1 w ICLG The International Comparative Legal Guide to: Private Equity st Edition A practical cross-border insight into private equity Published by Global Legal Group, with contributions from: Aabø-Evensen & Co Ali Budiardjo, Nugroho, Reksodiputro Angola Capital Partners Anjarwalla & Khanna Ashurst LLP Bär & Karrer AG Bentsi-Enchill, Letsa & Ankomah British Private Equity & Venture Capital Association Chiomenti Studio Legale Clifford Chance Elvinger, Hoss & Prussen Garrigues Goltsblat BLP Greenberg Traurig, LLP Hajji & Associés Houthoff Buruma Milbank, Tweed, Hadley & McCloy LLP Morais Leitão, Galvão Teles, Soares da Silva & Associados Schindler Rechtsanwälte GmbH Schulte Roth & Zabel LLP Shearman & Sterling LLP Simont Braun Skadden, Arps, Slate, Meagher & Flom (UK) LLP Țuca Zbârcea & Asociații Veirano Advogados Vieira de Almeida & Associados, Sociedade de Advogados, RL Zhong Lun Law Firm
2 The International Comparative Legal Guide to: Private Equity 2015 General Chapters: 1 Vendor Due Diligence Reports: A Tale of Two Markets Jeremy W. Dickens, Shearman & Sterling LLP 1 Contributing Editor Shaun Lascelles, Skadden, Arps, Slate, Meagher & Flom (UK) LLP Head of Business Development Dror Levy Sales Director Florjan Osmani Commercial Director Antony Dine Account Directors Oliver Smith, Rory Smith Senior Account Manager Maria Lopez Sales Support Manager Toni Hayward Editor Rachel Williams Senior Editor Suzie Levy Group Consulting Editor Alan Falach Group Publisher Richard Firth Published by Global Legal Group Ltd. 59 Tanner Street London SE1 3PL, UK Tel: Fax: URL: GLG Cover Design F&F Studio Design GLG Cover Image Source istockphoto Printed by Ashford Colour Press Ltd July 2015 Copyright 2015 Global Legal Group Ltd. All rights reserved No photocopying ISBN ISSN Strategic Partners 2 Enforcing Investors Rights in Latin America: The Basics Emilio J. Alvarez-Farré & Juan Delgado, Greenberg Traurig, LLP 7 3 Unitranche Facilities A Real Debt Funding Alternative for Private Equity Paul Stewart & Ewen Scott, Ashurst LLP 12 4 The Development of EU Regulation since the Financial Crisis and the Future of the Capital Markets Union Simon Burns, British Private Equity & Venture Capital Association 16 Country Question and Answer Chapters: 5 Angola Vieira de Almeida & Associados Sociedade de Advogados, R.L. and Angola Capital Partners: Hugo Moredo Santos & Rui Madeira 20 6 Austria Schindler Rechtsanwälte GmbH: Florian Philipp Cvak & Clemens Philipp Schindler 26 7 Belgium Simont Braun: David Ryckaert & Koen Van Cauter 33 8 Brazil Veirano Advogados: Ricardo C. Veirano & Gustavo Moraes Stolagli 41 9 China Zhong Lun Law Firm: Lefan Gong & David Xu (Xu Shiduo) Germany Milbank, Tweed, Hadley & McCloy LLP: Dr. Peter Memminger Ghana Bentsi-Enchill, Letsa & Ankomah: Seth Asante & Frank Nimako Akowuah Indonesia Ali Budiardjo, Nugroho, Reksodiputro: Oene J. Marseille & Emir Nurmansyah Italy Chiomenti Studio Legale: Franco Agopyan Kenya Anjarwalla & Khanna: Roddy McKean & Dominic Rebelo Luxembourg Elvinger, Hoss & Prussen: Toinon Hoss & Jean-Luc Fisch Morocco Hajji & Associés: Amin Hajji & Houda Boudlali Netherlands Houthoff Buruma: Alexander J. Kaarls & Johan Kasper Norway Aabø-Evensen & Co: Ole Kristian Aabø-Evensen & Harald Blaauw Poland Clifford Chance: Marcin Bartnicki & Wojciech Polz Portugal Morais Leitão, Galvão Teles, Soares da Silva & Associados: Ricardo Andrade Amaro & Pedro Capitão Barbosa Romania Țuca Zbârcea & Asociații: Ștefan Damian & Silvana Ivan Russia Goltsblat BLP: Anton Sitnikov & Vera Gorbacheva Spain Garrigues: María Fernández-Picazo & Ferran Escayola Switzerland Bär & Karrer AG: Dr. Christoph Neeracher & Dr. Luca Jagmetti United Kingdom Skadden, Arps, Slate, Meagher & Flom (UK) LLP: Shaun Lascelles USA Schulte Roth & Zabel LLP: Peter Jonathan Halasz & Richard A. Presutti 179 Further copies of this book and others in the series can be ordered from the publisher. Please call Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.
3 EDITORIAL Welcome to the first edition of The International Comparative Legal Guide to: Private Equity. This guide provides the international practitioner and in-house counsel with a comprehensive worldwide legal analysis of the laws and regulations of private equity. It is divided into two main sections: Four general chapters. These are designed to provide readers with a comprehensive overview of key private equity issues, particularly from the perspective of a multi-jurisdictional transaction. Country question and answer chapters. These provide a broad overview of common issues in private equity laws and regulations in 22 jurisdictions. All chapters are written by leading private equity lawyers and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor, Shaun Lascelles of Skadden, Arps, Slate, Meagher & Flom (UK) LLP, for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at Alan Falach LL.M. Group Consulting Editor Global Legal Group
4 Chapter 1 Vendor Due Diligence Reports: A Tale of Two Markets Shearman & Sterling LLP Jeremy W. Dickens Introduction Over the past 20 years or so, a peculiar (at least in the author s opinion) difference has grown between the European and American manner of conducting auction sales processes for private equity transactions. 1 In the European style of practice, the development of which first began in England, it is routinely the case that before a seller (the vendor, in European parlance) commences a formal sales process, it commissions legal, accounting and often other advisors to prepare comprehensive due diligence reports related to the target business. Those vendor due diligence reports (or VDDRs) are not only made available to prospective purchasers of the target, but the experts who prepare them are expected to, and customarily do, permit the successful bidder to rely on those reports as though prepared for them in the first instance. In the United States, sellers only occasionally ask their advisors to prepare VDDRs and more rarely are those reports made to successful bidders on a reliance basis. This article evaluates the difference in market practice and concludes twofold: (i) there is no compelling reason for the difference; and (ii) participants in U.S.-based private equity transactions would benefit materially if American practitioners were to adopt the European model. What is Vendor Due Diligence? As it sounds, vendor due diligence is the process by which a private company contemplating a sales process commissions lawyers, accountants and other relevant experts to prepare comprehensive reports addressing those legal, accounting 2 and other substantive topics 3 almost any buyer would otherwise investigate for itself in deciding whether to bid for a particular business. 4 Legal due diligence (which is the central area of focus for this article) typically addresses key areas such as the following: general corporate matters, such as the due organisation, valid existence and capitalisation of the target, as well as formal legal requirements related to the proposed sale transaction. Relevant areas of interest range from the mundane, such as confirmation that the target company and its subsidiaries in fact legally exist under the laws of their jurisdictions of organisation and possess legal authority to conduct business in other jurisdictions in which they operate, to the important, such as confirmation of the capitalisation and ownership of the target and its subsidiaries, including the existence of any rights, such as options or warrants or other securities, giving third parties the ability to acquire an ownership interest in the target and/or its subsidiaries, to the critical, such as formal legal requirements related to shareholder approval of mergers and consolidations or the sale of all or substantially all the assets, class voting rights, or the availability of appraisal (sometimes called dissenters ) rights; material contracts affecting the sales process itself, such as those under which shareholders or other investors may have contractual (as distinct from legal) approval or other rights, such as drag-along or tag-along rights, rights of first offer or first refusal, specific board approval rights or supermajority consents, etc. Other types of contracts that one might consider relevant to the sales process are those related to executive compensation plans, such as equity plans, employment agreements, retention agreements, severance plans, etc., all of which must be evaluated and taken into consideration as part of the overall economics of the transaction to the buyer. Similarly, the target s existing financing arrangements 5 may have an impact on the sales process (for example, many financing arrangements require repayment with specified premiums upon a change of control; in other cases, there may be financing arrangements a buyer considers unfavourable that cannot be prepaid and which, therefore, may require negotiations with lenders and the payment of make-whole amounts); material contracts related to the target s business, such as those with key customers or suppliers, or licensors or licensees, or franchisors or franchisees, lessors or lessees, etc. Each type of company will have its own set of material contracts; intellectual property, including not only the status of patent applications (pending, provisional, or issued) or the registration of trademarks, but also the existence of confidentiality or work-for-hire agreements intended to safeguard trade secrets or otherwise ensure the validity of the target s claim to key IP assets; pending and threatened litigation, which may run the gamut from employment practice-related claims, to infringement of intellectual property, to commercial and product liability claims, to shareholder or securities fraud lawsuits, or governmental investigations (formal or informal) or actual cases brought by governmental authorities related to antitrust matters, alleged violations of the Foreign Corrupt Practices Act or many other types of alleged violations of law (including cases that may raise criminal liability as well as civil liability). 6 Litigation diligence also covers both cases where the target is or may be a defendant, as well as those cases where the target is a plaintiff; and pensions-related matters, such as the funding status of plans governed by ERISA, 7 potential claims by the PBGC, 8 and labour-related matters, such as the status of collective bargaining agreements or union organising efforts or cases proceeding before the United States National Labor Relations Board. ICLG TO: PRIVATE EQUITY
5 Shearman & Sterling LLP Vendor Due Diligence Reports As should be obvious from the foregoing list and the related endnotes, the categories of information covered by legal due diligence are well understood, but the specific due diligence for individual companies is likely to vary widely from one company to the next depending on its industry and its unique concerns. How did the Practice of Vendor Due Diligence Come About? At the risk of being facetious, it seems likely that the concept of vendor due diligence arose out of a conversation among exhausted executives at a private equity firm complaining about various sales processes they had endured recently and inefficiencies such as: repetitive and seemingly endless management presentations to prospective buyers; 9 significant time and effort spent responding to multiple due diligence request lists and follow-up questions from sponsors and their financing sources; time wasted coming up to speed with and crafting solutions to specific problems typically (and a little embarrassingly) identified by one or more bidders during diligence that, in hindsight, could have been addressed up-front had the seller and sponsor focused on them; suspicion that they might have negotiated more favourable indemnity provisions (i.e., higher baskets/deductibles, lower caps, shorter duration) or, potentially, a more favourable purchase price, had they better controlled the diligence process; 10 and suspicion that a more efficient sales process presents the opportunity to better control the legal and other advisory costs associated with the transaction. The benefits of vendor due diligence to the seller seem self-evident. There are also corresponding benefits to a prospective buyer. For example: A properly prepared VDDR provides bidders with a road map to likely issues of material interest to them. 11 Therefore, bidders are more able to assess rapidly whether there are red flags that either are deal breakers or simply issues for which the buyer will require specific accommodation (whether via the purchase price, specific structuring solutions, indemnity, or a combination). The ability to make a quick go-no go decision obviously reduces costs to those parties electing to withdraw from a sales process. The seller, of course, obtains a corresponding benefit to the extent that it has been able to determine more accurately and more quickly which bidders are likely to be the most serious in their interest in the target. Moreover, having received VDDRs in advance, it may be more difficult for a bidder to submit a high bid simply to obtain exclusivity with the objective of using a later due diligence process as a means of negotiating a lower ultimate price. The VDDR enables bidders to direct their advisors more effectively in terms of prioritising the issues of most concern to them. A targeted approach to diligence should enable bidders to better control their own costs because their advisors are able to engage in confirmatory rather than comprehensive diligence. In many vendor-controlled diligence processes, the bidders submit follow up questions in writing and, in some cases, are subject to limits on the number of those questions. The seller then catalogues the follow up questions and prepares a single response shared with all bidders. From the bidder s perspective, there is comfort obtained from knowing that there is a level playing field among the parties when it comes to developing an understanding of the target business. In a similar vein, it is not uncommon for seller s to host group meetings with management and/or advisors to deliver presentations about the business and the contents of the VDDRs. While it may be slightly inconvenient for bidders to participate in these group briefings, particularly those hosted by phone where there may be limited or no ability to ask questions, each bidder at least knows that the playing field remains level. Finally, having been afforded the opportunity to participate in a thoughtful, well-organised and fair diligence process, the bidder may acquire sufficient comfort with its understanding of the business to be encouraged to put forward its best offer for the target company relatively secure in the knowledge that the disclosure schedules to the definitive purchase agreement are unlikely to contain surprises. Downside to Vendor Due Diligence There are, of course, potential negatives inherent in vendor due diligence. 12 For example, from the seller s perspective, potential disadvantages largely consist of (i) increased upfront time and associated (and potentially significant) cost involved in having outside advisors prepare the VDDRs, (ii) the prospect that the items disclosed will affect negatively the sales price, (iii) potential concerns, in the case of disclosures about pending or threatened litigation and/or governmental investigations and proceedings, of waivers of attorney-client privilege, (iv) the prospect that notwithstanding the seller s best efforts, it will still be forced to respond to multiple, conflicting and time-consuming requests for follow up diligence and meetings, and (v) the risk that there will not be any tangible benefit to it in terms of an increased sales price and/ or more favourable indemnification terms than it would otherwise have achieved had it simply left each bidder to its own device in carrying out diligence. In the author s view, none of the potential negatives to the seller are sufficiently onerous as to tip the scale in favour of opting for the traditional approach. Time invested by sellers up front often substantially limits the time required from launch to completion of a sales process. The cost of VDDRs is something that a seller can require the successful bidder to share in as part of the transaction. Worries that disclosure may affect the sales price is a red herring in the author s view, if an item of disclosure is so material as to have an actual (or perceived) effect on the sales price, it is precisely the sort of information the seller should (indeed, one might argue, must) disclose to the bidder. 13 Concerns about losing the benefits of attorney-client privilege in the context of litigation-related disclosure is another red herring. Whether the vendor sponsors the due diligence process or bidders are left to fend for themselves, the seller s general counsel and, frequently, external counsel handling material litigation or governmental investigations or proceedings, will invariably be called upon to brief bidders and their counsel about those matters. Custom and practice in avoiding disclosure that jeopardises the attorney-client privilege is well-developed and the process of vendor due diligence should have no bearing on how this disclosure is handled. The risk of the due diligence process running amok, notwithstanding the seller s attempt to control it, seems to be one well within the seller s ability to control (and if the issues are such that the seller cannot control the process, it suggests those issues have considerable substance to them). Finally, as to whether or not vendor due diligence will provide the hoped-for benefit of an improved sales price and/or more favourable indemnification provisions, the author leaves it to economists and others to study the issue and reach an objective conclusion. However, given the widely accepted wisdom of the efficient market hypothesis as applied to publicly listed companies, it is not much of a leap to hypothesise that 2 ICLG TO: PRIVATE EQUITY 2015
6 Shearman & Sterling LLP Vendor Due Diligence Reports the more a bidder knows about the company, the more the price paid and terms offered will reflect that information. Put another way, the less a bidder knows (or fears that it does not know) about a company, the more likely it will be to discount its purchase price or otherwise seek to shift the consequences of unknown risks to the seller. 14 From a bidder s perspective, there seems to be little reason to reject VDDRs out of hand. It may be the case that a bidder is unfamiliar with the vendor s advisors, and therefore may place less inherent trust in the quality of their work than had those reports been by its own advisors. It may also be the case that a particular bidder has a different view as to materiality from that taken by the advisor preparing the VDDR or prefers a different reporting format from that used in the VDDR. However, those sorts of objections are not particularly compelling. Indeed, so long as a seller works with reputable advisors with experience in private equity transactions, it seems unlikely there is much actual risk that a VDDR would be so shoddy, or so flawed in the materiality judgments it makes, or presented in such a confusing format, as to make the report of no or little value to a bidder. In the author s experience, most bidders will be content to have their own advisors conduct confirmatory diligence of the matters covered in the VDDRs, at least unless and until they discover a substantive problem with those reports. 15 European Vendor Due Diligence in Practice Over the past 20 years or so, European market practice has evolved to the point where VDDR is a routine and expected part of the private equity sales process. At the outset, the vendor, as it begins to prepare for the sales process, engages accounting, legal and other relevant advisors to prepare draft VDDRs. Those draft reports are made available to prospective bidders on a non-reliance basis. At the conclusion of the sales process, when the successful bidder enters into a definitive purchase agreement for the target, the various advisors deliver their definitive VDDRs to the buyer subject to the terms of a reliance letter, which often contains a cap on the advisor s liability 16 to the recipient for any deficiencies in the report other than those arising out the preparer s gross negligence, recklessness or fraud. A non-reliance letter, in the context of a legal due diligence report, serves primarily to record the recipient s acknowledgment that delivery of the report does not establish an attorney-client relationship between the law firm and the recipient of the report. It also contains disclaimers largely self-evident to the effect that the preparing firm has not consulted with the recipient in connection with defining the scope of the report and, as a result, it is possible that the recipient may have different interests and views of materiality from those expressed by the preparer of the report. Finally, the non-reliance letter contains a waiver and release by the recipient of any and all claims it may have against the preparing firm with respect to the report. Although different law firms use different language in their non-reliance letters, the gist of the letter is the same the recipient uses the report at its own risk and the provider takes no responsibility for its contents and disclaims any responsibility to update the report. The reliance letter, however, is a more substantive document and its tone and content is very much like that of a legal opinion letter, taking great pains to tell the recipient what it is within the scope of the opinion letter and to spell out any limitations and qualifications applicable to the covered matters. The typical reliance letter covers: (1) a careful definition of the Report being delivered; (2) a description of the scope of work encompassed by the report and a disclaimer of liability or responsibility for any matters outside the scope of the report; (3) consent to the recipient s review and reliance upon the report solely for the purpose specified in the reliance letter, subject to a number of important disclaimers and limitations with respect to the report; (4) specific acknowledgments by the recipient, such as its agreement to the terms of the reliance letter and its understanding that the provider makes no representations or warranties as to the sufficiency or appropriateness of the information in the report for the purposes for which the recipient intends to use it; (5) confidentiality undertakings of the recipient with respect to the report; (6) a cap on the liability of the provider to the recipient, which (to the extent permitted by law) is only available in the case of the provider s gross negligence, recklessness, or fraud; 17 and (7) the governing law and the forum in which any disputes related to the report will be heard. 18 Why Hasn t Vendor Due Diligence Caught on in the United States? The author frankly admits to being stumped by the question just posed. There is no adequate explanation. Vendor due diligence offers sellers the same advantages, and delivers buyers the same head-start in understanding a target s business, regardless of whether the transaction is European or American. There is no greater reason to discount the reliability of VDDRs because they are prepared by the seller s U.S. law firm (or the U.S. office of an international law firm) than there is to discount the reliability of reports prepared by an English law firm or the London office of an U.S.-based international law firm. Moreover, U.S. law firms routinely deliver legal opinions to third parties when requested to do so by their clients (e.g., opinions delivered by a borrower s counsel to lenders in a senior debt transaction, or opinions delivered by an issuer s counsel to underwriters and/or initial purchasers in capital markets transactions). Indeed, it is quite common for U.S. law firms representing buyers in acquisition transactions to share their due diligence memoranda (most often, but not only, on a non-reliance basis) with prospective co-investors, other financing sources and even providers of rep and warranty insurance. The only substantive reason that the author has seen offered to explain the absence of vendor due diligence in American transactions is that: [E]thics rules applicable to lawyers in the United States disallow them from capping or otherwise limiting the amount of their liability for malpractice. A U.S. law firm that contractually permitted a buyer to rely on its due diligence report therefore would be liable, without any limitation, for any losses incurred by the buyer that result from mistakes or omissions contained in its report. 19 Unfortunately, the prohibition on lawyers limiting their liability for malpractice is not as absolute as the commentator, quoted above, suggests. For example, Rule 1.8(h)(1) of the New York Rules of Professional Conduct states that [a] lawyer shall not make an agreement prospectively limiting the lawyer s liability to a client for malpractice (emphasis added). 20 By its terms, Rule 1.8(h) only prohibits liability caps if (1) they are entered into prospectively, and (2) with a client. 21 Accordingly, there is no ethical prohibition on a law firm asking a non-client to agree to a cap on the law firm s liability for malpractice. 22 There is likewise no ethical rule that prohibits a law firm from permitting a third party from relying on its due diligence report. Indeed, Rule 2.3(a) of the New York Rules of Professional Conduct specifically provides [a] lawyer may provide an evaluation of a matter affecting a client for the use of someone other than the client if the lawyer reasonably believes that making the evaluation is compatible with other aspects of the lawyer s relationship with the client. Moreover, Rule 2.3(b) provides that, with the client s informed consent, a lawyer may provide the evaluation to a third ICLG TO: PRIVATE EQUITY
7 Shearman & Sterling LLP Vendor Due Diligence Reports party even if the lawyer knows or reasonably should know that the evaluation is likely to affect the client s interests materially and adversely. In short, there is nothing in the New York Rules of Professional Conduct that explain why vendor due diligence has not been adopted more widely in the United States. Conclusion In the author s view, there is no principled reason why vendor due diligence should not be the norm of practice in the United States as well as in Europe. There is much to recommend the practice and very little to say against it. At best, the arguments against it are parochial and lazy. That said, until one or more significant private equity firms decide to adopt vendor due diligence as a core part of their process when selling their portfolio companies, there is very little practical incentive for the U.S. market to change. The only thing that prevents vendor due diligence from being used more in the U.S. is the indifference of sellers, a strange state of affairs given that many private equity firms also operate overseas and use the practice extensively and routinely when selling their non-us portfolio companies. Endnotes 1. This article considers only sales processes affecting nonlisted companies (that is, companies that do not have a class of securities, whether equity, debt or hybrid, as to which the company has an obligation to file periodic, publicly available reports with the United States Securities and Exchange Commission, comparable authorities in other jurisdictions or foreign securities exchanges exercising similar supervisory functions). Sales processes in take private transactions have separate considerations and practitioners conduct them pursuant to the requirements of specific regulatory and market practices. 2. The specifics of accounting due diligence are outside the scope of this article. Speaking from practical experience, however, relevant areas of accounting due diligence are likely to include the quality of earnings, the cash-generating capabilities of the company, and material risk areas such as inventory accruals, bad debt experience, litigation and other reserves, such as for product warranty claims or similar contingent liabilities, as well as those accounting areas most subject to significant estimates and judgments. 3. Examples include environmental, actuarial, engineering and/ or other technical areas relevant to the target company s business. Tax due diligence is generally not reflected in vendor due diligence because tax optimisation strategies are generally driven by the particular needs of each prospective purchaser. For example, a private equity sponsor may consider preserving the net operating losses or other tax assets of the target to be critical to achieving its targeted investment returns, yet a strategic buyer may put very little value on those assets. 4. The author is a U.S. lawyer with only a passing familiarity with the terminology and requirements of the laws of other jurisdictions. For the sake of simplicity, then, this article tends to use U.S. terminology and legal concepts with the hope that a reader qualified in another jurisdiction will accept his apologies and identify the appropriate analogies for themselves. 5. By the term financing arrangements, the author intends to encompass not only traditional bank financing arrangements but also debt or preferred securities, saleleaseback arrangements, equipment leases and other types of similar arrangements, whether or not accounted for on a balance sheet as a liability (e.g., some material lease arrangements may be treated as capital leases, while others may be operating leases). Off balance sheet financings and contingent liabilities are also likely fall into the category of contracts relevant to the sales process. 6. Different industries have their own specific regulatory profiles. For example, both the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency oversee national banking associations. In certain circumstances, the Federal Deposit Insurance Corporation may also be a relevant regulatory body. A state chartered bank may be overseen by both a state banking department and the Federal Reserve. Insurance holding companies may be subject to regulation in a variety of states. Pharmaceutical companies are subject to the jurisdiction of the Federal Drug Administration, as are manufacturers of medical devices. The list of potential regulatory concerns for various industries is, unfortunately, endless. 7. The United States Employee Retirement Income Security Act of 1974, as amended. 8. The United States Pension Benefit Guaranty Corporation. 9. The benefits of a focused sales process that minimises the demands on management time cannot be underestimated. In the author s experience, it is not uncommon for business performance to lag during the sales process because management becomes distracted. This is certainly the case when critical operating executives are essential presenters during management meetings. The less time management spends on these meetings, the more time it has to focus on running the business. 10. By this observation, the author refers to the negative consequences to transactions when a buyer discovers a material issue during diligence that had not been flagged previously by the seller. When this happens, the most favourable inference drawn by a buyer is that the seller is sloppy and does not have its arms fully around its own business; the worst interpretation is that the seller is dissembling. In either case, the buyer tends to lose confidence in the seller and fears that there may be other undisclosed and undiscovered significant issues. Any buyer worried about the integrity of the due diligence process is likely to seek more protective indemnification terms than it might otherwise had the due diligence process been managed better by the seller. 11. While particular bidders may have concerns about issues of unique interest to them given their individual circumstances (which therefore are issues that a seller may not necessarily be able to anticipate), it is almost certainly the case that if the vendor and its advisors highlight a due diligence issue as being material from their perspective, it will be an issue worthy of study and understanding by all bidders. 12. In the case of European transactions, the potential negatives of vendor due diligence were long ago evaluated and discounted. There seems no prospect that market practice will revert to the older model. Market participants have become used to the process. In the United States, however, market practice has moved only glacially toward vendor due diligence, which suggests to the author that there is still a debate as to the merits of the process. 13. A seller that affirmatively decides not to disclose materially negative information to a bidder, or that hopes to bury the disclosure amid an avalanche of other information to obscure its significance, risks post-closing litigation, potentially for fraud, breach of contract, or negligent misrepresentation. In the case of the seller that simply takes the view that it will populate a data room and leave it to the buyer to discover items of significance, it risks losing credibility in the eyes of the buyer, which in turn is likely to motivate the buyer to take a more hard-line position in negotiating the acquisition agreement than it might if it had a more positive view of the seller s integrity. 4 ICLG TO: PRIVATE EQUITY 2015