13.2 Due Diligence in Practice 431binding on the other are interrelated. This can be illustrated by the following three
situations. (1) Before concluding a binding agreement that automatically leads to
the acquisition of the target, the acquirer will require plenty of useful information.
(2) In contrast, before concluding an agreement that neither forces it to acquire the
target nor influences the terms of the acquisition agreement, the acquirer will re-
quire less useful information. (3) Therefore, if the parties have separated signing
and closing, the acquirer’s information needs before signing depend on many
things. (a) The acquirer needs useful information about the target in order to know
what particular issues it should address and what terms the parties should fix in the
agreement to be signed by the parties. The flexibility of contract terms at signing
will therefore play a role. (b) If the terms of the acquisition agreement are fixed at
signing, the acquirer will need more useful information before signing. (c) If the
parties at signing agree on flexible terms that will be fixed at closing, the acquirer
needs less useful information before signing but additional information before
closing.
In addition, due diligence and conditions precedent to closing should be interre-
lated. (a) Where the acquirer already has carried out a complete due diligence in-
spection before signing and the contract terms have been fixed at signing, the ac-
quirer is sufficiently protected although the acceptable outcome of a due diligence
inspection is not made a condition precedent to closing. It is sufficient to verify
that the representations and warranties of the vendor/target are true at the time of
closing and that other conditions precedent to closing are met. (b) Where the ac-
quirer either did not or was not given the opportunity to carry out a complete due
diligence inspection before closing, the acquirer is not sufficiently protected
unless the acceptable outcome of a due diligence inspection is made a condition
precedent to closing.
Due diligence, disclosures and warranties tend to be interrelated as well. The
relation between due diligence, disclosures and warranties have been described by
UK and US lawyers as follows, whereby the practice and mechanism for disclo-
sures in the UK are arguably more favourable to the seller compared with those
applied in the US:^6
“In the UK, disclosures against the warranties are typically contained in a separate Disclo-
sure Letter, rather than in the schedules to the agreement itself, as is sometimes the case in
the USA. The Disclosure Letter usually contains ‘general’ disclosures (for example, matters
that appear in public records), which quality all warranties, and “specific” disclosures,
which, although usually cross-references to specific warranties, are often treated as effec-
tive disclosures in relation to all warranties (whether or not specifically references to a par-
ticular warranty).
The Disclosure Letter invariably has annexed to it a large volume of documents (often
called ‘the Disclosure Bundle’), some (but not all) of which are include because they are
expressly referred to in the Disclosure Letter itself. The seller almost invariably seeks to
treat the entire contents of the documents contained in the Disclosure Bundle as disclosed
in relation to all the warranties. In some cases (particularly auction sales), the seller also
(^6) Phillips J, Runnicles J, Schwartz J, Navigating trans-atlantic deals: warranties, disclo-
sure and material adverse change, JFRC 15(4) (2007) pp 475–476.