Introduction
Are you about to embark on a due diligence journey for an upcoming merger? As a lawyer, your role in uncovering any concerning aspects of a potential acquisition is vital to ensuring the success of the deal. However, the extensive nature of due diligence can make it overwhelming to know where to start, especially for junior attorneys. That’s where an M&A due diligence checklist becomes indispensable. With a structured checklist as your roadmap, you’ll have a clear direction, know what to look for, and be able to manage your tasks efficiently.
M&A Due Diligence Checklist Steps
This comprehensive M&A due diligence checklist covers all the essential steps required for both public and private mergers and acquisitions. By following these steps, you’ll cover all the bases and ensure a thorough due diligence process.
- Handle preliminary matters: Before diving into due diligence, answer fundamental questions and gather foundational information about the deal.
- Assemble the due diligence team: Put together a team of experts in various fields to ensure a comprehensive review of the target company.
- Submit the due diligence request: Gather the necessary information by requesting specific documents and answers to key questions.
- Distribute and organize materials: Properly organize and distribute the collected materials to the relevant parties involved in the deal.
- Communicate and report due diligence findings: Ensure effective communication with senior members of the deal team by providing regular progress updates and reports on the due diligence findings.
- Review key sources of information: Dive deep into the target company’s SEC filings and other relevant sources to gain critical insights.
- Determine whether specialist review is necessary: Identify specialized areas that require expert review and involve relevant specialists accordingly.
Creating an M&A Due Diligence Checklist
Creating an M&A due diligence checklist requires considering the unique aspects of each deal. While there are some general requirements applicable to all buyers, the checklist should be adaptive to address the specific needs of the deal at hand. By incorporating elements such as the merging entities’ nature, management and ownership structures, market presence, and historical data, you can create a checklist tailored to the deal’s specific parameters. The checklist should address not only the basic diligence requirements but also cover any unique considerations that may impact the deal’s success.
What to Include in an M&A Due Diligence Checklist for Public Deals
Public deals involve many moving parts, including shareholder considerations, financial reporting obligations, and equity market volatility. To navigate the complexities of a public deal, it’s crucial to review the target company’s extensive documentation, such as securities filings, quarterly reports, and regulatory requirements. Key steps to include in your due diligence checklist for public deals are:
- Handle preliminary matters
- Assemble the due diligence team
- Submit the due diligence request
- Distribute and organize materials
- Communicate and report due diligence findings
- Review key sources of information
- Determine whether specialist review is necessary
Organizing the Due Diligence Process for Public Deals
Handle Preliminary Matters
Before delving into due diligence, gather essential information about the deal. Understand the type of merger, the nature of the merging entities, and the target company’s business operations and market presence. Clarify the logistics, including the parties involved in the process, deadlines, and the desired end product.
Assemble the Due Diligence Team
Ensure you have a well-rounded team of experts, including specialists in real estate, employee benefits, intellectual property, tax, and environmental issues. Plan the workflow and determine how responsibilities for reviewing specific materials will be divided among team members. Consider whether local counsel or outside specialists are necessary for certain aspects of the due diligence process.
Submit the Due Diligence Request
When requesting diligence materials, be specific about the information you need. Focus on the target’s management and ownership structure, potential impediments to closing the deal, and areas of potential liability. Request relevant documents, such as the target’s governing documents, financial reports, and subsidiary information.
Distribute and Organize Materials
Organize the collected materials in a way that makes them easily accessible and searchable. Consider using databases or AI tools for efficient organization. Ensure compliance with confidentiality agreements and adopt a secure system for disseminating materials within the deal team, taking into account any restrictions on sharing sensitive information.
Communicate and Report Due Diligence Findings
Share the due diligence findings with the deal team and senior members involved in the negotiations. Determine the preferred format for reporting, whether oral or written, and provide regular progress updates to keep everyone informed.
Conducting the Due Diligence Review for Public Deals
Review Key Sources of Information
Thoroughly examine the target company’s SEC filings, which are critical for a public deal. Pay attention to any restatements or corrections in the filings and assess their potential impact on the deal. Analyze the shareholder landscape and identify any major equity holders or activist shareholders. Understand the target’s compliance with Sarbanes-Oxley Act requirements and review relevant matters such as internal controls, financial reporting, and essential committee compositions.
Determine Whether Specialist Review Is Necessary
Coordinate with specialists in key areas such as real estate, intellectual property, and accounting to ensure a comprehensive review of relevant materials. Engage experts who can provide valuable insights into specific aspects of the target company’s operations, such as IP ownership, property holdings, and financial reporting.
What to Include in an M&A Due Diligence Checklist for Private Deals
Due diligence for private company acquisitions shares similarities with public deals but requires more emphasis on direct interactions and face-to-face interviews with company officials. Since private companies may have less publicly available documentation, it’s important to tailor the due diligence checklist accordingly. Key steps to include in your due diligence checklist for private deals are:
- Define the due diligence task
- Assemble the due diligence team
- Submit the due diligence request
- Get access to sources of information
- Distribute and organize materials
Organizing the Due Diligence Process for Private Deals
Define the Due Diligence Task
Clearly establish the scope and deadlines of the due diligence review, taking into account the buyer’s specific needs and concerns. Determine the budget allocated for due diligence and whether outside consultants will be required. Define the preferred format for communicating findings and the process for sharing information with deal parties.
Assemble the Due Diligence Team
Form a due diligence team consisting of legal, business, accounting, and tax specialists. Assign a point person to coordinate the process and ensure effective collaboration among team members, especially if the team includes individuals from multiple organizations.
Submit the Due Diligence Request
Tailor the due diligence request to the specific target business and industry. Request documents and information based on the buyer’s specific areas of focus. Be explicit about the nature of the requested documentation and clarify any terminology to avoid misunderstandings between the buyer and seller.
Get Access to Sources of Information
Private companies may limit access to sensitive information, even within their own premises or virtual data rooms. Be prepared to conduct on-site visits, interviews, and direct interactions to gather critical information. Be respectful of the seller’s concerns about sharing trade secrets and ensure clear communication about the purpose and use of the requested information.
Distribute and Organize Materials
Adhere to any restrictions imposed by the seller on the dissemination of materials, especially if the parties are competitors. Respect confidentiality agreements and implement secure systems for organizing and accessing materials. Seek the necessary permissions to review critical terms within the seller’s documents without sharing confidential information.
What to Look for When Reviewing Materials for Private Deals
When conducting due diligence for private deals, focus on ownership documents and specialized reviews.
Categories of Materials and Common Issues
Examine the target company’s capitalization and equity ownership, identifying any restrictions or consents related to equity transfer. Analyze the target’s financial reports, contracts, and any potential litigation that could impact the deal. Pay attention to pending or ongoing legal matters that could affect the target’s operations and future prospects.
Specialist Reviews
Engage legal specialists and outside consultants, such as IP attorneys or accountants, to carefully review relevant materials. Assess specialized areas such as intellectual property, real estate, and regulatory compliance to fully understand the target company’s potential risks and opportunities.
Conclusion
By utilizing a comprehensive M&A due diligence checklist tailored to the specific requirements of public and private deals, you can efficiently navigate the complexities of the due diligence process. Remember to communicate effectively with the deal team, involve specialized experts when necessary, and stay organized throughout the review. With the right approach and attention to detail, you’ll contribute to the success of the merger and ensure a fruitful relationship with your client.
For more information on M&A due diligence and legal expertise in general, visit Garrity Traina.