This post is part three of our series exploring various aspects of due diligence in the context of a merger and acquisition (M&A) transaction. Our prior posts discussed M&A due diligence generally and its objectives and described the due diligence process. This post will focus on assembling your due diligence team of experts and the due diligence request list.
Building your due diligence team of experts
Every deal is different, and one of the first priorities in the due diligence process is to assemble a diverse due diligence team. The team’s collective expertise should cover the various business, legal, technical, and financial matters unique to the seller and the deal at hand. This means not only assembling the appropriate legal team, but making sure that the buyer or seller has designated the appropriate in-house contacts to address questions that may arise concerning financial, customer, marketing, technical/engineering, information technology/infrastructure or personnel matters.
Although the primary lawyers on the deal will conduct much of the legal diligence review, there are certain areas that will warrant a legal “specialist’s” review. These areas include antitrust, corporate and securities, debt facilities, environmental, executive compensation and employment, government contracts or regulatory agencies, import and export, intellectual property, litigation, privacy, real estate and real property, and tax. Each specialist should have an integral role in creating the contents of the due diligence request list (or responding to the request list), reviewing material related to the specialist’s subject matter, and drafting, reviewing and modifying the portions of the definitive transaction documents relevant to the specialist. In order to make the due diligence review by a specialist cost-effective, the specialist should be briefed on the objectives of the parties as discussed above in our prior post.
The due diligence process is a collaborative effort and delegating responsibility will facilitate a more efficient and effective process, thereby producing a higher quality result and reducing the probability that key issues will be overlooked or improperly addressed or negotiated. Consider having one point person from each of the following groups: the seller; the seller’s counsel; the buyer; and the buyer’s counsel. These point people are responsible for fielding and responding to all requests for additional due diligence material or information.
Preparing the due diligence request list
The due diligence request list (as prepared by the investigating party) is an important step in formulating the scope of a due diligence review. Although some may believe that this list is generic or “boilerplate,” a detailed and targeted request list can make the due diligence process more efficient, which may also lead to a more thorough and cost-effective review. In general, a due diligence request will include all material agreements, stockholder agreements, capitalization records, financial information, customer and supplier information and contracts, employee records and benefits plans.
Despite the general nature of the types of information that will be requested, the list itself should be fairly specific, and tailored to the specific deal. It is better to make a targeted request for specific materials than it is to make a general request such as, “Provide us with all material information about the company.” For example, asking for “all charter documents” or “all financing documents” is not as helpful or efficient as asking for “the company’s certificate of incorporation, its bylaws, and all amendments as now in effect” or “all loan agreements, credit facility documents, security agreements, indentures, bonds, notes, and other evidences of short-term or long-term indebtedness, and all amendments, as now in effect.” This is particularly the case with parties that are not experienced in handling due diligence requests and may not be familiar with the information generally.
Whether the request is global or targeted, generic or detailed, it should be tailored to the particular provider as much as possible. For example, if the provider is a public company, its SEC filings should be read (typically the prior 12 months’ of filings) before the request is submitted. This will enable the recipient to identify particular documents (or potential documents) it might not otherwise be in a position to ask for specifically. Although this kind of customization is more difficult when the provider is a private company, it is not impossible. The recipient will likely have some specific information about the provider (from firsthand knowledge or information from a website); and a modest amount of advance teamwork among those who have this information can help focus the request.
Example due diligence request list
Here is an example of what a comprehensive due diligence request list might look like. Please note that this form is merely an example starting point and would typically be customized and trimmed down to eliminate areas of inquiry that are not applicable or of interest to the buyer or seller. While this example might seem very long (at 16 pages), it is not uncommon to receive even longer versions (20+ pages) from large companies like Microsoft. Whether the form is used for a single global request or staged focused requests (often called a supplemental due diligence request), it should provide an itemized list of material documents that are important in any due diligence review. As will be discussed in our future posts, the due diligence request list will become the inventory of documents requested, provided and reviewed on the road to completing an M&A transaction.