Strategic Due Deligence -notion of Caveat Emptor
Caveat Emptor or Buyer Beware is the concept that strictly favors the buyer. Every buyer shall have the knowledge, of what he purchases from the seller. This concept is applicable almost every where, whether is ordinary sale-purchase or even a strategic alliance. The notion of caveat emptor in context to Strategic Alliances (Mergers & Acquisitions) is very important because the total value of the entire transaction one strategic alliance could run into millions and such an investment without the knowledge of the purchase can be fatal. In practicality this concept of caveat emptor is brought out in the form Strategic Due Deligence or Due Deligence Reports.
Due Deligence is terminology which describes many notions involving either the performance of an investigation of business of person or the performance of an act with certain standards of care. In simple terms it is the method through which the acquirer evaluates the potentiality of a target company for a strategic alliance in the form of an acquisition. Even in the case of a merger the transferor company may conduct a due deligence upon the transferee company before the deal is finalized. Thus it can be said that due deligence permits the potential buyer to find out each and everything about the target company before acquisition.
The due deligence sets for the certain information based on which the potential buyer is able to decide on certain factors such as withdrawal from acquisition, adjustment in the valuation of the investment and any remedy for the problems in the course of the entire transaction. Strongly, the results of a due deligence would give out information such as the analyses of the target company, additional information uncovered during the investigation and most important factor of the various risks involved. For illustration consider the pack of chips with the declaration of ingredients, nutritional facts, price, dates of manufacture & expiry. The manufacturer provides all these details in order give the buyer a brief information about the product that is about to be purchased from him. In simple words it is awareness to be created for the buyer.
A simple due deligence report would be inclusive of details such as Company Profile, Division of Shares, Employees, Financial information, Immovable Property, Assets of the Target Company, Intellectual Property, Taxation, Insurance and Liabilities and litigations pending against the company.
From the above list of details the company acquiring the target company can obtain details about the scope of investment and the presumed results that could be obtained from the acquisition. Usually the due deligence reports are made by the experts either hired by the company or the experienced employees of the transferor company. When a law firm or agency is hired to make the due deligence reports the first step is have Indenture of Confidentiality be made by the target company and the firm. This indenture is important because all the confidential information is provided by the target company to the firm, which can not be risked to be leaked out into the market.
Due Deligence is sole root cause which can given credit for most successful strategic alliances that have been witnessed by the Global Corporate Markets. Due Deligence creates the awareness for the Buyer or Transferor Company before the alliance takes place. In many a circumstances it was seen that alliances between corporates was not possible as there was no favorable result in the due deligence. With its wide usage and results, Corporate Due Deligence has been seen as major step towards Intensification of business through strategic alliances and the entire credit bears upon the “Notion of Caveat Emptor”.
Iam 22years old, resident of Hyderabad,India.perusing BBM.LLB from The ICFAI Law School at Dehradun, India. My hobbies are reading and surfing the net. I have a great interest in Information technology and mobile technology ,at leisure I write articles on law topics, some of them have been published online. I participated in essay contests and have won them at 1st and 2nd positions.
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