The first of a two part article looks at the importance of considering regulatory issues when carrying out due diligence. This part looks at key health and safety issues and the potential implications. The second part, which will appear in the next newsletter, will look at environmental issues.

What is Due Diligence?

Due diligence is the process by which a buyer or investor gathers and analyses information on a target company, or asset.  Although a seller may provide some information, it is up to the buyer to ask the right questions, to carry out the right enquiries and to commission the right specialist reports to find out everything it wants or needs to know about a business before making a commitment to buy. 

Due diligence tends to fall into two categories: first, there are the things which go to the heart of a valuation and will influence the decision whether or not to proceed with the purchase; secondly, there are things which are not fundamental to the decision but which the buyer needs to be aware of in order to make sure a plan is put in place to fix any issues after the sale completes. 

It is important for the buyer to be aware of any issues early on so that it can consider whether:

  • the price is fair;
  • any specific warranties and indemnities are required in the sale agreement;
  • insurance might be appropriate to cover any specific issues revealed;
  • the target is a good fit with the buyer;
  • there are any issues that would need to be dealt with after completion.

Regulatory concerns

Awareness and management of regulatory concerns is essential for the smooth running of all businesses. However, with the focus in corporate transactions primarily on the financial and employment aspects there may be a temptation to view regulatory issues as less important. However, failure to carefully consider regulatory issues such as health & safety and environment could lead to a buyer purchasing a business which is unable to operate or about to face a substantial fine for non-compliance. Investment in expert due diligence is therefore crucial both to save money and identify reputational issues.

The Health and Safety framework

The Health and Safety at Work etc. Act 1974 (HSWA) is the primary legislation covering occupational health and safety in Great Britain. It is enforced by the Health and Safety Executive (HSE) or by Local Authorities, depending on the type of business involved. Generally, Local Authorities cover retail and leisure businesses and HSE manufacturing and other industries. The HSWA has many associated Regulations covering different industries and specific areas of risk.

The HSWA places a duty on employers to manage risks in the workplace, which as well as employees, covers visiting contractors and members of the public.  Occupiers of premises also have a duty to ensure these are safe, as far as is reasonably practicable.

This means that a target business should have documentation which sets out its health and safety policy (a written policy is required for any business with 5 or more employees), risk assessments which identify hazards and suitable control measures, and policies and procedures in relation to specific areas of work. Other documents which should be provided include accident records, maintenance and testing records and health and safety reviews/audits.

Breach of health and safety legislation is a criminal offence. Most health and safety offences are "either way" offences which mean that they can be tried either in the Magistrates' Court or Crown Court. The maximum fine in the Magistrates Court is £20,000 with unlimited fines in the Crown Court. Levels of fines vary enormously, depending on the facts of the case, the existence of any aggravating or mitigating factors and the resources of the Defendant.

Documentation – what to look out for

While there may appear to be an impressive array of health and safety documents, it is vital to check that the documentation is up-to-date and that there is evidence of regular review. If issues have been identified – either in audits or reviews, or following an accident/incident, then clarification should be sought of whether an action plan has been put in place and if there are any follow-ups outstanding.

This is crucial both to establish the potential cost of remedial measures, which, in the case of replacement machinery, electric systems or asbestos removal, for example, may be significant, but also to identify whether there is any evidence of non-compliance with health and safety requirements. 

Accidents and incidents

It is important to be aware that a weighty accident book is not necessarily a bad sign! Often it indicates that employees are encouraged to record all incidents involving employees, contractors and members of the public. It may include details of "near misses" but if not clarification should be sought as to whether these are recorded and, if so, how. Near misses are important because a number of similar incidents may indicate an issue with health and safety which, although it has not yet resulted in an accident, needs to be addressed.

Confirmation should be sought as to whether there are any potential or known civil claims from employees, contractors or members of the public and that these have been notified to insurers.

Regulatory investigations

In addition to regular inspections, an accident or incident may lead to investigation and potential enforcement action by the HSE or Local Authority. This may include an informal warning, improvement or prohibition notices, written caution or prosecution, and details of any such action against the target business should be requested. Unlike civil claims, any fines incurred would not be covered by insurance.

Key concerns

This will depend on the type of business, but in recent years, there have been particularly high-profile cases involving fire safety and asbestos. In 2009, retailer New Look was fined £400,000 for fire safety breaches at its Oxford Street store and in 2011 Marks & Spencer was fined £1million for failings in relation to asbestos at its Reading and Bournemouth stores.

Asbestos is most likely to be found in properties which were built or refurbished prior to 2000. Duties in relation to the management of asbestos are set out in the Control of Asbestos Regulations 2012. Dutyholders (those in control of premises) must take reasonable steps to find out if there is asbestos present and, if asbestos is present, remove or manage it as necessary. Where an asbestos management plan is provided which identifies that asbestos is being managed in situ, it is important to check that its condition has been inspected on a regular basis and that the plan has been updated accordingly.[4] and require .

Fire safety is covered by the Regulatory Reform (Fire Safety) Order 2005 in England and Wales and in Scotland by Part 3 of the Fire (Scotland) Act 2005, supported by the Fire Safety (Scotland) Regulations 2006. In the majority of premises, local fire and rescue authorities are responsible for enforcement. It is a legal requirement to carry out and keep up to date a fire safety risk assessment and put in appropriate fire safety measures.

Key points – health and safety due diligence

  • Breach of health and safety legislation is a criminal offence with potential fines of up to £20,000 in the Magistrates' Court and unlimited fines in the Crown Court (levels are similar under the Scottish system).  
  • Health and safety documents – check when these were last reviewed; this should be evident from the documents themselves but, if not, ask for clarification, and check that any action points have been followed up.  
  • Accidents/incidents – review accident book, ask about near misses, and confirm whether there are any civil claims or regulatory investigations in progress.  
  • Ask for records of visits and correspondence from enforcement officers and confirmation of any previous enforcement action taken.  
  • Fire safety – check the fire safety risk assessment (a legal requirement) is up-to-date and control measures are in place.  
  • Asbestos – particularly relevant in older buildings. Ask what measures have been taken to establish if asbestos is present. If asbestos has been identified ask to see removal certificates and the on-going management plan.