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?

Due diligence provides potential buyers with the opportunity to evaluate the legal, financial, tax and commercial position of a target company or business. The scope of legal due diligence in the US varies based on the situation, but as a general matter is typically fairly broad and will cover such areas as basic corporate information, material contracts, litigation matters, compliance with law, regulatory matters, title to assets, share capitalisation, IP and information technology, and employee arrangements.

It is very uncommon for sellers to provide due diligence reports to prospective buyers.

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 purchase agreements usually limit a seller’s liability to claims for breach of the express representations and warranties in the agreement and exclude liability for pre-contractual and misleading statements (sometimes with an exception for cases of fraud).

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?

In the US, private companies are required to make only very limited filings that are publicly available. A company’s certificate of incorporation (including any amendments thereto, and any certificate of designation containing the terms of its capital stock, including any series of preferred stock) will be filed and publicly available at the office of the secretary of state of the company’s state of incorporation. However, the following are examples of information that are not required to be filed:

  • financial statements;
  • details of the board of directors or people with significant control over the company;
  • any shareholder resolutions; or
  • details of changes to the company’s share capital.

Information on mortgages or liens on the company’s assets can be obtained by undertaking a search for UCC-1 financing statements at the state level or a lien search at the local county level. Details of registered IP, such as patents and trademarks, can be obtained from the United States Patent and Trademark Office, United States Copyright Office and similar foreign offices.

A buyer of a company will typically carry out a search of information filed with the office of the secretary of state, including to confirm that no filing has been made to wind up or dissolve the company. Searches may also be performed in respect of liens and registered IP as noted above. A buyer could search litigation dockets in the locations in which the company is incorporated or principally does business, although such a search may not be exhaustive or reveal all pending claims.

Not all jurisdictions provide information on litigation dockets or lien searches in an online searchable format, so the nature of the search required and the confidence level can vary.

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?

If a buyer is not explicitly precluded by the 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 (although the analysis can vary from state to state).

However, if a buyer has actual knowledge of a matter at the time of entering into a purchase agreement, the seller may seek to argue that, by closing under the agreement, the buyer accepted and waived any claim in respect of that matter. Accordingly, to achieve clarity, a purchase agreement would specify whether a buyer’s actual, constructive or imputed knowledge of a matter will limit the buyer’s right to make a claim post-closing in respect of that matter.