Strong competition among investors interested in buying a company creates pressure not only on financial and other parameters of their bids but also on the promptness of the execution and settlement of the entire transaction. Some investors are thus willing to accept a much higher degree of risk, for example by curtailing and narrowing, or even eliminating, the due diligence process of the company of interest to accelerate the transaction as a whole. This may, yet often seemingly, pose an advantage for sellers. The investor’s insufficient review of the subject of purchase prior to the transaction often becomes the source of future disputes between the original company owner and the new investor.

Even the basic legal framework of the most common purchase agreement requires that the seller bring to the purchaser’s attention any defects on the subject of the purchase. In the area of mergers and acquisitions, this obligation has had a much broader interpretation for decades due to the established institute of the seller’s assurance concerning the capital investment to be sold itself (i.e. equity interests and shares) as well as all possible aspects of operation of the company in question.

The seller can only be released from the liability for certain defects when compared to the company’s condition as asserted in the sale if they notified the purchaser of or allowed the purchaser to identify those defects, such as by providing the most detailed supporting documentation for performing the vendor’s due diligence.

A risky course of action on the investor’s part in acquiring an enterprise without customary due diligence may, as a consequence, turn against the original owner that has not been given the opportunity to inform the investor on potential defects. Resulting disputes impose a significant financial burden on both parties involved, which could, however, be avoided. Nevertheless, the seller may assume a more-active role in the transaction and perform the vendor’s due diligence for the purchaser. The seller may also have the company’s as-is state assessed by relevant specialists and handle the resulting findings, which may cause harm to the purchaser, transparently within transaction-related negotiations to clearly distribute related risks among the parties to the transaction. Each investor may address transaction risks by reducing the purchase price; nevertheless, this will only provide the seller with a bid that is truly comparable. By accepting it, the seller will have a substantially higher level of certainty that it will retain the transaction proceeds in the future which is among the key factors in company sales.

The article is part of dReport – December 2018, Legal news.