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Due Diligence Notes

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DUE DILIGENCE Purpose of DD?
 Obtain as much information as possible about the target
 Allows B to decide whether or not to proceed with the acq, and if so, on what terms.
 B will look to obtain information on: o target's strengths and weaknesses o areas requiring contractual protection (this will inform the types and extent of warranties and indemnities in SPA) o identify consents needed (e.g. for the continuation of key contracts) o identify potential costs of integration and plan accordingly Areas to review (i) Business - Carried out by senior management of B and its business advisers
  market position?
  business plan and prospects?
  will it fit in with B's business?
(ii) Financial - Undertaken by accountants who will produce a report outlining investigation
  Review past accounts
  Consider achievability of projections
  Is further financing required?
(iii)Legal - Undertaken by legal advisers who will produce a report outlining investigation.
 Any potential legal issues which may affect the value/prospects of target
 Terms on which target does business
 Extent of liabilities of target
 Confirm

the extent to which the target owns the assets used

Type of the DD report

Format of DD report

(i) interim
 DD may be length and B may require interim reports summarising any issues of key importance.
 this will act as an early warning mechanism in relation to matters which may be so serious that B will consider withdrawing from the deal or renegotiating the main contract terms. (ii) full audit
 complete audit of the target business, including an in-depth summary of all the target's legal obligations.
 Very rare because of the expense and will only be required there B is concerned with the risks associated with the acquisition. (iii)by exception (for most transactions)
 focuses only on matters that are material to the proposed acquisition, or on matters that are unusual or unexpected.

Standard format: (1) Executive summary
 sets out the key findings of the report.
 may also include key proposals (e.g. consents or conditions) which must be fulfilled before the acquisition can proceed, or terms which should be included on B's behalf in the acquisition documentation. (2) Statement on Scope of investigation and liability
 B of shares or assets may have relied on the opinions of parties other than S (e.g. lawyers).
 If these turn out to be false or misleading, B may have a remedy against the third party.
 In the report there is, therefore, typically a statement as to the agreed scope of the investigation and any limitations on the liability of the advisors who have prepared it. (3) Main report
 The main report will normally be divided into sections covering each area of the target business.
 Each issue will be identified, together with the results of that investigation and
  Explanation of risks involved and appropriate solutions.

Procedure for DD:

1. Public searches
  Review all public records of the target business or company o Companies House o Land Registry o Land Charges Registry o UK Intellectual Property Office
  Commercial providers of information
  Websites, trade press, etc.
  Report from accountants

2. DD questionnaire
  Forward detailed questionnaire to S's lawyers
  Replies will be B's main source of information on the target business

  Tailor the questions to the particular business

3. Interviews
 Management questions
 Site visits

4. Secure data room
 Where information about the target is highly sensitive
 Where sale is by way of auction
 Provides access to data by way of a secured data room - S will make limited information available to B. Scope of DD?

DD carried out by a number of different advisers o Important to split areas of responsibility between them to avoid duplication of time/costs

Lawyer responsibilities = "Engagement Letter" which will set out: o terms of the appointment o areas of responsibility o set up lines of communication between various advisers o fees and limitations

The extent and focus of the DD required by the lawyer will depend on: o B's knowledge of the target o Type of transaction
 private sale will have access to more information when compared with an auction sale. o Structure of the transaction
 share or asset sale? DD on all assets and liabilities, or focused on particular assets/liabilities

Focus of DD Will depend on the following facts: 1) Purpose of the acquisition a) Investment?
i) potential for financial return?
ii)no barriers to realising investment?
iii) no hidden costs?
b) Growth?
i) details and prospects of research and development?
ii) marketing arrangements?
c) Synergy?
i) economies of scale?
ii) marketing advantages?

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