Vendor due diligence
The role of Due Diligence in M&A
Andrew Walker, Partner John Brewster, Partner Sam Morrissy, Lawyer
Mergers & Acquisitions
Overview
1.
Introduction & Background
2.
Confidentiality Agreements / Deeds
3.
Due Diligence: What? Why? How?
4.
Relevance of M&A to Sale Agreements
Mergers & Acquisitions
Introduction & Background
• History of due diligence
• Development of due diligence in Australia • Legal framework – Statute
– Case law
Confidentiality Agreements / Deeds
• • • •
1st step in the process Short form vs long form Typical clauses Sunset date
Mergers & Acquisitions
Confidentiality Agreements / Deeds
• • •
Clients often prefer to use "commercial" short form confidentiality deeds in a transaction involving multiple bidders to minimise negotiations and delays "Sunset" date - will depend on the nature of the information provided but 1 to 2 years is customary Confidentiality Agreements typically contain: – Covenants by Recipient to maintain the confidentiality of the Confidential Information (Recipient may only disclose to its representatives who have a need to know) – Requirement that Recipient ensures its representatives comply with the same obligations – Requirement that Recipient returns or destroys all Confidential Information upon request, subject to certain exceptions (eg information in Board papers, on back up storage systems etc); – For listed companies, an insider trading acknowledgement/standstill – No "poaching" of employees/customers provisions
Mergers & Acquisitions
Due Diligence
• What is legal due diligence? • Why conduct legal due diligence? • How is it done?
Mergers & Acquisitions
What?
• Essentially, the gathering and assessment of information relevant to a particular transaction - an investigation • "Let the buyer beware" • An evaluation process to determine: – Am I buying what I think I'm buying? – Is what I'm buying worth the purchase price? – Are there any unexpected risks/liabilities?
Mergers & Acquisitions
What? (cont'd)
• Transactional due diligence
Valuation and Purchase Price
Due Diligence Process
Lawyers Accountants Financial Advisers
Due Diligence Reports
Sale and Purchase Agreement (representations, warranties and indemnities)
Integration Plan (separation, deal synergies)
Mergers & Acquisitions
What? (cont'd)
• Prospectus due diligence • Purchaser due diligence • Vendor due diligence
Mergers & Acquisitions
Why?
• Purpose - put yourself in the client's shoes Commercial
Legal Deal breakers
$ Identify risks
Forewarned is forearmed
Mergers & Acquisitions
Warranties and indemnities
Conditions precedent Post completion issues
Why? (cont'd)
• Prospectus due diligence - disclosure of information relevant to a potential investor; due diligence defence • Purchaser due diligence - identify risks of ownership; evaluate and price business; assist with negotiations • Vendor due diligence - identify potential weaknesses; strengthen negotiating position - forewarned is forearmed; make copy available to the purchaser on a reliance basis; reduces contingent expenses of Purchaser(s) - facilitates multiple bids
Mergers & Acquisitions
How?
• Scope of Work / Checklist / Questionnaire – Purpose of due diligence will drive the scope – Methodology
• Data Room – Online – Q&A
Mergers & Acquisitions
Scope of Due Diligence
• Scoping plan – – – – –
Background to transaction Purpose and method of DD Materiality Scope of DD Reporting
• Tailor the scoping plan to the transaction • Keep the scoping plan up to date as the transaction evolves
Mergers & Acquisitions
Data Room
• Transaction website - online data room containing a document room and Q&A section • Access given to bidders • "Black Box" restricted on-line/hard copy data room for sensitive information • Q&A or "RFIs" Requests for further information • Ability for Vendor to track data room activity by each bidder
Mergers & Acquisitions
Due Diligence Checklist
• Lawyers can prepare Due Diligence checklists • Useful for: – drafting Q&A when acting for a bidder – requesting information from the client when preparing a data room or a vendor due diligence report
Mergers & Acquisitions
Due Diligence Protocols
• Contain the rules and procedures by which the Vendor provides information to, and permits due diligence by bidders (including access to Data Room) • Bidders only granted access to the Data Room after they have returned a signed protocol and confidentiality agreement
Mergers & Acquisitions
Due Diligence
• Examples of areas of investigation – – – – – – –
Corporate Structure Material Contracts IP/Computer Systems Real Property Loans and Borrowings Litigation and Claims Personnel and Industrial Relations
Mergers & Acquisitions
Due Diligence
– – – – – –
Insurance Environment TPA Licences Regulatory issues - e.g. food production Other?
Mergers & Acquisitions
Due Diligence Report
• Legal Due Diligence Report – – – –
Full Report Exceptions Report Executive Summary - "Material" issues only Identify "deal breakers" immediately
• Reliance/non-reliance by Purchaser on Vendor Due Diligence Report – Consider the Purchaser's concerns
Mergers & Acquisitions
Due Diligence
• Other tips – Read instructions – Ask questions – Meet deadlines!
• Questions?
Mergers & Acquisitions
Relevance of M&A to sale agreements
•
The due diligence process is critical to certain aspects of sale agreements. For example: A. Conditions Precedent B. Warranties / Warranty & Indemnity Insurance C. Limitations on Vendor's liability under Warranties
Mergers & Acquisitions
Conditions Precedent
• Generally, Buyers prefer the protection of Conditions Precedent and Sellers prefer an unconditional SSA • Conditions precedent will include matters identified in due diligence • Example Conditions Precedent are listed on the next slide
Mergers & Acquisitions
Conditions Precedent
› › › › ›
Regulatory approval - e.g. Treasurer, ACCC, FIRB Shareholder approval (for either Buyer or Seller) Funding approval (risky in current environment) No material adverse change Consent of landlords or counterparties to key contracts which are required in the event of a change of control of the target (or assignment of the relevant lease/contract)
Mergers & Acquisitions
Warranties
• A warranty is a contractual promise/statement made by the Vendor to the Buyer relating to the target company or business/assets to be sold under the Sale Agreement • The Buyer will rely on these warranties (as well as due diligence) when entering into the Sale Agreement
Mergers & Acquisitions
Warranties
Examples • As far as the Seller is aware, all information contained in the Data Room (except for information consisting of any forecast, budget, estimate, projection, statement of opinion or statement of intention) is materially accurate and not misleading or deceptive.
Mergers & Acquisitions
Warranties
Other Examples • The Seller is the sole legal and beneficial owner of the Shares and has complete and unrestricted power and authority to sell the Shares to the Buyer. • The Last Accounts give a true and fair view of the financial position and the assets and liabilities of the Company as at the Last Balance Date and the income, expenses and operational results of the Company for the financial period ended on the Last Balance Date.
Mergers & Acquisitions
Limitations on Warranty Claims
• Warranties are typically given subject to specific caps, thresholds, time limits and other limitations of liability agreed to by the parties • Importantly, warranties are given subject to all information fairly disclosed in due diligence • This means the Buyer cannot claim for matters fairly disclosed to it in the data room or Q&A - incentive for Sellers to make full and fair disclosure
Mergers & Acquisitions
Effective Disclosure
• Generally, warranties are qualified by information in: – Disclosure letter – Data room (including Q & A) – Certain public registers (eg. courts, ASIC, land titles, IP Australia)
• For a Seller, it is important to involve the target's management in reviewing draft warranties to ensure all material information has been disclosed in the data room or the disclosure letter
Mergers & Acquisitions
Specific Indemnities • If the parties agree that the Buyer should be protected for certain known risks (identified during due diligence) then these will be covered by specific indemnities (which are not qualified by disclosure) rather than warranties • Warranty & Indemnity Insurance? • Otherwise, these risks can be factored into the purchase price
Mergers & Acquisitions
Questions?
Mergers & Acquisitions
Andrew Walker, Partner John Brewster, Partner Sam Morrissy, Lawyer
Mergers & Acquisitions
Overview
1.
Introduction & Background
2.
Confidentiality Agreements / Deeds
3.
Due Diligence: What? Why? How?
4.
Relevance of M&A to Sale Agreements
Mergers & Acquisitions
Introduction & Background
• History of due diligence
• Development of due diligence in Australia • Legal framework – Statute
– Case law
Confidentiality Agreements / Deeds
• • • •
1st step in the process Short form vs long form Typical clauses Sunset date
Mergers & Acquisitions
Confidentiality Agreements / Deeds
• • •
Clients often prefer to use "commercial" short form confidentiality deeds in a transaction involving multiple bidders to minimise negotiations and delays "Sunset" date - will depend on the nature of the information provided but 1 to 2 years is customary Confidentiality Agreements typically contain: – Covenants by Recipient to maintain the confidentiality of the Confidential Information (Recipient may only disclose to its representatives who have a need to know) – Requirement that Recipient ensures its representatives comply with the same obligations – Requirement that Recipient returns or destroys all Confidential Information upon request, subject to certain exceptions (eg information in Board papers, on back up storage systems etc); – For listed companies, an insider trading acknowledgement/standstill – No "poaching" of employees/customers provisions
Mergers & Acquisitions
Due Diligence
• What is legal due diligence? • Why conduct legal due diligence? • How is it done?
Mergers & Acquisitions
What?
• Essentially, the gathering and assessment of information relevant to a particular transaction - an investigation • "Let the buyer beware" • An evaluation process to determine: – Am I buying what I think I'm buying? – Is what I'm buying worth the purchase price? – Are there any unexpected risks/liabilities?
Mergers & Acquisitions
What? (cont'd)
• Transactional due diligence
Valuation and Purchase Price
Due Diligence Process
Lawyers Accountants Financial Advisers
Due Diligence Reports
Sale and Purchase Agreement (representations, warranties and indemnities)
Integration Plan (separation, deal synergies)
Mergers & Acquisitions
What? (cont'd)
• Prospectus due diligence • Purchaser due diligence • Vendor due diligence
Mergers & Acquisitions
Why?
• Purpose - put yourself in the client's shoes Commercial
Legal Deal breakers
$ Identify risks
Forewarned is forearmed
Mergers & Acquisitions
Warranties and indemnities
Conditions precedent Post completion issues
Why? (cont'd)
• Prospectus due diligence - disclosure of information relevant to a potential investor; due diligence defence • Purchaser due diligence - identify risks of ownership; evaluate and price business; assist with negotiations • Vendor due diligence - identify potential weaknesses; strengthen negotiating position - forewarned is forearmed; make copy available to the purchaser on a reliance basis; reduces contingent expenses of Purchaser(s) - facilitates multiple bids
Mergers & Acquisitions
How?
• Scope of Work / Checklist / Questionnaire – Purpose of due diligence will drive the scope – Methodology
• Data Room – Online – Q&A
Mergers & Acquisitions
Scope of Due Diligence
• Scoping plan – – – – –
Background to transaction Purpose and method of DD Materiality Scope of DD Reporting
• Tailor the scoping plan to the transaction • Keep the scoping plan up to date as the transaction evolves
Mergers & Acquisitions
Data Room
• Transaction website - online data room containing a document room and Q&A section • Access given to bidders • "Black Box" restricted on-line/hard copy data room for sensitive information • Q&A or "RFIs" Requests for further information • Ability for Vendor to track data room activity by each bidder
Mergers & Acquisitions
Due Diligence Checklist
• Lawyers can prepare Due Diligence checklists • Useful for: – drafting Q&A when acting for a bidder – requesting information from the client when preparing a data room or a vendor due diligence report
Mergers & Acquisitions
Due Diligence Protocols
• Contain the rules and procedures by which the Vendor provides information to, and permits due diligence by bidders (including access to Data Room) • Bidders only granted access to the Data Room after they have returned a signed protocol and confidentiality agreement
Mergers & Acquisitions
Due Diligence
• Examples of areas of investigation – – – – – – –
Corporate Structure Material Contracts IP/Computer Systems Real Property Loans and Borrowings Litigation and Claims Personnel and Industrial Relations
Mergers & Acquisitions
Due Diligence
– – – – – –
Insurance Environment TPA Licences Regulatory issues - e.g. food production Other?
Mergers & Acquisitions
Due Diligence Report
• Legal Due Diligence Report – – – –
Full Report Exceptions Report Executive Summary - "Material" issues only Identify "deal breakers" immediately
• Reliance/non-reliance by Purchaser on Vendor Due Diligence Report – Consider the Purchaser's concerns
Mergers & Acquisitions
Due Diligence
• Other tips – Read instructions – Ask questions – Meet deadlines!
• Questions?
Mergers & Acquisitions
Relevance of M&A to sale agreements
•
The due diligence process is critical to certain aspects of sale agreements. For example: A. Conditions Precedent B. Warranties / Warranty & Indemnity Insurance C. Limitations on Vendor's liability under Warranties
Mergers & Acquisitions
Conditions Precedent
• Generally, Buyers prefer the protection of Conditions Precedent and Sellers prefer an unconditional SSA • Conditions precedent will include matters identified in due diligence • Example Conditions Precedent are listed on the next slide
Mergers & Acquisitions
Conditions Precedent
› › › › ›
Regulatory approval - e.g. Treasurer, ACCC, FIRB Shareholder approval (for either Buyer or Seller) Funding approval (risky in current environment) No material adverse change Consent of landlords or counterparties to key contracts which are required in the event of a change of control of the target (or assignment of the relevant lease/contract)
Mergers & Acquisitions
Warranties
• A warranty is a contractual promise/statement made by the Vendor to the Buyer relating to the target company or business/assets to be sold under the Sale Agreement • The Buyer will rely on these warranties (as well as due diligence) when entering into the Sale Agreement
Mergers & Acquisitions
Warranties
Examples • As far as the Seller is aware, all information contained in the Data Room (except for information consisting of any forecast, budget, estimate, projection, statement of opinion or statement of intention) is materially accurate and not misleading or deceptive.
Mergers & Acquisitions
Warranties
Other Examples • The Seller is the sole legal and beneficial owner of the Shares and has complete and unrestricted power and authority to sell the Shares to the Buyer. • The Last Accounts give a true and fair view of the financial position and the assets and liabilities of the Company as at the Last Balance Date and the income, expenses and operational results of the Company for the financial period ended on the Last Balance Date.
Mergers & Acquisitions
Limitations on Warranty Claims
• Warranties are typically given subject to specific caps, thresholds, time limits and other limitations of liability agreed to by the parties • Importantly, warranties are given subject to all information fairly disclosed in due diligence • This means the Buyer cannot claim for matters fairly disclosed to it in the data room or Q&A - incentive for Sellers to make full and fair disclosure
Mergers & Acquisitions
Effective Disclosure
• Generally, warranties are qualified by information in: – Disclosure letter – Data room (including Q & A) – Certain public registers (eg. courts, ASIC, land titles, IP Australia)
• For a Seller, it is important to involve the target's management in reviewing draft warranties to ensure all material information has been disclosed in the data room or the disclosure letter
Mergers & Acquisitions
Specific Indemnities • If the parties agree that the Buyer should be protected for certain known risks (identified during due diligence) then these will be covered by specific indemnities (which are not qualified by disclosure) rather than warranties • Warranty & Indemnity Insurance? • Otherwise, these risks can be factored into the purchase price
Mergers & Acquisitions
Questions?
Mergers & Acquisitions
