Determine the scope of due diligence from four directions
To determine the scope of due diligence, lawyers need to fully understand the objectives and transaction purposes of the acquirer, the specific needs of the acquirer, and consider the characteristics of the target company's industry, the requirements of the commission, the fees of lawyers and other factors, and then determine the scope after full communication with the acquirer. Due diligence is mainly aimed at evaluating the investment value and revealing the investment risk of the M&A target, and drawing as comprehensive, reasonable and effective investigation conclusions as possible.
A merger involves not only legal due diligence, but also financial due diligence, industry expert due diligence. Different due diligence, not only the scope of the overall due diligence is different, even if the same investigation content, its focus is different. For example, when conducting due diligence, the intermediary agencies all investigate the fixed assets and intangible assets of the target company, while the lawyer's due diligence focuses on the ownership, legality and effective use period of the assets. The accountant's examination focuses on the book value of the asset such as the original value, depreciation and net value; The industry expert review focuses on the technical status of the asset, the performance of the asset, and the production capacity of the asset.
How to determine the scope of due diligence work?
The focus of due diligence and the degree of in-depth investigation in terms of assets, business, etc., are often different due to the company type of the target company, the industry it belongs to, the characteristics of the project itself, the acquisition plan, and the focus of the acquirer. It is important not to be "the same".
1. Determine the scope of due diligence according to the purpose of the transaction
Every transaction has its purpose. Some of these transaction purposes or motives can be understood through discussions with the management of the M&A party, while others may not be understood or can not be personally approved by the management, which requires due diligence personnel to make independent business judgments based on the transaction behavior. Based on this judgment, combined with the due diligence results, help the acquirer to take the initiative. Due diligence that ignores the real purpose of a merger is likely to bring fatal flaws to the merger.
Case: Failure to disclose the true purpose of the M&A transaction leads to the opposite of due diligence
Lawyers and accountants are told that the main purpose of M&A is to supplement their product range and increase their product market share by acquiring the target company. After due diligence, the legal due diligence report found that the target company was legally established, effectively continued, and the legal status was clear; According to the technical due diligence report, the target company has advanced technology and stable and reliable product quality; The financial due diligence report found that the target company's products were highly profitable. There's room for a market. The above due diligence indicates that there is a high probability that this merger can successfully achieve the merger objective. But in fact, the real purpose of the acquisition company is to use the target company's existing sales channels to promote a new product. The reason why M&A firms are reluctant to disclose their true purpose of the deal is that the acquisition firm is afraid that if this target is leaked, the target company will increase the value negotiation leverage, so it is kept secret. But in fact, the target company's existing sales channels are simply not suitable for promoting its new products, resulting in the failure of future mergers and acquisitions.
2. Determine the scope of due diligence according to the transaction method
Merger and acquisition includes two different ways: equity merger and asset merger and acquisition.
Equity merger and acquisition refers to the merger behavior that investors acquire the equity of the target company by purchasing the equity of the shareholders of the target company or subscribing to the capital increase of the target company. Asset merger and acquisition means that investors acquire the profit-creating ability of the target company by purchasing valuable assets (such as real estate, intangible assets, machinery and equipment, etc.) of the target company and operating the assets, thus achieving similar effects to equity merger and acquisition.
Due diligence, equity mergers and acquisitions need to conduct detailed investigations on all aspects of the enterprise from the qualification of the main body to the assets, liabilities, employment, taxation, insurance, qualifications and so on, so as to strive to prevent merger risks to the greatest extent. Compared with equity mergers and acquisitions, the scope and degree of legal due diligence in asset mergers and acquisitions are smaller, and generally only involve matters such as ownership status, right sources, ownership transfer and tax burden of the transaction assets.
3. Determine the investigation focus according to the industry characteristics of the target company
Simply put, legal due diligence should focus on different target companies. For high-tech companies, for example, intellectual property is the focus of due diligence; Whether chemical enterprises have conducted environmental assessments, whether environmental protection measures are in place, and whether civil lawsuits have been filed or administrative penalties have been imposed because of pollution are the focus of due diligence.
4. Determine the investigation focus according to the characteristics of the target company or target assets
Even if the target company in the same industry has different characteristics of the target company or target asset, the focus of due diligence is different.
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