Within a sale, investment or merger, the legal review is one of the elements that prevents the most risk. Legal due diligence is the examination of the legal situation of a company or an asset carried out before signing, to confirm that everything is in order and that there are no contingencies capable of altering the price or the viability of the deal. It is one of the areas of due diligence, focused on everything that affects the legal certainty of the transaction.
In transactions involving Andorra (and especially when the buyer or investor comes from Spain or France), this review takes on added value, because the usual precautions are compounded by the particularities of the Andorran legal framework. Below we look at what it is, when it is needed and what exactly it checks.
What is legal due diligence?
Legal due diligence is the part of due diligence that deals with the legal situation of a company, an asset or a project. A transaction combines several reviews in parallel (financial, tax, labour and legal); within that joint analysis of due diligence, the legal lens answers questions that no other review resolves: who really owns the shares and the assets? What obligations arise from the current contracts? Are there disputes or breaches capable of passing to the buyer? Answering them is what prevents inheriting a legal problem along with the business.
What it is for: the objectives of the legal review
Its purpose is for the buyer or investor to know exactly the legal risks they are taking on. By bringing to light contingencies that do not appear in an initial exchange of information (a contract with a problematic clause, an asset with no clear owner, a latent dispute), the legal review makes it possible to decide with confidence and, where appropriate, to renegotiate. Specifically, it serves to:
- Confirm the ownership of shares, real estate, trademarks and the other assets being transferred.
- Detect legal contingencies, from open litigation to regulatory breaches or penalties.
- Adjust the deal, translating what is found into guarantees, price adjustments or holdbacks and conditions precedent to closing.
Unlike the general view of the objectives of a due diligence, in the legal field what matters is enforceability: each risk detected becomes a specific clause that can be claimed later. And if the seller concealed information or was untruthful, the representations and warranties they sign are the basis for holding them liable or claiming compensation after closing.
When is legal due diligence needed?
The legal review is advisable whenever an important decision depends on the legal state of a company or an asset, not only in a sale. These are the moments when its absence proves most costly.
In company sales and M&A transactions
This is the classic scenario. When someone is going to buy a company or integrate it into a group, they need to confirm that they are acquiring what they believe they are acquiring. The review is carried out after agreeing a preliminary price and before the final signing, when the buyer checks that the business matches what was agreed in corporate and M&A transactions.
On the entry of investors or new partners
In a capital increase or an investment round, whoever contributes funds takes on part of the company’s risk. Reviewing the legal situation before entering prevents the investor from inheriting contingencies that predate their arrival and protects the shareholders’ agreement to be signed afterwards.
In financing, restructurings and joint ventures
The entities that grant financing, as well as companies that merge or set up a joint venture, also base their decision on a prior legal review. Here it is particularly important to detect the change of control clauses in contracts (agreements that can be terminated if the ownership of the company changes) and any commitment that conditions the deal.
When investing or setting up in Andorra
For the investor who decides to operate in the Principality, the legal review serves an added function: to confirm that the company or the asset comply with the Andorran framework. This is where the most relevant particularities arise, which we look at further on.
What areas legal due diligence reviews
The exact scope of a legal review depends on the company, but it usually covers the same broad blocks. The table sums up what is analysed in each one and what risks it helps to detect. The tax and labour areas are addressed here only insofar as they affect legal matters, since they have their own specific review.
| Area | What is analysed | Risks it helps to detect |
| Corporate and commercial | Bylaws, ownership of shares, management bodies and powers of attorney | Defects in corporate resolutions, unclear ownership of capital |
| Contractual | Contracts with clients, suppliers, distributors and leases | Change of control clauses, non-transferable contracts |
| Labour | Workforce, collective agreements, contributions and severance | Bogus self-employment, social security debts, dismissal liabilities |
| Fiscal | Tax | Taxes, contingencies and deductions applied |
| Regulatory and compliance | Licences, authorisations, data protection and compliance | Regulatory breaches, administrative penalties |
| Intellectual and industrial property | Ownership of trademarks, patents and domains | Intangibles not registered in the company’s name |
| Litigation and contingencies | Open proceedings, claims and guarantees granted | Lawsuits capable of eroding value |
How it fits into the transaction process
The confidentiality agreement, the letter of intent, the data room, the analysis and the report make up the path common to any due diligence; on the legal side, that path has three particular nuances worth highlighting.
- Documentary review: much of the work consists of examining deeds, bylaws, contracts and judgments, so a well-ordered data room is decisive.
- The legal report: which ranks the findings according to the risk they pass on to the deal: an essential asset with unclear ownership, a key contract with a change of control clause or a dispute with financial impact weigh more than a formal issue.
- Legal translation: it is these findings that shape the representations and warranties, the indemnity clauses and the conditions precedent to closing that protect the buyer.
Particularities of legal due diligence in Andorra
When the transaction involves a company or a property located in Andorra, the legal review changes framework: the Principality has its own company law, its own foreign investment rules and its own authorisation procedures, different from those of other countries.
Specifically, it is advisable to check the legal form and the correct incorporation of the Andorran company, the foreign investment authorisation when the transaction requires it, the registration of owners and directors in the Principality’s registers and the licences needed for the activity.
In real estate transactions, the review of the ownership and encumbrances of the property under Andorran law is added. An adviser with local knowledge prevents a requirement specific to the Principality from stalling a deal that was well planned at origin.
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The in-house lawyer as coordinator of the due diligence
A legal due diligence brings together specialists from several disciplines and generates a considerable volume of information in a short time. That is why it needs a figure to coordinate the process, prioritise the risks and turn the findings into decisions. That role fits naturally with the in-house lawyer: a professional embedded in the operation, who knows the business from the inside and can lead the review with an overall view.
Their contribution, moreover, is not exhausted in the one-off transaction. Unlike a review that is only triggered when a sale comes up, in-house support makes it possible to keep the documentation in order, anticipate contingencies and prevent risks on an ongoing basis, so that the company is always ready for a possible transaction or inspection. At Augé we approach legal due diligence from this perspective, integrating the legal, tax and corporate knowledge that each operation requires.
