M&A Bytes: Corporate Liabilities – More Than Just Loans (Part 2)
Would you still buy – or could you still sell – if the business you thought you knew had problems you didn’t even know existed?
Continuing from Part 1, let’s uncover more hidden liabilities that Buyers should watch out for in an M&A transaction.
Key Areas to Uncover:
(1) Contractual Liabilities
- Indemnities, warranties or undertakings under past or existing agreements
- Change-of-control clauses that may trigger termination or penalties
- Minimum purchase commitments or exclusivity arrangements
- Unrecorded side agreements or informal arrangements
(2) Undertakings, Performance Bonds & Guaranties
Undertakings, bonds or corporate guarantees issued in the name of the company to third parties may remain enforceable even after a change in ownership, potentially exposing the Buyer to financial liability or claims if called upon.
Common examples:
- Performance bonds for project completion
- Bank guarantees or comfort letters
- Guarantees provided for subsidiaries, joint ventures or related parties
(3) Real Estate & Asset Liabilities
Land, property and other assets can carry hidden liabilities that may surface after completion, which may become post-acquisition liabilities affecting the Buyer’s financial and operational position.
Common examples:
- Defective titles, caveats, encumbrances
- Unpaid quit rent, assessment or statutory charges
- Illegal extensions / unapproved renovations
- Tenancy obligations binding on the target company
- Machinery with liens or encumbrances
(4) Intellectual Property Liabilities
Improper ownership, invalid registration, or inadequate licensing of the company’s intellectual property can expose the Buyer to legal disputes, infringement claims, or unexpected post-acquisition liabilities.
Common examples:
- Unregistered or improperly assigned trademarks, patents or copyrights
- Expired or invalid IP rights
- Infringement claims
(5) Information Technology (IT) Liabilities
In today’s digital landscape, a company’s IT systems are generally crucial to its operations — but they can also be a hidden source of risk. Buyers should review software licensing, cybersecurity and data protection practices to identify potential operational, regulatory or legal liabilities post-acquisition.
Common examples:
- Use of unlicensed or expired software
- Cybersecurity incidents or data breaches
- Weak data protection practices
(6) Environmental & Operational Liabilities
Environmental and operational obligations can create hidden post-acquisition liabilities, including fines, remediation costs and operational disruptions, particularly in manufacturing, industrial or construction businesses.
Common examples:
- Improper waste management, environmental contamination or restoration obligations under the Environmental Quality Act 1974
- Non-compliance with workplace safety and health standards under Occupational Safety and Health Act 1994
- Enforcement notices, closure orders or other regulatory actions
🔑 Key Takeaway:
The above list is not exhaustive – the scope and depth of liabilities vary based on the target’s business, structure and industry.
A detailed and transaction-specific due diligence is therefore crucial to uncover hidden liabilities and shield the value of a buyer’s investment.
In Essence:
Disclaimer: The content of this article is intended for general informational purposes only and does not constitute formal legal advice.
Our Corporate team regularly advises local and international corporations on mergers and acquisitions (M&A), cross-border transactions, joint ventures, and corporate restructuring. We also provide comprehensive support for shareholders’ agreements and general commercial advisory to help businesses navigate the Malaysian regulatory landscape.
For legal assistance or further inquiries regarding your corporate matters, please feel free to contact us.
