors, for example, in case  of buying a share in a company, its corporate history must be analyzed.

If the investor buys only real estate and equipment, it is necessary to analyze whether the plant will be able to continue operating on the basis of those permits and contracts that the seller had; to solve the issue of re-registration of employees and the transfer of intellectual property rights to the investor. In addition, already at the stage of the legal due diligence one should think about structuring the business, as we wrote about in detail here.

The lawyers drew up a list of documents necessary for analysis, which the investor gave to the seller’s lawyers. After getting the required documents, we started the legal due diligence and revealed a number of risks. For example, the plant was missing one air emission permit and not all of the hazardous works were licensed. We checked that a comprehensive inspection by environmentalists, the State Emergency Service and the State Labor Service was scheduled at the plant. And one of the workshops of the plant was outside the leased land, which could theoretically cause a dispute with a neighbor.

It was also found that the supplier filed a lawsuit against the company to recover penalties for contract breach. The seller told the investor about this dispute, but the investor realized the real risks only he involved lawyers that are qualified to deal with the situation.

After reading the results of the examination, the investor decided to wait with the purchase until the plant had undergone a comprehensive inspection, received the necessary permits and resolved the land issues. Subsequently, the investor purchased the facility at a discount and began to successfully develop production.

If you have a similar project, or you intend to invest in industrial facilities in Ukraine, we will be happy to apply our experience and conduct a full due diligence according to your needs.

How an investor avoided investing in a risky business

The investor requested a due diligence of the food retail chain with which he intended to start four new outlets. The format of the cooperation assumed that the investor would fully finance the opening of the new outlets, register them as his property, and transfer the chain to centralized management. The chain had a template of an investment agreement, which the investor transferred to us for analysis.

We checked whether the chain really owns the rights to the commercial name, which the investor was supposed to use for the new outlets. It turned out that its owner is another person who is informally related to the owners of the chain, but had no plans to be a party to the investment agreement and had not formalized in any way the right of the chain to use, much less allow the use of the commercial name.

Interesting: When an investor wants to invest in a “franchise” business, it is necessary to take into account a number of legal aspects that may not be properly worked out by the franchise network. For example, it is necessary to check the availability  of all the necessary permits, detailed description of the investor’s rights in the investment agreement. You can read more about franchise investment here.

The franchise network refused to make any changes to the “investment” agreement template, even though it was not balanced and did not protect the investor’s rights. For example, the investor had very limited rights to review the primary documents of the outlets and had no control over the payments of its business units to network-affiliated companies.

As a result of the legal due diligence, the investor decided not to invest in this project, and later we learned that the network had problems with liquidity and regulatory agencies, and investor outlets actually had lower financial performance compared to the marketing press releases.

We always give priority to our Clients’ interests and we never recommend questionable projects, even if they are full of legal work, which lawyers are usually very willing to do.

You may also like: Retail Investments in Ukraine: Crowding and Other Basic Aspects for Investors

How we chose the best option for an investor to invest in a startup with a guaranteed return

When investors intend to invest in startups, they usually understand the high risks of investing, counting on a multiple of returns. In such a format, the deal is built mainly on the belief in the startup team. However, there are also cases when the investor wants to help the project, but not at the cost of his own legal security.

For example, during the legal due diligence of one startup that was developing a mobile fitness application, we analyzed the jurisdiction of the project, ways of attracting investors in Ukraine and the group company which owned the main value - the intellectual property rights to the developments.

The investor did not want to become the owner of the share in the company and wanted to get a guaranteed profitability, regardless of the success of the project. We found a legal way to conclude an agreement with the founders of the project with safeguards and means of securing the interests of the investor.

As you can see, the tasks and results of legal due diligence may vary considerably.

Our specialists are competent to organize various formats of legal due diligence: from the quick check of the real estate object or basic aspects of the startup to the full-scale legal analysis of each business area, in which the Client is willing to invest.

See the cost of investment project due diligence here.

Publication date: 31/05/2022

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