Should a Seller Care About Due Diligence?

| 2 minutes

Yes. And here’s a few reasons why.

Legal due diligence is typically a key part of an acquisition, but historically the focus has been on diligence from the perspective of the buyer, and less frequently from the perspective of the seller. Of course, this is natural given it’s the buyer who will want to uncover everything it can about the business it plans to acquire before a definitive agreement is entered into. But does this mean that sellers shouldn’t also care about legal due diligence?

There are a number of important reasons why a seller should concern itself with legal due diligence in the face of a divestiture, a handful of which were canvassed recently by Drew Hasselback in his article in the National Post, A new way to sell (including insight from David Woollcombe here at McCarthy Tétrault – we suggest you check it out).

For example, a seller will be concerned about potential barriers to the sale, or liabilities that it may incur as a result – two things that legal due diligence conducted by the seller during the early stages of a transaction can help to uncover. For instance, if there are prohibitive provisions in one or more of the seller’s contracts with third parties, the seller will want to consider ways of addressing these in order to facilitate the sale.

Along the same lines, the seller will want to confirm any consents that are required to complete the transaction, both in order to ensure that nothing will derail the transaction, and in order to meet any conditions related to consent to the assignment of its agreements to the buyer, or to a change of control that will result from the sale. In connection with the process of making itself aware of required consents, the seller should be mindful of not only the time required for the determination of any required consents, but also the fact that it can sometimes take several weeks (or longer) to obtain what it may need from a third party before the transaction can be completed.

Importantly, a seller will also want to ensure at the outset of the deal that there are no rights of first refusal, pre-emptive rights or other obligations that it must fulfil prior to the completion of the transaction. If both the buyer and the seller are focused on determining and addressing potential barriers to the transaction, the buyer is less likely to uncover surprises that may prevent it from ultimately going through with the deal.

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