HOW TO CONDUCT LEGAL DUE DILIGENCE WHEN ACTING FOR A PURCHASE OF EITHER SHARES IN A BUSINESS OR THE BUSINESS

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31 Aug, 2020

By Trench & Associates

A. General Information

In any acquisition transaction the purchaser (the “Purchaser”) always wants to ensure that the seller (the “Seller”) and the company which is being bought (the Target) has good title to the assets it owns and to understand the full extent of any liabilities the Purchaser might acquire with the Target.

For any acquisition transaction the principle of caveat emptor (i.e. buyer beware), always applies. It is therefore paramount that the Purchaser carries out its own due diligence review (i.e. investigation) of the Target before entering into the share purchase agreement to acquire the Target.

B. Types of Due Diligence

Due diligence is an audit of the Target’s legal, business and financial affairs.

There are 3 types of due diligence:

a. Business due diligence looks at issues such as the business’ strengths and weaknesses, production and sales, etc.  Business due diligence helps to identify what is required of the Purchaser to take control of and reduce risk in the Target.

b. The scope of the legal due diligence investigation will depend on the purpose of the acquisition. Furthermore, it should be noted that the extent of the legal due diligence is guided by practical realities, such as time and expense. Usually, in any acquisition transactions time is of the essence.

c. Financial due diligence is not the equivalent of an audit and the financial due diligence should usually focus on those areas of the Target’s financial affairs that are material to the Purchaser’s decision so that the Purchaser can assess the financial risks and opportunities.

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