Due Dilligence Flashcards
Why is DD important for M&A?
1) To investigate the financial and business state of the target
2) To verify all material facts in relation to the target
3) To assess all risks and opportunities of proposed transaction to avoid any deal breakers
4) To manage the identified risks so that there are no damaging results
5) To gain information that enables one to assess the true worth of the target
6) To assist client in gaining a commercial advantage when it comes to negotiating SPA or APA (reps, warranties, indemnities, CPs, etc)
What practice areas are involved in legal DD?
Corporate, Finance, Employment, Property, IP, Litigation
What is the role of CORPORATE in DD?
Tasked with reviewing constitutional documents (articles of association, certificates of incorporation) of a company to ascertain the following three things:
1) Does the target have the authority to sell?
2) If an APA, are there any restrictions on the directors to transfer assets?
3) Are there any restrictions on shareholders transferring their shares?
What is role of FINANCE in DD?
1) Has target borrowed money and if so are there assets which are subject to a charge (ie secured against a loan)? These need to be discharged
2) If SPA, there is often a change of control clause, so we need to check loan documentation to ascertain the consequences of clause (ie will the lender accelerate the loan)
3) How many lenders does is the target subject to?
What is the role of EMPLOYMENT in DD?
1) Who are the employees?
2) What is the pension situation?
3) Is the target complying with employment legislation?
4) Are there key managers we want to stay with the target?
What is the role of PROPERTY in DD?
1) Is property in good state - does it need repairing?
- We might need to conduct site visits or survey to take place
2) Has relevant legislation been complied with (ie EPA and planning legislation) because we can carve it out in the agreement
What is the role of IP in DD?
1) Often harder to transfer IP in APA so we need to check relevant documents to see if we can transfer those assets
2) We might conduct searches via Trademark Register to see what the target has in terms of IP
3) Find out if there are any existing or threatened infringement actions
What is the role of DISPUTES in DD?
Explore the following:
1) Is there any existing or threatened litigation?
2) Might also check target’s correspondence that shows customers or employees unhappy to ascertain if future claims are a possibility.
Interview Question
After completing DD, you discover a litigation claim could be brought potentially against the target. What do you?
1) See if buyer can resolve before concluding the agreement.
2) Include CP that thorough DD is conducted and buyer is satisfied before completing sale
3) Adjust consideration
4) Put money aside in escrow for the event that litigation does arise
5) Include warranties or indemnities (likely an indemnity because one has found a potential litigation claim)
6) Walk away if serious risk
