Corporate Social Responsibility (IVOR nr. 77) 2010/7.3.3:7.3.3 Other reasons for executing due diligence

Corporate Social Responsibility (IVOR nr. 77) 2010/7.3.3

7.3.3 Other reasons for executing due diligence

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

Besides legal reasons, companies also mention other reasons, of a more practical nature, why they perform a due diligence investigation. For example, the motivation of a bank to carry out a due diligence inspection before granting a loan is to ascertain, firstly, whether the company can repay the loan and generate sufficient cash flow to pay for the periodical interest and, secondly, to identify collateral and to determine its value. A risk analysis of the company, its business, the industry and the geographical region usually forms part of a finance due diligence.

The reason for initiating a due diligence analysis before concluding an operational agreement is that the company needs to know about the operational and business opportunities, the value of the proposed contract, and which obstacles and risks can be expected. Other drivers for a due diligence investigation are:1

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evaluating possible synergies for a merger, e.g. in the type of business activities or geographical markets, new opportunities or innovative approaches;

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verification of assumptions regarding the business or the price offered;

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avoidance of ' skeletons in the cupboard' (unexpected liabilities);

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finding arguments for renegotiating the price;

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examining whether permission from third parties is required for the transaction, e.g. pursuant to legislation or contractual change of control' clauses.2 Certain transactions require government consent, e.g. in the Netherlands, for the sale of a bank, permission has to be obtained from the Minister of Finance; for transactions with a EU dimension, the approval of the EU Commission is required pursuant to EU competition law;

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to optimise the transaction structure (e.g. to consider legal and tax variations: a share or asset purchase? Should a new company be incorporated to acquire the new business? If so, under which jurisdiction?);

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identification of ' conditions precedent'3 which are applicable to concluding the transaction (e.g. supervisory board or shareholders' approval, consultation with unions or works councils, third-party consent);

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preparation of the ' representations and warranties' that will become part of the transaction documentation;4

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to substantiate taking a decision on concluding the transaction: YES or NO?

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to avoid mismanagement and directors' liability (due to unfunded investment decisions);5 and

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to prepare a to-do-list concerning improvements which need to be made after the transaction has been concluded.

In sum, there are various reasons for companies to commence a commercial due diligence investigation. Some reasons are aimed at gaining a better understanding of the target business. Other reasons are more transaction-related, such as the preparation of the best tax structure for the acquisition or joint venture, or the analysis of which steps need to be taken before the transaction can take place. There are also reasons of a more practical nature: to find assets over which to demand a security right. To date, companies did not consider human rights concerns as a typical subject to be included in a due diligence assessment.

Deze functie is alleen te gebruiken als je bent ingelogd.