September 2011 | The Ukrainian Journal of Business Law | www.ujbl.info
Oleksiy Demyanenko, associate, Asters law firm
The purpose of a due diligence exercise in the context of the M&A project is to assist a potential buyer in assessing the level and nature of legal risk related to an acquisition target. Being interested in the most cost-effective approach, the purchasers normally ask their legal advisers to prepare a red flag due diligence report highlighting only identified legal risks. In some M&A projects clients ask for limited due diligence reports covering only specific and most crucial parts of the target’s business, e.g. corporate history, title to core industrial assets and financial covenants.
The recent increase in the number of acquisitions by private equity funds, which are reluctant to undertake their own due diligence until they have some exclusivity in a competitive bid process, has made increasingly common preparation of vendors’ due diligence reports. Moreover, preparation of a vendor’s due diligence report helps the vendor to identify and resolve in a timely manner any legal issues in the target’s business before potential buyer commences its own due diligence. Prior to launching a due diligence process, the client and the legal advisor have to establish a materiality threshold allowing the scope to be determined for the due diligence review, which excludes from the analysis documents regarding insignificant matters. One recent trend is to determine a materiality threshold not as a specified dollar or Euro amount, but rather as a fixed percentage of the group’s turnover for the previous financial year. This percentage varies depending on the value of the transaction.