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Due Diligence in Commercial Transactions

Friday, 27 January 2012

Whenever businesses look to acquire another business or to pursue a joint venture with another business, detailed due diligence is vital. With 'buyer beware' the starting premise, it is critical that acquirers or joint venture partners carry out sufficient investigation into the other party to know what they are getting before they complete a transaction. Thorough due diligence before-hand can help avoid unpleasant surprises and, more importantly, avoid the cost and damage of subsequent disputes or claims - particularly important if there will be an ongoing relationship.

Due diligence is a broad term that encompasses all aspects of investigation into a business including:

  1. Commercial - analysis of products, markets, distribution, suppliers, risk management;
  2. Contractual - what contractual obligations does a target company have that will need to be honoured after the deal is completed?
  3. Financial - review of management accounts, company accounts, cost allocations, accounting policies;
  4. Technology - verifying ownership of Intellectual Property assets and licences, trade mark registrations, R&D facilities;
  5. Real estate and facilities - verifying legal title to properties; physical condition of buildings and equipment, development plans;
  6. Environmental and health and safety - compliance and procedures;
  7. Employees and personnel benefits - key personnel, pensions; and
  8. Tax - tax status, potential tax charges.

This is not necessarily an exhaustive list but it highlights some of the areas in which an acquirer is likely to seek to investigate when performing due diligence on the target. These investigations are usually coordinated and carried out simultaneously and could take place either before or after documentation, such as Heads of Agreement, has been signed.

Important points for the legal team to investigate may include some of the following. The legal terms of major commercial contracts will need to be reviewed in some detail; legal title to properties and other key assets will need investigation as any deficiencies can significantly affect their value; litigation, potential litigation or breaches of regulations by the target must be identified. The extent of any licences, employment contracts for key personnel and disputes with tax authorities will all require legal consideration also.

It is important for due diligence to be tailored to individual businesses as no two are the same. Thorough investigation is therefore of great importance but it is also necessary to avoid unnecessary duplication in the face of time and cost considerations. The scope of investigation may also vary depending upon the circumstances; a joint venture could involve a less detailed examination than an acquisition, for example. Frequently, an acquirer will know its target to some degree and know of specific areas of concern, meaning they can instruct solicitors to look into those specific matters.

If you are considering entering a business transaction where due diligence would benefit and require a confidential discussion please contact James Crighton via e-mail or by phone on 020 7611 4848.