MALTA Law and Practice Contributed by: Dr Josef Cachia Fenech Gonzi and Cherise Abela Grech, GTG Legal
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flag” exercise, with specific focuses on the legal structure of the company, regulatory compliance, tax compliance, employment law, data protec - tion, legal agreements, intellectual property, debt agreement, active securities and warranties, as well as litigation. Such exercise will be subject to materiality and relevance thresholds and often involves multiple jurisdictions because Maltese companies are typically used in multi-jurisdic - tional structures and have numerous companies in various jurisdictions, even in SMEs. Additional scrutiny is also carried out on specific company assets, specifically when the compa - ny’s main asset is intellectual property. Technical experts are often also engaged to assess the technical architecture and, depending on the industry, any required security aspects of the technology. For instance, in the crypto-asset, gaming or payment industry, technical security is a critical element of the technical asset. 3.2 Process The timeline typically varies from weeks to months, and the duration thereof is dependent on a number of factors as follows. • The time needed for the investors to come to a financial agreement on factors such as the acquisition price, share of profits, equity share and shareholder rights. • The drafting of any required preliminary agreements/terms sheets, memorandums of understanding which may or may not be required as part of the process, and any negotiating time required to agree on a final text. • The time needed to conduct any required due diligence. This timeline could be extended if the information provided lacks sufficient detail as well as in situations where the due dili- gence uncovers certain issues which would
3. Investments in Venture Capital Portfolio Companies 3.1 Due Diligence The due diligence process carried out is very similar to due diligence carried out under stand - ard M&A situations, albeit with a different focus and objectives. Various technical experts are engaged to carry out due diligence on specif - ic parts of the business subject to the poten - tial acquisition. Accountancy and audit firms are engaged for financial due diligence on the books of the enterprise. Law firms are engaged for the legal due diligence and technical experts are engaged to carry out due diligence on other assets such as technology or intellectual prop - erty. A tax compliance assessment is also typi - cally carried out to ensure that the enterprise is compliant with its tax obligations. It is standard practice that prior to engaging the legal and technical experts, the business model of the enterprise is primarily assessed, to ensure that the target has sustainable potential growth prospects. Scrutiny of key individuals in the industry is also common. In local SMEs targeted by VC investors, most of the critical work is car - ried out by the founders and their initial team and hence a certain level of scrutiny is carried out on these individuals. Time commitments are also often required by the founders to ensure that such key members of the enterprise do not abandon the project in the medium term. Following an agreement on the financials, legal firms are often engaged, along with other tech - nical experts, depending on the enterprise. Any legal due diligence carried out is typically “red
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