What Does an Attorney Actually Do When She Conducts “Due Diligence?”

Due Diligence overlaid on a desk with business persons working.

{3 minutes to read}  I believe conducting proper due diligence adds value to any M&A transaction. But picture yourself a young, sleep-deprived associate, staring at a conference room table full of documents to review. Do you know why you’re reading them? Do you know what you are looking for?

Aside from noting the names of the parties, the date and duration of the term of the contract, one of the most important things to look for is what rights Seller may have to assign the contract to Buyer.

Rights to assign go hand in hand with understanding what happens to the contract in the event of a “change of control.” The applicable provision depends on whether the transaction will be an asset or a stock deal. Since you may not know how the transaction will be structured when the due diligence process begins, I recommend you take note of what the contract says about both of these scenarios, and be very clear when summarizing them. You want to avoid having to review each contract a second time, which has happened to me more times than I care to remember.

In asset purchase deals, the relevant issue is whether the contract is “freely” assignable or if consent of the other party needs to be obtained before closing the contemplated transaction. If a contract is silent as to whether it can be assigned, it is assignable without consent. If the contract restricts assignment and consent needs to be obtained, attorneys often include these or similar words: “such consent shall not be unreasonably withheld, delayed or conditioned.” This modification makes it easier to assign a contract in the event of a sale of the business in the future. Understanding the nature of the contract, and your client’s roles and responsibilities thereunder, informs whether the contract should be easy to assign or restricted, thereby requiring your client’s consent to assign it.

In stock purchase deals, contracts typically don’t need to be “assigned” because Buyer will be acquiring the stock of the target company from the shareholder/owner, including all of the target’s assets and liabilities. However, contracts sometimes contain explicit prohibitions in the event of a “change of control.” This term includes, but is not limited to, the sale of stock. In a stock sale the shareholder of the target company will be a different person after the closing. Thus a change of control will be occurring as a result of the stock purchase transaction. In these instances, consent of the other party to such contract will need to be obtained before closing. If consent to assign cannot be obtained, the contract will be terminated and/or excluded from the deal.

Young associates beware: Assignment and change of control provisions may not appear under a heading entitled “Assignment.” Contracts may also contain internally conflicting provisions, so unfortunately (much like reading cases in law school), it’s best to review the entirety of each contract to ensure you understand the complete picture.

Aimee B. Davis Law P.C. is committed to advising its clients and resolving issues relating to the legal and business matters that are important to them. If you have any questions, please feel free to contact us at (917) 617-2243 or email aimee@aimeebdavis.com.

Aimee B. Davis

Aimee B. Davis
Aimee B. Davis Law P.C.
122 Ashland Place
Brooklyn, NY 11201
www.aimeebdavis.com
aimee@aimeebdavis.com

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