430 13 Due Diligence and Disclosures
agement of information; the structuring of the negotiation process; as well as legal
requirements and legal constraints.
Management of information. Due diligence is a means to manage information
(generally, see Volume I). Both the vendor and the acquirer must manage incom-
ing information and outgoing information.
The acquirer needs to obtain useful information about return and risk for its in-
vestment. As the target and the vendor can be expected to know more about the
target than the acquirer does, the acquirer will also need to mitigate risks caused
be information asymmetries. If the acquirer knows little about the target, it cannot
be expected to pay much.
The target needs to protect its confidential information in case the negotiations
fail. However, it may also need to ensure that a preferred acquisition will material-
ise. For this purpose, the target needs to ensure that the acquirer obtains useful in-
formation. The more the acquirer knows about the target, the more likely it is to
pay a price that reflects the true value of the target.
For the same reasons, the vendor will need to ensure that the acquirer obtains
useful information. The vendor also has an interest in protecting its own and the
target’s confidential information in case the negotiations fail.
On the other hand, where the vendor and the target are not the same, they may
have conflicting interests and different information-related incentives even where
the vendor owns all shares in the target. The target has typically more powerful
incentives to protect its confidential information. Members of the target’s board
and its management owe wide-ranging duties to the company and wide-ranging
duties to comply with laws that govern the company’s business. It is the duty of
the target’s board and management to manage outgoing information and keep the
target company’s confidential information confidential. A shareholder typically
both owes fewer duties and benefits from the separate legal personality of the tar-
get company.
As a rule, if the target and the vendor are not the same, the vendor will there-
fore prefer to disclose more information about the target, and the target’s board
and management have stronger legal incentives to keep the target’s confidential
information confidential.
Because of legal rules on the liability of a party for information disclosed by it
and legal rules on the effects of disclosed information on the contents of contrac-
tual obligations (see section 16.2 and Volume II), both the target’s representatives
and the vendor need useful information about the target in order to know what to
disclose and to assess the quality of their own disclosures.
The structuring of the negotiation process. The structuring of the negotiation
process plays a role. All parties (acquirer, vendor, target, lender) tend to carry out
due diligence inspections in a privately-negotiated asset deal. In contrast, where a
company issues shares to the public and its shares are subscribed for by retail in-
vestors, only the issuer and its advisers as well as the parties responsible for the
prospectus can carry out due diligence inspections (the investors having neither
legal rights nor economic resources to do so).
Generally, the structure and contents of due diligence inspections (and disclo-
sure of information in general) on one hand and the process of making the contract