Due Diligence
We advise buyers and sellers and can offer a range of options, from “emergency” due diligence on major red flags to in-depth on-site reviews at major operating enterprises
The term ‘due diligence’ is often associated with mergers and acquisitions.
In that context, due diligence is a process undertaken by a party or parties – typically, a vendor and a prospective buyer – to investigate a company or an asset to ascertain related risks.
Due diligence usually involves a number of areas, for example, financial and/or accounting matters, environmental compliance or intellectual property rights. The type of diligence that we are primarily concerned with here is referred to as ‘legal due diligence’. Legal due diligence is often carried out together alongside financial due diligence. The former is the focus of legal counsel, and the latter is the focus of accounting / financial consulting firms.
In the context of an acquisition, between the vendor and the buyer, legal due diligence would often be structured in categories based upon the warranties in the acquisition agreement and be implemented through a virtual data room and request lists / responses. Legal due diligence may cover, among others, the following areas:
- corporate aspects of the target;
- capacity and authority of the vendor;
- finance arrangements and agreements;
- other material agreements;
- material disputes and litigation;
- title to material assets and intellectual property;
- employment and pensions matters;
- health and safety and environmental matters; and
- taxation.
The prospective vendor might draw up an information request list with specific questions pertaining to the above categories and submit that to the vendor. In turn, the vendor will be expected to respond to the questions and make relevant files available.
Due diligence results will be used by the vendor and the buyer to address the identified risks in the transaction, but from different standpoints: the vendor will wish to qualify the warranties in the acquisition agreement accordingly; and the buyer may wish to seek additional protections against such risks or request a price adjustment.
Due diligence can be time consuming and costly. It is important accordingly to take steps to ensure that a due diligence exercise does not become a unjustified burden.
Naturally, due diligence must focus on the areas important for the business at hand.
Thus, if a mine is being acquired, the key due diligence areas are likely to be the terms of the concession, any long terms off-take commitments and HSE track record / present arrangements.
Setting a realistic time to completion and allocating a sufficient budget for due diligence cannot be overlooked. Without these, due diligence could proceed almost indefinitely without adding significant value.
Another item to consider is allocation of responsibility between consultants and coordination of work between them. Most obvious relevant area is finance/accounting and legal due diligence, where consultants should certainly cross-check their findings.
