Due Diligence

March 24, 2022

Due diligence is the process by which a company reviews the private documentation of another company for the purpose of an acquisition or investment. Typically, parties will conduct legal and financial due diligence, but occasionally the due diligence will be specialized in particular operational areas that are crucial to the success of the transaction. Due diligence is particularly important in a situation where a company is considering a takeover or merger, by which the purchasing company acquires the entirety of the target company. Bloomberg Law offers the tools and resources needed to conduct a thorough legal due diligence review.

What is the importance of due diligence in M&A?

Due diligence in a merger or acquisition is essential for a number of reasons, including, but not limited to:

  • Assisting the buyer in evaluating its obligations under the acquisition agreement by identifying and assessing the obligations, liabilities, and risks it is undertaking;
  • Developing the buyer’s understanding of the seller’s business, and helping the buyer determine the representations and warranties that it will request in the definitive acquisition agreement, as well as the necessity for certain closing conditions and indemnification provisions;
  • Confirming that the buyer will be acquiring a business in the form represented by the seller;
  • Identifying any unusual business problems that need to be dealt with specifically in the acquisition agreement, in addition to those that need to be addressed prior to closing; and
  • Identifying potential contractual and other legal obstacles to closing the merger or acquisition.

Sample M&A Due Diligence Issues Report

Sample M&A Due Diligence Issues Report

Download this free template of an M&A due diligence issues report, sometimes called a “red flag” report, which allows counsel to summarize key issues or actions following due diligence review of the target company.

What is the due diligence process?

The buyer’s due diligence process – from a legal perspective – focuses on the review of documents furnished by the seller. The process may begin with issuance of a due diligence request list by the buyer to the seller.

[Bloomberg Law subscribers can access a sample due diligence checklist.]

Best practice is to submit a due diligence request list that has been prepared for the specific transaction and is carefully focused to meet the buyer’s objective due diligence needs.

Following submission of the request list, documents are then assembled by the seller and/or its counsel and made available to the buyer. In recent years, it has become more prevalent to convert documents being produced for due diligence purposes to electronic format and to make them available either on disk or through an online database such as a virtual data room.

Often, the buyer will request a focused due diligence report that identifies “red flags” or issues that require further consideration or may even be “deal killers.” Buyer’s counsel, at the conclusion of the due diligence review process, summarizes these key points in a Due Diligence Issues Report, limiting their comments to material problems or issues that require further investigation.

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What is pre-sale or “sell-side” due diligence?

Prior to engaging in a merger or other acquisition, a target may engage in pre-sale due diligence

(also referred to as “sell-side” due diligence). Pre-sale due diligence is an internal review of the target company’s business and assets and is intended to prepare the target company for an M&A sales process.

Although pre-sale due diligence is similar to the due diligence process conducted by a buyer in a traditional M&A transaction, there are some differences between the two processes. For instance, the target company does not need to obtain approvals for accessing records or meet third-party deadlines when conducting its own review.

This process typically focuses on the following key areas:

  • Corporate affairs
  • Financial, tax, and accounting
  • Litigation/disputes
  • Change of control provisions that may be triggered by a sale

Transactions & Contracts -- Bloomberg Law 2022

Bloomberg Law 2022 – Transactions & Contracts

Read our free report on the major forces impacting transactional law and key markets, from overriding trends in mergers and acquisitions and IPOs, to the more nuanced impacts of privacy and data security laws on contract language.

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