This post isn't about Donald Trump, but a recent case where a corporate buyer went easy on the due diligence because of time pressure.
Lessons for corporate buyers and their advisers:
- If you only have the time or inclination to carry out limited due diligence, make sure it is highly focussed. Here, the target was an insurance company but its accounts did not include enough provision for its liability to pay claims and the target company was subsequently found to be insolvent. This should have been top priority but was missed.
- A de minimis on claims of £500,000 in the SPA should tip off a buyer that something is wrong with a target company: i.e. a seller who is confident in their business and understands what liabilities it has doesn't need such a high de minimis.
- Properly drafted warranties are worth their weight in gold for a buyer and saved the buyer over £2 million in this case. Proper due diligence is even more valuable, and would have saved the buyer its subseqent accounting and legal fees.
- Pay attention to disclosure and what is meant by "disclosed". A deal I worked on a few years ago hinged on this definition and kept us working well into the early hours of Christmas Eve, but the buyer was right to be cautious. In the Motorplus deal, the sellers were found not to be liable in relation to a non-recoverable debt because they had provided enough information in the disclosure letter and emails between advisers. If you see a red flag: ask more questions.
Cockerill J said the sale of Motorplus was concluded “without any due diligence” being performed, “at least in part because the existing management team were working on obtaining finance for a management buy-out and there was a desire not to alert them until the sale was due to complete”.