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Due diligence requirements
What due diligence is necessary for buyers?
The due diligence process can generally be divided into three or four main steps. Normally, an acquisition begins with preliminary due diligence (initial due diligence) which will provide an overview of the target. Following a number of preliminary agreements, full-scale due diligence/confirmatory due diligence will be performed, the complexity of which is determined by the parties. This exercise commonly includes reviewing the commercial, financial and tax, legal (corporate, commercial, real estate and litigation), human resources and organisational, cultural, environmental and IP, IT and technical relations of the target. The purpose of the buyer’s due diligence is to minimise risks arising from the intended purchase. Further, a management presentation can be part of the due diligence process, during which the executive staff, managing directors and board is presented and a plan for future business development is introduced. The whole process is typically concluded with a due diligence report that can be all-encompassing or reduced to key findings.
What information is available to buyers?
During initial due diligence, the available information often comes from publicly accessible sources such as:
- the documents filed with commercial registers;
- published financial statements and stock exchange filings;
- analyst reports; and
- other generally available documents.
This is also the scope of the information to which the buyer will have access to if the target elects not to give out information – for example, in case of a hostile situation.
During confirmatory due diligence, the extent of the information reviewed depends on the individual agreement between the parties. Extensive due diligence usually involves the review of a large number of documents. A more cursory examination of the target concentrates only on the most relevant information. The buyer must always consider that extensive due diligence may be costly, but that less comprehensive due diligence increases the risk of undiscovered hazards.
Information will usually be made available in a data room (physical or electronic). After having reviewed the documents provided, the buyer will usually get the chance to ask questions in the form of a question and answer request list in regard to areas of concern or special interest.
What information can and cannot be disclosed when dealing with a public company?
If the target is a public company, the management is generally obliged by corporate law (Section 93(1)(1) of the Stock Corporation Act and Section 13(1) of the Securities Trading Law) not to disclose confidential information. However, it can be permitted and, in some cases, if the survival of the company is at stake, even be required in the course of pre-bid due diligence. The executive board has the discretionary power to decide whether and to what extent the buyer may perform due diligence and how much information will be released, based on the company’s best interests. The Federal Financial Supervisory Authority interprets this dichotomy to mean that a seller of a public company’s shares is generally permitted to provide non-public and price-sensitive information to a genuine bidder. The bidder and purchaser must keep this information confidential and may not unfairly benefit from the possession of the exclusive information.
The insider trading rules will be considered breached if insider information causes the bidder to substantially deviate from its original plans – for example, if the buyer purchases more shares than originally intended or reduces an existing investment in the target after performing due diligence. To minimise such risks, careful documentation of all steps from the adoption of the original acquisition plan to its implementation is advisable. Due to these concerns, the extent of due diligence in relation to public companies will often be limited. In addition, the target will generally be reluctant to provide commercially sensitive information, especially if the bidder is a competitor.
How is stakebuilding regulated?
It is common to seek undertakings from key target shareholders in order to sell their shares, which may be structured either in hard or soft (revocable) form. The existence of irrevocable undertakings must be disclosed in the offer document and in voting rights notifications.
Undertakings by key shareholders are often structured as:
- contractual obligations with regard to the bidder in order to tender their shares if a public offer is made;
- options granted to the bidder in order to acquire their shares outside the offer; or
- a sale of shares subject to the condition precedent that the bidder acquires a certain minimum number of shares under the offer.
The biggest difference between these commitments is whether the bidder is obliged to purchase the shares and, if so, at what time.
Agreements with key shareholders may not be structured in a way that violates the principle of equal treatment of all shareholders. The payment of a premium for a control block is thus excluded.
A prospective bidder may generally build a stake in the target before launching a bid, but must follow the particular rules of the Securities Trading Act. If certain thresholds are met or exceeded (or shareholdings fall below such thresholds), the acquirer must notify the target without undue delay and no later than four trading days after the respective purchase (or sale) of shares. The target in turn must publish this information.
Further, the share purchases made by the bidder or certain associated parties pre-bid may affect the terms of a subsequent offer. When making a takeover offer, a bidder must offer at least the highest price it paid for the target shares during the six months before publication of the offer document.