Authors: Alex Gorka and Brett Anderson
Due diligence
In the course of either an asset purchase or share purchase transaction, purchasers will conduct due diligence to investigate the business, financial and legal affairs of the target business.
There are four primary categories of due diligence:
- business and operational due diligence: onsite inspection of the physical facilities, properties, plants, equipment and operations of the target business, which, depending on the nature of the business being acquired, may involve due diligence investigations conducted by third parties (e.g., environmental assessments)
- financial due diligence: inspection of the financial and tax position of the target business, typically conducted by third-party auditors or other financial and tax advisors of the purchaser
- management diligence: interviews with the target business’ management team
- legal diligence: review of legal contracts, documents, public records, litigation and other legal matters
The legal portion of the due diligence investigation will be informed by a number of factors, including the type of transaction and the nature of the business, but will typically include
- a review of contracts, licenses and permits to which the target business is a party, including to identify any consent or notice requirements that may be triggered by the transaction
- a review of any litigation to which the target business is a party
- a review of intellectual property owned or used by the business
- corporate, Bank Act (Canada), bankruptcy and insolvency, litigation, execution and lien searches of the target company and its assets
In a share purchase transaction, the legal due diligence will also involve a review of the corporate records of the target corporation to confirm that the purchaser is acquiring all of the shares of the target corporation. Minutes of board meetings may also contain discussions concerning corporate strategy, contemplated transactions, potential liabilities and other matters that might affect the target corporation going forward and, therefore, may be a valuable source of due diligence information.
