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Due diligence requirements
What due diligence is necessary for buyers?
Due diligence exercises are a critical part of most corporate transactions. Usually, the most important objectives of the buyer when conducting a due diligence are to:
- gain a deeper understanding about the target;
- value the target;
- determine whether the seller has good title to the shares in the target or to the assets being sold;
- uncover potential liabilities or areas of the business which are insufficiently protected;
- negotiate price and other terms with the seller;
- determine any consents that may be required for the transaction; and
- plan post-closing integration.
Legal, tax and financial due diligence is standard for any acquisition, but the scope may vary enormously taking into account various factors, including:
- deal complexity and size;
- the industry and market where the target operates;
- the buyer’s knowledge and plans for the business;
- the structure of the sale process; and
- the timetable.
Depending on the particularities of the target and its business, technical, commercial or environmental due diligence may also be carried out.
Legal due diligence will cover aspects such as corporate matters, financings, real estate, regulatory, environment, contractual relations, litigation, employment, intellectual property, competition, data protection and insurance.
What information is available to buyers?
Buyers may have access to information regarding the target from either publicly available sources or documents made available by the seller or the target. Usually a first source of information is the teaser and information memorandum prepared by the seller and its advisers, outlining the key features of the target and its business.
A virtual data room is set up in most cases, containing various documents and information concerning the target, such as:
- corporate records (eg, statutory documents, shareholder decisions, shareholders’ agreements and a group chart);
- property titles (eg, ownership, use rights, superficies rights over assets or shares);
- financing agreements;
- business-related agreements;
- information on clients and suppliers;
- court files;
- authorisations and associated terms and conditions;
- past studies, appraisals or audits in connection with the target or the target’s assets;
- past due diligence reports;
- disclosure of third-party interests;
- disclosure of breaches or investigations; and
- known liabilities.
The data room is organised according to a structure determined by the seller (as is usually the case in auction sales) or based on a due diligence request list sent by the buyer. The buyer may make enquiries on the documents reviewed and request copies of further relevant documents.
In Romania, buyers can obtain publicly available information on companies from various sources:
- corporate information from the Trade Registry;
- information on bankruptcy status from the Insolvency Bulletin;
- shareholders’ resolutions published in the Official Gazette;
- reports submitted to the stock exchange and the Financial Supervisory Authority;
- financial and corporate information from the Ministry of Finance website;
- information on mortgages from the Electronic Archive for Movable Securities and the Land Book Register; and
- brief information on litigation from the portal of the Romanian court files.
What information can and cannot be disclosed when dealing with a public company?
Information regarding public companies can be disclosed to bidders, subject to the rules preventing insider dealing. Disclosure of information is also governed by the principle of equal treatment of shareholders and equal treatment of investors – meaning that the same information should be made available to all shareholders and investors.
In case of a pre-bid due diligence, the target may include in the data room only information which has already been disclosed on the market or is already available to the public. In fact, according to Romanian case law, a public company data room should be "merely a place where the public information is put together in a structured way".
No inside information can be made available to potential investors or buyers, and trading based on inside information is a criminal offence. If non-public information concerning the target is intended to be disclosed, the target should first disclose it to the entire market.
How is stakebuilding regulated?
Stakebuilding is not prohibited by Romanian capital markets regulations, but it should be carried out subject to the regulations on insider trading and market abuse, disclosure obligations and, in case of certain regulated activities such as banking and insurance, notification and approval requirements.
In practice, the effectiveness of a stakebuilding strategy is significantly limited by several factors, such as:
- the mandatory shareholding disclosure requirements, which would make the market aware of any attempt of stakebuilding and may lead to a price increase;
- if certain shareholding quotas are achieved, the obligation to launch a mandatory takeover bid where the price cannot be lower than the highest price paid by the bidder within the last 12 months; and
- low market liquidity.
It is common for a bidder to buy the shares of a majority shareholder and then launch the mandatory takeover bid.
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