In 2021, Merger & Acquisitions (M&A) activities soared above 2020 levels in line with the record-breaking year globally for M&A. Corporations in Thailand have been taking advantage of greater access to capital to invest in high growth opportunities in a low growth environment. The pandemic has been a catalyst to invest in enhancing digital capabilities, in line with a post-pandemic world as consumers noticeably grew their reliance on technology.
Despite a stall in economic recovery due to measures to contain the spread of Omicron variant at the end of last year, we still expect to see continued robust M&A activities continue throughout this year, with major themes being digital transformation, divestments and diversification, synergy capture, economies of scale and the continued rise of private equity & venture capital.
“With the rise in M&A activities in Thailand, we would like to emphasize on the importance of conducting a comprehensive and integrated Due Diligence,” says Boonyaporn Donnapee, Legal Partner, KPMG Law in Thailand. “While Financial Due Diligence is a well-known step towards a successful M&A deal, Legal Due Diligence is sometimes overlooked. Legal Due Diligence is a way to evaluate the level of risk involved in the investment, identify a suitable purchase price given the risk factors, determine the structure of the M&A transaction, and identify the conditions for the deal that needs to be included in the transaction agreements.”
Considerations in conducting Legal Due Diligence
- Corporate Organization Matters: This includes important documents or registrations related to the business including affiliated businesses to the target, such as corporate documents, and any documents registered or filed with relevant authorities, transferring of shares, issuance of share certificates, shareholders registry, or dividends issuance documents, etc.
- Assets: To check whether the target has title and legal rights e.g., the ownership over their assets. This includes both fixed assets such as land and buildings, and other assets, along with other rights such as rental rights or to determine whether there is any encumbrance on the assets.
- Intellectual Properties: To check that the target company owns any patents, trademarks, or any intellectual properties or any other similar documents such as licensing arrangements which are important to the business.
- Regulatory Compliance: To check whether the target company has the sufficient permits licenses, or certificates for operating its business, which may be issued by different government agencies and whether they are compliant with regulations. This often leads to the requirements for certain issues to be rectified prior to the completion of the deal, and therefore captured in the Share Purchase Agreement (SPA) as conditions precedent.
- Labor: To check that employee benefits and employment contracts are up to standard and compliant with regulations, including benefit schemes, other monetary benefits, working regulations and other agreements, labor union and their claims, as well as making sure that expat employees are hired legally. This is so that the conditions can be included in the SPA, such as conditions for the transfer of employees, conditions for severance pay for employment termination or other special severance pay, and other conditions or benefits.
- Insurance: To examine the details in insurance contracts and other restrictions in insurance documents related to the M&A deal.
- Significant contracts: This may include commercial contracts, contracts with financial institutions or contracts between companies within a group to check whether there are conditions in the contracts that will affect the M&A transaction, such as change of control or other conditions that require the target to obtain waiver or consent from the counterparties prior to completion of the transaction or whether the M&A transaction is prohibited under the terms of the contracts.
- Check whether the target has any pending litigation, whether they are the one taking legal action or being claimed against, both criminal and civil cases. This can be done either by examining the documents provided by the target or by conducting an independent search from the relevant courts.
In the case that the target company, the seller or the buyer is a listed company, there are more factors to consider when conducting Legal Due Diligence. For example, if the target company is a listed company, when the prospective buyer is conducting due diligence on the target, the target company needs to put in place measures to prevent the leaking of information and be careful of insider trading activities. Moreover, there are other legal considerations such as whether the M&A transaction will be considered an acquisition or disposition of assets or connected transactions under Thai securities law, and whether a tender offer is needed, and whether and when to disclose information to the stock exchange, etc. All this would need to be considered if the target company, the seller or the buyer is a listed company.
While acquiring, making an investment in or merging with a business presents new challenges and opportunities, today’s constantly changing business environment makes it even more important for businesses to carefully consider their rationale for doing a deal and how it fits into their wider business strategy. Just financial and tax Due Diligence is not enough. This is why due diligence must be approached in a new and integrated way, to include legal due diligence, among others.