Legal due diligence on a business purchase

Further reading from this practice: Blockchain and Irish Law. For Hugh's background and qualifications, see Hugh Phelan.

Most acquisitions in Ireland are completed faster than the legal due diligence supports. The pressure to sign reduces the time available for review, the data room is uneven, the target's management is responsive on the easy questions and slow on the hard ones, and the buyer's solicitor reports on title and warranties under a timetable that is rarely generous. This is the operating reality of mid-market M&A in Ireland, and the working discipline of due diligence is to use the time well rather than to wish for more of it.

This is a working note on what legal due diligence on an Irish business purchase actually involves, where time is best spent, and the issues that most often surface late. It is written for the buyer's CFO, in-house counsel or principal — the person who has to decide whether to proceed, on what terms, and with what protections.

The scope decision

The first decision is the scope of the diligence. The full legal diligence on an Irish target typically covers corporate structure and capitalisation, material contracts, employment, real estate, intellectual property, data protection, tax, regulatory, litigation, and insurance. For a small or single-jurisdiction target, the scope is the whole list. For a larger target with multiple subsidiaries and international operations, the scope is structured by materiality with the focus on the entities that drive value.

The scope should be agreed in writing before the diligence begins, with a clear allocation between the buyer's principal solicitor and any specialist solicitors retained for particular issues (tax, IP, employment, regulatory). A diligence team that has not agreed scope is a team that will deliver something the buyer cannot use.

The scope also determines the form of the deliverable. A full legal due diligence report, with red-amber-green findings on each issue and recommended actions, is typical for a mid-market acquisition. A shorter issues memorandum, identifying the deal-breakers and the major points but not surveying every contract, is sometimes appropriate for a strategic buyer who already knows the business. The form should match the buyer's decision-making process.

Corporate structure and capitalisation

The first substantive part of the diligence is the corporate structure. The buyer needs to know the legal identity of every target entity, the shareholding structure, the relationship between entities, and the regulatory status of each. The work involves obtaining the constitutional documents, the share registers, the CRO printouts, the beneficial ownership filings, and a statement of any options, warrants, convertible instruments or other rights affecting the shares.

The most common issue I see in this area is incomplete capital history. Companies that have raised funding in multiple rounds, with founders' shares, employee options and convertible loan notes layered over time, often have a capital structure that is not fully reflected in the share register. The buyer needs to be sure that the share register is the complete record and that any rights against the share capital are identified and either honoured or extinguished before completion.

Material contracts

The material contracts review is the largest single element of most legal due diligence. The work involves identifying every contract material to the business, obtaining the documents from the data room, reviewing each for assignment provisions, change-of-control provisions, termination rights, unusual financial terms, and any breaches or potential breaches.

The change-of-control review is often the most important single item. A target with material contracts that are terminable on change of control is a target whose value is at risk on the closing of the acquisition. The standard remedy is to identify the contracts in advance, to negotiate consents or waivers with the counterparties before exchange, and to make completion conditional on the consents being obtained. The work takes time and is often the longest-running pre-completion task.

The review of unusual financial terms — long-tail liabilities, deferred payment obligations, guaranteed minimums, complex earn-outs — is the part of the diligence that often produces the most material findings. A target's stated profitability can mask substantial contingent obligations that materially affect the price.

Employment

Irish employment law gives substantial rights to employees on a business transfer. The European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 transpose the Acquired Rights Directive and protect employees' terms and conditions on a TUPE transfer. For an asset purchase, the buyer takes on the target's employees with their existing rights. For a share purchase, the employment relationship continues with the same employer and no transfer occurs.

The diligence on employment covers the headcount, the terms of employment, any unusual rights or benefits, any collective agreements, any pending claims, any health-and-safety issues, and the pension arrangements. The pension diligence is particularly important — defined-benefit pension liabilities can be substantial and are often imperfectly understood by the target's management.

The most common employment issues I see in Irish M&A are these. Outdated employment contracts that do not reflect the terms actually applied to the employees, exposing the buyer to claims based on the historical position. Employees who have been promised options or other equity rights that are not properly documented. Termination obligations under contracts that did not previously include them, where the buyer's intended restructuring will trigger payments. Employees on long-term sick leave whose status and entitlements have not been properly managed.

Real estate

The real estate diligence overlaps with the conveyancing work where the target owns or leases property. The diligence covers the title to any owned property, the terms of any leases, planning compliance, environmental issues and any disputes. For an asset purchase that includes property, the conveyancing work is part of the acquisition documentation. For a share purchase, the property remains in the target's name and the diligence focuses on the state of the title and any liabilities.

For Cork-specific commercial property diligence, the longer note on commercial conveyancing in Cork sets out the relevant ground.

Intellectual property

The IP diligence covers the target's owned intellectual property, the licences in and out, the employee assignment position, and any disputes. For technology and brand-led businesses, the IP diligence is often the most important single element of the work.

The most common issue I see in Irish technology M&A is incomplete employee assignment. A target whose code base or product was developed by employees, contractors or founders without proper assignment of intellectual property rights has a defect in the title to its core asset. The defect can usually be cured before completion by appropriate assignments, but only if it is identified in time.

The licences-in review is also material. A target that relies on open-source software, third-party libraries or other licensed IP must be in compliance with the licence terms. A buyer inheriting an open-source compliance issue inherits the remediation obligation as well, and depending on the licences in question, the obligation can include releasing the buyer's own code under an open-source licence.

Tax

The tax diligence is typically conducted by a tax specialist working alongside the legal team. The work covers the target's historical tax filings, any audits or open enquiries, any disputes, the carrying value of tax assets and liabilities on the balance sheet, and the implications of the proposed transaction structure. For an Irish target with cross-border operations, the international tax position is often the most complex element.

The interaction between tax and legal diligence is significant. The tax specialist identifies the issues; the legal team allocates them in the documentation by way of warranties, indemnities, escrow arrangements or specific representations. A diligence team that works as a unit produces a coherent documentation package; a team that works in silos produces a documentation package with gaps.

Regulatory

For a regulated target, the regulatory diligence is central. The work covers the target's licences and authorisations, the conditions attached to each, any open issues with regulators, the change-of-control approval requirements, and the conditions under which the regulator will approve the transaction. For Central Bank-regulated firms, the change-of-control approval process is typically a six-to-nine-month exercise and is often the rate-limiting step in the acquisition timetable.

The diligence here also covers the target's compliance arrangements, including the senior management roles under the fitness-and-probity regime and the firm's response to any recent regulatory inspection or thematic review. The buyer is inheriting both the licence and the regulator's view of the licensee.

The reporting deliverable

The diligence concludes with a report — long-form or in issues-memorandum form — that identifies the issues found, classifies them by materiality, and recommends actions for each. The actions are typically of three types: matters to be resolved before completion (consents, assignments, remediation steps), matters to be addressed in the documentation (warranties, indemnities, specific representations), and matters to be accepted as inherent in the deal (where the issue cannot be cured and the buyer must decide whether to proceed).

The report is the document the buyer's board relies on to approve the acquisition. It should be written for that audience — clear, structured, with the major issues identified up front and the supporting detail behind. A report that buries the deal-breaker on page seventeen of a hundred-and-twenty-page document has failed its purpose.

For a related working note on the broader checklist that runs through any Irish business transaction, see legal checklist for an Irish business transaction. To book a notarial appointment with Hugh Phelan, call (021) 489-7134 or visit phelansolicitors.com.