Marxman Advocaten has a team of specialists in the field of M&A - Berthe Schellinger and Pieter Verloop deal with this practice on a daily basis! As we like to share our knowledge, a blog appears on our website on this topic every fortnight. This week an article on due diligence.
A merger, business acquisition or investment round consists of various stages, each with its own key considerations. An important stage in any transaction is the due diligence process.
When a buyer wishes to purchase something, they will want to be certain that they are buying a good product. Compare it to buying a car: a buyer will want to check that the engine is running, that the brakes and tyres are not worn out, that the gearbox is working, and so on. It is no different when it comes to a business.
The buyer is also obliged to do this before entering into the sale. In a sale and purchase transaction, both the buyer and the seller have a duty towards the other party. The seller must provide the buyer with full and proper information. The seller therefore has a duty to disclose. The buyer, however, must carry out a proper investigation into what they wish to purchase. The buyer therefore has a duty to investigate. The so-called ‘due diligence’ investigation is usually carried out by the buyer in order to fulfil this duty of investigation as fully as possible.
How does such an investigation work, what do you investigate, and how extensive is that investigation? And what should you do if, as the saying goes, ‘skeletons come out of the cupboard’?
When investing in or buying a company, the buyer will have to fulfil his duty of investigation. A (secure) data room is often opened for that purpose, where all the documents from the company's records are placed. This is therefore often a major operation: all customer contracts, contracts with suppliers, annual accounts, ledgers, housing agreements, etc. must be made available. If this does not happen or is incomplete, a buyer will soon be able to argue that the duty of disclosure was breached by the seller.
It is important that all the information the buyer is shown is actually assessed. After all, if a buyer has had access to documents showing, for example, that the company is a guarantor for a third party, the buyer cannot later knock on the seller's door saying that the seller is liable for this. So that also makes it preferable for the seller to share as much information openly as possible. After all, it is not always clear in advance which information is specifically important to the buyer.
As is so often the case: the devil is in the details. Indeed, case law regularly returns to the question of how far the duty to disclose and the duty to investigate extend. The answer to that question is not straightforward and depends on the circumstances of each individual sale. For instance, the complexity of the transaction, the expertise of both parties and the parties' familiarity with the other party's (valuation) methods are taken into account when determining whether one of the duties has been breached by a party. In doing so, it is quite possible that a document contains a particular reference that a judge feels should have been examined more closely.
A buyer must therefore conduct prudent due diligence. That research can consist of more than just reviewing documents. Often, the due diligence investigation has a fiscal, legal, operational and financial angle and is complemented by management interviews -and presentations. In general, a good picture of the company can then be formed - especially with the support of the right advisers.
It is common after a due diligence investigation to draw up a report with identified areas of concern and risks. If the report suggests so, the purchase may be abandoned. Should the due diligence investigation lead to less vehement conclusions, however, it may possibly be reason to negotiate further on (i) the (provisional) purchase price or (ii) warranties and indemnities for damages in the purchase agreement. This is precisely when a potential risk is discovered at an early stage that both parties can agree on. This will generally be in the interest of both the buyer and the seller; nobody is waiting for a conflict after acquisition or investment.
Do you have any questions about the due diligence phase, the scope of the investigation or what you, as the seller, are required to provide or withhold?
Our specialists will be happy to help you!