428 13 Due Diligence and Disclosures
legal framework in order to assess cash flow and legal and other risks properly.
However, this can be difficult.
Like the acquirer’s own legal framework, the target’s legal framework is both
vast and complicated. Furthermore, legal risks range from general legal risks to
contributory legal risks, and can be difficult both to identify and to assess.
This can be illustrated by insurance cover. Like any companies, the target should have a
risk management program. Even the most basic risk management programs tend to address
the question of insurance cover. It would be difficult to evaluate the target’s cover in a reli-
able way, because one would have to understand the target’s business, collect all relevant
policy documents from all jurisdictions, analyse the wordings in detail, decide the law ap-
plicable to each policy, and apply the insurance and general law of that place to the word-
ing. Often, the acquirer will only review the summary of insurance cover, compiled by the
vendors or by the target’s insurance broker. In practice, the acquirer will not review the ac-
tual policies themselves but hopes to rely on a warranty that the target has “adequate” in-
surance cover in place. Furthermore, if the acquirer actually tried to study the target’s in-
surance documents, the vendor’s warranties would be qualified by disclosure (see above).^1
13.2 Due Diligence in Practice
Each party should inspect the target. In practice, the form of inspections is more or
less standardised. These standardised inspections are called due diligence. Due
diligence has different objectives depending on: by whom it is performed (the
vendor, the target, the acquirer); when it is performed (before solicitating offers,
before signing, before closing, after closing); and its nature (legal, financial,
other).
Vendor due diligence. The vendor should perform a due diligence inspection
before entering into detailed talks with the potential acquirer. The purpose of ven-
dor due diligence is to prepare the target for sale and to speed up the process.^2
A vendor due diligence enables the vendor to: decide what to sell and what to
leave out; decide how to structure the transaction; decide on price or how price
should be determined; avoid giving information that is not accurate; avoid prom-
ises that it cannot keep; avoid breaches of contract; fix things that can be fixed (in
particular documentation and permits); take care of time-consuming things such as
environmental inspections in advance (and speed up negotiations); reduce buyer’s
uncertainty (and risk) and obtain a better price; and avoid “deal breakers” and the
risk that the buyer becomes disappointed during contract talks and walks away
(and uses information disclosed by the seller and the target for its own competing
business purposes).
(^1) See Napier C, Evenett H, Insurance in Cross-border Acquisitions: Investigation of Cover
and Assessment of Exposures, Int Ins L R 3(11) (1995) pp 383–388.
(^2) See Vandrill R, Legal Due Diligence in Private Equity Transactions, Int Comp Comm L
R 13(8) (2002) pp 292–293.