We have encountered numerous instances recently whereby
investors were about to make an investment without performing a prior legal
due diligence examination. There are various reasons put forward by
investors for not performing a due diligence examination, such as:
the contemplated investment is in a young company, insufficient
budget, cost-benefit considerations, the volume of the investment,
timetables, long-standing work relations between the investors and
the corporation, and the like.
As a rule, whenever we encountered a decision to not perform a
legal due diligence before investing, the decision turned out to be
Undeniably, every investment involves some risk, but the degree
of risk may be mitigated by performing a comprehensive examination
of the business being acquired.
A legal due diligence process allows the investors to learn
about the corporation in various aspects, including: the identities
of the corporation's shareholders; its relations with the
banking system; the approvals required from third parties; the
corporation's pledged assets; the corporation's licenses
and the potential impact of the transaction on their validity; its
workforce and their employment terms, including exposures relating
to the company's obligations to its employees, both by law and
by virtue of the employment agreements with such employees; the
corporation's tax exposures; the structure of the agreements
with the corporation's suppliers, including the degree of risk
involved in working with a few material suppliers; the
corporation's customer base and the terms of engagement with
them; the corporation's exposure to past lawsuits; necessary
actions in order to protect the corporation's intellectual
property rights, including the registration of patents, trademarks
and copyrights; and the like.
The outcome of the due diligence examination should have a major
impact on the nature of the contemplated transaction, inter alia:
on the structure of the transaction (share purchase transaction or
asset purchase transaction); on the transaction price; on the
representations that will be required of the business being
acquired and its owners, on the collateral to be provided to
guarantee the investment; on the suspensive conditions to
consummation of the transaction; indemnity clauses; the mechanism
of the investment and, in the final analysis, on the very decision
about whether or not to proceed with the transaction, considering
the results of the due diligence examinations.
In this context, we further advise that in 2014 the Israel
Antitrust Authority ("IAA") published a public statement
addressing information disclosures between competitors during the
performance of due diligence examinations prior to executing a
transaction. According to the IAA statement, the importance of a
due diligence examination to the efficient operation of a business
on the one hand, and the concern about competition being
compromised as a result of a due diligence being performed between
competitors, on the other hand, obliges competitors that are
conducting due diligence examinations of each other, to carefully
and meticulously consider their actions. The main discussion in the
IAA's foregoing statement targets the tension between the
prohibition of becoming a party to an unlawful restrictive
arrangement, and the need for an adequate factual foundation of
knowledge for the purpose of forging a transaction between the
Originally published November 16, 2016
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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