442 13 Due Diligence and Disclosures
consuming and expensive to enforce breach of warranty claims. Even if the buyer
succeeded in obtaining a favourable judgment, it would be unclear whether the
vendor had the financial means to reimburse the buyer for all damage that it has
sustained. In addition, most breach of warranty claims are subject to time limits^37
and financial thresholds.
The right of the buyer to ask for information. The buyer is not prevented from
asking the target for permission to perform a due diligence inspection.
The right of the buyer to receive information. Whether the buyer is entitled to
perform a due diligence inspection or entitled to receive information otherwise is
another matter. It is important to distinguish between information to be disclosed
by the vendor and information to be disclosed by the target.
First, the vendor may have a duty to disclose information to the buyer before
closing. The parties may agree on such a pre-contractual right when they reach a
preliminary understanding (letter of intent) or sign a contract document before
closing. The buyer is also protected by the fraud rule.
Second, the vendor may have a duty to disclose certain facts to the buyer before
closing according to a substantive rule or an information rule which is a substan-
tive rule in disguise. This can influence the interpretation of the contract. If the
vendor does not disclose such facts, the vendor risks breach of contract.
Third, the target can have a duty to disclose information to the public. This ap-
plies, in particular, to financial information (Volume I).
The duty of the buyer to ask for information. Generally, the buyer has no legal
duty to ask for information. However, failure to perform a due diligence informa-
tion search properly when given permission to do so can have an adverse effect on
the rights of the buyer to invoke breach of contract depending on the governing
law and the contract.^38 For example, the prospective acquirer might be regarded to
have waived its right to invoke things that it could have noticed had it performed
the due diligence inspection after being given an opportunity to do so. Further-
more, the buyer’s board members have information-related duties.
13.3.6 Buyer Due Diligence, Buyer’s Board
It would be contrary to board members’ duty of care to authorise an acquisition
without a sufficient information basis.^39 Due diligence assists the board in making
an informed judgment. It makes it easier to prepare disclosure documents and acts
as a liability mitigation device.^40
There are several legal constraints on the use of information obtained from the
target or the vendor.
(^37) See, for example, CISG Article 39(1).
(^38) See CISG Articles 36(1), 35(3), and 39(1). For German law, see nevertheless § 442(1)
BGB.
(^39) For German law, see the case LG Hannover, AG 1977 pp 198 and 200–201.
(^40) See Bainbridge SM, Mergers and Acquisitions. Foundation Press, New York (2003) pp
177–179.