7.3.4 How is the due diligence process executed?

How does one carry out a due diligence process? As may have become clear, a corporate due diligence concerns a factual investigation into the affairs of a business and into factors that may impact its results. A legal due diligence consists of an examination of the legal, tax and financial structure of a company or a project. It is very important to make any obstacles or hidden liabilities transparent to the counterparty before concluding the transaction. These could also concern human rights issues.

A due diligence assessment typically consists of a factual investigation and desk research. The factual part takes place by for example interviewing company representatives, inspecting operations and machinery, taking soil samples to examine pollution levels, valuating real estate and exploring the IT systems. The steps to be taken depend on the type of business that needs to be investigated and on the type of transaction. A finance transaction requires other information than a management buy-out transaction. The desk study part of a due diligence process will focus on examining documents, e.g. annual accounts and other financial documents such as management reporting systems, accountants' letters. Other relevant documents include: operational licences, intellectual property rights registrations, court documents, consultant reports, commercial contracts, distribution contracts, supply contracts, rental contracts, service level agreements, key employee agreements, collective labour agreements and social plans. Reference is made to Annex 7.1 in fine.

Besides investigating facts and risks pertinent to the company, the examination also focuses on more general business risks. Questions to be answered are, for example: are there any country risks such as currency risks or corruption risks that need to be avoided? The NGO Transparency International provides useful indices on corruption risks on its website. Human rights issues could well be included in this part of the investigation. In order to deal with this subject - as with any subject which forms part of a due diligence investigation -the researcher should truly understand the way in which the company works and produces its products. It is also necessary to understand where the resources and other ingredients needed for the production process come from, where the company buys its products, and in which way the products are manufactured. Based on this overall knowledge, sensitive issues from a human rights perspective can be distilled and more fully investigated. Furthermore, the due diligence research could include an internet search to see if the company concerned has been identified in connection with any human rights issues. Local news sources could also be included in the search to analyse whether there are any issues in which the company is mentioned. If the parties agree, stakeholder interviews can also be made part of the due diligence assessment.