Due diligence report 20150414

Business Law
Professor Florencio TRAVIESO
Charles GUERIN / Estelle BOISSART / Garance COUVRY
Pauine PROT / Rebeka KRSKOVA / Woojin KIM
Class 13 / Year 2014-15
Due Diligence in
International Transactions
To what extent can economic crisises impact on due diligence?

Business Law
Professor Florencio TRAVIESO
Charles GUERIN / Estelle BOISSART / Garance COUVRY
Pauine PROT / Rebeka KRSKOVA / Woojin KIM
Class 13 / Year 2014-15
Table of Contents
CH
1:
WHAT
IS
DUE
DILIGENCE?
1

ETYMOLOGY
1

FUNCTIONAL
TYPES
AND
PURPOSES
2

DUE
DILIGENCE
FRAMEWORK
4

IMPORTANCE
OF
DUE
DILIGENCE
6

DUE
DILIGENCE
CHECKLIST
8

CH
2:
DUE
DILIGENCE
UNDER
LAW
12

UNDER
TAX
LAW
AND
ACCOUNTING
REGULATIONS
12

UNDER
INTELLECTUAL
PROPERTY
LAW
12

UNDER
ENVIRONMENTAL
LAW
13

UNDER
EMPLOYMENT
LAW
15

CH
3:
DUE
DILIGENCE
AND
CURRENT
EVENTS
19

DUE
DILIGENCE
POST
9/11
&
ENRON
21

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Due diligence is an investigation of a business or person prior to signing a contract, or an act
with a certain standard of care.
It can be a legal obligation, but the term will more commonly apply to voluntary investigations.
A common example of due diligence in various industries is the process through which a potential
acquirer evaluates a target company or its assets for an acquisition. The theory behind due
diligence holds that performing this type of investigation contributes significantly to informed
decision making by enhancing the amount and quality of information available to decision makers
and by ensuring that this information is systematically used to deliberate in a reflexive manner on
the decision at hand and all its costs, benefits, and risks.1
Throughout our report, we will analyse due diligence in many aspects and will finally draw a
conclusion to our research question: “To what extent can economic crises impact on due
diligence?”
Etymology
« Due diligence » are reasonable steps taken by a person to avoid committing a tort or offence.
More this is an investigation or audit of a potential investment. It permits to confirm all the
material facts regarding an investment situation.
Before that, the first time that the combination of the two words was used, it was in a poem by
Richard Carew, called "A Herring's Tale." In this poem he said that monarchs had their commands
obeyed “with due diligence”.2
After that, the term due diligence was used in the United States of America at a time of a Great
depression. It came more precisely from the « securities act of 1933 ». The securities act of
1933 are primarily intended to restrict the sale, but they contain an act concerning the defense (at
1
http://whatis.techtarget.com/definition/due-diligence
2
http://www.evs-translations.com/blog-com/tag/due-diligence-word-etymology/
Chapter 1 What is Due Diligence?

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section 11) called "due diligence" to describe a legal defense when information is disclosed
improperly. This term is generally used by brokers-dealers when accused of inadequate disclosure
to investors. When broker-dealers used « due diligence » in their investigation into the company
which selling equities, they will not be held guilty of non-disclosure of elements in the
investigation.
This term is now introduced into the legal vocabulary of different nations, and became an
important concept to investigate in a potential investment, more precisely for the risk analysis of a
future investment.3
Functional Types and Purposes
Due diligence is about trusting and having confidence in your business partner.
Many companies undertake the due diligence process with insufficient vigor, to maximize due
diligence efficiency and reliability it is easier not to work on a global and general area.
Since it is a complex process differing from case to case we will have a look at different types of
due diligence.
In order to identify issues, to establish the true value or cost of a business, and to evaluate if
this one is beneficial or not we divide due diligence into three main categories: legal, financial,
and commercial. We will call them the three types of diligence. This division facilitates the work
on due diligence issues since each case will be about another point, meaning that each firm will
choose on which part it want to study.
The firm will prefer the legal type if it is concerning laws issues, questions about possibilities
and obligations. Whereas financial analysis is necessary while evaluating the profit or loss of the
business and more generally costs and earnings. Finally, commercial type of due diligence takes
into account the whole market and not only our business, it analyses the competition environment.
3
http://www.oxforddictionaries.com/definition/english/due-diligence
Legal Financial Commercial

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Legal
When speaking about the legal part of a due diligence we consider all the legal basis of
transactions. We take here into account the legal structure, contracts, loans, properties,
employment, pending litigations and put these elements into its legal context. Most of the time the
question is “Can the target business hold with this or can it exercise it?”. We look at the legal
environment of the firm, if it has a lot of restrictions or if it is a “free field”. Thanks to the answer
the firm can evaluate if it should or rather not enter the business.
Financial
Financial due diligence focuses more on the verification and stability of financial information. It
assesses the underlying performance of a target business. For the financial evaluation we consider
firm’s earnings, assets, liabilities, cash flows, debts and management.
The most common method is to do accounting and financial audits, to do some simulations and
see if the firm is able to handle it.
Financial audits can very easily determine whether the firm will succeed its objectives and even
more, it will show imperfections needing to be improved to do so.4
Commercial
This evaluation is a macro-environmental one. We do not evaluate a special firm or target
business but the entire market owning it.
We focus on competitors, analyze the business plan in a global context, aiming to sate
afterwards if the business matches with reality or if it is unachievable.5
Purpose
Due diligence takes different forms depending on its purpose:
4
http://www.icaew.com/en/members/business-resources/business-management-and-strategy/m-and-a/types-of-due-diligence
5
http://www.referenceforbusiness.com/small/Di-Eq/Due-Diligence.html#ixzz3XCi6EDqw

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1. The examination of a potential target for merger, acquisition, privatization, or similar
corporate finance transaction normally by a buyer. (This can include self due diligence or
“reverse due diligence”, i.e. an assessment of a company, usually by a third party on behalf
of the company, prior to taking the company to market.)
2. A reasonable investigation focusing on material future matters.
3. An examination being achieved by asking certain key questions, including, how do we buy,
how do we structure an acquisition, and how much do we pay?
4. An investigation of current practices of process and policies.
5. An examination aiming to make an acquisition decision via the principles of valuation and
shareholder value analysis
Due Diligence Framework
1. Knowing what you “need” to know
First of all a company needs to be aware of the type of due diligence to a particular transaction.
Each type of transaction has a specific due diligence checklist. That’s why a company should know
what they have to do check before beginning the due diligence.
Another important factor is time: in a transaction there is always a period to provide a potential
expertise or a potential audit of the company, which is about to be sold. It may vary according to
countries.
To perform a good due diligence, the best way is to be well focused and efficiently allocated.
The work on the due diligence has to be irreproachable, so that the company that wants to invest
should take care about the checklist and to act smartly.
We should be familiar with the type of due diligence and have experience with this type in order
to understand what kind of information need a company to understand the process of the due
diligence and to know what they have to look at.
The information that a company should require is really useful to understand the goal and set
new goals for the future and to reach it.

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2. Assembling the due diligence team
The due diligence team is really important in a transaction; they have a important role because
the team have to implement a new strategy and to satisfy their bosses. They also have to analyze
what kind of target they will choose and to interact with them. This is an opportunity to create a
more positive relationship.
Industry knowledge, experience carrying out due diligence investigations, and an awareness of
roles, responsibilities and deadlines for the due diligence work are all important factors to consider
when choosing the due diligence team members.
The due diligence team has to look for information in a matter sensitive to the particular
transaction: certain employees of company may not know that assets are being sold; these
employees might react negatively to the transaction (Company A has been counting with company
B). If the employees find out in the preliminary stages of A and B’s deal, this could frustrate the
continuations of due diligence process and jeopardize the deal.
3. Preparing the “target” for the diligence event
We need to decide with the “target” what date is needed for assessment, how it will be
collected and for what purposes, who will have access to it, and where it will be stored.
Then, denoting these specifications at the outset helps the due diligence process runs smoothly.
4. Managing interactions between firms
The “Target” focused due diligence and transaction focused due diligence. Investigations occur
at very sensitive periods and often involve sensitive and confidential information.
The deal may not occur, that’s why a need to balance sharing proprietary information and the
knowledge is required in most of cases.
This is really important to clearly define of roles and responsibilities of staff, actions for each
stage of the process and information upload for a data room.
They must have clear understanding of the management process of the data room and must have
clear plan in place to manage the release of information in stages of required knowledge and
advancing stages of negotiation.

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5. Using the collected information to create value in both firms
Information gleaned from the due diligence investigation can be valuable to both parties the
information and issues found can be addressed prior to a deal, and/or included and indemnified in
the closing agreements.
Due diligence can lead to less reliance on Representations and warranties and a clearer idea of:
1) The general state of the business
2) The way the business has been run in the past
3) Whether the business has been operated according to industry standards or in a unique
fashion because of certain factors, rights or assets that the purchaser may or may not acquire.
4) Actual and contingent liabilities;
5) Third - party interests.
Sometimes due diligence searches can turn up unanticipated information which indicate that the
transaction should not go through for a balance of reasons, walking away from a bad deal before
sharing confidential information is a luxury for businesses which have created a comprehensive due
diligence framework that shares sensitive information as it is needed for the due diligence
investigation.
Importance of Due Diligence
In a globalized world, international transactions are more than ever at the forefront. This
directly impacts the due diligence process, as it can differ drastically when doing domestic business
or international business. International transactions impact due diligence in two ways: it makes it
even more important and at the same time it makes it even more complex. Due diligence is the
process by which the person who conducts it can obtain valuable information. This information is a
critical component of the transaction process.6
6
http://www.protiviti.com/en-US/Documents/POV/POV-Due-Diligence-Protiviti.pdf

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When doing business internationally, such as mergers and acquisitions or FDI, the investor needs
to gather as much pertinent information as possible about the target assets and about the
implications of doing business in the possible host country. But, due diligence in international
transactions may be a particularly difficult exercise because of the scarcity of information and
difficulty in processing it. And as the main objective of due diligence is to identify, reduce and
quantify uncertainty and risks, due diligence in an international transaction has to, no matter
what, be held thoroughly.7
This information gathered will help the investor, partner or buyer, to make a choice of entering
in the transactions or not. It will also provide the person with great insights of the target company
and the potential issues and terms that have to be negotiated before closing the deal. We may say
that conduct due diligence in the most effective and efficient way is really important in many
ways. Indeed, to put it simply, it reduces the risk of losing money, an issue stressed with the
economic crisis. Due diligence, more than avoiding to become poorer, can also makes you richer.
Due diligence permits to gain information that will be useful for valuing assets, defining
representations and warranties, and negotiating price concessions.
It also permit to limit the risk of being suited, because if the target is engaging in illegal
activities it might causes you problem when doing business with it. But thorough due diligence is
also a moral imperative that permit the investor to avoid any remorse.8
Also, it can be appealing for an investor to base its choices on personal or general perceptions
and assumptions of what is the host country. We believe that the credo ‘trust your instincts” does
not suit at all when doing international transactions. This is why we need due diligence, to confirm
that the business is really what it appears to be9
and to be aware of all the hidden aspects of the
host country.
Eventually, the best approach to international due diligence can be summed up by the sentence
“never assume anything”.
Also due diligence is undeniably necessary, it can be tricky and vicious. Effectively what is due
and what is diligent can vary amongst people. In addition, the due diligence process in contextually
7
http://www.fasken.com/en/home/
8
http://exitpromise.com/due-diligence-process-when-acquiring-a-business/
9
http://www.astutediligence.com/diligence_basics.htm#why

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dependent. Indeed, it differs from one situation to another, even if we can find some similitudes
between the due diligence processes, there is no formal rules or standards that can be applied to
all the situations where due diligence is needed.
To finish, we must say that due diligence is important but it is not magical. What we mean is
that even a perfectly conducted due diligence cannot guarantee that the transaction will be
successful. It only increases your chances of success and decreases your risks of failures.
Also, even if the transaction turns out to be unsuccessful or if it unfortunately results in legal
proceedings, having conducted a good due diligence upstream could represent a great help.
Effectively, a thorough due diligence, where the person took all the reasonable care in analyzing
the transaction and prevent what at the end actually occurred, is a defense argument. It shows
that the offence happened by accident and not by choice or negligence, because all the necessary
precautions were taken to avoid it.10
Due Diligence Checklist
The due diligence checklist is an efficient way for assessing the value of a business and the
potential risks in a sale or investment situation. The checklist therefore enables to thoroughly
investigate the different factors of a business. The checklist process usually takes place after the
two parties have agreed to make a deal, but before officially signing a contract. The checklist is
divided in several parts which facilitates the process of due diligence. The checklist usually
includes:
Organization and Good Standing
This section usually gathers corporate records and documents about the organization. This includes
the company’s articles of Incorporation, and all amendments thereto, the company’s bylaws, and
all amendments thereto, the company’s organizational chart and information about shareholders
and their ownership on shares. All agreements (warrants, voting trusts etc..), all the places where
10
http://www.allens.com.au/pubs/env/envmay01.htm

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the company does business or owns/leases property, a certificate of Good Standing from the
Secretary of state where the company is incorporated and copies of active status reports.
Financial Information
The financial information refers to all the financial data which is related to the company.
Usually, there is a lot of information given that not only it involves an analysis of all financial
statements (usually for three years) but also other documents such as auditor’s letters or
descriptions of the company’s internal control procedures.
Physical Assets
The physical assets include a schedule of fixed assets and the locations thereof. and a schedule
of sales and purchases of major capital equipment (during last three years).
Real Estate
This part focuses on a schedule and copies of all real estate leases, deeds, mortgages, title
policies, surveys, zoning approvals, variances or use permits.
Intellectual property
To check intellectual property, it is necessary to look at patents, trademarks, copyrights,
descriptions of important technical know-how and all the agreements which are linked to them.
Employees and Employee Benefits
This section includes all information about employees to ensure that they work in an ethical,
legal and appropriate environment. For instance, descriptions of employee problems and issues,
labour disputes and health benefits are checked. Their current salaries, positions and bonuses are
also part of the section.

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Licenses and Permits
This checkpoint involves copies of any governmental licenses, permits or consents and any
documents relating to any proceedings of any regulatory agency.
Environmental Issues
To analyze the environmental status of the company, all the information about the way the
company handles environmental issues are examined as well as whether it manages such the issues
in a legal way (permits, licenses).
Taxes
The taxes are usually analyzed through income tax returns, audit and revenue agency reports,
tax settlement documents and employment tax filings (for the last three years).
Material Contracts
All the contracts which relate to subsidiary, partnership, or joint venture relationships and
obligations are focused on. These types of contracts also involve loan, security, distribution options
and stock purchase agreements as well as all the other possible material contracts.
Customer information
The customer information refers to all the data about customers, such as a schedule of the
company's twelve largest customers in terms of sales thereto and a description of sales thereto
over a period of two years. This section also collects information about purchasing and credit
policies as well as materials in the marketing department.
Litigation

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Litigation includes a schedule of all pending and threatened litigation and unsatisfied judgments.
Insurance Coverage
This checkpoint takes into account a schedule and copies of the company's general liability,
personal and real property, product liability, errors and omissions, key-man, directors and officers,
worker's compensation, and other insurance.

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Under Tax Law and Accounting Regulations
A century after it gained its power to tax corporate income, Congress is still finding new ways to
do it – and affecting M&A due diligence in the process. Buyers, sellers, and their advisors invariably
consult the Internal Revenue Code (Title 26 of the U.S. Code) when structuring their transactions.
They know that it is important to ensure compliance with tax code sooner rather that later. During
the due diligence stage, buyers ad sellers an benefit from understanding the tax and accounting
aspects of transaction structure.
After all, the aim of due diligence is to reduce post-merger exposure to insolvency or liability –
an knowing tax law and accounting regulations can help in this regard.
Under Intellectual Property Law
Intellectual Property (IP) due diligence is an audit to evaluate the quantity and the quality of
intellectual property assets owned by, or licensed to, a company, business or individual. In
addition, an assessment of how IP is acquired and protected by the concerned company is also
necessary. In terms of process, it involves gathering information on the value and the risks of a
company’s intangible assets.11
There are two main ways IP due diligence can be carried out. The first one consists of a
prospective purchaser in relation to the IP assets of the target company. IP due diligence can also
be done by a company on its own IP assets in order to prepare for a transaction. The first step to
conduct IP due diligence is to identify IP assets in order to understand whether they are relevant
for the company. The second step implies verification of IP ownership: this is an assessment of the
intangible is made based on whether it is owned by the company, which enables to identify
ownership problems as well as what solutions exist. Then, the process looks at restrictions on IP
11
http://www.taylorwessing.com/synapse/ip_duediligence.html
Chapter 2 Due Diligence under Laws

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asset use, which relates to freedom to operate and how the value can be assessed. The fourth step
is to establish the validity and strength of IP rights. Finally, IP infringements in order to avoid
developing conflicts between parties.12
The main consideration while looking at due diligence in terms of IP is materiality. This concept
can be used to fasten the process of due diligence instead of making it a never-ending one. This
occurs when there is an agreement on a specific definition of the IP rights that are material to the
business. In other words, this enables to save time and costs. Materiality can be assessed through
turnover or profits relating to the IP rights.
To sum up, IP due diligence is a key process which contributes to the process of developing an IP
strategy, although it is just is a precondition for any capital investment.
Under Environmental Law
Nowadays, we witness an increased concern for the environmental issues, what might be due to
an increased awareness of the urgent need for sustainable development, even despite the
economic crisis and its consequences. This environmental concern is seen in people’s daily life with
individual actions, as well as in politics and business. Effectively, researchers and scientists are
formal: we need to change our habits, if no the impacts could be even more dramatic and will be
irreversible. What is highly recommended by the environment professional is a drastic reduction of
CO2 emissions as well as a need for clean and sustainable sources of energy (hydraulic, solar,
wind). But all of these recommendations require an international cooperation between countries,
countries and industries, and industries and individuals. That is why we assist to the emergence of
new and diverse regulations, conventions, treaties, laws concerning the environment and its
protection. These new legal tools to protect the environment can be introduced by international
authority or NGOS or can also be directly ones included in national laws. Actually, since 1972 and
the Stockholm Conference on the environment, international environment law is a separate area of
12
https://www.iprhelpdesk.eu/sites/default/files/newsdocuments/IP_due_diligence_0.pdf

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public international law. The main institutions that deal with these environmental issues are: the
United Nations Environment Program, the OECD, the European Union and the council of Europe.13
The international environment law is interdisciplinary, meaning that it is crossed with numerous
areas such as politics, research, and economics… Furthermore, the international environment law
concerns various topics: climate change, sustainable development, biodiversity, trans frontier
pollution, marine pollution, endangered species, desertification, hazardous materials and
activities, and use of the seas.14
The main international treaties, dealing with the environmental protection, are: the UN
convention on the Human environment in 1972 (note: considered for the first time environmental
protection as an international matter), the United nations conference on Environment and
Development in 1992 in Rio (note: aimed to define the means for a sustainable development), the
Kyoto protocol in 1997 (note: it commits state parties to reduce greenhouse gases emissions, based
on the facts that global warming exists and that it is due to man-made CO2 emissions), and in 2002
the World Earth Summit (note: focused on different challenge such as improving people’s life and
the protection of the natural resources, but absence of the USA)15
As for the due diligence process, it is not exempt from integrating the environmental issues.
Effectively, while conducting the due diligence, the investor should look at the environmental
concerns arising from the analysis of the transaction. The reasonable care concerning the
environment, care that is evidently present all along the process and no matter the issues, is called
the environmental due diligence (EDD). The EDD allows opportunities and constraints, linked to the
environment, to be identified.16
Also it is important to bear in mind that it is better and beneficial for companies to accept and
implement this by their own, rather than having the burden imposed externally after through fines
or even legal proceedings.17
The main focus of the EDD is to determine if the present or past operations of the target
company are responsible for pollution damages that can represent a potential economic risk (risk of
having extra costs due to the need for corrective measures, for example costs for depolluting some
13
https://www.law.georgetown.edu/library/research/guides/InternationalEnvironmentalLaw.cfm
14
http://www.asil.org/sites/default/files/ERG_ENVIROMENT.pdf
15
https://www.law.cornell.edu/wex/international_environmental_law
16
http://www.ecoagir.fr/audit-environnement/due-diligence-environnement/due-diligence-environnement.html
17
http://www.allens.com.au/pubs/env/envmay01.htm

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zones), as well as a legal risk if the damages caused are contradictory to the requirements in the
sector.18
As we saw earlier (cf: importance of due diligence), well conducted due diligence can represent
a defense argument if things don’t happen according to the plan. So, EDD is a necessary exercise
that is performed to satisfy certain liability protections that may be available under federal and
state environmental laws.19
In the USA, due to expansive liability under environmental statutes, most notably CERCLA (note:
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)( note:
commonly known as Superfund, was enacted by Congress on December 11, 1980), a purchaser of
contaminated property can be held liable for all cleanup costs regardless of whether the purchaser
caused the contamination or knew it was present. Therefore, taking the appropriate steps to
understand what you are buying and with whom you are transacting is critical.
What we mean by appropriate steps is that, under federal law, investors can protect themselves
from liability under CERCLA thanks to the conduct of proper due diligence, as established by EPA
regulation and guidance (Proper due diligence is referred to by EPA as “all appropriate inquiries”)
If a purchase performs due diligence in accordance with AAI, it can qualify for liability
protection known as the “bona fide prospective purchaser defense” (BFPD).20
Under Employment Law
The Employment Due Diligence clarifies whether the employment-related documents have been
concluded and it has been established in the company. Moreover it allows company to see if there
is any employment contract from a foreign country. During the Due Diligence process we are
informed of any risks and discovery make by the due diligence team. After the study of this party
the company has gathered enough data in order to improve and to set new goals.
The due diligence team checked the employers, employees, supervisors, managers and
directors. They really take care about the work condition and health. Then, they take in account
18
http://www.ecoagir.fr/audit-environnement/due-diligence-environnement/due-diligence-environnement.html
19
http://www.environmental-law.net/key-practice-areas/environmental-due-diligence/
20
http://www.ohioenvironmentallawblog.com/2013/06/articles/brownfields/buyer-beware-five-environmental-due-diligence-tips-for-purchasers/

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all act and regulation done in the country and inside the company because it may have some
bilateral contract between the top managers and the Trade Unions.21
The due diligence team begins with the employers:
-‐ Employers must have ensured health, safety and welfare at work of their employees
(section 15 of the ACT)
-‐ They look at the ability to the employers to communicate perfectly with his teams
and to provide them the information that they need in the right time.
-‐ The team assesses the ability to the employers to pick up the best supervisors. That
means they want to know if he is able to take the persons who has qualifications required to
apply for supervisors.
-‐ They clarify potential legal risks relating to conclusion of service agreements with
natural persons (service providers). What is the level of awareness of potential hazards?
Then, the supervisors have to responds to several criteria for a due diligence under employment
law. The due diligence team assesses the supervisors in the same way as they evaluate the
employers. Supervisors are under the employer; they should be able to act as the employer when
he is not present inside the factory.
We offer due diligence of employment contracts and civil law contracts. This activity has a
simple goal, assess the risk linked to employees and to defines new goals and clear objectives:
-‐ Individual employment contracts and civil law contracts concluded by the employer;
-‐ Internal regulations and collective labor agreements, social packages and agreements
concluded with trade unions and employee councils;
-‐ Working time and remuneration policies; we also advise on simplification and
standardization of employee remuneration policies;
-‐ Collective labor law relations.
The due diligence team verify the worth of performing obligations towards employees’
representatives, trade unions and employee councils. They have to analyze employment disputes
and to find out a way solve this problem by restructure the process. Of course the employers is
informed of any obligations resulting from this act and what would be the consequences.22
21
http://exitpromise.com/due-diligence-process-when-acquiring-a-business/
22
http://www.pwc.pl/en/doradztwo-prawne/prowadzenie-prawno-pracowniczej-analizy-prawnej-due-diligence-dla-celow-transakcji.jhtml

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The due diligence team needs to assess 6 different steps. Each step has its own importance and
it brings a huge number of data not negligible for the potential buyer.
ANALYSIS OF AGREEMENTS CONCLUDED WITH EMPLOYEES
The evaluation of the compatibility of the company’s standard employment agreement and other
agreements concluded with employees with the law. The due diligence company relate the
importance of these measures according the needs of the company. Each contract and regulations
have to go in the same way with the company otherwise it is useless and time-consuming.
ANALYSIS OF EMPLOYMENT AGREEMENTS CONCLUDED WITH KEY
PERSONNEL
The evaluation of the compatibility of employment agreements concluded with key employees
with the law and the needs of the company. Sometimes key personnel have special agreement
between them and the employer.
RULES AND POLICIES OF THE COMPANY
The due diligence team take care about the clarification of all necessary policies regarding
working environment have been adopted in the company. The rules and the policy of the company
have to be the more convenient for every worker. It should have a good working condition and a
cohesion inside the company. Thus, the study of the rules and the policy is important to evaluate
this aspect.
REPRESENTATIVES OF EMPLOYEES AND THE EMPLOYER
The Checking of whether the requirements on electing employer’s representatives as well as
employees’ representatives have been duly met. How do they organize their own representative
election inside of the company? This question can reveal more than it seems because if there are

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no employees’ representatives it could mean that this is a kind of dictatorship and this is an
unclear situation.
EMPLOYER’S OBLIGATION TO INFORM AND CONSULT EMPLOYEES
In case of medium and large companies, the due diligence team will clarify whether the
procedures of informing and consulting employees established by law are being followed and
provide relevant instructions. A leader cannot impose his own rules without talking to his
employees. The evaluation of the procedures and the legitimacy of its rules and regulations are
quite important in order to don’t spend time in solving problems before working.
COLLECTIVE EMPLOYMENT RELATIONSHIPS
The analysis of the terms of the collective agreement should meet the requirements of the new
Employment Contract Act. Every agreement has to be written in a specific way and it has to
respond to standards imposed by the law of the host country.23
23
http://borenius.ee/en/our-services/services/fixed-fee-services/employment-due-diligence/

Business Law
Due Diligence in
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Due Diligence Post 9/11 & Enron
After those crises, many people realised that it is high time to raise the bar on due diligence. In
addition to being extreme examples of terrorism and fraud, the World Trade Centre catastrophe,
Enron debacle and other recent major accounting scandals have hoisted bright red flags that should
drive corporate leaders to take a hard look at who they’re really doing business with.
The spectacular failure of Enron and the still unfolding scandal spawned by its collapse are
having a profound impact on the way lawyers and other professionals conduct “due diligence”
reviews in corporate transactions. Simply put, many areas that were previously ignored or
relegated to cursory review are now the subject of intense scrutiny. Accounting practices are at
the forefront of these recent developments, thus this article examines some of the pertinent
trends in this area. First, however, a brief explanation of the due diligence process itself.
In both merger and acquisition transactions and public securities offerings, a team of lawyers,
accountants and other professionals conducts what is commonly called a “due diligence”
investigation of the affected company or companies. In M&A transactions, both buyer and seller
typically conduct due diligence investigations on one another, though the investigations are usually
much more intensive on the seller. In the case of public securities offerings, the investment
bankers who underwrite the offering conduct due diligence on the proposed issuer. The purpose of
Chapter 3 Due Diligence and Current Events
9/11 Enron

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Due Diligence in
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these due diligence investigations is two-fold: first, to ensure that the target of the investigation
does not have undisclosed problems or liabilities that could make proceeding with the transaction
unwise -- either at the proposed deal price or at any price; and second, in the case of securities
offerings, to obtain the benefits of the so-called “due diligence defense” to certain types of civil
liability for false or misleading information in the prospectus.
No area of the due diligence landscape has been more transformed by Enron than the accounting
area. Enron has resulted in significantly greater scrutiny of anything and everything that touches or
involves a company’s accounting practices. Prior to Enron, it was not uncommon for both
investment bankers and acquirors to accept a target company’s “numbers” pretty much at face
value, and to not go behind those numbers in any significant detail. Simply put, those days are
over, at least for the foreseeable future. Today, prudent participants in both M&A and offering
transactions are not just looking at the numbers, they’re looking behind them and questioning the
reasoning and judgment that underlie a company’s financial statements and the transactions they
reflect. Moreover, the Securities and Exchange Commission has issued a significant number of
accounting-related pronouncements in recent months -- many of them Enron-motivated -- that are
of key importance to public companies and those that aspire to be. As part of today’s due diligence
exercise, a company’s compliance with these new requirements must be carefully assessed.
Accounting issues that are “hot buttons” in today’s environment, and thus those areas that are
most likely to attract intense scrutiny during the due diligence process, include the following:
pro forma presentation of earnings, typically in quarterly press releases
disclosure of a company’s “critical accounting policies” in that portion of a prospectus or
periodic financial report required to set forth a textual discussion of the company’s
financial statements
the use of “special purpose entities” and other structured finance vehicles through which
the financial reporting of transactions is moved “outside” a company’s financial
statements
revenue recognition practices
so-called “earnings management” and the use of non-recurring restructuring charges to
reduce ordinary operating expenses
segment-based reporting and disclosure

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Due Diligence in
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In addition to assessing the overall quality of the financial statements themselves, acquirers
and underwriters now more than ever look closely at the accounting and control infrastructure that
is in place within a company. Among the questions that will be asked are the following: Is the
accounting and control infrastructure sound? Are the outside auditors truly independent? Are there
avenues for discussion and disclosure to appropriate parties should accounting irregularities
surface? Is the audit committee fully engaged and functioning as it should?
At the end of the day, all those crisises have made due diligence checklist of today much
stricter than before.

Due diligence report 20150414

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