Added Value of Legal Due Diligence

I involved in several due diligence works last month, for acquisition process and capital market transactions. I learnt that there are misunderstandings on why the due diligence is conducted and their roles in the bigger picture of related transaction.

First, due diligence is carried out to find the red flags. This approach, especially brought by buyer’s counsel, is giving unnecessary tension between counsels. The approach causes a “hostile” due diligence. It becomes the irony as the transaction itself is carried out under business mutual understanding between the seller and the purchaser.

Fox (2010) provides an insight on how the lawyers should treat the due diligence. Due diligence flows from a basic principle of economic and legal system, the principle of caveat emptor, or “let the buyer beware”. No party has an obligation to disclose information to the other party.

The lawyers also should understand that the businessperson may use different approach. Businessperson tends to use cost and benefit analysis when it comes to business transaction. Lawyers are trained be a risk-averse person. If I assume the risk, should I be awarded more. What if what I acquired is 100 times more valuable than the assumed risk (again, the risk).

Second, due diligence is carried out like it is a different part of the transaction. Due to this approach, the result of due diligence does not add a value to the contracting process, or the negotiation strategy.

If on due diligence, the buyer’s counsel finds that there is an existing contract between the seller and other third party which it gives restrictions on certain future conduct who bring obstacle to the transaction, then the buyer’s counsel can give advice to the client on what is the solution to not cause a breach of contract, or how to mitigate the risk if the transaction is done, or should the transaction is delayed or cancelled.

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