Kyiv, 6 Ivana Dracha St., of. 15
Your power to winLegal audit (Due diligence)
Doing business in our country is complicated by a continuous series of legal issues and challenges. Therefore, whether a business decision will be effective from an economic standpoint also depends on its legal component. For example, a particular agreement may seem highly attractive based on its price but may contain significant hidden legal risks, such as negative tax consequences. As a result, situations may arise where, without a professional legal examination of contracts, agreements that were expected to generate millions in profits turn into losses of millions. Additionally, in the event of a dispute with a counterparty, a decision to go to court as soon as possible may be made without properly assessing all relevant circumstances and evidence. Consequently, instead of the expected protection of interests in court, an unfavorable court ruling may be obtained. If a business acquisition (M&A) is planned, conducting a prior legal audit of the merger or acquisition target is a mandatory and primary component of the process. The target company may be burdened with tax debts, liens, mortgages, multiple legal disputes, and multimillion credit obligations.
Thus, a legal audit (Due Diligence) is a comprehensive legal analysis of the assessed entity, such as a company and its corporate structure, the emergence and termination of rights to existing assets (corporate rights, real estate, and movable property), an evaluation of encumbrances on those assets, and an analysis of the obligations related to the object under review (contractual relationships, credit obligations).
The goal of such an audit is to obtain legal information necessary for making decisions to protect the business, increase the company's value, and optimize business processes.
Conducting a legal audit allows for an objective assessment of a company's compliance with legal requirements, the appropriateness of the chosen legal business model, and the presence and complexity of potential negative consequences of planned or completed business transactions. A legal audit also helps identify existing legal violations to prevent or minimize the negative consequences of future inspections by relevant government authorities.
Thus, a legal audit is a detailed examination by attorneys of the legal status of various objects of interest to the audit client, aimed at identifying legal risks associated with the audited entity and providing recommendations for their elimination or mitigation. Therefore, conducting a legal audit can be compared to diagnosing the legal "health" of the audited entity—it is easier, faster, and cheaper to detect and "treat" a legal "illness" at an early stage than to deal with its severe consequences later.
WinnerLex Law Firm has extensive experience conducting various legal audits for a wide range of different objects of analysis.
full-scale DD – a comprehensive and thorough review that delves into all tax and legal risks;
red-flag DD – aimed at identifying the most high-risk issues that could significantly impact the terms of the deal;
vendor DD – an in-depth legal analysis of the business, starting from its formation and historical operations;
purchaser DD – conducted by a potential business buyer and may take place at different stages of the deal cycle, such as at the start of negotiations or to supplement other due diligence work;
corporate DD for the purposes of business acquisition, mergers and acquisitions (M&A);
verification of the legal integrity of planned or already concluded transactions, including those related to land and other real estate;
legal audit before a reorganization (transformation) or business diversification;
assessment of the activities of potential and existing counterparties;
evaluation of the prospects for initiating litigation and of ongoing legal disputes;
legal audit before an expected inspection;
analysis of the state of contractual relationships;
legal audit of startups;
verification of labor relations compliance with legal requirements.
If your company frequently experiences breaches of contractual obligations by counterparties, claims from tax authorities, or labor disputes, these are clear indicators that the legal support of your business is not at the proper level. To identify the specific causes of legal issues and develop an action plan for their resolution, it is advisable to conduct a legal audit of your company's operations.
A legal audit must be conducted before a company reorganization, the conclusion of business purchase agreements, or the acquisition of real estate. A legal audit helps prevent financial losses, litigation, claims from regulatory authorities, and reduces the risk of corporate raiding.
The assessment of the claim and litigation management should include an analysis of the company's debtors and creditors, an examination of the outstanding debts, identification of the measures taken to settle the debts, and recommendations for debt repayment or recovery.
Before carrying out any transaction related to the acquisition of real estate, it is necessary to verify the legality of the current owner's title to the property, determine if there are any encumbrances, and check for any ongoing legal disputes involving the property. This will allow you to identify and assess the risks before completing the transaction.
If you regularly require legal assistance, it is advisable to consider legal outsourcing – retainer legal services that will allow you to save on the costs of an in-house lawyer, their workspace, optimize taxation, and avoid dependence on sick leave, vacations, and other human factors. Additionally, it provides you with more efficient solutions to your legal issues.
Due diligence may be required by a potential investor before making a decision to invest in a particular project, ensuring the legal integrity of the investment object. A legal audit is also advisable before initiating a company reorganization (transformation) process to identify existing problems and risks at an early stage. Additionally, conducting a legal audit is beneficial before initiating major litigation, as it helps assess the prospects of the court proceedings.
The duration of the audit and the preparation of a written report depend on the complexity and number of issues under review. The process can take anywhere from two to three business days to several weeks. In the case of due diligence, the timeframe may extend to several months, particularly when the audit involves large-scale matters, such as the legal assessment of a manufacturing and retail network or an agro-industrial holding before corporate mergers and acquisitions.
A legal audit is conducted in stages, the number of which depends on the complexity and scope of the issues presented by the Client. Typically, the process includes:
• Formulating the initial audit request. This is usually done during a meeting with the Client or through email correspondence.
• The Client submits an initial written request, and WinnerLex responds with clarifications to refine the scope of the audit. Based on the Client’s response, the audit objectives are agreed.
• Receiving and conducting a preliminary analysis of information and documents. After agreeing on the audit objectives, WinnerLex requests a list of necessary documents and information from the Client. Following an initial review, the audit scope may be further refined, and additional documents or information may be requested.
• Conducting the audit. Once all required information and documents are obtained, a detailed analysis of the audit subject is performed. If necessary, depending on the type and object of the audit, an on-site visit may be conducted to inspect internal documentation and hold meetings with employees.
• Preparing the report. Based on the results of the legal audit, a written report is compiled and provided to the Client. This report outlines the audit objectives, the condition of the subject under review, identified issues, and recommendations for their resolution.