Due Diligence for the acquisitions of company and shares: utility and added value

Prior to acquisitions of companies, businesses or shareholdings, it is nowadays common for Enterprises, especially large and medium-sized, to entrust Law Firms or Auditors to carry out legal, tax and financial Due Diligence with the aim of collecting and of evaluating information and documents on debts, credits, contracts and litigations of the target company, in order to use the results of the audits, to be shown in a final report, as a guide to the final decision and the strategic plan of the transaction.

These preliminary analyzes should always be executed, even and above all, in every acquisition of small or medium-sized companies, probably less structured than big companies, as they constitute an added value for the buyers in terms of costs and of related risks.

Due Diligence activities, generally prior to the preliminary contract or, sometimes, to the final transfer agreement, should examine the most characterizing aspects of the target company, by way of example: legal, tax, equity and financial, economic, operational and also reputational.

During a Due Diligence procedure, it’s fundamental the analysis of the contractual relationships entered into by the target company, at least the most significant ones, in terms of amounts and risks.

The purpose of this verification is twofold: on one hand, to understand in details the rights and obligations arising from the ongoing contracts and, on the other hand, to point out the threats to which such contracts may be exposed.

In particular, important will also be carrying out an accurate survey on the pending and potential litigations, by analyzing any civil, criminal, administrative and arbitration proceedings in which the target company is involved, focusing on the most relevant ones in terms of amounts and uncertainties, evaluating the predictable outcomes.

The aim of these activities is, among the others, to certify the economic and financial soundness and reliability of the target company, as well as to determine the consistency of its assets.

If unexpected and relevant liabilities or hazards emerge from the Due Diligence, the buyer may request further guarantees from the seller, and an extension of the latter’s contractual responsibilities also to any potential unregistered debt.

On the basis of the results of the Due Diligence Report the Closing (comprehensive of all acts and documents that determine the actual transfer of ownership of the target company) is generally subject to the exact fulfillment of a series of activities by the seller and to the fulfillment of certain conditions, aimed at reducing and/or removing the uncertainties of the transaction.

Furthermore, for any risk that cannot be verified before the Closing, representations and warranties shall be issued by the seller, with specific contractual clauses thought mainly to protect the buyer, in relation to some material issues and with regards to liabilities not declared by the seller.

The correct performance of a Due Diligence requires the utmost attention by the entrusted professionals in order to highlight the most critical aspects of a transaction, and to give useful suggestions to the Clients, so to minimize the exposures that could arise from it.

In facts, some recent rulings of the Italian Supreme Court have made even more evident both the usefulness and the importance of a preliminary Due Diligence for the acquisition of a company or shareholdings; in particular:

With reference to the acquisition of a Company, the Court highlights existing that  the rule of  law  limiting the joint liability of the buyer and the seller only to debts of the transferred company resulting from the mandatory books prior to the transfer (Article 2560 of the Italian Civil Code), shall be applied taking into account  the purpose of protection of the company’s  creditors, and therefore  the buyer’s joint liability might prevail, even for debts not resulting from said books (Italian Civil Supreme Court, Section VI – 1 , Order n. 13903 of July 6, 2020,);

In relation to the sale of shares: the Italian Supreme Court clarifies that the corporate’s liabilities, even if considered in specific representations or warranties by the seller, do not constitute the immediate object of the shareholding transfer agreement, which is  the shareholding itself, but its indirect object, which shall be identified in the related  part of the patrimony; therefore, in case of misrepresentations or breaches by the seller, in the absence of a different agreement between parties, the buyer shall have the right to obtain indemnification of damages, but not the termination of the sale and purchase contract, due to lack of quality of the shareholding (Italian Civil Supreme Court, Section I, Judgment n. 7183 of March 13, 2019).

Landolfi & Associati’s Lawyers are experienced in advising clients in relation to every kind of Due Diligence, in each field of law, thanks also to the cooperation with auditing firms and other consultants of its proper network, with the purpose of timely and effectively achieving the clients’ targets.

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