To what level of detail is due diligence customarily undertaken?
Mergers & Acquisitions (2nd edition)
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.
Due diligence continues to be a challenge in Myanmar, reflecting the poor record keeping and compliance of Myanmar companies, lack of familiarity with due diligence and sensitivity to disclosing company information. Prospective acquirers are advised to engage early with potential target companies to explain the purpose and nature of due diligence procedures and build the relationships required to ensure an appropriate quality of disclosure.
A typical buyer will arrange for legal, accounting and tax due diligence exercises before deciding on an acquisition, depending on the acquirer’s risk profile. When financial and legal due diligence is undertaken, the acquirer may have access to the financial and legal books and records of the company, including tax books and records, corporate information not limited to corporate governance, copies of key client contracts (sometimes redacted), commercial contracts, financial contracts, assets and real estate property, pending or threatened litigation, environmental licences, intellectual property, insurance and internal auditors’ reports, et.al.
The scope of the research is usually limited at the first stage, whereby the potential acquirer receives information by reviewing published data related to the target company. In the following stage, a more detailed due diligence review may be allowed for those acquirers which have submitted an offer. Finally, the preferred acquirer may be granted the opportunity to perform an update due diligence before signing the transaction agreements.
Target’s due diligence reports are prepared in a number of deals. On the other hand, should little or no prior due diligence occur, then detailed protection clauses are negotiated and incorporated in the transaction documents, such as changes in the price or penalty clauses.
Generally, the scope of due diligence is rather limited in public takeovers compared to private acquisitions, and in the case of a hostile offer even limited to publicly available information. In the case of a friendly bid supported by the management, the due diligence may be more extensive, although the target board will have to decide carefully how much information it is appropriate to disclose, taking into account its fiduciary duties, the interest of the company and insider regulations.
In general, a party which receives confidential price-sensitive information about a target would be subject to insider trading restrictions unless that information was made public and, with a few exceptions, the bidder may be prevented from dealing in target shares or proceeding with the offer unless the relevant information is made public or ceases to be price sensitive prior to the acceptance period. It is generally accepted that, where a party intends to make a takeover bid (or enter into a merger) from the outset, and the due diligence merely confirms this intention, acquiring shares in the target in furtherance of the initial plan will not be prohibited, even after the receipt of due diligence information.
Generally, any bidder is advised to carry out as much due diligence as possible, as the possibilities to withdraw after announcement of the bid may be very limited. If the bidder is permitted to conduct due diligence, the bidder will usually be given only limited information during a limited period of time.
In private M&A transactions, highly confidential information is typically disclosed after the indicative bid or binding offer as confirmatory due diligence, or in a special data room to which only very few experts have access.
In private M&A deals, it is common to undertake a due diligence. The scope usually covers financial, tax and legal aspects of the target company.
In public M&A, the level of detail will typically depend on:
(i) the friendly (recommended) or hostile nature of the public offer, which will cause the board of directors of a target company to be more or less willing to share information respectively; and
(ii) legal restrictions that may limit information sharing, such as the corporate interest, the confidentiality obligation of directors, equal treatment requirements and restrictions in view of market abuse regulation.
7.1 In the context of public companies (whether listed or unlisted):
- the standard expectation of target companies and vendors is that purchasers should rely solely or primarily on the information available on the public record;
- on a case-by-case basis, some target companies and vendors will consider facilitating the conduct of due diligence, to an extent which is in most cases significantly limited; and
- in any event, target companies and vendors need to take care to avoid contravening Vietnam law prohibitions against insider trading, in connection with the disclosure and receipt of information which is not on the public record but which may be price-sensitive.
7.2 In the context of private companies, historically Vietnamese companies and vendors have been uncomfortable with the concept of due diligence and have been resistant to facilitating the conduct by prospective purchasers of detailed due diligence investigations. After more than two decades since Vietnam first opened its doors to foreign investment, however, the need for foreign investors to conduct detailed due diligence investigations is now widely appreciated in Vietnam, and target companies and vendors are increasingly willing to allow sufficiently transparent and detailed due diligence investigations to be conducted.
7.3 In many (but not all) cases nowadays, Vietnamese target companies and vendors are generally prepared to facilitate the conduct of due diligence investigations which approach the levels of transparency and detail to which investors from more developed jurisdictions are accustomed.
7.4 On the other hand, Vietnamese target companies and vendors:
- are in many cases strongly resistant to the use of electronic data rooms and/or the delivery to purchasers or their advisors of copies of documents (whether in hard copy or electronic format);
- in many cases will insist on the use of physical data rooms only, normally on-site at the target company’s premises, with no opportunity for the prospective purchaser or its advisors to take copies (whether in hard copy or electronic format);
- in many cases will be inexperienced with handling due diligence processes and will struggle to identify, locate, collate, and present in an orderly and comprehensive manner the information and documents having been requested for disclosure; and
- in many cases, will be reticent to incur costs in engaging legal, financial, accounting, and/or tax advisors to assist them in handling due diligence processes, instead seeking to rely on internal employee resources who lack the time and experience to manage an adequate and efficient due diligence process.
7.5 As a result of the factors outlined in Section 7.4 above, it is in many cases not possible, from a practical perspective, for foreign investors to conduct due diligence investigations to the degree of transparency and detail to which they are accustomed when conducting M&A transactions in more developed jurisdictions.
The scope of due diligence review in negotiated public transactions varies considerably from case to case. Typically, however, the scope is much more limited in a public deal, as the level of public disclosure is higher for listed companies than for private businesses, especially as regards the financial reporting (see question 6).
A potential acquirer of a public company would typically start conducting a desktop due diligence based on publicly available information. In a second stage, a bidder would ask the target company for non-public information on equity plans and outstanding equity instruments, change of control clauses in commercial and financing agreements, terms of employment of executive management, intellectual property, compliance with laws, material correspondence with SIX and other key regulators, litigation and other matters.
Due diligence normally covers four aspects of a company’s business:
- Operational and business matters;
- Tax matters;
- Financial and accounting affairs;
- Legal issues.
Sometimes also environmental due diligence is undertaken.
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 limited to 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.
The level of details is decided on a case by case basis. Time limitations (e.g. the previous three years) and materiality thresholds (e.g. exposures over EUR 100,000) usually apply.
Ordinarily a due diligence will be undertaken although it is not required by law. A due diligence will look at various matters including corporate & shareholder Information; government & regulatory matters; details of assets; financial position & statements; financial obligations & commitments, material contracts, real estate, insurance policies, taxation position & issues, employees, intellectual property & technology, litigation, arbitration & other disputes.