Performance of Due Diligence in Transactions

Due diligence is a phase of every transaction, from a bank loan to a corporate merger. It is how the parties determine if and how they should proceed. The process typically involves reviewing a company's documents and in some instances visiting a company's facilities or interviewing employees.

Perhaps because it is time-consuming, due diligence is often unappreciated, but wrongfully so—no one wants to purchase a company only to discover that it is in substantial debt or about to be sued by a former employee with several well-documented reasons to be disgruntled. Despite the critical role of due diligence, it is not always well understood, especially by new associates, who often are the ones assigned primary responsibility. It is therefore crucial that a transactional attorney understand the purpose of diligence and how it relates to the particular deal.

Due diligence generally falls into two overlapping categories: business and legal. Business diligence focuses on a company's financial situation, operations, and prospects. This is often handled by the involved businesses themselves or their financial advisers rather than their legal representatives.

Diligence should be a cooperative process. It should be undertaken by the reviewed entity's own counsel as well as the counsel for the other side. Both sides have the same goal of getting the transaction completed, and they need to work together in order to address any issues that may come to light. Unfortunately, many companies and their counsel become defensive when subject to due diligence review. Generally, diligence begins with delivery of a due diligence checklist, which requests the documents and information that the attorney needs to review.

Diligence lists, modified as appropriate for the transaction at hand, will often request documents showing corporate organization, management, capitalization, financial statements, tax information, regulatory licensing, intellectual property, employees, and material contracts.

Diligence requests usually involve several rounds of back and forth with requests for additional documentation and clarification as the reviewing party becomes more familiar with the subject company. For example, if initial diligence reveals that there are a number of regulatory licenses involved in a business, that will be an area of focus, and more documentation may be required. In other instances, the disclosed documentation may be incomplete. For example, an amendment to...