Due Diligence PDF

Corporate & Commercial Practice Mergers & Acquisitions Conducting Due Diligence Teoh Sze Min Partner Allen & Gledhill LLP Lecture Outline Part A Wha...

Corporate & Commercial Practice Mergers & Acquisitions Conducting Due Diligence Teoh Sze Min Partner Allen & Gledhill LLP Lecture Outline Part A What is Due Diligence? Purpose of a due diligence exercise Part B The usual due diligence process for a Singapore corporate transaction Part C Preparing the due diligence report Part D Dealing with negative findings Copyright © 2024, Singapore Institute of Legal Education What is Due Diligence? PART A What is Due Diligence? The gathering, organising, analysing and verifying of relevant / appropriate information relating to a particular commercial transaction (e.g. joint ventures, acquisitions, initial public offerings) Fact Finding Copyright © 2024, Singapore Institute of Legal Education What is Due Diligence? The gathering, organising, analysing and verifying of relevant / appropriate information relating to a particular commercial transaction (i.e. joint ventures, acquisitions, initial public offerings) Stems from principles of freedom of contract and caveat emptor Copyright © 2024, Singapore Institute of Legal Education What is Due Diligence? Due diligence varies depending on: the nature of the transaction the parties involved the quality and quantity of data supplied Copyright © 2024, Singapore Institute of Legal Education Types of Due Diligence Legal - investigates the legal affairs of the target business or the target company Business / operational - examines broader issues such as the industry in which the business operates, competitors, the business’ strengths and weaknesses, research and development Copyright © 2024, Singapore Institute of Legal Education Types of Due Diligence Financial / tax - focuses on financial affairs that are material to Buyer’s investment decision Environmental - where business involves manufacturing sites, environmental due diligence seeks to identify any contamination or pollution on the sites or other environmental risks/issues Copyright © 2024, Singapore Institute of Legal Education Purpose of Legal Due Diligence Purpose of Legal Due Diligence: Acquisition Seller’s Perspective To “groom” the target business or the target company for sale To prepare an information memorandum To assist the process of disclosure against warranties in the sale agreement To ensure commercially sensitive or confidential documents are not released to potential Buyers or Bidders Copyright © 2024, Singapore Institute of Legal Education Purpose of Legal Due Diligence: Acquisition Buyer’s Perspective To check what it is buying To structure and negotiate transaction To ascertain the need for indemnity or warranty protection To ascertain if any ancillary documents need to be signed To plan integration steps after deal is completed To avoid post-deal disputes Copyright © 2024, Singapore Institute of Legal Education Due Diligence: Warranties What are warranties? Warranties do not act as a substitute for due diligence – the two are complementary Copyright © 2024, Singapore Institute of Legal Education Due Diligence: Warranties Warranties do not act as a substitute for due diligence – the two are complementary Extent of warranties & indemnities will not be certain until signing Warranties are often qualified Warranties are subject to disclosures Warranty claims are subject to limitations Warranty protection depends on the credit- worthiness of the warrantor Copyright © 2024, Singapore Institute of Legal Education Due Diligence: Warranties What are warranties? Warranties do not act as a substitute for due diligence – the two are complementary Indemnities address negative disclosures in due diligence Copyright © 2024, Singapore Institute of Legal Education Due Diligence: Warranties Buyer’s due diligence Seller Seller warrants shows that there is in discloses the that there is no fact a claim for $100m $100m claim litigation which is disputed by in a disclosure the target. letter. Buyer then says that it will not proceed with the deal unless (a) there is a specific Since the claim is indemnity given by the seller in relation to disclosed, there can the $100m claim, or (b) the deal is changed be no breach of the from a share deal to an asset deal, where litigation warranty. the litigation liability is left behind Copyright © 2024, Singapore Institute of Legal Education  Usual Due Diligence Process: Singapore Mergers & Acquisitions PART B 8 Steps in Due Diligence Process 1. Protect data to be disclosed (Seller only) 2. Acquire data 3. Vet and review data acquired 4. Index, store and organise the data 5. Distribute the data 6. Collaborate with teams 7. Analyse the data 8. Report data Copyright © 2024, Singapore Institute of Legal Education  Preparing the Due Diligence Report PART C Preparing the Due Diligence Report: Considerations If target is IP company Profile of the target What industry does it engage in? Focus on IP or What are its particular patent rights concerns? Copyright © 2024, Singapore Institute of Legal Education Preparing the Due Diligence Report: Considerations If target is a Profile of the target manufacturing concern What industry does it engage in? Focus on land, What are its particular environmental concerns? issues, HR Copyright © 2024, Singapore Institute of Legal Education Preparing the Due Diligence Report: Considerations Profile of target Typical areas of risk and liability Deal structure: asset sale vs share sale Relative importance of jurisdictions covered by the target business Available time Budget Materiality Role of other advisors Copyright © 2024, Singapore Institute of Legal Education Preparing the Due Diligence Report Type of Document Issue / Comment Corporate Secretarial Validity and chain of title to shares Records (Constitutional Restrictions on transfer of shares (e.g. moratorium of documents, minutes, transfer and pre-emption rights) registers, etc.) Minority shareholder protections Encumbrances over shares / assets Restrictions against granting security Copyright © 2024, Singapore Institute of Legal Education Preparing the Due Diligence Report Type of Document Issue / Comment Material Contracts Share sale – change of control / shareholding Business sale – prohibition against assignment Term / termination of material contracts Onerous and unusual terms Warranties, indemnities and guarantees Governing law Copyright © 2024, Singapore Institute of Legal Education Preparing the Due Diligence Report Type of Document Issue / Comment Acquisitions / Deferred consideration due Disposals Unexpired warranty or indemnity obligations Restrictive covenants (e.g. non-compete, non-solicit) Joint Venture / Board representation Shareholders’ Minority shareholder protection Agreements Restrictions on transfer of shares Financing obligations Consequences of default / deadlock Finance Repayment provisions on change of control / shareholding Documents Penalties on prepayment Outstanding indemnities Unusual events of default and security Financial covenants Copyright © 2024, Singapore Institute of Legal Education Preparing the Due Diligence Report Type of Issue / Comment Document Land / Check title, planning, contractual relationships, contingent liabilities Buildings Conduct legal requisitions Third party consent required? Title documents, tenancy agreements etc stamped? Licenses / Compliance with: Permits Business operations Asset compliance Environmental issues Health safety issues Insurance Are essential assets covered by insurance and are there any gaps in coverage? Any outstanding insurance claims? History of claims made Copyright © 2024, Singapore Institute of Legal Education Preparing the Due Diligence Report Type of Issue / Comment document Employment Employment retention Benefits (retrenchment benefits etc.) Termination provisions Collective agreements Restrictive covenants (e.g. non–compete, non–solicit) Compliance with Employment Act Litigation Number (if any) of litigation claims pending and in progress Are litigation claims covered by insurance? Any litigation threatened? (conduct litigation, bankruptcy searches etc.) Accounts Useful for flagging anything that should be reviewed as part of due diligence exercise Copyright © 2024, Singapore Institute of Legal Education Preparing the Due Diligence Report Form of the report Long form: Relatively rare, describes business in detail and summarises each and every document Short form, “Exceptions Only”: Common, covers material issues only Any exclusions (such as financial, accounting, actuarial, environmental or taxation matters)? Assumptions? Copyright © 2024, Singapore Institute of Legal Education  Dealing with Negative Findings PART D Dealing with negative findings: Acquisitions Suggested Method Comment Adjust price Suitable where parties can quantify the actual and contingent cost of adverse finding Restructure transaction e.g. business sale rather than share sale Concessions in other areas Buyer may assume a risk / liability provided concessions in other areas are given by Seller Condition for closing Material adverse findings should be remedied by Seller before closing Performance related Useful where accuracy of financial payment information / projected performance is in doubt Copyright © 2024, Singapore Institute of Legal Education Dealing with negative findings: Acquisitions Suggested Method Comment Indemnities Specific indemnities to be sought for problem areas Reduce any limits applicable to warranty and indemnity claims Escrow for To manage the Seller’s credit risk warranty claims Defer part of purchase price and place it in escrow as security to meet Buyer’s warranty claims Post-closing Administrative or less material issues may be dealt with post- closing Walking away Suitable where adverse findings cannot be adequately addressed by any of the above methods Copyright © 2024, Singapore Institute of Legal Education Notice Copyright © 2024, Singapore Institute of Legal Education. All rights reserved. The Course materials are developed by the Singapore Institute of Legal Education, based on the content, syllabus, and guidance provided by the Chief and Principal Examiners and their teams. No direct or indirect reproduction, publication, communication to the public, adaptation or any other use (that is prohibited and/or proscribed by copyright laws) of the Course materials in whole or in part in any form or medium is allowed without the written permission of the Singapore Institute of Legal Education. Part B Candidates should refer to the Code of Conduct for more information, particularly, the sections on conduct and behaviour, and the use of SILE resources. Copyright © 2024, Singapore Institute of Legal Education