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International Due Diligence: What Is It and How Does It Work?

By: Pushkala Sivaramakrishnan, COGENCY GLOBAL, on Apr 5, 2023 4:22:20 AM


CleanShot 2023-03-28 at 18.29.30@2x

What this is: An explanation of international due diligence and how it works.

What this means: Carrying out international due diligence searches can help you identify risks associated with a business that you are engaging with and thereby help you make an informed decision about your impending transaction.

What Is an International Due Diligence Search?

When two or more companies transact with one another, it is important that the parties are fully aware of the legal, financial, and commercial health of the transacting parties. The transactions could range from a lending transaction where a lender is interested in knowing about the borrower or it could be an acquisition transaction, where the investor is interested in establishing the investee company’s good standing. Usually, the lawyers advising on the commercial transactions would undertake due diligence searches on behalf of the transacting parties, instead of merely relying on information provided by the target company.  

The process typically involves a comprehensive review of a company’s legal, financial, and commercial aspects, including its corporate structure, ownership, financial statements, contracts, regulatory compliance, intellectual property (IP), litigation history, and reputation.

Law firms will typically use third-party services, to undertake these searches so that they can make an informed decision on behalf of their clients. As more and more companies have now become global, with business interests in several jurisdictions, the due diligence process has become more involved. The service company undertaking these searches will not only need to have expertise in the jurisdiction where the parent company is located, but it will need to have an understanding of what information about a legal entity is available in several other countries/ jurisdictions where subsidiaries or branches may be located. The extent of information as well as its availability greatly varies between countries, thereby making this information gathering process even more challenging.

What Information Can You Obtain From a Due Diligence Check?

As part of due diligence checks, your service provider may be able to obtain the following documents, depending on the location of the target entity and the extent of information available publicly in the specific jurisdiction.

The specific documents and information that are obtained may vary depending on the country, the nature of the due diligence check, and the type of transaction or investment being considered.

Some common documents and information that may be obtained during a due diligence check include:

Corporate Documents

This normally includes documents related to the company's constitution documents, amendments thereof, such as articles of incorporation, copies of recent corporate filings, director/ officer information etc. In some countries, the beneficial ownership information of a company is also publicly available. It might also be possible to obtain details of bankruptcy/ insolvency filing, if any, made by or against the company. Any outstanding loans/ mortgages could also be searched. The purpose is to find out whether a company is validly constituted, is in good standing, its indebtedness, etc.

Financial Documents

In certain countries, companies are required to disclose their financial performance for an accounting year by filing annual financial statements. This could be an important part of the financial due diligence process.

Legal Documents

In addition to the corporate and financial documents of the company, another important aspect of the due diligence checks is to obtain information about any litigation (or potential litigation) against the target company. It is important to search for any court judgments or litigation against the company in every jurisdiction the company has business interests.

Intellectual Property (IP)

In certain industries, Intellectual Property is an important high-value asset that is owned by a company. The value of these IP rights might ultimately determine the valuation of the company. Therefore, it is important to corroborate the IP ownership/assignment information provided by the target company from the actual IP Registry of the country. IP search is, therefore, a key part of due diligence searches, especially in certain industries such as Pharma, Tech, etc.

Tax Search

The service provider can search for outstanding unpaid taxes and tax liens, if any, which can have an effect on the business transaction or merger. In many countries, this information is not available publicly and cannot be obtained by third parties.

Reputation and Background Checks

This can include background checks on key executives, employees, and stakeholders to identify any red flags or potential risks. Credit Reports, where available, are also a good tool in the due diligence process.

apple-touch-icon-120x120Need help navigating through complex due diligence requirements across the world? Learn more here.

What Are the Differences Between the US and the EU?

The approach to due diligence can differ between the United States and the European Union due to differences in legal and regulatory frameworks and cultural norms. Here are some key differences:

Legal and Regulatory Requirements

In the US, companies are subject to a complex web of federal and state regulations. Therefore, information about a company could reside at multiple levels - at the Federal level, State level, and County level. Further, privately held companies in the US don’t publish their financials publicly.

In the EU, due to the Transparency Directive, all EU companies are required to provide a certain level of information about their company ownership, financials, etc. and this is generally available publicly.

Privacy Considerations

The EU places a greater emphasis on data privacy and protection than the US. As a result, companies conducting due diligence in the EU must be particularly mindful of data privacy laws, such as the GDPR, which imposes strict requirements on how personal data can be collected, processed, and transferred.

This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.




Topics: Article 9 Filing, Searching and Due Diligence