Legal Due Diligence

Nathaniel Mangunsong

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Areas Covered today
- What is due diligence?
- Common complaints
- How to do it

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What is due diligence?
- On an acquisition of shares or assets, it
enables the purchaser to make an informed
decision and identify particular areas of risk or
liability
- On a securities offering, it is used to ensure the
offer document does not omit any material facts
and is not misleading

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Some transaction types
Transaction Type of due diligence
1. Buying (or selling) a company or Assets and liabilities of target.
business
Legal audit on companies, verify
2. IPO contents of prospectus and issue a
legal opinion

3. Joint Venture Assets contributed by JV partner.

Creditworthiness of partner.

4. Financing Bank’s lawyers will do limited due

diligence of the borrower and issue a
legal opinion
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Why?
- To identify and assess
- obligations, liabilities and other costs
- factors affecting the value of assets and
business
- restrictions on future conduct
- potential obstacles to the transaction

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Why? (Cont’d)
- Benefits of due diligence:
- show-stoppers
- problem solving

- Good quality due diligence is often better than warranties and other
contractual remedies (as these are subject to extensive limitations
and not all losses may be recoverable)

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On acquisition of shares or business-
some common purposes
- Confirm licenses, permits and title to assets
- Confirm terms of material contracts
- Identify “structural” issues – e.g. CPs, closing
deliverables, etc.
- Quantify known liabilities and uncover unknown ones
- Identify contractual protection needed, especially
indemnities (but be sensible…)
- Identify post-closing matters – the conditions subsequent

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How to do it: Scope and limitations
– Meet with the client to:
- Understand transaction
- Discuss operations, risk, plans and concerns
- Agree scope of review (then document scope)
- Agree materiality guidelines
- Agree how we report and agree format of report and
timing
- Agree timing
- Identify areas to be reviewed by others (e.g.
accountants)
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How to do it: Research
– Do your research:
- Information memorandum
- Vendor due diligence
- Annual report and accounts (including notes)
- Website
- Company search and other public filings
- Management presentations

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How to do it: Data room
– Virtual or paper? Printable? Copies?
– Get questionnaire, index and data room rules as early as
possible
– Divide up index and try to spot what’s missing
– Team leader to review/scope – allocate responsibility
– Take contract summary sheets with you
– Ask for copies of important or complicated documents
– Establish process for asking questions/receiving
responses
– Update client regularly on issues, exposure and
recommendations

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How to do it: Internal communication
- Communicate clear instructions and timeframe
- Distribute relevant documentation after careful
consideration e.g. scope letter and draft SPA
- Team leader to prepare transaction briefing note
- Circulate template format and definitions for DD Report
- Regularly update on progress and timing
- Communicate with other advisers (e.g. accountants)

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How to do it: External communication
- Agree update process with client
- Discuss each issue with the client
- Send copies of the update or draft report to the
accountants and get them to send their report to
you

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How to do it: Reviewing documents
– Read contracts in full looking for:
- Details of how the business works
- Liabilities/exposure/indemnities
- Limits on liabilities
- Consents: assignment or change of control
- Guarantees
- Financing Commitments
- Expiry and termination
- Pricing and minimum supply/purchasing commitments
- Exclusivity
- Anything else unusual

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How to do it:
What to look for in contracts
Type of contract Issues
Sale of shares/business Outstanding exposure
Limitation of liability
Guarantees
Joint Venture Change of control/transfer
Financing commitments
Exit/termination

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How to do it:
What to look for in contracts (cont’d)
Commercial contracts Change of control
Guarantees
Indemnities
Minimum supply/purchase
Pricing terms
Termination
And always anything unusual
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 How to do it: The report
– Clear and concise
– We don’t need to summarize everything we read
– Clearly identify risk/issue exposure
– Recommendation or solution:
- Condition precedent
- Consent
- Indemnity/price adjustment/escrow
- Further information
- Seller to rectify problem
- Identify areas for follow up
- Include an executive summary
- Offer a PowerPoint presentation to the client

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Follow up on due diligence in the Sale
and Purchase Agreement (SPA)
– Condition Precedent (satisfied before closing)
– Condition Subsequent (satisfied after closing)
– Consequences of failure to satisfy conditions-break fee or payment
of costs?
– Warranties
– Contractual protection
– Remedy is the breach of contracts with amount and time
limitation
– Covering information not provided or unclear in the due diligence

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Follow up on due diligence in the SPA
(cont’d)
– Indemnities
– Covering specific risks, including tax, environmental,
litigation or issues found in the due diligence
– Specific cap and time limitation
– Remedy is for Rp per Rp of losses and kept in the escrow
account
– Stronger than warranties, no need for any court decision or
arbitration award (except there is a dispute)

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Conclusion
– Think about what you’re saying and why
– Put yourself in the “client’s shoes”
– Risk management – be careful how certain points are
phrased
– Due diligence is critical to the success of the transaction
– Go through Due Diligence DO’s and Don’ts and apply
these in practice

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Key Do's
- Select lead co-ordinator
- Critical preliminary task - agree scope of work with client
- form of report - by exception/full DD?
- style (template to be agreed)
- timing (interim/final reports)
- scoping the data room
- Understand client strategy/rationale for deal (including
post-acquisition planning)
- Every issue highlighted to be accompanied by a proposed
practical/commercial solution

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Key Do’s (cont’d)
- Highlight show-stoppers early
- Flag missing information
- Identify information in section under review which may
also need to be reviewed by another team member or
adviser
- Track/record who has reviewed each relevant
document

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Key Don’ts
- Don’t
- proceed without an agreed scope of work
with the client
- produce a data dump
- delay in highlighting show-stoppers

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Questions?

These are presentation slides only. The information within these slides does not constitute
definitive advice and should not be used as the basis for giving definitive advice without
checking the primary sources.

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