By Richard D. Harroch and David A. Lipkin
Mergers and acquisitions typically involve a substantial amount of due diligence by the buyer. Before committing to the transaction, the buyer will want to ensure that it knows what it is buying and what obligations it is assuming, the nature and extent of the target company’s contingent liabilities, problematic contracts, litigation risks and intellectual property issues, and much more. This is particularly true in private company acquisitions, where the target company has not been subject to the scrutiny of the public markets, and where the buyer has little (if any) ability to obtain the information it requires from public sources.
The following is a summary of the most significant legal and business due diligence activities that are connected with a typical M&A transaction. By planning these activities carefully and properly anticipating the related issues that may arise, the target company will be better prepared to successfully consummate a sale of the company.
Of course, in certain M&A transactions such as “mergers of equals” and transactions in which the transaction consideration includes a significant amount of the stock of the buyer, or such stock comprises a significant portion of the overall consideration, the target company may want to engage in “reverse diligence” that in certain cases can be as broad in scope as the primary diligence conducted by the buyer. Many or all of the activities and issues described below will, in such circumstances, apply to both sides of the transaction.