Due diligence requirements
What due diligence is necessary for buyers?
Due diligence ensures that the purchaser is aware of all components (positive and negative) that exist within the target business. Due diligence is required of all aspects, including legal and financial aspects, and prospective assets and future business plans must be reviewed. Legal due diligence, including in regard to technology, intellectual property, physical plant equipment and real estate, is conducted by the purchaser in order to review outstanding contracts, corporate documents, financial statements and financial matters, public records and property, and to ensure both the operations of the target company and the impact that the acquisition may have.
The degree of due diligence required depends on:
- the size and complexity of the transaction;
- the nature of the target’s business and its regulatory environment;
- the significance of the transaction for the purchaser;
- the degree of indemnification available from the vendor;
- the purchaser’s knowledge and expertise; and
- the resources and time available.
What information is available to buyers?
If a public company is the target, it must comply with ongoing disclosure requirements and reporting obligations under the Securities Act. All filings and documents relating to any public company can be found at www.sedar.com.
There are four types of disclosure requirement:
- Regular reporting requirements – these include quarterly and annual financials. The documents must be disclosed at predetermined intervals and include audited financial statements and information circulars.
- Timely requirements – these reveal irregular or unpredictable changes in the affairs of the company, including any material change to the company and press releases.
- Early warning requirements – early warning disclosure prevents a purchaser from slowly acquiring enough shares in a target company and taking it over without warning. The company must disclose ownership levels of 10%, as well as any additional 2% beyond this. A separate set of rules applies when there is a formal takeover bid in place; for example, the company must disclose at 5% instead of 10% and issue a press release.
- Insider reporting requirements – ‘insiders’ include directors, senior officers and individuals with beneficial ownership, control or direction over 10% of the voting rights. Insiders must disclose any change in ownership and file reports within the prescribed period.
What information can and cannot be disclosed when dealing with a public company?
Unlike private companies, public companies cannot disclose a register of all their shareholders.
How is stakebuilding regulated?
Disclosure must be made when a person acquires:
- 10% or more of a reporting issuer’s voting or equity securities, where the securities are not subject to an outstanding bid; or
- 5% or more of a reporting issuer’s voting or equity securities, where the securities are subject to an outstanding bid.
Bidders must promptly issue and file a press release, as well as file an early warning report on the system for electronic document analysis and retrieval within two business days of acquisition.
A bidder must issue a further press release and publicly file an additional early warning report when:
- it acquires beneficial ownership of, or the power to exercise control or direction over, an additional 2% of outstanding shares; or
- there is a change in any material fact contained in a previously filed early warning report.
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