What Is Corporate Due Diligence

In the business context, due diligence is the process of investigating a company to verify its representations and identify risks related to governance, regulatory compliance, operations, and other key areas. While corporate due diligence can be required in multiple scenarios, such as in joint ventures or fundraising, it is most commonly associated with mergers and acquisitions (M&A).

In M&A transactions, the importance of due diligence cannot be overestimated. The results of corporate due diligence can make or break the transaction or call for significant price adjustments due to potential gaps in compliance and other risks. Meanwhile, inconsistent due diligence practices can expose the buyer’s organisation to unexpected costs, regulatory penalties, as well as civil, administrative and even criminal liabilities.

Although due diligence is a multidisciplinary endeavour, the key role belongs to legal teams. Below, we discuss the objectives and scope of due diligence and explain common practices applied by corporate lawyers.

Key Takeaways

Corporate due diligence is the in-depth investigation of a target company and an evaluation of the risks involved in associated business transactions.
The results of due diligence are essential for remediating risks and implementing deal price adjustments.
Inconsistent due diligence practices can lead to unexpected liabilities.
Competent corporate lawyers can enhance due diligence processes, assist in addressing risks, and help achieve better terms for a transaction.

The Key Objectives of Corporate Due Diligence

Corporate due diligence, when properly conducted, provides peace of mind to the buyer by verifying key information about the target company, identifying key risk areas and potentially providing leverage in price negotiations.

Risk Assessment

In conducting due diligence, teams assess various aspects of the target business, including Environmental, Social, and Governance (ESG), legal, compliance, finance, and other areas to uncover any gaps, inconsistencies and potential liabilities.

Risk Remediation

After the teams finalise the due diligence checks and identify key risks, the organisations can further address those risks either before or after the transaction to avoid liability.

Better Decision Making

Equipped with the result of due diligence, the financiers or buying companies in an M&A transaction can make well-informed decisions on the prospects of proceeding with their deal-making and associated costs.

Achieving a Better Deal Price

The buyers can further use the results of the due diligence to gain leverage in price negotiations with the sellers, compensate for the costs of risk remediation, and cover potential gaps and liabilities.

The Scope of Corporate Due Diligence

A modern business organisation is a multifaceted structure, and so is corporate due diligence. A typical M&A assessment of risks for the buyers includes:

Legal Due Diligence: This investigation is conducted by legal teams assessing multiple aspects of a business operation, its standing with regulators, and relationships with other entities, among other aspects.
Tax and Financial Due Diligence: These areas are checked by finance teams evaluating the financial health of the target company and its tax liabilities.
Operational Due Diligence: This type of due diligence aims to check if the business has robust operations and uncover operational risks and processes.
Technology Due Diligence: With technology being the key to gaining a competitive advantage, most company acquisition due diligence plans include a detailed check of technologies, digital infrastructure and safe data practices in the target company.

Legal Due Diligence

In the meantime, legal due diligence is typically the most extensive among other corporate checks and covers such critical areas as:

Corporate Governance: In legal due diligence, corporate lawyers investigate the governance frameworks and relationships among company management, the board, shareholders, and other stakeholders.
Regulatory Compliance: Compliance due diligence is one of the most extensive checks of a company’s adherence to all applicable regulations across all jurisdictions where it operates.
Contracts: During contract due diligence, the legal teams assess the existing commercial contracts between the target company and all its contractors, suppliers, and other entities.
IP Rights and Patents: The legal teams verify how IP rights are registered and maintained and assess associated risks of infringements.
Environmental, Social and Governance: With ESG compliance shifting from voluntary to mandatory across industries, the due diligence teams run extensive checks on adherence to existing and emerging regulations for sustainable business practices.

What Is the Process of Corporate Due Diligence

Any type of due diligence, including the legal investigation, starts with defining a due diligence questionnaire (DDQ), identifying key areas that need to be ascertained and verified. The DDQs allow for determining the scope of each type of due diligence, assessing what might be missing, as well as evaluating the timeline and due diligence costs.

Given the importance of the DDQs for identifying all risks associated with each transaction, they need to be drafted by experienced due diligence lawyers and approved by both the buyer and the seller. After the DDQ is approved, the legal team will request access to the target company’s corporate records and conduct checks, summarising its findings in the due diligence report.

Corporate Due Diligence Lawyers

The corporate legal team at IRB Law firm in Singapore conducts all types of legal due diligence for M&A, fundraising, joint ventures, and other transactions. Our team has extensive experience in conducting corporate due diligence checks for companies from multiple industries, including digital startups, e-commerce, hospitality, real estate, fintech and other verticals.

Our M&A due diligence services include a detailed evaluation of corporate governance, regulatory and ESG compliance, reviewing contracts, verifying IP rights and conducting other legal checks according to customised DDQ checklists. For more information about our services for legal due diligence in Singapore, please don’t hesitate to contact us for a free initial consultation.

FAQs About Corporate Due Diligence

What is corporate due diligence?

The Official Assignee acts as the overseer of the bankrupt individuals estate. They investigate the affairs of the bankrupt individual and recover the persons assets, so that it can be distributed to their creditors. The Official Assignee also assists the bankrupt individual in obtaining a discharge from bankruptcy.

What is included in a corporate due diligence check?

The scope of corporate due diligence includes multiple checks of a target company’s legal, financial, commercial, operational, and other aspects. The parties identify the scope of these checks in the Due Diligence Questionnaire (DDQ) approved by the buyers or investors and the target company in advance.

What are the costs of corporate due diligence in Singapore?

The cost of corporate due diligence is determined based on the scope of the due diligence questionnaire (DDQ), the availability of accurate and complete corporate records in the target company, the number of its legal entities and jurisdictions where it operates, and other factors. For more information about the costs of corporate due diligence in Singapore, please contact IRB Law’s legal team for a free initial consultation.