Pre-transaction due diligence
In any potential acquisition of a business or a company, or even a part investment in one, an investigation or audit of the target is usually carried out. This investigative process is referred to as due diligence and its purpose is to provide the acquirer/investor with confirmation of material facts regarding the target and/or to identify risk areas which might require further attention.
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The scope of the due diligence task often covers all aspects of the business including: legal, financial, taxation, commercial, technical, management, employment, pensions, environmental, tangible property and intellectual property.
The acquirer/investor, typically after having signed a non-disclosure agreement (also known as a confidentiality agreement), would brief his advisors as to the nature of the deal and of the target’s business and characteristics. Having gained a good understanding of the potential investment, the advisors would prepare a questionnaire for the target to complete, requesting that responses are returned by a specified date in accordance with the agreed timetable for the transaction. Alternatively, the seller may prepare a “data room” whereby information on the target company is collated by the seller often to enable potential purchasers to formalize the terms of an offer. With the advances in electronic communication, a ‘virtual’ data room could be created with scanned copies of the documents uploaded to a secure server and made available for viewing via a secure web interface.
It is important for the target to appreciate reliance will be placed by the acquirer/investor on the accuracy and the validity of the responses when making a decision to invest, and the information received will help stricture the nature and extent of the warranties and indemnities in the share purchase agreement.
Typically, a target would be expected to supply copies of the following key documents:
- Memorandum & Articles of Association;
- Statutory books including minutes of board meetings, resolutions and shareholders’ meetings;
- Recent financial statements and taxation returns;
- Business plans;
- Employment contracts;
- Material sales contracts, supplier contracts and distribution agreements;
- Licensing agreements;
- Intellectual property matters such as patents and trade-marks;
- Property lease agreements;
- Pension scheme details and actuarial valuation reports.
- Insurance schedules;
- Environmental reports; and
- Details of any litigious or contentious matters
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Harding Mitchell provides non-financial due diligence investigations, focusing on the track record, reputation, associations and likely integrity of one or more subjects. This type of investigative due diligence – depending on circumstances also referred to as “integrity due diligence”, “ethical due diligence” or “enhanced due diligence” – is critical to understanding the bona fides of a third party.
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