Due diligence and disclosureScope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
Typically, the scope of legal due diligence covers the following items but may vary depending on factors such as the industry in which the target company operates, the size of the acquisition, the buyer’s budget restriction, as well as time constraints:
- corporate information;
- licences, permits and regulatory approvals;
- material contracts;
- banking and finance;
- assets including real properties owned, held on lease or occupied by the target company;
- labour and employment;
- intellectual property;
- environmental issues; and
In Malaysia, it is not common for a seller to prepare and provide a vendor due diligence report to be relied on by the prospective buyers. Instead, prospective buyers will normally be given the right to conduct their own due diligence on the target company. However, in the case of an acquisition through an auction process where multiple bidders are involved, the seller may provide an information memorandum (with appropriate disclaimers) to the potential bidders. In such instance, parties are generally free to negotiate and determine the degree and limitation of reliance on the information memorandum. In the event that the information memorandum is not sufficiently comprehensive or where more information is required, the bidder may engage its own adviser to advise on the matter or to make further enquiries.Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
A seller may be liable for pre-contractual or misleading statements (such as negligent misstatement) under the law of tort. Under the Malaysian Sale of Goods Act, 1957 (SOGA), there are implied conditions and warranties as to title and quality or fitness in respect of goods, which includes movable property and shares and a seller needs to be aware of this.
The implied conditions and warranties under the SOGA may be diluted in writing under the sale and purchase agreement. In negotiating the sale and purchase agreement, the parties are free to set out or limit the representations and warranties to be provided by the seller. Further, the representations and warranties made by the seller may also be qualified by disclosures made by the seller to the buyer in writing. The parties would usually limit the extent of the seller’s liability to claims for breach of contract and exclude liability for pre-contractual matters such as statements or representations made prior to the signing of the agreement.
It is customary for the buyer to confirm that it has not relied on any representations outside of the contract and it is usually expressed as such in boilerplate clauses expressing that the written agreement is the only and entire agreement between the parties. This has the effect of superseding or supplanting all previous negotiation, discussion or agreements with respect to the said subject matter.Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
A buyer would typically carry out searches on publicly available information from the following government agencies :
- the Companies Commission of Malaysia: to obtain corporate information, details of directors and shareholders, particulars of share capital, company charges, summary of financial information as disclosed in the annual return, certificates of incorporation and registration, copies of constitution and memorandum and articles of association;
- the Malaysian Department of Insolvency: to obtain information on the insolvency status of the target company and individuals;
- the Land Office: to obtain information on the particulars of the land, ownership, dimensions and area, status of the land (i.e., freehold or leasehold) and its encumbrances; and
- the Intellectual Property Corporation of Malaysia: to obtain information on the filing or application date, applicant name and address, legal status, grant or registered date, certification issuance date, expiry date, class and specification of goods and services of the relevant trademark, patent, industrial design or geographical indication.
In Malaysia, there is no public search function available for members of the public to conduct litigation searches on a particular company.Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
Generally, parties will negotiate and set out in the definitive transaction documents the representations and warranties given by the seller, which are usually qualified by a disclosure letter entered into between the parties. Such a disclosure letter will set out matters that have been disclosed by the seller to the buyer during the due diligence exercise, and parties are generally free to negotiate the extent and scope of the disclosure letter. The buyer will generally be restricted from bringing a claim against the seller in relation to matters that have been sufficiently disclosed in a disclosure letter as the buyer is deemed to have acquired actual knowledge for matters disclosed therein.