What is Due Diligence An Overview Atu Siwatibau
What is Due Diligence? - An Overview Atu Siwatibau Partner
Definition n Legal Due Diligence is q q a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential. reasonable steps taken by a person to avoid committing a tort or offence. © Siwatibau and Sloan 2018
Due Diligence Continuum Identify risk Manage risk © Siwatibau and Sloan 2018 Defend breaches
Why is DD important? © Siwatibau and Sloan 2018
Why is DD important? © Siwatibau and Sloan 2018
Identify Legal Risk 1. Procurement and Sales 7. Regulatory Compliance 6. Finance and banking 2. Core Business Your Business 5. Employment 4. Land Assets © Siwatibau and Sloan 2018 3. Internal Structure, Management And Corporate Governance
What does it look like? Business Sector DD review 1. [Core Business] Sale and purchase 1. Summary of [Core Equipment] (a) Nature agreement (b) Collateral Agreements (c) Governing law (d) Date (e) Parties/Address What does [Client] want Offer letter outlining terms for purchase of [Core Equipment] [Supplier] standard terms and conditions [Supplier] standard form LC [Supplier] standard form performance guarantee Technical specifications Terms and conditions are governed by the laws of the State of New South Wales, Australia. Performance guarantee is governed by the laws of Federal Republic of Germany. Courts of Munich having exclusive jurisdiction. Offer letter dated [date]. [Supplier] Limited (seller) [Agent] Limited (purchaser) © Siwatibau and Sloan 2018 Risks, Comments and Suggested Solutions This contract should be complete (except for performance guarantee and warranties) by the time [Client] takes equity in [Target]. Ensure that technical specs Check technical are what up to [Client]’s specifications requirements [Agent] will be novating rights and obligations under novation agreement to [Target]? / [Related Company]?
(f) Commencement Upon placement of order by purchaser (g) Term and end of term date Offer valid until [date] (h) Renewal: term / number / conditions (i) Authority to enter into agreement (j) Conditions precedent Novation agreement to be signed between [Supplier], [Agent] and [Related Company] Each page of technical offer to be stamped and signed by authorised signatory of [Agent] and [Supplier] Limited. Novation agreement is drafted with [Related Company] as signatory. However, clause 33 of contract states that novation will be to [Target]. [Client] would prefer that the novation be to [Related Company] in the first instance (to purchase and install the equipment) and then only transfer the equipment not [Related Company] on commissioning. Not sure if this will be agreed to by [local bank] who is lending to [Related Company]. Need to clear this point. (k) Covenants/obligations: General/Special Price includes commissioning spares, 2 years operational spares and 40 man-weeks for supervision or erection and commissioning of generator. © Siwatibau and Sloan 2018
(l) Consideration / payment obligations Euro [big number] based on fixed total value of CZK [another big number]. Final purchase price will be fixed on date of confirmation of order depending on then prevailing exchange rate between CZK and Euro and will be fixed for duration of contract unless changed in accordance with conditions of agreement. Price is exclusive of any taxes, duties and levies outside of Europe and is on a FOB European port basis. Price doesn’t include cost for conduction, providing testing equipment, etc for performance testing of the equipment. Euro [more big numbers] on purchase order Euro [more big numbers] on 20% completion Euro [more big numbers] on 50% completion Euro [more big numbers] on 70% completion Euro [more big numbers] on 90% completion Euro [more big numbers] on dispatch of delivery documents. Irrevocable LC for balance of payments to be established within 4 weeks of date of order. (m) Delivery obligations Equipment supplied 11 months Ex-Works (one month grace before LD’s are applied) FOB European sea Port according to Incoterms 2000. © Siwatibau and Sloan 2018 Price is not fixed on Euro but fixed on CZK and still subject to exchange rate fluctuations between the two. Will this fluctuation affect amount of loan from [CLIENT]? Or will [Target] take the risk of exchange rate fluctuations? Price exclusive of taxes. When does [CLIENT] have to pay its loan to [Target]? Is it before shipment or after commissioning? Either way, it is better for [CLIENT] to ensure that machine is properly insured and safely delivered and installed rather than just relying on guarantees on the loan (in the event it falls over).
(n) General warranties / warranty period / LD’s / Performance warranties Seller warrants work will materially conform to requirements of contract. Equipment will be free from defects in title. Materials and workmanship will conform to contract requirements. Warranty period – 12 months from date of acceptance or 24 months from date of notification of readiness to ship (whichever is first). Seller will correct any failure at its expense. Warranties are exclusive remedy of purchaser. LD’s for delay at 1% of contract price per week up to maximum of 10% LD’s for performance shortfall (non-achievement of values stated in technical specifications. For each full 1% shortfall in output purchaser is entitled to LD’s of 1% of contract price up to a maximum of 10% of contract price. Cumulative LD’s for delay and performance capped at 12. 5% of contract price. [CLIENT] should ensure that warranties are not voided in the course of delivery and installation of the machine. Performance Guarantee (appendix F) is given by [Supplier] Financial Services (and not a commercial bank) on behalf of [Supplier] Australia (the contract is with [Supplier] Limited and not [Supplier] Australia) for the benefit of [AGENT] (this must be novated in the novation agreement). Termination event under performance guarantee (subparagraph 3) must be changed to conform to performance obligations under contract. Otherwise the performance guarantee will terminate before the performance period does under the contract. Need to add reference to novation agreement and fact that rights and duties and obligations will be getting transferred to other parties. Performance guarantee subject to laws of Germany while contract subject to laws of New South Wales. Need to sort this out, possible conflict. Get guarantee from commercial bank in Australia? (o) Security / negative pledge / guarantees / indemnities / side letters Nil (p) Authorised signatories for drawdowns LC and performance guarantee requirements (q) Arbitration / dispute procedure Disputes will be settled (final decision) under Rules of Arbitrations of ICC and shall take place at Sydney, NSW at a place nominated by seller in the English language. (r) assignment us/them Cannot assign subject to prior written consent except seller may assign to “affiliates”. (s) Termination: us/them/notice 30 day written notice upon substantial default by one party. 30 days after failure to make payment shall be considered a substantial default. Termination by written notice upon insolvency. Amount of compensation payable by purchaser to seller on termination to be determined in accordance with a “Termination Curve”. Not clear what the termination curve is. (t) Default events? Grace periods? One month (30) days grace on 11 month delivery schedule before LD’s kick in. © Siwatibau and Sloan 2018
(u) Change of control: definition / us / notice / consents Nil (v) Cross defaults? Nil (w) Address for notices / method of notice Not specified (x) Limitation of liability (y) Intellectual property Purchaser does not get any title to software embedded in goods but gets a non-exclusive, perpetual, transferable and royalty free license to use software upon payment in full. Standard clause. (z) Title and risk Passes to purchaser upon delivery (FOB European sea Port) Need to ensure that adequate insurance cover is in place upon delivery (aa) Installation Goods to be installed by and at risk of purchaser. Need to ensure that any installation doesn’t void seller’s warranties! (ab) Insurance [Target] should put in place adequate insurance (FOB European Port) (ac) Other key terms? 2. Obligations 2. 1 Initial obligations (a) dated? Counterparts? No signed documents. Still in draft yet to be finalized. (b) signatures? Signatories? Who are they? Sealed? Seal no. ? Not yet (c) certificates / other conditions precedent © Siwatibau and Sloan 2018
Assess and Allocate Risk 1. Can the risk be avoided? 2. Can the risk be reduced? 3. Can the risk be absorbed? 4. Can the risk be transferred? © Siwatibau and Sloan 2018
Assess and Allocate Risk Allocation Principles 1. The extent to which the consequences of a risk are allocated to a party should take into account the overall effect on that party’s business 2. Risk should be allocated to a party in proportion to the extent to which it can influence the likelihood of that risk occurring © Siwatibau and Sloan 2018
Assess and Allocate Risk Allocation Principles 3. Risk should be allocated to a party in proportion to the extent to which it can minimise the consequence of that risk occurring with, all things being equal, the second principle taking priority 4. For minor risks, clarity of allocation should take priority over other principles © Siwatibau and Sloan 2018
Managing Risk n Legal Due Diligence is q q a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential. reasonable steps taken by a person to avoid committing a tort or offence. © Siwatibau and Sloan 2018
Due Diligence Continuum Identify risk Manage risk © Siwatibau and Sloan 2018 Defend breaches
Managing Risk Assessing potential impact of risk Likelihood of occurrence 1 3 2 4 Impact © Siwatibau and Sloan 2018
Managing Risk Legal Risk Rating Chart Critical Key Business Area is not sustainable in the short term. Poor Foreseeable legal risks have been identified and need urgent attention in this Key Business Area Good Key Business Area is currently being managed in some areas but some improvement opportunities identified Excellent Key Business Area currently being managed successfully © Siwatibau and Sloan 2018
Managing Risk 1. Procurement and Sales 7. Regulatory Compliance 6. Finance and banking 2. Core Business Your Business 5. Employment 4. Land Assets © Siwatibau and Sloan 2018 3. Internal Structure, Management And Corporate Governance
Managing Risk Legal Risk Management Matrix Client: XXXX Date: Framework Management Key Business Area 1 2 3 4 5 6 7 Risk Status Business Objective X 1. Expand operational premises X 2. Secure core business capability X 3. Increase customer base X X 4. Increase product base © Siwatibau and Sloan 2018 X X X X Notes
Due Diligence Continuum Identify risk Manage risk © Siwatibau and Sloan 2018 Defend breaches
Grammar and Punctuation What could go wrong? © Siwatibau and Sloan 2018
Grammar and Punctuation What could go wrong? n The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods. © Siwatibau and Sloan 2018
Grammar and Punctuation What could go wrong? n The canning; processing; preserving; freezing; drying; marketing; storing; packing for shipment; or distributing of: (1) Agricultural produce; (2) Meat and fish products; and (3) Perishable foods. © Siwatibau and Sloan 2018
Grammar and Punctuation What could go wrong? n This agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party. © Siwatibau and Sloan 2018
“I’d like to thank my parents, Mother Teresa and the Pope” © Siwatibau and Sloan 2018
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