Legal Risks in the M&A Process: How Can Businesses Avoid “Buying Trouble”?

Jun 12

The M&A process is not only a financial and strategic exercise but also a legal battlefield full of risks. Just one loosely drafted contract or an overlooked legal issue during due diligence can lead to severe consequences for the acquiring business.

So what are the common legal risks in M&A transactions, and how can businesses proactively mitigate them? Let’s explore this topic in depth with DEDICA.

Why Legal Risk Determines the Success or Failure of an M&A Deal

When acquiring or merging with another business, the buyer does not only take over assets, customers, and employees — but also inherits all legal obligations, including hidden or undisclosed ones.

Even a minor legal oversight can result in:

Prolonged disputes over ownership
Undeclared tax liabilities or hidden debts
Labor disputes from unlawful employment terms
Expired or invalid business licenses

Therefore, legal risk management must be a central focus from the early survey stage through to post-closing.

5 Common Legal Risks in the M&A Process

Identifying legal risks is essential, but more importantly, businesses must implement preventive strategies from the outset. A successful M&A transaction is not only about valuation, but about ensuring legal compliance and preventing future liabilities.

DEDICA now shares practical solutions proven effective in many Vietnamese M&A deals.

1. Ownership and Equity Structure Risks

Many target companies have unclear ownership structures, especially when capital contributions involve assets that have not been fully transferred or when internal shareholder disputes are unresolved.

Typical issues:

Contested shares without final resolution
Invalid voting proxy arrangements
Incomplete capital contributions

2. Risks from Business Contracts and Legal Obligations

Business contracts may contain binding or termination clauses triggered by changes in ownership. Non-compliant contracts can be rendered void, negatively affecting the business’s value.

Key concerns:

Any pending litigation or claims for damages?
Any anti-assignment or change-of-control clauses?
Were contracts signed by authorized persons?

3. Licensing and Regulatory Risks

Post-M&A, changes in shareholders or legal representatives may require updates or reissuance of certain licenses. Missing deadlines may result in suspension of business.

Example scenarios:

FDI ownership change requiring updated investment registration
Regulated sectors (education, logistics, healthcare) needing reapproval

4. Tax and Financial Liability Risks

Acquiring a company means assuming all financial liabilities, including undeclared debts or ongoing tax inspections.

Common risks:

Late or incorrect tax filings (VAT, CIT)
Long-standing social insurance debts
Disputes over asset depreciation, intercompany loans

5. Employment and Internal Dispute Risks

Policy changes or termination post-merger can trigger collective or individual labor claims. Buyers must understand employee entitlements and prior commitments.

Examples:

Unexpired collective labor agreements
Unpaid bonuses or commissions
Ongoing labor contract disputes

How to Mitigate Legal Risks in M&A

Here are steps and legal tools that businesses can use to prevent risk from the start and avoid costly consequences post-closing:

1. Conduct Comprehensive Legal Due Diligence

This step uncovers hidden risks. Hire a lawyer to thoroughly review:

Corporate legal documents
Contracts, assets, debts, taxes
Ongoing litigation
Licenses, investment certificates

2. Draft Robust M&A Agreements

Include:

Clear warranties and covenants
Price adjustment mechanisms for post-deal issues
Clear dispute resolution terms and governing law

3. Post-M&A Legal Planning

Immediately after signing:

Update business registration
Amend relevant licenses
Review and novate key contracts
Reassess HR contracts and policies

M&A Is Only Successful When Legal Risks Are Well-Controlled

Don't let your business “buy trouble” because of poor preparation or lack of legal oversight.

If you're planning an M&A transaction, let DEDICA be your trusted advisor — from legal due diligence to contract drafting and post-deal integration.

DEDICA – Your Legal Partner in M&A Transactions

With an experienced legal team, DEDICA provides optimal legal solutions for your M&A plans, helping your business expand confidently and grow sustainably.

Contact us today for a free consultation on legal risks in M&A.

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