Part 2: What do I need to know about due diligence?

In part 1 we explained what the due diligence process is, why it is important and how it is conducted.

In part 2, we will look at the information that needs to be provided in due diligence.

If you are the vendor, you need to be mindful of certain things when providing information in due diligence. The general considerations for a vendor disclosing information has been set out below.

Materiality

It is common for vendors and purchasers to agree a materiality threshold in respect of the vendor’s disclosures so that the vendor can focus on providing only material information, rather than spending time on minor issues. This is something that needs to be discussed and agreed upon between the purchaser and vendor. For example, it can be agreed that only customer contracts with an aggregate value over $10,000 need to be provided, which means that any customer contracts under $10,000 need not be provided.

Commercially sensitive information

The vendor should ensure that it is comfortable disclosing all due diligence material that it intends to disclose, including ensuring that it does not disclose any information that it considers commercially sensitive or that was provided to it on a ‘commercial-in-confidence’ basis. For example, if the vendor is sensitive about disclosing customer names or pricing arrangements it may consider providing copies of the relevant documents with the sensitive information redacted.

If no confidentiality agreement has been entered into between the parties by this stage, a confidentiality agreement should be drafted and executed by the parties before the due diligence process commences. This is necessary to protect the vendor from the purchaser/s using confidential information disclosed in the due diligence process to compete.

Privacy

Similarly, the vendor should also consider whether or not it is breaching privacy laws by disclosing any individuals’ personal information to the purchaser. If so, this information may need to be redacted.

Legal Professional Privilege

The vendor needs to be careful that it does not inadvertently ‘waive’ any legal professional privilege applying to any material by disclosing it to the purchaser, or referring to that material in a response to the purchaser.

For example, correspondence between the vendor and its lawyers (internal or external) may be subject to legal professional privilege, as well as any lawyer correspondence regarding potential or actual litigation. Legally privileged material should generally not be provided in the due diligence process.

Third Party Consent / Notification

The vendor may wish to ensure that it will not be in breach of an agreement, or of any law, by disclosing a particular document or certain information to the purchaser without obtaining the consent of a particular third party or notifying that third party of the disclosure. Your lawyers can assist with identifying any such restrictions.

Conclusion

The due diligence process is a very important process in any sale of business or M&A transaction. Whether you are a purchaser or a vendor, we strongly recommend that you seek assistance from experienced commercial lawyers. Your commercial lawyer can assist throughout the entire transaction, including the due diligence process, and provide you with valuable guidance.

If you are a purchaser looking to pay a significant amount of money to buy an existing business – next month we will be doing a 3 part series on the key areas to review in the due diligence process. Stay tuned!