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 conducted by buyers often includes investigation into financial, tax, legal, organisational, operational, environmental and intellectual property matters. Legal counsel is often engaged to conduct due diligence on legal title to, and liens registered against, shares or assets, compliance with laws, legal structure, material legal risks, financial and other obligations, employment or labour matters, litigation, contract review, third-party consents, government approvals, and tax and transaction structuring matters.

It is not typical for sellers to prepare legal due diligence reports to share with prospective buyers, but it is becoming more common for sellers to prepare financial due diligence reports in auctions. Sellers may conduct some level of internal due diligence in advance of a transaction with a view to curing significant deficiencies. Sellers or their advisers will usually establish physical or digital data rooms to allow buyers to conduct their own due diligence investigations.

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 may be liable for pre-contractual or misleading statements that were made negligently or fraudulently, or if he or she induced the buyer to enter into the transaction or agreement. However, parties typically agree to an ‘entire agreement’ or exclusionary clause that excludes representations or warranties other than those set out in the transaction agreement. Such clauses are enforceable, absent 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?

Private companies are generally required to file with a corporate registry limited information about directors and, in some cases, shareholders, all of which is publicly available. Other public searches that a buyer would typically conduct on a private company include lien, litigation, workers’ compensation, bankruptcy, tax, employment, intellectual property, real property and environmental searches. Some searches require the consent of the target company, and the types of searches and information available may differ across jurisdictions.

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?

In the absence of specific agreement by the buyer and seller, there is no definitive answer. A buyer’s knowledge may adversely affect its ability to make claim for breach of contract relating to such knowledge and, if the buyer fails to use such knowledge to mitigate damages, may reduce the damages a buyer is able to collect.

Because of the uncertainty, buyers often seek to include in the transaction agreement language to the effect that it can rely on the representations and warranties in the agreement, notwithstanding any actual or deemed knowledge of a breach or potential breach, whereas sellers may seek an ‘anti-sandbagging’ clause prohibiting the buyer from making claims if it knew of the breach.