Due diligence or in translation due care, is a term used in Anglo Saxon speaking countries where it is used for all kinds of in-depth analysis. Currently it is mostly used for a comprehensive analysis of the company which is the subject of a transaction.
Characteristically, it is generally accepted that the standard legal definition of due diligence does not exist. Lawyers would usually defined as a process of study and research by a potential buyer which would confirm that the buyer buys exactly what he thinks he is buying.
There are different types of due diligence reports such as:
- Legal due diligence;
- Financial due diligence;
- Technical due diligence;
- Commercial due diligence;
- Operational due diligence;
- Tax due diligence.
Current corporate practice suggests that the Due Diligence is one of the most important steps taken in the process of the sales transaction of a company. Due Diligence estimates the process of company sale form financial, legal and technical aspects.
It’s implementation is important for companies because it represents a security process which avoids the possibility of intentional or unintentional false informing of investors.
By creating Due Diligence report it is possible to avoid any future disputes that may arise during and after the sale of the company. This is possible precisely because Due Diligence allows you to perform a proper analysis of the company before, during and after conducting certain business transactions.
Failure to carry out Due Diligence increases the risk of sale, which means that the entry in the purchase of companies without prior proceedings of collecting relevant information can lead to significant financial investors losses.
Because of all the above transactions from every sphere of business requires a complete due diligence, as international and domestic capital market highlights the importance of transparency of business activities.
Participants in drafting of a due diligence are usually the seller or owner of a company, the buyer (investor), a company whose value and potential is subject of due diligence analysis and business advisers.
Business practice shows that the process of making due diligence varies from a few weeks to several months, depending on the readiness of participants, experience and organization of business advisers.
Due Diligence creation process takes place in stages which must be well organized and coordinated.
Given that legal due diligence can be a costly enterprise, it is important to determine what to check. There is often a bare minimum that one will need to investigate. Legal due diligence analysis focuses on all possible legal problems, the analysis of all sellers contracts with interested parties.
In a larger acquisition, more legal items will be investigated.
Legal due diligence also may include an analysis of the whole industry sector of the company which is the subject of analysis belongs and potential legal and regulatory problems. Analysis examines all contractual relations between subject of analysis and interested parties, such as customers, suppliers, employed, as the mentioned contractual relations are potential risk for all operations in the future. By buying the company, the new owner will be responsible for the legal situation going forward.
The legal part of the team for conducting due diligence analysis drawn up a contract of sale, merger or acquisition.
According to Peter Howson in drafting legal due diligence review we have to examine the following information:
- Information about the company;
- financial data;
- information about employees;
- information about tangible and intangible assets of the company;
- contractual obligations of the seller;
- eventual disputes of a company;
Legal due diligence is the basis of the sales contract. This is why adviser who conduct legal due diligence should determine whether the people who sell a company or its shares are actually legitimate owners of the subject of sale.
Current commercial practice indicates to us that the awareness about the importance of Legal Due diligence is extremely low. For those who are aware of the importance of this analysis mostly represented dilemma is who to engage to create analysis – particular agency or individually choose certain specialists for individual stages of the procedure.
As someone with experience in drafting legal due diligence I always opt for the second option – to choose experts for every individual phase, because technically you do not know how much and what kind of experience people who are at your disposal in the agencies have, or if you do not have this option before hiring an agency you should get all relevant information about experts who are engaged in the agency.
- professional article is published by Bar Association of Serbia
Lawyer with passed Bar exam
Specialist for Corporate Governance