We will start by defining what is a due diligence process (Debida Diligencia, in Spanish). Due diligence is nothing more than an investigative process through which, prior to a transaction that usually involves the acquisition or corporate and commercial disposition, purchase of real estate, or securities, the seller will reveal all the legal information that the potential buyer considers important, giving the latter the opportunity to know in depth the real status and legal situation of the property or business, in order to assess whether or not to make the investment.
The seller will voluntarily disclose information that will allow the buyer to study and calculate the risk and opportunities before finalizing the transaction, as well as weigh the liabilities and contingencies, all situations that could influence the price of the transaction in question, or put him in a position favorable for negotiation.
In general terms, this information will be all that is related to the corporate structure of the company, ownership documents of the real estate, or of the securities, with which the investigation will be completed.
In the specific case of corporate due diligence, the buyer will delve into the company’s incorporation documents, its byelaws and reforms (if any), if it was duly registered in the corresponding public registry of real estate and commercial property, the book of minutes, the share registry book and the corresponding certificates that have been issued to identify the current shareholders of the company and the entire chain of ownership, the existence or not of liens on said titles, or any limitation on the transfer of such titles, as well as documents that prove the solvency of the company before the administrative tax collecting authorities such as the General Directorate of Revenues or the Municipal Mayor’s Office.
Usually due diligence also involves the analysis of material contracts of the company with its main suppliers and clients, in order to determine obligations and contingencies arising from said contracts, the analysis of the financial statements, the existence of litigation in which the company is involved as of the date of the transaction, including labor lawsuits from employees or former employees of the company. In addition, if the buyer considers it necessary, he could even request that the partners of the company be investigated in a personal capacity, including a judicial record or police records, among other documents.
If it is the due diligence of a real estate, A&A usually investigates up to 42 years before in the chain of ownership of the property in the respective real and commercial property registry, as well as the cadaster offices and the municipality, in order to guarantee that there are no encumbrances or potential ownership problems with previous owners or neighboring owners.
As a result of the due diligence process, a final report is generated containing the “red flags” or alert situations in relation to the process carried out that could cause damage to the buyer in the transaction or put him at a disadvantage in relation to the counterparty, as well as suggestions to correct omissions that are remediable in the documentation presented, legal recommendations, and comments in relation to obstacles during the investigative process, and how such obstacles affected the content of the final report, so that the buyer is in all capacity to assess all variables in the transaction.