Due diligence and disclosure

Scope 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?

Legal due diligence in Australia will generally confirm title to the shares in a company or assets in a business, the legal structure, terms of financial obligations, terms of material contracts, ownership and use of information technology, intellectual and real property, employee arrangements, material litigation and compliance with the law.

Seller due diligence reports are generally a feature of larger sales or sales of highly regulated businesses. Seller due diligence reports are generally reported on a ‘red flag’ or ‘exceptions-only’ basis. It is customary for a buyer to conduct its own due diligence process, which is ordinarily more detailed than the seller due diligence process. It is not uncommon for a successful buyer, and its lenders, to be able to rely on a seller due diligence report.

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 where such representations amount to ‘misleading and deceptive conduct’ or conduct ‘likely to mislead or deceive’ under the CCA. Silence, in some circumstances, can be misleading and deceptive where there is a reasonable expectation that a certain matter or fact ought to be disclosed. Liability cannot be excluded for misleading and deceptive conduct, although recent case law suggests that parties may be able to limit or cap their liability for misleading and deceptive conduct in some circumstances.

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?

Australian companies are required to notify ASIC of certain matters, details of which are publicly available online (at a cost), including the solvency status of a company, details of directors, share capital and shareholders (including ultimate beneficial ownership). Details of the charges registered against a company, including against assets held by the company, are available (for a nominal cost) on the Personal Properties Securities Register.

Details of the ownership of real property, mortgages and charges and other attributes of real property are available at the land registry office of each state and territory. Details of registered intellectual property, such as patents and trademarks, can be obtained from the registers held by IP Australia, Australia’s intellectual property rights administrator. It is usual for court searches to be conducted to ascertain whether a company is involved in any material litigation.

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 sale and purchase agreement would customarily exclude matters within the buyer’s actual, constructive or imputed knowledge, and such knowledge will qualify the seller’s warranties.