In the context of an acquisition, the legal due diligence should, but sometimes fails to, take into account information that is not recorded in the due diligence documents made available in the data room.

When acting on buy-side, a very important aspect of legal due diligence that may often be neglected or overlooked, is summarising and reporting on information obtained from key people, that may otherwise be absent from formally disclosed due diligence documents.

Lawyers collect such information in various ways including by:
– conducting interviews with target’s management and key employees
– Q&As in the due diligence process and at expert meetings/calls
– statements made and questions answered at management meetings and presentations.

The value of such information can be substantial since it could be used to provide context, complete, supplement, check and verify already available information, test assumptions and conclusions and ultimately to improve the quality of the due diligence report. For instance, it could help reevaluate the preliminary list of red flags identified, prioritise the issues in order of urgency and importance, reassess the potential legal implications and include analysis of the strategy and legal steps that the target’s management has already adopted to address such issues. Overall, the report will become better aligned with reality and may include specific, practical/actionable recommendations.

Here are five sensible steps a buyer’s lawyers can always take:

1. Prepare. At the outset of the due diligence, identify the key persons with knowledge of the target and its business affairs. Research publicly available information, e.g. registrations on their names in the public registries (trade registry, patents and trade marks registries, etc.), publications, interviews, podcasts, and so on.
2. Have a questionnaire ready. Tailor and adjust it beforehand to the relevant industry, company and individual (position, job function). Questionnaire should be brief, limit the number of questions to 10, prioritise and select only the critical ones. Questions should be clear and simple (avoid including multiple sub-questions in one sentence). Be specific, refer to due diligence documents and be ready to cite or hand copies of those in to the interviewee so that they could give you an informed answer.
3. Record the statements precisely, use the prevailing jargon. Read the information critically, check and verify based on the information already disclosed in the due diligence documents and public registries.
4. Fill in the gaps. Or clearly mark all gaps and missing information. Update accordingly the seller warranties section in the transfer agreement.
5. Update your due diligence report swiftly and in particular the list of material issues/red flags identified. Include a current status update and update the recommended feasible legal remedy. The client will appreciate the speed and the added value of your update.