Transaction Due Diligence

What Is Transaction Due Diligence?

Transaction due diligence is due diligence organised around a specific deal and its documents. While other due diligence services focus on a topic, such as financial, tax or legal review, or on an investor's decision, transaction due diligence is run to a deal timetable and designed so that every finding has a destination in the transaction: the price, a price adjustment mechanism, a warranty, an indemnity, a condition precedent to completion, or a post-completion action.

It is used in acquisitions, sales of businesses or shares, mergers, joint ventures and significant investments. It starts with the structure of the deal and the draft agreement, scopes the workstreams that matter for that structure, manages the data room and timetable, and ends with a consolidated report, a list of recommended contractual protections and a completion checklist. For sellers, a vendor due diligence prepares the business and its disclosure in advance.

The value of the approach is coordination. Findings from financial, tax, legal, regulatory and commercial work are brought together and translated into deal terms, so that the buyer does not discover a problem after signing, and the seller does not face surprises that derail the timetable. Due diligence is an investigation of facts on the basis of documents and information provided, within an agreed scope. It is not a valuation, not an audit and not a formal legal, tax or accounting opinion, and it cannot detect what is not disclosed.

Who Needs Transaction Due Diligence?

• Buyers acquiring shares or businesses
• Sellers preparing a business for sale
• Parties to a merger, demerger or business transfer
• Joint venture partners entering a deal
• Investors in significant minority or control investments
• Lenders and financiers involved in acquisition finance
• Boards and advisers managing a deal timetable

When Is Transaction Due Diligence Required?

It is not generally a legal requirement, but it is valuable when:

• A deal has a defined structure and a timetable for signing and completion
• A share purchase agreement or similar document is being negotiated
• Price will be adjusted for working capital, debt or completion accounts
• Warranties and indemnities need to be informed by findings
• Regulatory or counterparty approvals are conditions to completion
• Several advisers need to work to a single timetable
• The seller wants to prepare disclosure and reduce the risk of renegotiation

What Our Transaction Due Diligence Includes

The work is tailored to the deal and typically covers:

• Understanding the deal structure, parties, draft agreement and timetable
• Scoping of workstreams by structure: share purchase, asset or business transfer, merger or investment
• Request list, data room and Q&A process
• Financial, tax, legal, regulatory and commercial workstreams, in the scope chosen
• Price mechanism analysis: net debt, working capital, locked box or completion accounts
• Mapping of findings to deal terms: price adjustment, warranties, indemnities, escrow, conditions precedent and covenants
• Regulatory and third-party approvals and consents map
• Disclosure schedule preparation for sellers, or review for buyers
• Consolidated report with red flags, quantified exposures and recommended actions
• Completion checklist and deliverables list
• Vendor due diligence option for sellers before launching a process
• Post-completion issues list and integration points

Legal and Practical Considerations

Findings drive the agreement. Due diligence findings are most useful when they shape the contractual terms. Known issues are typically handled by price adjustment, specific indemnity or condition, because general warranties may not protect a buyer against matters it knew about, depending on the agreement.

Regulatory approvals. Depending on the deal, approvals may be needed under the Companies Act, 2013, such as for schemes of arrangement, under the Competition Act, 2002 if combination thresholds are met, under FEMA for foreign investment and under sector regulations. For listed targets, SEBI takeover and disclosure rules apply, including open offer triggers. These affect timing and conditions to completion.

Price mechanisms. Net debt, working capital and the choice between a locked box and completion accounts determine how value moves between buyer and seller between signing and completion. Due diligence supplies the numbers.

Stamp duty and tax. Transfers of shares and assets attract stamp duty and tax consequences that depend on the structure. These should be reviewed early, as they can affect the choice of structure.

Sellers' disclosure. A seller who discloses against warranties in an organised way reduces the risk of later claims. Disclosure must be accurate, since misleading disclosure can create liability.

Scope and limits. The review is limited to the agreed scope, period and information, and cannot detect what is not disclosed. It is not a valuation or audit or formal opinion.

Confidentiality. Data room information is confidential and should be covered by a non-disclosure agreement.

Common Findings in Transaction Due Diligence

• Debt-like items and undisclosed liabilities affecting price
• Working capital levels not matching assumptions
• Historical tax exposures that stay with the company in a share purchase
• Contracts requiring counterparty consent on change of control
• Missing licences or approvals needed to continue the business
• Title or property defects
• Litigation and notices not disclosed
• Warranties proposed that do not match the risks found

Professional Fees, Government Fees and Timeline

Due diligence carries no government fee. Fees of advocates, tax professionals, valuers and other external advisers, as well as approval fees and stamp duty on transaction documents, are separate. Our professional fees depend on the size and structure of the deal, number of entities and workstreams, and the timetable. Transaction due diligence typically takes 15 to 30 working days after the data room is available, running in parallel with negotiation.

Transaction Due Diligence vs Investment Due Diligence vs M&A Due Diligence

Transaction due diligence is organised around the documents and mechanics of a specific deal of any type. Investment due diligence is an investor's integrated review for its decision. M&A due diligence, in the mergers and acquisitions group, focuses on acquisitions and integration. Related services include Investment Due Diligence, Financial Due Diligence and Tax Due Diligence.

Need Professional Assistance With Transaction Due Diligence?

Connecting due diligence to the deal documents turns findings into protection. The Legal Bank can help you plan and run transaction due diligence to your deal timetable. Share your requirement to discuss the next steps.