Answer ... (a) Commercial/corporate
From a commercial perspective, specific investigations should be conducted with respect to:
- change of control provisions in major contracts;
- non-transferable contracts, rights and licences; and
- any existing liabilities.
With respect to corporate matters, the following main aspects should be assessed:
- the general status of the company, including decision-making mechanisms, powers of representation and a group chart;
- specific shareholders’ agreements and tag-along, drag-along, pre-emption and first refusal rights; and
- share pledges.
(b) Financial
Specific attention should be paid to:
- financing agreements (change of control, material adverse change, force majeure and hardship provisions);
- loans/facilities granted intra-group/to affiliates;
- cash pooling arrangements; and
- business-related agreements and information on clients and suppliers.
The aim is to ensure that the target will benefit from a steady cash flow during the implementation of the transaction, as well as in the business integration stage.
(c) Litigation
Generally, basic information on past and ongoing litigation is available from public sources. However, to determine the target’s exposure, the following main issues should be reviewed:
- up-to-date information and relevant documents provided by the target regarding existing, pending or threatened litigation and/or arbitration; and
- information on ongoing investigations conducted by public authorities.
(d) Tax
Tax due diligence should cover a period of at least five fiscal years (ie, the local statute of limitations for tax obligations).
(e) Employment
In both share and asset deals, specific investigations should be conducted with respect to employment-related matters, to:
- determine the obligations and liabilities incumbent upon the target/transferring along with the assets in deals that qualify as a transfer of undertaking; and
- identify key employees and potential financial exposure relating to non-compete, dismissal and other specific indemnifications.
To this end, the following should be reviewed:
- all employee individual and collective agreements;
- personnel files;
- management agreements;
- benefits;
- policies (eg, internal regulations);
- dismissals;
- disciplinary reports; and
- litigation.
Moreover, in case of asset deals, an assessment should be made in order to establish whether there is a transfer of undertakings. According to Court of Justice of the European Union case law, this is a matter for the national courts, in view of the specific interpretation factors involved (which cannot be considered in isolation) – that is:
- the type of undertaking or business;
- whether tangible assets such as buildings and moveable property are being transferred;
- the value of intangible assets at the time of transfer;
- whether a majority of employees will be transferred to the new employer;
- whether the customers will be transferred;
- the degree of similarity between the activities carried on before and after the transfer; and
- the period, if any, for which those activities were suspended.
The above assessment is not necessary in the case of a share deal, as the employer remains the same.
(f) IP and IT
Often, IP and IT rights are overlooked in transactions outside the technology, media and telecommunications industry and are dealt with as boilerplate provisions in common law structured agreements, which creates further liability and increases the buyer’s exposure. There are various national specifics and technicalities when it comes to IP rights, and the following main aspects should be reviewed in the context of the legal due diligence:
- patents;
- copyright;
- trademarks;
- domain names;
- licensing/sub-licensing agreements; and
- IP litigation and claims.
(g) Data protection
As data protection issues have become increasingly important from a purchaser’s perspective, the due diligence should encompass all aspects in this regard, including:
- the existence and accuracy of a data processing register;
- the existence and form of privacy agreements signed with providers/clients;
- technical and organisational measures implemented in order to ensure personal data security;
- privacy information notices; and
- proof of compliance with the data processing principles imposed by the General Data Protection Regulation (eg, data processing impact assessments and/or legitimate interest assessments performed by the target).
(H) Cybersecurity
Cybersecurity has become paramount as the threats in this area become increasingly severe, such as incapacitating ransomware attacks. The due diligence should thus encompass issues such as:
- verification of the information system security measures taken by the target;
- penetration tests; and
- reports, including security certifications.
(i) Real estate
Typically, the due diligence should address:
- ownership title;
- restitution claims;
- zoning requirements;
- potential overlapping; and
- environmental-related issues.
Lease contract reviews should highlight:
- termination clauses;
- service charges;
- rent indexation or similar;
- force majeure;
- hardship; and
- the existence of flexible mechanisms and tools that allow for risk sharing renegotiations.
Considering the consequences of the COVID-19 crisis on the real estate market, another matter to be considered during the lease review is business interruption insurance/insurance for loss of rent.