2. Overview
It is a fact finding exercise. Due diligence refers to the
investigating effort made by an individual to gather all
relevant facts and information that can influence his decision
to enter into a transaction or not. Exercising due diligence is
not a privilege but an unsaid duty of every party to the
transaction
It can be done by the Vendor or by the Seller
Vendor – to fix problems; for several bidders
Purchaser – evaluating and verifying information received
from the target and analyzing it; deal breakers
Why “DD” - “Skeletons in the cupboard”
Cavet Emptor or Uberrimae Fidei
DD team – Specialists
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3. Client’s needs
Understanding Client’s instructions – its needs and
priorities
Common complaint – focus on legal technicalities
Client Conferences – why the acquisition? What is
your client buying? What information does the client
have?
Flow of Information – Infiniteland v Artisan –
Information supplied to the Purchaser’s adviser was
imputed to have been given to the Purchaser.
(obiter)
Risk appetite
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4. Legal Due Diligence
Venue – data room; vendors office, regulator
Areas – Corporate – Incorporation, Regulatory
Assets – Real Property and Intangibles
Material Contracts
Litigation – actual and potential
Personnel – 4 associates
Engagement Letter – clear responsibilities, communication,
scope of work, fees
DD questionnaire – Target, filing requirements, statutory
registries, meeting, contracts, business assets, real property,
IT etc.
Poison pills that my impact the other DD – litigation
Gaps and effect on the Purchaser – tax
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5. 5
Legal Due Diligence Cont’d
Obstacles to LDD
Sensitive information – Farenttii
Other Purchasers
Access to information and documents
DDR – summary, presentation, interim reports –
early warnings, negotiation, time, corporate
governance
Corporate governance
Impact on warranties and Indemnities
Due Diligence and Disclosure
Always keep your client informed on the
information you have.
Your timelines should be realistic.
Know your client.
6. Financial Due Diligence
Historical look into the company’s financials to determine the profitability
of the target.
Aims to assess the extent to which historical performances may be a guide
in the future
FDD is not an audit on the target and does not recommend whether or not
to do the deal.
Focus
Cash – Cash is King
Projections and forecasts
Assets and liabilities – Are there black holes? Liaise with the solicitors
to determine if there are existing litigations or not. Quality of assets
– is it sufficient for the future? Can it be security in a leveraged
transaction?
Management, systems and control – capabilities and readiness of
senior management
Management interview – key skills that can add value to Purchaser’s
business
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7. 7
Commercial Due Diligence
This is a futuristic outlook obtained by investigating
the company and its market by obtaining
information from the company and other sources.
Utilised for – acquisitions, MBO/MBI, Joint Venture,
Capital Investment, Investments in new products or
services, market entry in a new country.
Why CDD?
reduces risks in transactions
impacts on valuation
shows technological changes
deteriorating trading conditions
imminent changes to market
gives the purchaser a better information on the target thereby increasing negotiating
power
plan for integration
Cadbury case study
8. IP Due Diligence
Value of IP in the current market
Greater value in intangibles assets – brands – Google -
$111.5bn
Brand may most dependable asset which can survive poor
trading years – Apple $153.3bn, M&S, Tommy Hilfiger
Things to look out for – Patents, know-how/trade secrets
(breach is a crime in some countries), trademarks,
protection of unregistered marks, copyrights, designs,
domain name
Why IPDD? Ensure target owns the IP, identify third part
rights, access how strongly protected the IP is, identify
problems associated with the IP, Is there a litigation on the
IP
Where to find answers – Target, Own searches, Employment
Contracts, Consultancy Agreement, Distribution Agreement,
Franchise Agreement, Joint Venture Agreement, Settlement
Agreement
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