13 Due Diligence and Disclosures
13.1 General Remarks
Business acquisitions belong to the largest transactions that the firm will make,
and they are individually-negotiated. This increases the importance of information
management, due diligence, and disclosures. At a general level, two large legal
topics are of particular interest in the context of due diligence and disclosures: le-
gal risks related to due diligence and disclosures as such (in particular, the qualifi-
cation of representations and warranties); and legal risks related to the target (in
particular, the target firm’s legal framework).
Qualification of representations and warranties. It is characteristic of European
contract laws that all information in whatever form and from whatever sources is
deemed to qualify all representations and warranties. In effect, legal background
rules under European contract laws protect the vendor.
A practical application of those rules is that the vendor may try to present a
massive amount of information at a late stage just before the conclusion of the
contract. The buyer should either analyse the disclosed information within a very
short period of time, or manage this problem by careful drafting.
The acquirer can use certain tools and practices to manage the problem of gen-
eral qualification of representations of warranties.
First, the acquirer should do everything that it should always do to manage the
attribution of incoming information and to mitigate the risk that firm is deemed to
know something (Volume I).
Second, the acquirer should ensure very early on in the negotiations that the
parties agree on: the express terms of the disclosure process; the disclosure chan-
nels; the form of disclosures; the requirement that disclosures may only qualify
representations and warranties to which they are specifically referenced; and
minimum requirements for disclosures that will qualify representations and war-
ranties.
Third, the acquirer should, simultaneously, agree on: a general obligation to
disclose information in good faith and in a timely manner; and a general standard
for disclosures.
In the US, statements that qualify representations and warranties tend to be more specific.
There is a reference to each warranty and representation that the statement seeks to qualify.
The target firm’s legal framework. The second legal topic relates to the target. Ba-
sically, the prospective acquirer would need information about the target firm’s
P. Mäntysaari, The Law of Corporate Finance: General Principles and EU Law,
DOI 10.1007/ 978-3-642-03058-1_13, © Springer-Verlag Berlin Heidelberg 2010