Pre-deal checks should involve not only the examination of company accounts but also of the relevant programmes to comply with national and international regulations.
As 2017 brings with it another wave of economic growth, an increasing number of entrepreneurs are considering making the move to purchase their competitors before their competitors decide to purchase them.
If this sounds like you, then congratulations! You have the idea and the courage to move forward. You have done your research and you know what needs to be acquired. Now you need to put your plans into action. The first step to a successful acquisition is carrying out due diligence checks which calls for legal advice.
Pre-deal checks are often time-consuming, laborious and costly but they are the only way to avoid nasty surprises. Buyers need to carry out a thorough examination of the company accounts, legal issues and any compliance procedures. Companies need to identify what kinds of liabilities they are taking on before proceeding with the deal.
The aim of due diligence is always the same: to avoid any unexpected problems arising from the target company’s outstanding liability to pay environmental fines, labour compensation agreements, late tax bills and other charges derived from mistakes or illegal acts committed by the previous owners.
Due diligence checks should be carried out by lawyers specialising in the field of M&A. There is a saying: “if you think it is expensive to hire a professional, wait until you hire an amateur”. Typically, the first problem lawyers face when they start the due diligence examination is the lack of comprehensive data from the seller. The sellers often do not want to disclose too much information in order to avoid additional questions from buyers. Sometimes it is a part of the sellers’ tactics, and other times it may be an attempt to hide problems. Lawyers must be tough on this point because collecting all documents is of paramount importance. Lawyers must be sure that they have comprehensive information about the target company and so they can fully analyse the situation from a legal and tax point of view. Remember that there is no "one size fits all" answer and lawyers must adopt a very flexible approach.
On a deeper level, buyers should also take a closer look at the programmes put in place to deal with bribery, corruption, human rights abuses and many other governance issues not directly linked to the commercial side of the operation. Companies based in the United States, for example, will always have in mind that they work under the Foreign Corrupt Practices Act, which enables the authorities to pursue alleged breaches of American law anywhere in the world. UK companies at home and abroad, as well as overseas businesses operating in the UK, face similar requirements and stringent penalties under the 2010 Bribery Act.
But the preoccupation with checking everything is justified not only from a legal point of view but is also necessary from the point of view of reputation protection. Reputation must be protected at all times so buyers need to be aware that undisclosed information can be really harmful.
As our in-house legal and tax teams are busy assisting clients with various acquisitions, I must confess that carrying out good and effective due diligence is not an easy task, especially in Poland where checking compliance programmes often requires going back to the era before the fall of communism. There are also property restitution claims which have not been fully resolved. Every investment plan in Poland needs to take into account the risk of a restitution claim concerning the immovable. Unfortunately there is no other way to establish the legal status of the investment