Due diligence
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Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.
Due diligence can be a
Development of the term
The term "due diligence" can be read as "required carefulness" or "reasonable care" in general usage, and has been used in the literal sense of "requisite effort" since at least the mid-
As long as broker-dealers exercised "due diligence" (required carefulness) in their investigation into the company whose
The broker-dealer community quickly institutionalized,[when?] as a standard practice, the conducting of due diligence investigations of any stock offerings in which they involved themselves. Originally the term was limited to public offerings of equity investments, but over time it has become associated with investigations of private mergers and acquisitions (M&A) as well.
Examples
Business transactions and corporate finance
Due diligence takes different forms depending on its purpose:
- The examination of a potential target for merger, acquisition, finance transactionnormally 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.)
- A reasonable investigation focusing on material future matters.
- 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?
- An investigation of current practices of process and policies.
- An examination aiming to make an acquisition decision via the principles of valuation and shareholder value analysis.[5]
A due diligence process can be divided into nine distinct areas:[5]
It is essential that the concepts of valuations (shareholder value analysis) be considered in a due diligence process. This is in order to reduce the number of failed mergers and acquisitions.[5]
In this regard, two new audit areas have been incorporated into the Due Diligence framework:[5]
- the Compatibility Audit which deals with the strategic components of the transaction and in particular the need to add shareholder value and
- the Reconciliation audit, which links/consolidates other audit areas together via a formal valuation in order to test whether shareholder value will be added.[5]
The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits (including the
Due Diligence has emerged as a separate profession for accounting and auditing experts and is typically referred to as Transaction Services.[further explanation needed]
Legislation
With the number and size of penalties increasing, the United States' Foreign Corrupt Practices Act (FCPA) has caused many U.S. institutions to look into how they evaluate all of their relationships overseas. The lack of a due diligence of a company's agents, vendors, and suppliers, as well as merger and acquisition partners in foreign countries could lead to doing business with an organization linked to a foreign official or state owned enterprises and their executives. This link could be perceived as leading to the bribing of the foreign officials and as a result lead to noncompliance with the FCPA. Due diligence in regard to FCPA compliance is required in two aspects:
- Initial due diligence – this step is necessary in evaluating what risk is involved in doing business with an entity prior to establishing a relationship and assesses risk at that point in time.
- Ongoing due diligence – this is the process of periodically evaluating each relationship overseas to find links between current business relationships overseas and ties to a Integrity Management initiative.[failed verification]
In the M&A context, buyers can use the due diligence phase to integrate a target into their internal FCPA controls, focusing initial efforts on necessary revisions to the target's business activities with a high-risk of corruption.[15]
While financial institutions are among the most aggressive in defining FCPA best practices, manufacturing, retailing and energy industries are highly active in managing FCPA compliance programs.
In the United Kingdom, the Bribery Act 2010 requires companies using an "adequate procedures" defence to a charge of bribery to have undertaken due diligence on their business partners. Due diligence is described as "knowing exactly who you are dealing with". Official guidance suggests that "ask[ing] a few questions and do[ing] a few checks" can help to protect an organisation from taking on untrustworthy partners.[16]
Human rights
Passed on May 25, 2011, the OECD member countries agreed to revise their guidelines promoting tougher standards of corporate behavior, including human rights. As part of this new definition, they utilized a new aspect of due diligence that requires a corporation to investigate third party partners for potential abuse of human rights.
The OECD Guidelines for Multinational Enterprises (a government-backed international agreement that provides guidance on responsible business conduct) state that multinational enterprises will "Seek ways to prevent or mitigate adverse human rights impacts that are directly linked to their business operations, products or services by a business relationship, even if they do not contribute to those impacts".[17]
The term 'due diligence' was originally put forward in this context by UN Special Representative for Human Rights and Business John Ruggie, who used it as an umbrella to cover the steps and processes by which a company understands, monitors and mitigates its human rights impacts. Human Rights Impact Assessment is a component of this.
The UN formalized guidelines for Human Rights Due Diligence on June 16, 2011, with the endorsement of Ruggie's Guiding Principles for Business and Human Rights.[18]
Civil litigation
Due diligence in civil procedure is the idea that reasonable investigation is necessary before certain kinds of
In civil actions seeking a foreclosure or seizure of property, a party requesting this relief is frequently required to engage in due diligence to determine who may claim an interest in the property by reviewing public records concerning the property and sometimes by a physical inspection of the property that would reveal a possible interest in the property of a tenant or other person.
Due diligence is also a concept found in the civil litigation concept of a
Criminal law
In criminal law, due diligence is the only available defense to a crime that is one of strict liability (i.e., a crime that only requires an actus reus and no mens rea). Once the criminal offence is proven, the defendant must prove on balance that they did everything possible to prevent the act from happening. It is not enough that they took the normal standard of care in their industry – they must show that they took every reasonable precaution.
Due diligence is also used in criminal law to describe the scope of the duty of a prosecutor, to take efforts to turn over potentially exculpatory evidence, to (accused) criminal defendants.
In criminal law, "due diligence" also identifies the standard a prosecuting entity must satisfy in pursuing an action against a defendant, especially with regard to the provision of the Federal and State Constitutional and statutory right to a speedy trial or to have a warrant or detainer served in an action. In cases where a defendant is in any type of custodial situation where their freedom is constrained, it is solely the prosecuting entities duty to ensure the provision of such rights and present the citizen before the court with jurisdiction. This also applies where the respective judicial system and/or prosecuting entity has current address or contact information on the named party and said party has made no attempt to evade notice of the prosecution of the action.[19]
Due diligence defence
In the United Kingdom, "proper use of a due diligence system" may be used as a defence against a charge of breach of regulations: for example, under the Timber and Timber Products (Placing on the Market) Regulations 2013[20] and the Environmental Protection (Microbeads) (England) Regulations 2017,[21] businesses may be able to defend a charge of non-compliance with regulations if they can show that they have undertaken supplier due diligence to a necessary standard. References to "due diligence" and the maintenance of a "due diligence system" in the regulation concerning timber are drawn from the European Union's Regulation 995/2010, which covers the legal obligations of "operators who place timber and timber products on the market".[20]
See also
References
- ISBN 0-324-27158-1.
- Practicing Law Institute, New York, NY.
- ^ 'Due Diligence' Merriam-Webster entry
- ^ Securities Act of 1933 Section 11(b)(3), accessed 11 July 2023
- ^ ISBN 978-0-409-04699-1.
- ^ .
- ^ doi:10.1504/IJTM.1991.025872 (inactive January 31, 2024).)
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: CS1 maint: DOI inactive as of January 2024 (link - ISSN 2329-9134. Archived from the originalon January 5, 2019. Retrieved July 21, 2015.
- ISSN 2329-9134. Archived from the originalon December 23, 2017. Retrieved May 23, 2016.
- ISBN 978-1-58852-066-1.
- ISSN 2329-9134. Archived from the originalon December 22, 2017. Retrieved July 23, 2015.
- ISSN 2329-9134. Archived from the originalon December 23, 2017. Retrieved July 21, 2015.
- ^ "Duty of Care Risk Analysis Standard". DoCRA. 2022.
- ^ "FCPA Definition - Foreign Corrupt Practices Act". Archived from the original on August 30, 2010. Retrieved 2010-01-07. WorldCompliance.com
- ISSN 2329-9134. Archived from the originalon October 18, 2015. Retrieved July 21, 2015.
- ^ Ministry of Justice, The Bribery Act 2010: Quick Start Guide, accessed 24 December 2023
- ^ [1] Archived September 4, 2011, at the Wayback Machine
- ^ "Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie" (PDF). Human Rights Council. Retrieved May 21, 2021.
- ^ Hawaii Revised Statues 353-66.5 and 604-7.2
- ^ a b Timber and Timber Products (Placing on the Market) Regulations 2013, SI 233/2013
- ^ Environmental Protection (Microbeads) (England) Regulations 2017, SI 1312/2017