Due Diligence Procedure In The Context Of Mergers And Acquisitions, Its Purpose And Effects On The Transaction
Table of Contents
The concept of “Due Diligence”, which is frequently used in the context of mergers and acquisitions, is defined as “prudent, careful, continuous and diligent activity or behavior that can be expected from a reasonable and prudent person in the presence of similar circumstances, provided that it is evaluated according to the specific conditions and characteristics of each case“.In a merger and acquisition process, it is of critical importance to conduct Due Diligence in the process starting with the submission of a non-binding offer and continuing through the submission of a binding offer, the conduct of negotiations and the completion of the process. As a matter of fact, Due Diligence is of great importance in a merger and acquisition transaction in terms of examining and x-raying the company and/or its assets in detail and from every angle, obtaining legal, financial and tax information as well as identifying risks. In this context, the data obtained as a result of the Due Diligence procedure constitutes the most important factor affecting the will of the party intending to invest or acquire whether or not to proceed with the transaction and is the source of how the negotiations will proceed in the later stages of the transaction and how the transaction documents will be created.
Due Diligence is more commonly referred to as “pre-acquisition due diligence” today. In the Due Diligence process, examinations are made on the basis of information and documents provided by the seller following the signing of a confidentiality agreement between the parties, but publicly available information is also utilized. Nowadays, with the development of technology, information and documents are uploaded to digital data systems called “data rooms” and made available to certain persons for review within a high security framework.
B. TYPES OF DUE DILIGENCE
Legal Due Diligence
Legal Due Diligence is a detailed examination of all aspects of the target company from a legal perspective. This review starts from the perspective of corporate law and starts with the examination of the company structure by examining the incorporation documents, company books, representation documents, shareholders’ agreement, if any, and corporate documents such as annual reports and auditor’s reports, with this way a determination and risk assessment within the framework of corporate law is made.
Another critical issue that should be emphasized in the Legal Due Diligence procedure is permits, licenses and permissions. As a matter of fact, in merger and acquisition transactions, the target company is generally desired to be taken over due to its operations in the commercial field in which it operates and its profitability from these operations. In order for the target company to continue these operations, it may be required to have certain regulatory permits, licenses or permissions. In our country, permit and license requirements in regulated markets such as energy, health and logistics are strict, and if the target company examined within the scope of Due Diligence has operations in these markets, it will be of high importance to determine whether it meets these requirements.
Agreements constitute one of the review subjects within the scope of Due Diligence. Agreements to which the target company is a party, such as loan agreements, business, customer, supply and confidentiality agreements, should be examined and important provisions such as termination, penalty clauses and change of control should be identified and action should be taken in this context.
The legal review of the target company’s assets focuses on issues such as the status of movable and immovable assets, restrictions on them, inventory and fixture determination.
Environmental issues are also a highly regulated area in Turkey. Determining whether the target company complies with environmental regulations within the framework of the market in which it operates is only one of the objectives of the Due Diligence procedure. Indeed, in cases of non-compliance with environmental regulations, high administrative fines may be imposed and minimizing the risk depends on the determinations made at this stage.
Another issue to be considered within the framework of the Due Diligence procedure is the lawsuits and enforcement proceedings to which the company is a party. Here, especially the lawsuits and enforcement proceedings to which the company is a creditor and debtor should be identified and the risk should be determined. At this point, not only a risk analysis subject to monetary size in lawsuits and enforcement proceedings, but also lawsuits and enforcement proceedings arising from tax issues, as well as lawsuits and enforcement proceedings that may cause the liability of the members of the board of directors – board of managers and managers of the company, are important for the continuation of the company’s commercial activities.Within the framework of the Due Diligence procedure, it is also important to assess the intellectual and industrial property rights of the target company. In this context, the ownership of these rights, whether they are subject to disputes, and especially the trademarks and patents owned by the target company or used under license agreements are issues that will affect the potential investor’s willingness to invest.
Financial Due Diligence
Within the scope of Financial Due Diligence, the target company’s financial status, income and expenditure status/balance, financial projection and especially profitability status are determined. In this framework, the company’s financial items such as income statements, balance sheets and budgets are analyzed.
Technical Due Diligence
Within the scope of Technical Due Diligence, the status of the technical competencies of the target company is determined according to the type of assets and licenses of the target company. In this framework, technical items such as licenses, permits, resource reserves, sales values of the target company are analyzed according to the necessity of the situation.
C. THE IMPACT OF DUE DILIGENCE PROCEDURE ON MERGERS AND ACQUISITIONS
It was mentioned above that the Due Diligence procedure takes place between the non-binding offer and the binding offer, negotiations and completion of the process. At this stage, Due Diligence is carried out by experts in the field and a report called the “Due Diligence Report” is prepared, in which the information obtained in this process and especially the risks are mentioned. As a matter of fact, the data obtained as a result of the Due Diligence procedure is frequently utilized in order to complete the transaction in a healthy manner and especially in a way to protect the interests of the potential investor. Such utilization manifests itself most frequently in the transaction documents to be prepared between the potential buyer and the seller and especially in the share/asset sale agreements. In these transaction documents, various mechanisms are established to mitigate the risks identified in the Due Diligence report. Examples of such mechanisms include establishing a liability and indemnification mechanism by determining the representations and warranties of the sellers, linking the completion of the transaction only to the elimination of the risk (for example, obtaining a missing permit by the target company), or obtaining a commitment and/or guarantee to cover any loss that may arise from the risk in the future by the seller.
On the other hand, the data and risks revealed as a result of Due Diligence are also of high importance in the negotiation process. High level of risks can strengthen the potential buyer’s hand in the negotiation phase or result in adjusting the sales price accordingly. In addition, the Due Diligence process also has an impact on the terms of the buyer’s offer when making an investment decision. Due Diligence, which has an impact on the transfer price, transfer terms and collateral mechanisms as a result of risk identification, also affects the buyer’s investment decision in this context.
Due Diligence is one of the indispensable and most important stages of merger and acquisition processes. Due Diligence aims to analyse the target company/asset in detail in every aspect and to reveal the risks. The data revealed as a result of Due Diligence significantly affects the fate of a merger and acqusition transaction. In order to protect the interest of the potential buyer in carrying out the transaction, it is possible to make special arrangements and organize various protective mechanisms in the transaction documents to be prepared between the parties based on these data and especially the risks.
Mergers & Acquisitions
The mergers and acquisitions department of Kılınç Law & Consulting; provides legal consulting services to domestic and foreign clients, private and public companies...