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 allows potential buyers to evaluate the legal, labour, financial, tax, accounting and commercial position of a company, business or assets. Legal due diligence will typically confirm:

  • title to the company or business;
  • its legal structure;
  • the terms of financial obligations;
  • intellectual and real property;
  • ownership and use of information technology;
  • physical assets;
  • litigation;
  • employee arrangements;
  • labour matters;
  • contractual matters; and
  • compliance with the law.

Vendor due diligence reports commonly feature in controlled sales processes in Spain. They enable sellers to accelerate the sale process, minimise disruption of the target business, facilitate access for management and explain any complexities involved in a transaction. Customarily, a buyer and its lenders will be able to rely on vendor due diligence reports. Buyers often also complete a confirmatory due diligence as part of their evaluation of a transaction.

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. However, with the exception of fraudulent misrepresentations, SPAs usually limit a seller’s liability to claims of breaches of contract, and exclude liability for pre-contractual and misleading statements.

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?

SA and SL companies are required to make extensive filings that are made publicly available online with the Commercial Registry, including:

  • the company’s by-laws;
  • audited financial statements;
  • details of the board of directors and people with powers of attorney representing the company;
  • shareholder resolutions, including matters affecting the company’s by-laws or matters that must be registered under Spanish law (eg, change of the corporate objects or registered address, or any amendments to the matters described in this question);
  • details of changes to the company’s share capital; and
  • approval of annual accounts.

Details of, inter alia, the ownership, mortgages and charges of real property are available from the Spanish land registry for the area in which such real property is located. Details of registered intellectual property such as patents and trademarks can be obtained from the Spanish Intellectual Property Office.

Buyers of companies typically conduct a search of the information filed with the Commercial Registry to confirm that a winding-up petition has not been lodged against a company. Searches may also be carried out for registered assets held to be material to a transaction. Usually, registry fees must be paid to be to carry out these searches.

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 buyer’s actual or deemed knowledge at the time of entering into an acquisition will prevent a claim for breach of implied title covenant or a claim for hidden defects (see question 3). In Spain, a usual negotiation point under an SPA is sandbagging provisions, where the buyer aims to not be precluded from filing claims for a breach of covenants or warranties, despite a buyer’s actual or deemed knowledge of any matters giving rise to the claim.

Therefore, an SPA usually specifies whether a buyer’s actual, constructive or imputed knowledge justifies the seller’s warranties. Note, however, that some scholars in Spain are reluctant to accept the validity of sandbagging clauses, and therefore a buyer’s knowledge at the time of entering into an acquisition will preclude a claim for breach of implied title covenant or a claim for hidden defects in any event.