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Due Diligence

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What does the acquisition agreement typically say about due diligence?

Among other items, the acquisition agreement should:

  • State the time available for due diligence
  • Promise the buyer access to the selling company’s personnel, sites, and files
  • Set conditions for this access, such as physical access only during working hours with notice, and availability of alternatives (such as electronic communication, during pandemic conditions (e.g., COVID-19).  

Here is sample language about due diligence from an acquisition agreement:

Investigation by Buyer. The Seller and Target shall, and the Target shall cause its Subsidiaries to, afford to the officers and authorized representatives of the Buyer free and full access, during normal business hours and upon reasonable prior notice, to the offices, plants, properties, books, and records of the Target and its Subsidiaries in order that the Buyer may have full opportunity to make such investigations of the business, operations, assets, properties, and legal and financial condition of the Target and its Subsidiaries as the Buyer deems reasonably necessary or desirable; and the officers of the Seller, the Target, and its Subsidiaries shall furnish the Buyer with such additional financial and operating data and other information relating to the business operations, assets, properties, and legal and financial condition of the Target and its Subsidiaries as the Buyer shall from time to time reasonably request.

Prior to the Closing Date, or at all times if this Agreement shall be terminated, the Buyer shall, except as may be otherwise required by applicable law, hold confidential all information obtained pursuant to this Section with respect to the Target and its Subsidiaries and, if this Agreement shall be terminated, shall return to the Target and its Subsidiaries all such information as shall be in documentary form and shall not use any information obtained pursuant to this Section in any manner that would have a material adverse consequence to the Target or its Subsidiaries.

The representations, warranties, and agreements of the Seller, the Target, and its Subsidiaries set forth in this Agreement shall be effective regardless of any investigation that the Buyer has undertaken or failed to undertake.

 

The first paragraph of this clause is called an investigation covenant. It ensures that the seller will cooperate with the buyer by granting access and logistical support for the buyer’s due diligence review of the seller and its subsidiaries. This is one of the most valuable parts of any acquisition agreement.

The second paragraph, sometimes nicknamed a burn or return provision, may help allay the seller’s fears about confidentiality. Note, however, that the seller will often require the prospective buyer to enter into a separate confidentiality agreement.

The third paragraph makes a statement that removes the burden of perfect investigation from the acquirer. Without such a statement, the seller can avoid liability following a breach of contract. The seller can disclaim responsibility for representations, arguing that the buyer could have discovered the breach during the investigation of the seller’s company.