To what level of detail is due diligence customarily undertaken?

Mergers & Acquisitions

Bermuda Small Flag Bermuda

Due diligence, as in most established and recognised jurisdictions, is customarily and commonly undertaken. It would be a very rare occurrence where due diligence would not be undertaken unless where a competing bidder forgoes due diligence as a completive advantage. However, as noted above, if the bid is hostile then the only information which might be available for due diligence would be that in the public domain. As also indicated above, the target company may look to limit the scope of due diligence undertaken and, in particular, withhold sensitive financial and business information until it is clear the bidder has a genuine interest in proceeding with the transaction.

Brazil Small Flag Brazil

Due diligence exercises in sophisticated M&A in Brazil is usually very deep and detailed, even in the case of listed companies. It involves at the very least legal, financial and accounting specialists, plus specialists in the industry where the target operates. Due diligence usually starts immediately after the execution of an NDA, which in some cases is coupled with an exclusivity agreement, and lasts until the very last day before the execution of the definitive agreements. This is very often a driving factor when negotiating transaction documents.

British Virgin Islands Small Flag British Virgin Islands

Customary due diligence will take the form of reviewing the memorandum and articles and any other public information filed with the Registrar as set out in question 6 above. The registered agent of the target company will be asked to provide copies of the target company’s registers of directors, shareholders and charges. Copies of all material contracts, the minute book and financial statements are also routinely requested.

In the case of a hostile bid the amount of due diligence information will be limited to the public information available from the Registrar and any other information in the public realm.

Cayman Islands Small Flag Cayman Islands

As Cayman companies tend to occupy the holding or top-co position in corporate group structures, due diligence is usually limited to the existence of the company, the terms of its securities and any shareholder arrangements (such as voting or registration rights agreements). Where the company is engaged in a regulated sector or is an operating company, verification of such licences and those operating agreements (and their terms) is typical.

China Small Flag China

ZL: Generally, in an ordinary case of acquisition, due diligence usually includes legal, financial, tax, business, and environmental aspects. In terms of legal due diligence, it usually includes general information, historical summary of shareholding, major assets, permits and licenses required for operation, major financing and assurance, material business contracts, financial subsidy, tax, administrative penalty, litigation and disputes.

In an acquisition that involves a listed company, if such acquisition constitutes material assets reorganization, the due diligence shall be conducted according to the requirements in Measures of Material Assets Reorganization and Standards on the Contents and Formats of Information Disclosures by Companies Publicly Offering Securities No.26 - Material Asset Restructuring of Listed Companies (Revision in 2014), and the due diligence information shall be disclosed publicly. In an acquisition that does not involve any listed company, as there are no mandatory requirements, the disclosure of due diligence is more depended on the acquirer’s commercial judgments and the negotiation of both parties. Therefore, the level of detail of due diligence undertaken on the target company is usually depended on the positions, bargaining power, and business demands of both parties. Generally, compared with acquisition that constitutes material assets reorganization of a listed company, in an acquisition that does not involve any listed company, the level of detail of due diligence is less stringent, with a focus on important items that may have effect on acquirer’s judgment of target company’s value and other important judgments.

Finland Small Flag Finland

Acquirer usually conducts at least financial, tax, and legal due diligence reviews in all relevant transactions whereas business, operational, environmental, pensions and insurance due diligence is done in cases where the target is sufficiently large or there are specific circumstances warranting such diligence. Transactions are prepared in a manner that closely reflects UK and US traditions and practices, and due diligence is customarily conducted by using one of the internationally known virtual data room providers. One distinguishing feature of the Finnish M&A landscape is that it is established market practice for all information included in the data room (that is 'fairly disclosed' – a concept defined in the relevant purchase agreement – rather than just the specific details set forth in a disclosure memorandum) to constitute disclosure material for purposes of qualifying the seller’s representations and warranties. This is something that foreign (non-Nordic) parties are not always used to and increases the importance of a high-quality data room process.

Germany Small Flag Germany

The scope of due diligence differs in particular between private acquisitions and public takeovers. While the due diligence in private acquisitions is rather broad (often amongst others due to requirements by financing banks), the due diligence in the pre-takeover phase in Germany is typically limited in scope. In some cases it is limited to publicly available information. In other cases the target may under certain circumstances allow a limited due diligence to a bidder. In such case the disclosure must be in the interest of the target and a strict non-disclosure agreement must be in place.

In private auction processes usually different levels of due diligence are provided for. In the initial stage only a limited due diligence review is allowed to bidders who have documented their interest in a letter of intent or a memorandum of understanding and signed an non-disclosure agreement. In the next stage an extended due diligence may be granted to a smaller number of bidders who have for instance submitted an indicative offer. Only the preferred bidder is usually granted an in-depth due diligence before signing the purchase agreement.

In an increasing number of M&A transactions W&I insurance plays an important role in particular, in private equity transactions. The insurer usually performs its own due diligence in addition to inspecting the due diligence report of the buyer.

Greece Small Flag Greece

Customarily, during the financial and legal due diligence undertaken for an M&A project, access is provided to all financial and legal books and records of the company, including, tax books and records, corporate information, copies of key client contracts (sometimes redacted), loan agreements, pension plans schemes, accounts, assets and real estate property, pending or threatened litigation and internal auditors’ reports. As regards listed companies, due diligence is further aided through access to the publicly available information. Obviously, the scope of the due diligence exercise depends on the magnitude of the transaction and the ad hoc arrangements of the transacting parties.

A recent trend in M&A deals involves the completion of the deal without the previous conduct of or following only a high level due diligence, combined with the negotiation of detailed specific clauses in the transaction documents providing for changes in the price or for penalty clauses, depending on future findings during the operation of the target company post-closing of the transaction.

Guernsey Small Flag Guernsey

A bidder would usually obtain as much information from public sources as possible in combination with approaching the target with a list of financial, legal, regulatory and operational due diligence questions and requests.

The Takeover Code contains provisions relevant to due diligence requests in a hostile bid.

Isle of Man Small Flag Isle of Man

This will depend upon the nature of the transaction but legal practice in the Isle of Man follows the legal practice in England and Wales.

Japan Small Flag Japan

Due diligence is undertaken from the perspective of business, legal, accounting and tax, etc. In the case of legal due diligence, a potential acquirer customarily aims to obtain information regarding, for example, whether or not (i) the target company has the necessary assets, intellectual property rights, licenses and approvals in order to conduct its current or anticipated business, (ii) the M&A transaction might be grounds for breach of contract, termination or acceleration, (iii) there are any contingent liabilities, (iv) there will be any business restrictions or disadvantages after the completion of the M&A transaction, and (v) there are any material violations of law.

It should be noted that long-form due diligence questionnaires in the style used in the US and UK are not common for Japanese domestic M&A; a foreign company seeking to acquire a Japanese private company should therefore take advice before submitting such a request to the seller.

Norway Small Flag Norway

The level of detail of a due diligence in the Norwegian market is normally transaction specific and, thus, may vary substantially depending on a number of factors. Such factors include (i) whether the deal involves a listed or non-listed company, (ii) the nature of the company's business, (iii) the bidder's familiarity with the target company, (iv) the relative bargaining strengths of the parties involved in the transactions, (v) the nature and size of the consideration, (vi) the nature and size of the consideration and (viii) the involvement of the competing bidders in the process and (vii) whether it is an acquisition of shares, business or assets.

Due to the above mentioned factors, it is difficult to provide a general statement applicable for all transactions. We have however seen that since the 2008 financial downturn, buyers in general have had an increased focus on a target's operational, financial, tax and legal position. A bidder's desire to conduct a wide range due diligence investigation will normally include a comprehensive financial due diligence, focusing on margin development, assessment of the business' underlying profitability, net debt, working capital, cash flow and investment requirements, budget assumptions, transactions with related parties, accounting principles and quality of financial information. Also the tax due diligence will typically be fairly detailed looking at pending tax issues with the authorities, dividends and group contributions, reorganisations, foreign exchange gains/losses, deferred tax positions, R&D costs, transfer pricing and other related parties issues, transaction bonuses, earn-outs, VAT etc. The legal due diligence may, however, have a more limited scope, but will typically focus on corporate governance, change of control issues, material contracts, real estate issues and potential environmental liability, separation issues and related parties, licenses, permits, need for public approval, employees and pension law issues, IPR, disputes, competition law issues etc.

A private equity buyer will normally also retain specialist consultants to carry out a detailed commercial due diligence which frequently includes a review of the market (trends threatening the target’s position etc.).

Depending on the transaction’s scale and the nature of the target business, it has also become fairly common to request specialist environmental due diligence reviews, specialist insurance due diligences reviews, specialist IT due diligences etc. Lately, so-called environment, social and governance due diligences have also become increasingly popular among private equity buyers. Often such buyers may further desire to carry out a more specific anti-bribery /anti-corruption due diligence.

Russia Small Flag Russia

Due diligence normally covers 4 aspects of a company’s business:

1. Operational and business matters;
2. Tax matters;
3. Financial and accounting affairs;
4. Legal issues.

Sometimes also environmental due diligence is being accomplished.

The level of detail will depend on numerous facts, such as background and experience of the target company, scale of business, general current situation in the market, and may be either quick diagnostics or may include deeper analysis.

The usual scope of legal due diligence includes corporate matters, real estate and title to other substantial assets, loan and financial matters, material contracts, including contracts with key customers and suppliers, disputes and litigations, regulatory affairs and investigations and employment matters.

Saudi Arabia Small Flag Saudi Arabia

As a result of the limited information available in respect of private companies in the Kingdom, acquisitions of private entities will often involve detailed due diligence by the acquirer.

For public takeovers where information about the target is more readily available, a reasonable view of target performance can be obtained without too much additional diligence, though this will depend on: (i) the nature of the business; (ii) the value of the transaction; and (iii) the co-operation of the target. Typically purchasers will ask for as much information as they can, and indeed offerors are under an obligation under the M&A Regulations only to announce an offer after the most careful and responsible consideration in accordance with the M&A Regulations. Specific provision is made in the M&A Regulations to allow a target to furnish a bona fide potential offeror with information that may not be available to all shareholders. However, once the existence of the offeror or potential offeror is announced, all information provided by a target to one offeror or potential offeror must, on request, be given equally and promptly to another offeror or genuine potential offeror.

Thailand Small Flag Thailand

Unlisted target company

Normally, extensive due diligence is undertaken, both legal and accounting/financial, but in the case of small family-owned targets there may be practical difficulties in obtaining all the information required (though all the more reason for trying to obtain it).

Listed target company

In the case of an acquisition of a publicly listed company, it will depend on the transaction (on an auction due diligence will probably not be possible) and the level of control the selling shareholder has in practice over the company. Very large acquisitions have been completed with reliance only on publicly-available information.

Austria Small Flag Austria

In Austria due diligence procedures in most cases are conducted in a detailed manner. However, some companies prefer a two-step approach, meaning that in a first step a high-level due diligence analysis is conducted in order to identify red flags or deal breakers, and depending on the results of such first step analysis then conduct a more comprehensive and detailed due diligence analysis regarding the target.

The specific scope and level of detail of a due diligence procedure further depends on the size of the transaction and the business sector and also differs between private acquisitions and public takeovers. Due diligence analysis for private acquisitions are usually comprehensive (especially since financing banks usually request a detailed due diligence), while due diligence analysis prior to a public takeover are usually comparably limited.

One due diligence topic that is particularly important in Austrian transactions is the strict prohibition of the return of equity to shareholders (Verbot der Einlagenrückgewähr). Under this prohibition, affiliate transactions, including these of shareholders, are subject to being null and void if the transactions are not on an arm’s length basis. This strict prohibition can also impact the protections a purchaser or seller needs to seek contractually.

Malta Small Flag Malta

The level of detail undertaken in a due diligence exercise varies on a case by case basis. As an absolute minimum, a prospective acquirer generally seeks to obtain insight through publicly available information as listed above. The setting up of data rooms hosting legal, commercial and financial data on a target company is a fairly common practice.

United States Small Flag United States

Compared to other jurisdictions, buyers of public companies in the U.S. usually conduct due diligence to a relatively high level of detail. The scope of diligence in private deals is typically even greater since the amount of publicly available information concerning a target company will often be extremely limited. By contrast, the scope of diligence in hostile deals is usually quite restricted since potential acquirers must rely solely on information that is publicly available.

Vietnam Small Flag Vietnam

Where the target company is public, the normal (but not universal) position is for vendors to be expected to rely upon the information publicly disclosed by the target company.

Where the target company is private, the conduct of legal due diligence investigations, to a degree of detail which is similar to the norm in more developed jurisdictions, is now commonplace.

Domestically-owned Vietnamese companies normally insist upon physical data room arrangements and are highly sensitive to confidentiality concerns (to a degree which is materially higher than the norm in more developed jurisdictions), and normally do not allow any copies of documents to be taken.

Mauritius Small Flag Mauritius

A potential offeror would usually obtain as much information from public sources as possible before approaching the target company with a list of financial, legal, regulatory and operational due diligence questions and requests.

Jersey Small Flag Jersey

In the case of a hostile bid, this would usually be limited to information from public sources. For a recommended or supported bid, public information may be supplemented by the target providing an electronic data room and/or responses to a list of financial, legal, regulatory and operational due diligence questions and requests.

The Takeover Code, if it applies, may require a target to provide equivalent information to competing bidders and/or govern the questions that can be raised by a bidder.

Romania Small Flag Romania

Depending on the activity of the target company, a due diligence usually covers aspects concerning:

  • legal matters;
  • operational and business matters;
  • tax matters;
  • financial and accounting affairs.

The level of detail will depend on numerous facts, such as background and experience of the target company, scale of business, general current situation in the market, and may be either quick diagnostics or may include deeper analysis.

The usual scope of legal due diligence includes corporate matters, real estate and title to other substantial assets, loan and financial matters, material contracts, including contracts with key customers and suppliers, disputes and litigations, regulatory affairs and investigations, employment matters and intellectual property.

New Zealand Small Flag New Zealand

The level of due diligence (and by whom) will often depend on the type of transaction and the size of the target company.

Legal vendor due diligence is rare on a deal that has been negotiated bilaterally from early on in the process, but is more common in a competitive bid process (on complex and/or high value transactions).

The level of due diligence for takeovers depends on the co-operation of the target company.

Detailed/full due diligence is usually undertaken for schemes of arrangement.

United Kingdom Small Flag United Kingdom

In a public M&A context, the level of due diligence undertaken is typically influenced by the nature of the approach which is being made to the target board.

On a friendly, recommended deal, where the target board are supportive of the merger, in addition to publically available information, the target board may be willing to provide the bidder with access to additional non-public information and/or with access to management. The level of information provided will still typically be less granular than one might expect to see on a private M&A transaction, due to the amount of relevant information relating to the target which will already be available in the public domain. Well advised target boards will typically also be circumspect in the information that they make available, due to their obligations under the Code to make equivalent information available to any competing bidder which may emerge during the process.
In a hostile situation, the bidder will typically have to make do with the information available in the public domain (as noted above) and will not have any expectation of the target board "opening its books" to them.

In the private M&A context, as noted above, it is common for a more detailed due diligence process to be undertaken. The level of detail involved will depend on the information the target is willing to make available, the bidder's attitude to DD (a strategic trade buyer may wish to conduct operational due diligence of a more granular nature than a financial buyer might deem appropriate) and whether there is an existing vendor due diligence package available.

Spain Small Flag Spain

During the last years, the common practice has been to reduce the scope of the due diligence and focus the study basically on checking whether a deal breaker comes up and key findings.

It depends on the target and the sector in which it operates, but in general, traditionally some aspects are analysed in most of the due diligence processes from the legal point of view, such as, among others, valid title of the owner to the shares, any existing burdens or encumbrances on them, limitation to the transfer of shares, valid deposit of the financial statements, legal status of the Company´s real estate, permits and licenses, IP, litigations and relevant clauses on agreements in view of the transaction (liabilities, change of control clauses, termination clauses, causes of resolution, etc.).

Over the last months, in accordance with the Spanish regulatory framework, the market has experienced a major concern on compliance and regulatory matters. As a consequence of the above, corporate governance matters, for example could also be included and a specific compliance due diligence may be carried out (including, for example, data protection issues, criminal liability on companies, antitrust, insurance, money laundering, etc).

In this regard, in Deloitte Legal Spain we have been able to adapt to these continuous changes related to due diligence processes and their scopes, focusing our efforts in the trend of the market and being capable to offer ad-hoc scopes and also special and specific compliance and regulatory advisory services.

Updated: November 10, 2016