Primarily, the buyer uses this information to decide whether the proposed transaction is a sound commercial investment. In an extreme case, a buyer may decide to abandon the transaction after performing due diligence, but more commonly it uses the information to negotiate contractual protections or to adjust the purchase price.

The types of due diligence include commercial, financial, legal and tax. In this article we will discuss the legal top tips:

Number 1 Top Tip

Our number one top tip is to ensure all the corporate records of the company such as statutory books and registers (register of members, directors, share allotments and share transfers etc) and Companies House filings are accurate and up to date. In many of our transactions when we act for sellers, they do not have statutory books and registers which under the Companies Act 2006 every company is required to keep and maintain.  This means that together with the transaction, the sellers are also required to reconstitute and/or update the statutory books and registers which detracts from the transaction and is an additional cost to the sellers.

Number 2 Top Tip    

Confidentiality of the company’s business and operation is a crucial factor to ensure that any proposed buyer cannot use the information disclosed to it as part of the due diligence process. A confidentiality agreement or non-disclosure agreement should be entered into between the parties at an early stage to ensure that the sellers have contractual recourse if the confidentiality is breached.  Together with a confidentiality agreement, sellers can also take a practical approach by anonymising any data that it sends to the proposed buyer to ensure that they will not be able to ascertain key customers, price lists or any other sensitive commercial information.

Number 3 Top Tip

If shareholders are proposing to sell their company or business, the sellers will need to be aware of the likely issues the buyer may raise following their due diligence. The usual issues a buyer will check and therefore sellers should check before disclosing any documents to a proposed buyer are (this list is not exhaustive):

• Change of control clauses in any contracts i.e. the right for the other party to terminate the contract if there is a substantial change of shareholders of the company
• Ownership of any business assets (including intellectual property) are owned by the company
• The articles of association of the company to establish if there are any restrictions or limits contained within them
• If the company has granted any security to a bank or other lender
• Any disputes that the company is subject to
• Property related documents such as leases

Number 4 Top Tip

The best way to deal with due diligence is in an organised and structured manner which will mean someone from the company or a seller taking ownership of the process to ensure that all documents (contracts, accounts etc) are available (usually by way of a virtual data room) and up to date to allow the buyer to take a comprehensive view of the company and its business. If the company is relying on an older set of accounts, additional protection is usually included in the share purchase agreement to protect the buyer for the intervening period.