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Due Diligence in Commercial Transactions
July 2, 2010   
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In today’s world of sophisticated commercial transactions, aggressive business tactics, and growing demand for efficiency, due diligence is an indispensable process that has to be ideally planned and executed.

Due diligence may be simply defined as a process of inquiry and investigation made by a prospective buyer in order to confirm that they are purchasing what they think they are.

Quite often due diligence is badly done regardless of the size of the enterprises involved in the process and the money spent on professional advisors. There are many reasons why due diligence can prove to be ineffective. First, the process costs money, so if the transaction does not go ahead the money spent on it will be considered as wasted. Therefore, the buyer does not begin due diligence until the deal is more or less guaranteed, as a result of which the whole process is usually conducted under time pressure. Also, the objectives of this process are commonly misunderstood as the purchaser, once he decides to go ahead with the process, often assumes that due diligence is supposed to confirm that the transaction that they want to finalize should take place.

Poorly executed due diligence may lead to failure to either pay or secure a fair market price for the company the buyer wishes to take over or even lead to the professional liability of the entities involved in the process.

Therefore, it is crucial that lawyers and advisers conducting the due diligence investigation understand the scope and nature of the work they have decided to perform to the best interest of their client. They also need to understand the risk associated with defective due diligence. Additionally, all members of the team should communicate clearly with their client about the important results of this investigation.

It is important to follow commonly accepted standards, guidelines, checklists and forms during that process. Nevertheless, blind reliance on standards, guidelines, checklists and forms will never be sufficient to ensure a meaningful due diligence review. It is only a first step that has to be completed by fully understanding the objective of the process—which is to identify and analyze all important information necessary for the parties to make an informed decision.

Many benefits may be achieved from a well constructed and skillfully executed due diligence review. This is ensured by the principal components of that process, which include full disclosure of information and documents, appropriate transaction evaluation, and determination to limit the professional liability of law firms and advisors involved in the due diligence process.

No matter what type of transaction is contemplated by the parties, in all cases it will require disclosing documents containing specified information. In most cases, the disclosure obligation arises in the context of principal transaction documents—generally in the form of representation and warranties and disclosure schedules.

Obviously, each party wants to make the best possible transaction in both economic and strategic terms. In order to achieve that, all important information has to be not only revealed but also evaluated. An appropriate due diligence study conducted by a team of experts from different fields is the best way to make sure that the transaction is evaluated in terms of market conditions.

Another important point is that lawyers and business advisors involved in the due diligence process increasingly find themselves exposed to the risk of litigation. Despite many conditions, restrictions and professional liability limitations contained in legal reports, law firms and business advisors still incur liability for their misconduct or inaccurate and incomplete actions. Therefore, an effective due diligence process is also a key issue for lawyers and advisors to make sure that a sufficient level of care and prudence has been exercised in the due diligence review.

The due diligence process is an undertaking of the utmost importance in every transaction. If good commercial due diligence is missing neither party will be able to identify and address potential areas of risk and concern. An effective due diligence effort may save time and money, minimize the risks and help ensure that the client makes an informed decision.

Katarzyna Fortak – Karasińska, Partner
Sławomir Karasiński, Partner
Fortak & Karasiński Radcowie Prawni Sp. p. ul. Gdańska 77a/3, 90-613 Łódź; tel. +48 (042) 6769020
Ul. Książęca 4, 00-498 Warszawa, Budynek Giełdy Papierów Wartościowych; +48 (022) 5377065 www.fandk.com.pl
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