The Consequences of Failing to Identify and Address the Legal and Regulatory Risks During the Due Diligence in Mergers & Acquisitions


The Consequences of Failing to Identify and Address the Legal and Regulatory Risks During the Due Diligence in Mergers & Acquisitions

Due diligence risk and compliance checks assist companies in protecting their interests, such as in the context of M&A transactions, safeguarding the value chain, or complying with regulations aimed at preventing money laundering, bribery, and corruption. In general, due diligence can benefit companies in the following six ways:

Organisation and ownership:

Due diligence evaluates the structure of a company from a personnel standpoint. The organisational due diligence phase gives insight into the ownership of the target company, which is crucial to the acquisition of the target company.

Compliance and regulation:

Due diligence assesses regulatory or compliance issues with the target company or the entire transaction, which is especially critical in businesses that are strictly regulated or involve significant counterparties, in order to look for any potential antitrust issues that the transaction may pose.

In Australia, due diligence should also consider the type of foreign investment to decide whether the relevant parties need to apply for the approval of the Foreign Investment Review Board (“FIRB”) for the prospective transaction.



Due diligence confirms the target company’s financial performance by reviewing its:

  • historical statements;
  • comprehensive trial balances;[1]
  • general ledgers;
  • current operational results;
  • company plans;
  • budgets; and
  • financial projections (including working capital and capital expenditure requirements, as well as an examination of historical earnings quality, net asset quality, net debt, and expected future performance)
  • to detect any unreported obligations, evaluate the present financial situation, and decide whether its earnings are sustainable. These actions contribute to a reasonable valuation of the target company and the justification of the buying price.



    Due diligence investigates the target company’s operating systems and procedures to identify risks associated with the performance of the business function and evaluates the performance of the target company’s operating model, including sales, marketing, technology, supply chain, and manufacturing, in order to identify gaps or prospective areas for investment, and to determine whether the target company’s business strategy is compatible with the existing condition of operations.


    Litigation/access to courts: 

    Due diligence assesses whether each party to an agreement will be entitled to bring action in the appropriate courts in Australia, and whether any disputes will be referred to and finally resolved by the appropriate regulations and rules, to enforce the party’s rights against the other party or relevant parties under the agreement.

    This procedure also confirms whether each party to an agreement will be required to be registered or otherwise qualified to carry on business in Australia, if not, whether the relevant party will act through a place of business, or any employee or agent situated in Australia.



    Due diligence investigates the risk of reputations being damaged. Businesses that commit financial crimes run the risk of their reputations being seriously damaged. Even if the company itself meets ethical and legal standards, its reputation can be damaged by the dishonesty of its business partners.

[1] A trial balance is a report that lists the balances of all general ledger accounts of a company at a certain point in time.,expenses%2C%20gains%2C%20and%20losses.


This article does not give legal advice. It is intended to provide general information in summary form on legal topics, current at the time of first publication, for general information purposes only. The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.