Due diligence requirements
What due diligence is necessary for buyers?
Conducting a legal due diligence exercise before the completion of a merger or acquisition is of prime importance. Due consideration should be given to the contractual terms, as well as issues which may have an effect on the feasibility of the merger. Material considerations in the legal due diligence process include:
- the existence of contingent liabilities and claims;
- change of control provisions;
- the validity of licences;
- employment protection;
- antitrust clearances; and
- tax exposures which may arise from the merger.
Such matters should be taken into account in order to avoid the possibility of the transaction being stalled at a later stage and to address any concerns as early as possible.
Due diligence reports may take the form of a red-flag report or full description report. The former is limited to a description of those issues which, in the opinion of the legal advisers, should be flagged to the buyer as being of potential material relevance, while a full due diligence report provides a more comprehensive overview, including a review and summary of all documentation examined.
In addition to legal due diligence, financial advisers are typically engaged to conduct financial due diligence and offer advice regarding the proposed acquisition.
What information is available to buyers?
The information available to the buyer typically depends on whether the seller is a private company or public listed company.
With respect to private companies, limited information is publicly available, typically limited to website content and the documents uploaded on the online databased of the Registry of Companies and Registry of Courts in relation to:
- past and present company directors;
- past and present company shareholders;
- authorised and issued share capital;
- whether the shares are subject to a pledge;
- the company’s audited accounts of the for each financial year end;
- whether the company is subject to insolvency proceedings; and
- litigation involving the target or its directors.
Since information relative to private companies is restricted, the majority of the information on the target is supplied by the seller in response to a due diligence request list, pursuant to which the buyer’s counsel would request documentation and feedback on various items relating to the target’s business.
In terms of the Listing Rules issued by the Malta Financial Services Authority, public listed companies must disclose certain information to the public through the issuance of company announcements which are made publicly available on the websites of the issuer and the Malta Stock Exchange. Moreover, at the time of listing, listed companies must publish a prospectus with in-depth detail on the company’s business and operations. Although the prospectus may be outdated, depending on the time between its date of issue and the date of the proposed transaction, updates on the company’s affairs should be publicly available. Such information would typically relate to:
- any material transactions;
- the company’s annual financial report;
- corporate governance matters;
- price-sensitive facts which arise in the issuer’s sphere of activity and which are not public knowledge;
- the date fixed for the issuer’s board meeting, at which a dividend is expected to be declared or recommended, or at which any announcement of profits or losses is to be approved;
- changes in the board of directors, company secretary or other senior officers;
- whether the filing of a winding-up application has been made;
- any material changes to its capital structure; and
- any resolutions put to a general meeting of the issuer which are not ordinary business and whether such resolutions were approved.
What information can and cannot be disclosed when dealing with a public company?
All price-sensitive facts must be made public by virtue of a company announcement from the issuer. For this reason, issuers are generally prohibited from disclosing material information which has not been made public. However, listed companies may furnish in confidence to a genuine offeror and the corresponding genuine transferor such information, including unpublished price-sensitive information, as may be necessary to enable the offeror, transferor and their advisers to make, confirm, withdraw or modify the offer. Such information may be provided only if certain conditions are satisfied, including the entry into a confidentiality agreement and an undertaking not to deal in the shares for one year following the completion of the transaction.
How is stakebuilding regulated?
Any shareholder which acquires or disposes shares to which voting rights are attached, in the case of companies where the home member state is Malta, must notify the issuer and the Listing Authority of the proportion of voting rights of the issuer held by such shareholder as a result of the acquisition or disposal where that proportion reaches, exceeds or falls below:
- 75%; and
A disclosure of any direct and indirect shareholdings (including indirect shareholdings through pyramid structures and cross-shareholdings) in excess of 5% of the share capital of a listed company, must be disclosed in the company’s annual report. The holders of any securities with special control rights and a description of those rights must also be disclosed in the directors’ report of the listed company. Accordingly, any stakebuilding exercise is subject to the foregoing mandatory disclosure requirements set out in the Listing Rules.
The acquisition of a controlling interest in a listed company will trigger the obligation to make a mandatory bid and the acquisition of significant stakes in a regulated company may require regulatory approval.
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