This article forms part of our guide to corporate simplification and legal entity reduction projects. Links to the other parts of the guide are at the end of this article.
Due diligence investigations form part of the wider processes which are undertaken to decide whether to go ahead with a particular set of steps, and to identify what actions are needed to implement them.
The approach taken will need to be appropriate in the context of the project and the group concerned. Typically it may involve:
- Setting a materiality threshold for due diligence issues
- Preliminary ‘desktop’ research on the companies involved
- Detailed due diligence, including issuing due diligence questionnaires
These are considered in turn below. A sample due diligence log and questionnaire can be accessed using the link in the final section of this article.
In many cases, this will be implicit rather than explicit. However, for larger projects, it can be very useful to make sure that the team has a clear understanding of what amounts are likely to be regarded as material.
It is impossible to ‘prove a negative’, and significant amounts of time and cost can be wasted in attempting to chase down every possible issues. Being clear about what is material in the context of the project is one way to make sure that investigations remain focused and productive.
In a larger project, this research may be organised by the core project team in order to categorise the relevant companies and plan more detailed work.
The desktop research may include information sources such as:
- Companies House or the relevant company registers
- Internal company secretarial records
- Annual accounts
- Internal accounting records
- Internal treasury records (such as whether the relevant companies have bank accounts)
- Register of Data Controllers
- Land Registry
- Trademark Register, Patent Registers and so on
- Registers of domain names
- Regulators (such as the UK Financial Conduct Authority)
When searches of public registers are carried out, it can be useful also to search using former company names, rather than merely the current name.
Consideration may also be given to possible typographical errors which may have occurred at the time of the original registration, and carrying out searches using those variants of the name involved. This may be particularly relevant if the company name includes digits which may have been transposed on the original registration.
Detailed due diligence
This often involves creating a due diligence questionnaire and issuing it to the relevant respondents. Clearly, this will need to be adapted to suit the particular circumstances of the group or companies involved.
For example, it will need to be adapted to take into account:
- The functions within the relevant organisation
- The group’s processes for corporate approvals
- The business units involved
- Typical assets and liabilities
- The geographical scope of operations, and requirements of local law
- Third parties, such as external advisers or agents, who should be consulted as part of the process.
Depending on the circumstances, additional due diligence measures may be justified. These may include:
- Reviewing historic financial records for e.g. rents received and paid
- Reviewing historic corporate approval documents
- Reviewing internal announcements
- Reviewing registers of sealings (if applicable)
- Reviewing deeds packets
Sample due diligence log and questionnaire
Click on the following link to view a sample due diligence log and questionnaire for corporate simplification projects.
Read the other parts of this guide to corporate simplification projects: