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Planning to sell a company, bring in an investor or acquire a business in Poland? Whether you have a large M&A deal in mind or a sale of a family business, one element is crucial for both the safety and valuation of the transaction: the legal due diligence.
A company's legal due diligence helps identify and assess risks that may significantly impact the investment decision and the buyer's situation following the signing of the agreement. It is not uncommon for the target company to struggle with irregularities that might expose the investor to potential legal, tax or financial implications.
What is legal due diligence?
Legal due diligence (LDD) is a comprehensive review of the legal status of a business, typically carried out prior to:
- the sale of shares or stock,
- the acquisition of a company,
- a merger or restructuring,
- the entry of an investment fund.
In practice, legal due diligence involves analysing corporate documents, agreements concluded by the company and the way the company operates in the legal environment. It is intended to determine whether the company’s operations comply with applicable laws and whether there are any obligations or restrictions that could negatively affect the feasibility of the transaction or the value of the target following closing.
Unlike a financial audit or controlling, due diligence does not focus on financial standings, but on the legal foundations of the company's operations, such as:
- the validity and enforceability of key contracts,
- pending litigation or risks arising from potential disputes,
- compliance with industry-specific regulations and applicable laws,
- ownership and corporate structure,
- the ability to effectively transfer shares or stock.
Importantly, legal due diligence has a practical business dimension. Its purpose is to support real business decisions – from determining the purchase price, through drafting share purchase agreements (SPAs), to deciding whether a given transaction should proceed at all. A well-conducted legal due diligence can help mitigate the risk of detecting material irregularities only after the agreement (SPA) has been signed, when resolving them may be more expensive or considerably more difficult.
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What is the purpose of legal due diligence?
The purpose of legal due diligence (LDD) is not to produce a comprehensive report that ends up gathering dust in a drawer but to support real business decision-making.
The key objectives of LDD:
- identification of material risks (litigation, unfavourable contracts, documentation gaps, corporate irregularities),
- assessment of the company's compliance with applicable law,
- assessment of the impact of the identified risk on the price and terms of the transaction,
- go/no-go decision support.
Legal due diligence will allow the buyer to gain an insight into the company's legal situation and reduce the risk of unforeseen and negative consequences of the transaction, The seller, on the other hand, will be better prepared for negotiations. Consequently, legal due diligence can streamline the process of agreeing the terms of the sale or acquisition and the execution of the SPA.
How can legal due diligence affect the price and the agreement?
In practice, the findings of a legal due diligence review may significantly impact the share purchase agreement (SPA).
Most common consequences of LDD:
- price correction or introduction of price reduction mechanisms,
- expansion of the seller's representations and warranties (R&W),
- introduction of safeguards such as escrow, holdback or indemnities,
- conditions precedent required before closing,
- in extreme cases – withdrawal from the transaction.
For the above reasons, legal due diligence is considered one of the key tools strengthening the investor's negotiating position.
Legal due diligence checklist – what exactly do lawyers review?
The scope of legal due diligence should always be tailored to the industry, scale of operations and nature of the transaction, but in practice a professional checklist covers several key areas that together provide a complete picture of the company's legal condition.
At this stage, lawyers verify whether the company has been properly incorporated, is correctly represented and whether the planned transaction can be carried out without additional restrictions. This includes reviewing current registry data (disclosed in KRS or foreign registers), the company articles of association or bylaws and all amendments, powers of attorney and a commercial power of attorney. The structure of the capital group is also reviewed to determine whether the transaction requires additional approvals or internal reorganisation.
The purpose is to clearly determine who holds rights to the shares or stock and whether their transfer is subject to any restrictions. The analysis covers the current shareholding structure (cap table), shareholder agreements as well as any potential pledges, options, pre-emptive rights or other limitations on the share transfers.
This area focuses on the accuracy of decision-making by the company’s governing bodies. Lawyers analyse resolutions and minutes of meetings from recent years and verify whether key decisions – especially those outside the ordinary course of business – were adopted in accordance with law and corporate documents.
One of the most important elements of LDD involves analysing contracts with key customers, suppliers and business partners. Particular attention is paid to change-of-control clauses, termination provisions, contractual penalties and exclusivity arrangements. Their presence can significantly impact revenue stability following a company's acquisition.
Lawyers identify all material financial obligations, such as loans, credits and bond issuances, as well as security interests over the company’s assets – mortgages, pledges, assignments, and guarantees. The goal is to detect liabilities that could negatively impact the buyer or the company after closing.
The review covers ongoing court and administrative proceedings as well as potential claims arising from the company’s past operations. Even seemingly minor cases may generate significant future costs, reputational risks or affect the ability to obtain required administrative approvals.
This includes assessing compliance with applicable laws, required licences and permits, the history of inspections and administrative penalties and matters related to personal data protection (GDPR).
The purpose of this analysis is to identify issues that may impact the company's operational continuity. The examination covers employment and management contracts, non-compete clauses, incentive systems and potential labour disputes.
Lawyers verify whether the company holds rights to key intangible assets, such as trademarks, patents, software copyrights and licences. For technology companies, analysing the potential use of open-source software is of particular importance.
The review covers legal titles to real estate, lease agreements, encumbrances and the compliance of the use of the real estate with its intended purpose.
Currently, more often than not, legal due diligence covers environmental matters, occupational health and safety and business ethics, all of which may have a significant impact on the long-term value of the company and its attractiveness to investors.
Thus structured scope of review facilitates the identification of risks, supports the assessment of their potential impact on the transaction and may constitute a basis for recommending appropriate contractual or business solutions.
Risk summary as a key element of the report
One of the most important sections of a legal due diligence report is not the list of documents reviewed, but a concise summary of the risk identified, including:
- a description of the risk,
- its impact on the transaction,
- recommended actions (such as a purchase price adjustment, an indemnity provision, or acceptance of the risk).
This section of the report usually serves as a key reference point for the management and investors when making transaction-related decisions.
Most common mistakes in the legal due diligence process
In practice, the most common errors involve:
- relying on generic checklists without adapting them to the specific industry,
- lack of risk prioritisation,
- reports focused on formalities rather than the actual impact on the transaction,
- failure to link LDD findings with SPA provisions.
Summary – what business benefits can legal due diligence bring?
A professionally conducted legal due diligence in Poland:
- increases transaction security,
- helps mitigate liability risks or unforeseen consequences arising after closing and may strengthen the negotiating position,
- supports decision-making based on the actual findings rather than assumptions alone.
In M&A practice, the key assumption remains highly relevant: it is much better to identify risks before signing the contract than to face their consequences after closing.
