LEGAL DUE DILIGENCE

The Black’s Law Dictionary defined due diligence as such: “Such a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case.”

In the context of mergers and acquisitions, due diligence is equivalent to a form of legal, operational, and financial review; to verify the claims and accuracy of the information provided by the involved parties.

In a simpler explanation, due diligence is an exercise of reasonable care in the course of business. The entire process involves careful investigation of the aspect of economic, legal, fiscal, and financial circumstances of an ongoing business or an individual. The covered aspects involve thoroughly examining sales figures, shareholder structure, and any possible links with economic crime, such as corruption or tax evasion. This form of appraisal is necessary for any company that initiates a new form of relationship with its partners and/or with the agenda of purchasing another company or property for investments.

The due diligence process is usually carried out by equity research firms, fund managers, individual investors, risk and compliance analysts, and broker-dealers. This process, however, does not mean due diligence is only allowed to be done by them, as individual investors are allowed as much freedom to perform their due diligence. Conversely, by default, broker-dealers are required by law to undertake due diligence on security before selling it.