WHAT IS A DUE DILIGENCE INVESTIGATION?
Gathering and investigating legal, tax and other information
A prospective buyer of a company may want to investigate and gather as much information as possible about that company and its business. The main purpose is to decide whether to proceed with the transaction and establish areas of risk that need particular attention. More in general, the investigation aims at assessing the benefits and downside (liabilities) of a proposed acquisition, and comprises the past, the present and the predictable future of the company and its business.
Most of the time, the prospective buyer doesn’t carry out such a due diligence investigation himself. Lawyers (attorneys) as well as consultants are hired to review the target company: financial and technical issues, legal, tax, environmental matters, etcetera. Lawyers primarily focus on, for example, reviewing the corporate structure, significant contracts, employment contracts, the validity of share issuances, proceedings pending, licenses, insurance, intellectual property rights, registration requirements, administrative approval, regulatory issues, etcetera. The results are laid down in a so-called due diligence report.
Usually, a due diligence investigation starts with a long list of questions and issues to be addressed. In the event of a large(r) target-company, often all the (legal and tax) information is gathered in a so-called data-room (due diligence room). It goes without saying that prior to such an investigation, a confidentiality agreement is concluded, which helps to prevent the prospective buyer from using all this information if he decides to withdraw from the proposed transaction.
Karel Frielink
Attorney (Lawyer) / Partner
