Although due diligence is the commonly used term in Spanish, a more accurate word to describe the process might be audit. An M&A due diligence is usually part of a larger audit which considers legal, financial, tax and employment issues. However, it can also be undertaken independently, regardless of whether there is an M&A deal under way, whenever management wishes to identify any contingencies which might affect the company´s operating account.

PURPOSE OF THE DUE DILIGENCE

Ultimately, the due diligence´s objective is to facilitate informed decisions. It optimizes the information available – in both quantitative and qualitative terms   and allows the systematic use of this information in the decision-making process, laying out all the possible risks, benefits and costs.

A due diligence can assist with assessing the suitability of a particular investment, provide an in-depth review prior to a public offer of shares, or simply serve as a management tool to improve management´s understanding of the business.  

WHO MAY REQUEST A DUE DILIGENCE REPORT

A due diligence may be requested by the target company, or its buyers, financing entities or guarantors in a possible M&A transaction. In the latter scenario, the objective will focus on detecting any contingencies which may affect the viability of the deal, its price or guarantees. The due diligence provides, in this case, an in-depth analysis of any enterprise risks. It is therefore a basic tool in negotiations, and will assist in establishing and agreeing the purchase price, as it shows all the strengths and risks associated with the transaction.

Under Spanish legislation, the target company´s representatives have a duty to provide all necessary information. The due diligence requires full cooperation and a transparent approach on their part, as it is not an investigation in search of hidden information.

ASPECTS INCLUDED IN AN M&A DUE DILIGENCE

An M&A due diligence examines and evaluates corporate, contractual and financial issues including the following:

Corporate matters:

During an M&A due diligence, an exhaustive analysis of all corporate documentation is carried out. This includes:

     Checks on the validity of the company´s incorporation: Articles of association of all corporate entities, current corporate statutes, pending registrations, etc.

     Business register checks: Legal history, registry qualifications, any delays arising from registry irregularities.

     Share capital: Agreed and authorised share capital, capital reductions and disbursements pending, non-monetary contributions and subscription rights.

     Financial obligations: Interest rates, impact of conversion into capital, preemptive rights...

     Bookkeeping: Annual accounts, board minutes, accounting registers, shareholders and partner registers, compulsory nominative shares...

     Legal representatives/powers of attorney: Have powers of attorney been granted? Are there any legal representatives? Are they given general duties or are they appointed for specific matters?

     Shareholding structure: Number of shareholders and stakes held, pledge and co-ownership of shares.

Corporate compliance plan: This comprises all the regulatory aspects which the company must comply with in order to not incur in criminal liability. Risk mapping, code of conduct.

Contractual review

The contractual review focuses on contracts with clients and providers, sale and purchase agreements for premises or equipment, lease and sub-lease agreements, insurance policies and payment of premiums, commitments to purchase or invest with third parties, etc.

Financial matters

An M&A due diligence will also carefully consider all contracts signed with financial institutions, including all banking products such as collateral guarantees, pledges, loans, mortgages or any other guarantees, financial leasing, renting, factoring and confirming agreements. Finally, financing contracts subscribed with third parties outside of the banking sector must also be considered.

DUE DILIGENCE REPORT

All the issues considered in the due diligence must be fully reflected in a final report which is adapted to client needs. This report includes all the areas analysed in the review, together with a professional opinion. If the due diligence was undertaken as part of an M&A transaction, the document must also reflect on the suitability of the deal, and recommend additional guarantees to minimise any contingencies which may have come to light.