Audit Senior at RSM Poland
Due diligence process
It is widely accepted that the first stage of the due diligence process is the signing by the parties of a non-disclosure agreement (NDA). It should be noted that the provisions of this agreement are governed by Art. 721 of the Civil Code:
- If during negotiations a party has provided information on a confidential basis, the other party is obliged not to disclose or provide to third parties, and not to use such information for its own purposes, unless the parties agree otherwise.
- In the event of non-performance or improper performance of the obligations referred to in par. 1, the disclosing party may claim damages from the other party or recover any advantage received by it.
The NDA doe not govern the exact course and scope of the audit, or the more so the price of the potential investment, but guarantees that future activities carried out by the parties (including the involvement of experts in due diligence and negotiations) will be kept confidential. Art. 721 paragraph 2 of the Civil Code also stipulates punishment in the event that either party does not comply with the provisions of the NDA.
The next part of the due diligence process is generally the signing of a letter of intent by the parties, a term sheet agreement or a memorandum of understanding (MOU). The common denominator of these three documents is the general lack of legal effect, unless the parties agree otherwise. Also, the provisions of the Civil Code concerning preliminary agreements do not apply to them.
The primary objective of the aforementioned agreements is to define the basic principles of the intended transactions, the details of which will then be negotiated and recorded in the investment agreement. These agreements should determine the will of both parties to enter into the transaction as well as their objectives and intentions. It is particularly recommended to sign such agreements when multi-stage negotiations are expected and when the final agreement will contain many small details of the transaction.
The next stage of entering into an investment transaction is usually the very due diligence process carried out by experts with strong collaboration of the interested parties. First, the investor (or investors) selects experts who will carry out the analysis and on this basis issue relevant reports containing their conclusions. It is important that the selected team of experts has a clear idea of the purpose of the analysis and that the issues most important for the investment have been communicated by the investor. When signing the agreement between the selected consultancy company and the investor, it is important to identify who will be the coordinator of the process, and the form of data exchange between the auditor (including lawyers, auditors, specialists in corporate finance, tax advisors and other specialists), the buyer and the seller.
It is good practice to ensure that before the start of the whole due diligence process, the auditor has obtained information on the potential investment from outside the company. To do this the auditor can use:
- Media information,
- Information on capital and personal relations,
- Opinions of third parties,
- Current and periodic reports (in the case of companies listed on the Stock Exchange),
- Website of the seller,
- Information contained in the extract from the National Court Register,
- Information contained in the Land Register,
- Information contained in the Register of Treasury Pledges.
In the case of obtaining information on the investment from the above-mentioned sources, it is much easier to prepare a list of documents necessary to carry out due diligence at an early stage of the process. Such a list, of course, can vary depending on further information obtained from the seller − it is possible that some transactions or economic events carry a higher risk than others, and the auditor should focus in particular on the most risky ones.