In part 1 of this blog series, we discussed issues that can arise at the outset of due diligence. There are additional red flags that may come up as you work through the due diligence process. Here are some of the more important red flags in the commercial due diligence process that may arise as the due diligence process proceeds.
Failure to meet contingency deadlines/requests for extensions of time
Depending on the issue, a high level red flag warning will be raised by a request for an extension of time to meet a contingency deadline or an outright missed deadline. Obviously, a series of extension requests and/or missed deadlines should be deemed a “flashing” warning sign suggesting that the closing might be delayed or the transaction not consummated.
But even a single missed deadline can be cause for concern depending on the circumstances and the nature of the contingency. As suggested above, contingencies fall on a spectrum of difficulty. For example, verifying corporate authority to consummate the transaction should be relatively “easy” to accomplish through review of corporate records. On the other hand, obtaining a permit approval from the local municipal authority may be magnitudes more difficult. Failure to meet the contingency deadline for proof of corporate authority could be seen as much more severe because meeting that deadline is “easy” and well within the control of the party which needs to provide proof. Attention to this particular problem is warranted, intervention may be needed, and concern should be communicated to the principals to the transaction so, if possible, timely and appropriate action can be taken.
Failure to confirm information and/or inconsistent information
Due diligence is a long process of reviewing documents and confirming information. Another important red flag is raised if, during that review, information cannot be confirmed or if the review disclosed inconsistent or inaccurate information. This may occur, for example, when reviewing sales figures or inventory lists. Such inconsistencies and/or inaccuracies must be investigated and communicated to the principals to the transaction.
Failure to meet contingencies
For self-evident reasons, the most severe red flag is an acknowledgement that a contingency cannot be met. At minimum, a contingency that cannot be met will lead to renegotiations. But, often, a failed contingency will make the transaction nonviable.
For more information, contact Baer Reed. Baer Reed provides commercial due diligence process support and review and other legal support solutions to law firms and in-house legal teams around the globe. To learn more, contact us online or call us today at 888-433-1990.
Mr. Reyes graduated with honors from the Ateneo de Manila University, where he received the Procter and Gamble Student Excellence Award. He obtained his Juris Doctor degree from the Ateneo de Manila School of Law. During law school, Mr. Reyes was part of the Philippine delegation to the Willem C. Vis International Commercial Arbitration Moot held in Vienna, Austria. He was also a member of the Ateneo Society of International Law and the St. Thomas More Debate Society. He completed his internship at the Public Attorney’s Office. He wrote a thesis entitled: “To Kill A White Elephant: An Analysis of the Fiduciary Exception to the Corporate Attorney-Client Privilege”. Mr. Reyes is admitted to practice law in the Philippines and the State of New York.
Ms. Lardizabal-Manzano is a graduate of San Sebastian College-Recoletos, where she earned her B.A. in Political Science. In 2003, she received her law degree from Lyceum of the Philippines and was admitted to practice law in 2004.
Matthew Hersh earned a B.A. in Political Science from Columbia University in 1990 and graduated cum laude from Georgetown University Law Center in 1999. He also holds a master’s degree in international relations from the Georgetown University School of Foreign Service.
Cap. Avi Levak (Res. IDF) graduated from from Israel’s prestigious Ben-Gurion University of the Negev with a Bachelor of Science in Computer Science and Mathematics. He is also a Leadership and Communication coach trained in TuT coaching by Alon gal in Israel. Avi specializes in high-level, in-depth analysis of business and client needs, within systems and software strategy and architecture.
Ms. Tyler graduated cum laude from Georgetown University and received her law degree, cum laude, from Georgetown University Law Center. During law school, she interned at the United Nations Economic Commission for Europe. She also worked on The Tax Lawyer journal and was a member of the award-winning Barristers’ Council Mock Trial Team. Ms. Tyler is admitted to practice law in the State of California and the District of Columbia.
Ms. Cruz-Anonuevo graduated cum laude and top nine in her batch from Miriam College with a degree of Bachelor of Arts in InternationalStudies. She obtained her Juris Doctor degree from Ateneo de Manila University School of Law in Rockwell. During law school, she interned in Rivera, Santos, Maranan & Associates. She was also part of Ateneo’s Labor Law Bar Operations. She wrote her thesis on, “Stealing Privacy: Limitations on Media’s Photographic Invasion.,” Ms. Cruz-Anonuevo is admitted to practice law in the Philippines.
Ms. Aquino-Batallones obtained a Bachelor of Arts degree in Development Studies (with Minors in Global Politics and Hispanic Studies) from the Ateneo de Manila University. In 2011, she received her Juris Doctor degree from Ateneo de Manila University School of Law. During law school, she interned at Romulo Mabanta Buenaventura Sayoc & de los Angeles then became an intern of Ateneo Legal Services Center’s Clinical Legal Education Program.
Mr. De Guzman graduated from San Beda College with a degree of Bachelor of Arts Major in Economics and received his law degree from San Beda College of Law. He is multilingual and is fluent in three languages: Chinese, Filipino, and English. He was admitted to the Philippine Bar in 2003.