Due diligence helps people and companies understand the nature of an investment, the risks of an investment, and how (or whether) an investment fits into a particular portfolio. Due diligence isn’t just good sense,
it’s a duty investors owe to themselves - doing this sort of "homework" on a potential investment is often essential to making prudent investment decisions
Aura’s integrated one-stop solution assist clients for buy-side financial, tax, information technology, compliance and HR due diligence. Organizations also benefit from Aura’s experience with sell-side diligence service offerings, identification of undisclosed risks, highlighting key deal issues, and providing valuable insight on transaction synergies. Aura’s tailors the approach for each individual transaction to maximize value and deliver a quality work product in a timely manner.
Aura’s M&A team has considerable experience advising clients on a full breadth of issues from minor negotiating points to major deal breakers.
Transactions that have been through a comprehensive due diligence process are ultimately the most successful. Determining the effectiveness of processes, infrastructure, systems and financial reporting as well as identifying areas of future capital requirements are essential to conducting effective due diligence and will ultimately allow an organization to maximize value.
Although 2016 saw a decrease in the total number and value of deals in the US compared to 2015, activity increased heavily towards the end of the year. October 2016 saw a record high of $250 billion in transactions according to financial information provider Dealogic, making it the busiest month in terms of deal value in history.
That momentum has continued in the first half of 2017 as US M&A deal values have increased by over 2% year-on-year from 2016, despite a drop in the volume of deals, according to Mergermarket. Aggregate deal values have remained strong over the past year thanks to the increase in the number of ‘mega deals’ entered into in excess of $10 billion. Examples of notable mega deals include British American Tobacco Plc’s $60
billion bid for Reynolds American Inc, Becton, Dickinson & Co’s $23 billion bid for CR Bard Inc and Amazon.com Inc’s $13.7 billion acquisition of Whole Foods Market Inc.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
While the 2016 US election and Brexit unleashed some uncertainty in the global markets, thus far neither appears to have caused any significant sustained adverse effect on US M&A activity. Political uncertainty may have factored in the decrease in deal volume within the US market, but deal values have remained strong and the number of UK bids for US companies has increased to its highest point since 1999, according to Mergermarket.
Political developments over the past 12 months have also arguably spurred enhanced scrutiny by the US government of Chinese investments in the United States, particularly in the technology industry. On September 13 2017, following a recommendation from the Committee on Foreign Investment in the United States (CFIUS), President Trump issued an executive order blocking the billion-dollar-plus acquisition of a US semiconductor manufacturer by a Chinese government-backed private equity sponsor.
This order comes on the heels of the December 2016 order by President Obama blocking the Chinese acquisition of a US business of a German semi-conductor company. In addition, the US Congress is expected to consider legislation in the near future that would expand CFIUS’ authority to review foreign investments into the United States and require enhanced scrutiny of investments from countries that pose the greatest threats to US national security.
According to Mergermarket, the following sectors represented more than 75% of the deals announced in North America in the first quarter of 2017:
energy, mining and utilities (28.4%);
consumer products (28.3%);
pharmaceuticals/biotechnology (11.2%); and
financial services (7.7%).
According to reports and surveys completed by KPMG and Deloitte, many practitioners expect:
technology, energy, mining and utilities and pharmaceutical/biotechnology to experience the most overall M&A activity in 2017;
an increase in deal size and volume, divestitures and middle market activity; and
a continued focus by insurers on good M&A opportunities.
Are there any proposals for legal reform in your jurisdiction?
While Congress has yet (as of September 18 2017) to pass any legislation on healthcare reform, Trump has proposed to repeal the Affordable Care Act and limit the amounts that drug manufacturers can charge for their products. If enacted, these legislative changes may have a chilling effect on the pharmaceutical, medical and biotechnology industries. Trump, and Congress more generally, is also seeking large-scale tax reform. In addition to proposals to lower income tax rates, this includes the possibility of mandatory taxation of the offshore earnings of US multinationals (although at a preferential tax rate), as well as a decrease in the repatriation tax rate to allow future earnings held overseas to be brought back to the United States at a lower tax cost. If enacted, these reforms could materially impact M&A activity in the US market. However, the exact contours and the likelihood of any such reforms, including the timeline for approval by congressional leaders, remains open-ended.
What legislation governs M&A in your jurisdiction?
A mixture of state and federal law governs M&A transactions in the United States. In particular, corporate governance rules (which are driven by, among other things, an entity’s jurisdiction of incorporation/formation and its organisational documents),
tax law, executive compensation rules, antitrust law and state and federal securities laws often drive deal structuring decisions and negotiations, as dealmakers seek tax efficiency, securities law compliance and necessary third-party approvals.
The applicable state law(s) in an M&A transaction typically depend on the jurisdiction of incorporation and the entities’ principal place of business. Applicable state laws
(when read together with the entities’ organisational documents) typically address corporate governance and M&A issues, such as ‘blue sky’ securities laws, board and stockholder voting requirements, fiduciary duties and various filing requirements.
Federal laws and regulations that may apply in M&A matters include the following (and related regulations):
the Internal Revenue Code of 1986;
the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
the Securities Act of 1933;
the Securities Exchange Act of 1934;
the Investment Companies Act of 1940;
the Committee on Foreign Investment in the United States; and
industry or sector-specific laws.
Stock exchange rules may also be implicated in transactions involving public companies.
How is the M&A market regulated?
The M&A market is regulated through a series of laws and regulations, the applicability of which will depend on:
the nature of the transaction (including its structure and size);
the parties; and
the types of asset involved (including whether the target is a public company – that is, a company traded or listed on a public exchange).
While exchanges play less of a role in regulating M&A in the United States than in other jurisdictions, they impose requirements that may have implications on the mechanics of M&A for public companies.
One of the key regulatory agencies is the Securities and Exchange Commission (SEC). The SEC supervises and oversees numerous participants in the US publicly traded securities markets. Its primary role is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.
Are there specific rules for particular sectors?
Yes – for example, transactions dealing with companies in the healthcare, telecommunications, hazardous waste, aerospace and defence, investment management, communications and transportation industries – just to name a few – may be subject to specific federal and state regulations.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
In a deal involving private companies (ie, companies not traded or listed on a public exchange), three common acquisition structures are as follows:
What due diligence is necessary for buyers?
Diligence is not mandated, but buyers typically conduct extensive due diligence before executing a definitive agreement. Diligence typically covers business, accounting, tax and legal review.
The depth and breadth of diligence can vary greatly among buyers and transactions and depends on numerous factors, including factors related to a buyer’s appetite for risk, timing and costs.
What information is available to buyers?
The information available to the buyer typically depends on whether the seller is a private or public company.
For private companies, publicly accessible data is often limited. Therefore, information is typically supplied by a seller in response to a diligence request list prepared by the buyer’s counsel.
Public companies must disclose various categories of information to the public. Therefore, certain documents of a public company can be obtained via the Securities and Exchange Commission’s (SEC) website (edgar.gov), including:
certain shareholder information; and material agreements and event
US securities laws generally prohibit a public company from intentionally disclosing material non-public information. Any material non-public information that is unintentionally disclosed must be publicly disclosed promptly. One exception is that a company may provide such information to persons who expressly agree to keep the disclosed information confidential.
In addition, under US securities laws, individuals are generally prohibited from trading on material non-public information.
Accordingly, targets will typically require buyers to execute a confidentiality agreement which, in the public company context, will often include a standstill that prevents a potential buyer from acquiring target securities, other than in a transaction approved by the target’s board of directors. It is usually only in this context that public targets will provide information to potential buyers.
How is stake-building regulated?
Stake building is regulated through a combination of state and federal laws. Acquisitions of more than 5% of any class of a target’s equity securities that are registered with the SEC must be disclosed through the SEC within 10 days of acquisition. Some of the applicable rules also require disclosure updates on certain changes in investment intent.
Moreover, acquisitions resulting in holdings exceeding certain dollar thresholds may require both the buyer and the target to make antitrust filings with the federal government. Further, generally, all transactions undertaken by the bidder in a public company’s securities that occur during the 60-day period before the commencement of a tender offer must be disclosed through the SEC.
State statutes may also affect a buyer’s ability to stakebuild. For example, the Delaware General Corporation Law, subject to certain exceptions (which in a negotiated transaction are usually easy to comply with), prohibits an owner of 15% or more of the outstanding voting stock of a corporation from engaging in a business combination for three years after acquiring the 15% stake.
In addition, stakebuilding in certain industries – such as banking, insurance and gaming – may require regulatory approval.
What preliminary agreements are commonly drafted?
Among the most common preliminary agreements are confidentiality agreements and letters of intent.
Letters of intent A letter of intent typically contains basic terms pertaining to the proposed transaction and often lays the groundwork for commencing negotiations before drafting the definitive agreements. Generally, a letter of intent contains a number of non-binding clauses (eg, proposed structure of the transaction and process) and a few binding clauses (eg, exclusivity, confidentiality, standstill and dispute resolution).
Letters of intent are generally not used in connection with the acquisition of public companies because of the desire to avoid triggering disclosure requirements.
What documents are required?
The documents required for an M&A transaction depends on the nature and structure of the transaction. Such documents may include:
an acquisition agreement;
in the case of a public transaction, certain disclosure based documentation (eg, a proxy statement or Schedule TO);
a shareholder, investor rights or joint venture agreement;
a transition services agreement;
employment agreements; and
other ancillary agreements (eg, escrow agreements, paying agent agreements, bills of sale, assignment agreements, letters of transmittal and stock powers).
Which side normally prepares the first drafts?
The buyer often prepares the first drafts, except in an auction context.
What are the substantive clauses that comprise an acquisition agreement?
Generally the substantive clauses that comprise a private M&A acquisition agreement include:
transaction mechanics (eg, asset purchases, stock purchases and mergers);
purchase price and other related provisions (eg, adjustments to purchase price, purchase price allocations, method and timing of payment, earn-outs and escrow arrangements);
representations and warranties;
covenants (interim and post-closing);
indemnification (in private M&A deals);
termination (which may be coupled with break fees); and
general provisions relating to notices, confidentiality, assignment, expenses, governing law and dispute resolution.
What provisions are made for deal protection?
In transactions where the target is a public company, common deal protections include:
no-shops (frequently with a fiduciary out);
top-up options (unless unnecessary as a result of legislation); and
What It Is?
Due diligence is the careful, thorough evaluation of a potential investment, whether on a corporate or individual level.
How It Works?
For individual investors, due diligence often means studying annual reports, SEC filings, and any other relevant information about a company and its securities. The objective is to verify the material facts related to the purchase of the investment, as well as to understand whether the investment fits an individuals return requirements, risk tolerance, income needs, and asset allocation goals.
An individual's due diligence might include reading the company’s last two or three annual reports, several recent 10-Qs, and any independent research they could find. In doing so, they would develop a sense of where Company XYZ is headed, what market factors might affect the stock’s price, and how volatile the stock is. This in turn might give them guidance about whether the investment is right for you, and if so, the size and timing of their investment.
In a merger scenario, due diligence often involves a team of people specially tasked with reviewing and verifying every aspect of an investment in another company. In many cases, this team might include lawyers, accountants, and investment bankers.