A more recent version of these Due Diligence notes – written by Cambridge And Oxilp And College Of Law students – is available here.
The following is a more accessble plain text extract of the PDF sample above, taken from our Private Acquisitions Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:
Due DiligenceCommon law principle of 'caveat emptor' (let the buyer beware) applies.
SCOPE OF DUE DILIGENCE??
Will generally focus on constitutional framework of target & ownership of assets &
liabilities. Any legal issues that may affect value or prospectus of target should be investigated. Identify any preconditions/consents that may be satisfied/required to transfer legal title of share/assets. Will investigate these areas: o Commercial Areas of Risk - e.g. risky market (property development)/financial difficulties. Scope of this will depend on buyer's knowledge of company/market. o Type of Transaction -
Shares = more extensive as all assets and liabilities are transferred.?
Time constraints - if seller is in strong position, may give shorter negotiation time
Assets = less extensive. May be willing to accept liabilities if seller gives buyer indemnity as liabilities may effect goodwill. Need to see how/if assets will fit into buyer's business structure. Extent of Contractual Protection - if through purchasing through insolvency/auction
= few protections. The more the buyer already knows about protection, the less DD will need to be done (however in current market, buyers do full DD just to be safe). Limiting Factors -
Financial resources & manpower - buyer will be working within a budget so need to be aware of it. o Confidentiality - must be aware that certain docs (e.g. joint venture agreements, customer lists etc) will be subject to confidentiality restrictions. Can be mitigated by confidentiality agreement When undertaking DD, will need to do public searches (CoHo, Land registry etc) and send out a 'DD questionnaire' to seller's sol.. A data room (real or virtual) will be set up to review the info given & keep the information safe/confidential
OTHER TYPES OF DUE DILIGENCE Commercial advisors??
Gets info such as financial position, market position & business plan of target company May also get business review of lender if borrowing to acquire. Usually undertaken by senior member of purchasing company. If they don't have the expertise, use professional business advisors
Produce a report which will be central to negotiations: o Shows strength and weaknesses of target and will form the basis of many warranties &
indemnities. Buyer's solicitors should liaise with accountants to define areas of responsibility & ensure no areas of crossover. Need to know terms of any confidentiality agreement between parties. Report should cover 1) commercial activities, 2) management structure and employees, 3) taxation, 4) profitability, 5) balance sheet strength, 6) accounting system and polices & 7) premises.
1 COMMON AREAS OF INVESTIGATION Corporate info??
Company search at CoHo on target & selling company. Limitations = no compensation for buyer if info filed at CoHo is inaccurate or incomplete (situations may have changed from date of filing to current date. Check constitutional documents to check pre-exemption rights & see if D's have power to dispose of assets. Check who the current D's and SHs are to ensure you are dealing with the correct people. Also D's SCs. Check registers and minutes to see if allotment/transfer of shares have been done legally (s550/561 CA) & if any other decisions have been made following the correct procedure.
COMMON AREAS OF INVESTIGATION CONT. Financial info??Accounts - this info will form basis of warranties or indemnities in final SPA. Loans o Request info of all target's loan docs. to ascertain target's borrowing liabilities (e.g. are any on demand?) o If share transfer, check if seller SH has given any guarantees as buyer may be asked to try and get seller released from obligations before transfer & give indemnities to seller if obligations are not obtained. o Will need to check that al guarantees to member companies do not continue after transfer. Charges o Buyer will want all assets sold free of charges - need to check if charges are registered properly. o If not - still enforceable against the Co (fine and payable immediately). Buyer of shares has no protection. Credit Reports - quick, up-to-date method of obtaining info on Co's liquidity &
creditworthiness. Checking solvency of seller o Bankruptcy searches at Land Charges Department against individual seller of shares.
o Check CoHo to ensure no insolvency proceedings have been made against corporate seller of shares.
o Make telephone enquiry to Central Registry of winding-up petitions to get up-to-date info.
o Any transactions entered into after insolvency proceedings have started may be void. Key ContractsContracts fundamental to business o For asset sale, need to assign/novate benefit of contracts.
o Check long-term contracts (distribution/agency/raw materials/IP licences/employee?
contracts/leases etc) o Check for any change of control clauses/expiry/legality (competition) issues (bigger concern for sale share) Rights triggered by Change of Control - D's SC = golden parachute clause (payment on change, assuming they will be dismissed). Employees may have right to buy shares at a favourable price under share option schemes. Non-arm's length trading relationships -
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