Some buyers prefer a condensed legal due diligence report known as a "red flag report" instead of a comprehensive one. The red flag report focuses solely on highlighting potential legal issues, particularly concerning contracts entered by the target companies.
This type of report covers the following contract-related aspects:
Identifying whether the contracts allow counterparties to unilaterally terminate them or terminate them based on specific events triggered by the M&A transactions, such as change of control or shareholding provisions.
Determining if the contracts grant the target companies or the counterparties the ability to terminate the agreements without any specific cause.
Investigating the presence of liquidated damages, penalties, uncapped liability or indemnity, or service level clauses that may lead to loss-making contracts.
Clarifying the ownership of intellectual property rights for deliverables (e.g., reports) provided by the target companies to their clients.
Analyzing whether the contracts include any covenants and exclusivity provisions that could restrict the target companies' business operations.
Checking for the presence of extension or renewal clauses within the contracts.
Examining whether counterparties have the right to assign the contracts to third parties without obtaining consent from the target companies.
Identifying any other burdensome provisions that could potentially impact the business or financial standing of the target companies.