Due diligence

There is mutual interest and preliminary agreements have been made. Now comes the crucial point: the buyer has the ambition to buy shares and, under common law, the sale/purchase is valid when there is agreement between the price and the object. It is the shares that are the object of the sale and not the underlying company itself. If afterwards something turns out to be wrong with the underlying company, it is established case law that the buyer cannot invoke the visible and hidden defects under common law as regards the underlying company. To cover this, the buyer will have to negotiate an explicit contractual protection. In order to negotiate this explicit contractual protection, the buyer will first have to carefully analyse the real nature of the company.

First of all, there is the possibility to create a first idea about the internal kitchen of the target on the basis of publicly available information. For example, you can take a look at the annexes in the Belgian Official Journal, the annual accounts and the CBE. In addition, you can investigate the real estate in the company by writing to mortgage offices. For a number of years, it has also been possible to consult the pledge register to see whether there are any pledges on the shares you are going to buy and

whether there are any pledges on the company’s bank accounts. Nowadays, there is also a wealth of information online. It is also worthwhile first screening the target via press releases or social media.

But you will not find the commercial soul, the ins and outs, the opportunities and the future plans of the company through public information. That is why the buyer wants to know in detail what the company actually contains via a due diligence (literally translated: “appropriate caution”). This is an extensive legal, financial, accounting, tax and operational investigation in which, as it were, an x-ray of the target company is made to identify both its strengths and weaknesses. This is usually done using a due diligence checklist, whereby the buyer draws up an inventory of the points on which he wishes to obtain information from the seller. The information that is made available is then stored in a data room.

Next, a Q&A process is started in which the buyer (together with his advisors) can ask the seller specific questions about the information made available in the data room. Advisors to the buyer will then prepare a due diligence report, after which the buyer will decide whether or not to buy.

Sometimes it happens that the seller decides to carry out his own due diligence first, and then you get what is called a vendor due diligence. As the owner of the company, he goes looking for possible weaknesses in order to remedy them at an early stage. This type of due diligence is often performed in the preacquisition phase. Especially in the case of large operations, it is worthwhile studying in advance how the situation of the company can be optimised. In order to speed things up, such a vendor due diligence report can immediately be made available to the buyer. But as a buyer, be aware of the fact that such a report will often be biased. After all, a vendor will try to present his own company as favourably as possible. Our advice: always ask for a confirmation due diligence whereby you, as a buyer, get access to the data room.