13.3 Legal Requirements and Legal Constraints 43313.3.2 Vendor Due Diligence, Vendor’s Perspective
For legal reasons, it is in the interests of the vendor to perform its own due dili-
gence inspection. Vendor due diligence is a central way to mitigate three impor-
tant risks: the risk of the vendor’s own breach of contract; the risk that the vendor
is deemed to know something (section 16.2); and the risk of non-compliance with
mandatory provisions of law.
In an asset deal, it is relatively easy to assume that the vendor has actual or con-
structive knowledge of things closely related to the target. In a share deal, the
same can be said of the controlling shareholder.
Actual or constructive knowledge by the vendor can increase the obligations of
the vendor because of a wide range of rules on issues such as: fraud; pre-
contractual duties of good faith and similar pre-contractual duties; disclosure; the
interpretation of contractual obligations; and liability for damage caused by negli-
gence.
The vendor can therefore mitigate the risk of breach of contract by verifying in-
formation that it has received from target management before passing it on to the
prospective acquirer.^7
Vendor due diligence also helps the vendor to know what to say and what not
to say. Disclosures can be constrained by mandatory provisions in many areas of
law.^8 For example, all listed firms are subject to an extensive information regula-
tion regime (see Chapter 19).
Under English law, the vendor will have three particular legal reasons to avoid misstate-
ments and withholding of information: section 397 of the Financial Services and Markets
Act 2000; section 2(1) of the Misrepresentation Act 1967; and section 19 of the Theft Act
1968.^9
13.3.3 Buyer Due Diligence, Vendor’s Perspective
For legal reasons, it is in the interests of the vendor to let the acquirer perform a
due diligence inspection. From the perspective of the vendor, buyer due diligence
is a way to reduce the responsibility of the vendor for the actual specifications of
the target. It is a general rule of contract law that where a contract party had actual
or constructive notice of certain circumstances at the time of contracting, that con-
tract party cannot invoke their existence as breach of contract.
CISG Article 35(3) provides that the seller is not liable for any lack of conformity of the
goods if at the time of the conclusion of the contract the buyer knew or could not have been
unaware of the lack of conformity. In addition, CISG Article 38(1) requires the buyer to ex-
(^7) Vandrill R, op cit, p 293.
(^8) For English law, see Vandrill R, op cit, p 293.
(^9) See Vandrill R, op cit, p 293.