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?
Due diligence provides potential buyers with the opportunity to evaluate the legal, financial, tax and commercial position of a company, business or assets. Legal due diligence will typically confirm title to the company or business, the legal structure, terms of financial obligations, ownership and use of information technology, intellectual and real property, physical assets, employee arrangements, litigation and compliance with law.
Vendor due diligence reports are a common feature of controlled sales processes in the UK, enabling a seller to accelerate the sale process, minimise disruption to the target business and access to management, and explain any complexities associated with the transaction. It is customary for a successful buyer, and its lenders, to be able to rely on certain of such vendor due diligence reports, although buyers will often also complete confirmatory due diligence to complete their evaluation of a transaction.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 can be liable for pre-contractual misrepresentations although, except with respect to fraudulent misrepresentations, sale and purchase agreements usually limit a seller’s liability to claims for breach of contract and exclude liability for pre-contractual and misleading statements.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?
English companies are required to make extensive filings with the Registrar of Companies that are made publicly available online, including:
- the company’s articles of association;
- audited financial statements;
- details of the board of directors and people with significant control over the company;
- special shareholder resolutions (requiring approval by at least 75 per cent of participating shareholders);
- details of changes to the company’s share capital;
- mortgages over the company’s assets; and
- an annual confirmation statement confirming that all required information has been delivered to the Registrar of Companies.
Details of the ownership of real property, mortgages and charges and other attributes of real property are available at Her Majesty’s Land Register and through local authorities responsible for the area in which the real property is located. Details of registered intellectual property, such as patents and trademarks, can be obtained from the UK Intellectual Property Office. Details of any authorisations held by a financial services business can be obtained from an online search of the UK Financial Conduct Authority’s register.
A buyer of a company will typically carry out a search of the information filed with the Registrar of Companies and confirm with the Companies Court that a winding up petition has not been lodged in respect of the company. Searches may also be performed in respect of those registered assets that are regarded as being material to a transaction. Nominal fees are generally payable to carry out such searches.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?
A buyer’s knowledge at the time of entering into an acquisition will preclude a claim for breach of implied title covenant (see question 3). Otherwise, if a buyer is not explicitly precluded by the sale and purchase agreement from claiming in respect of matters about which it has knowledge at the time of entering into the agreement, then a claim would not be expected to be automatically excluded.
However, it is arguable that if a buyer has actual knowledge of a matter at the time of entering into a sale and purchase agreement, a claim cannot be preserved through a specific contractual provision. Accordingly, a sale and purchase agreement would usually specify whether a buyer’s actual, constructive or imputed knowledge will qualify the seller’s warranties.