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Due diligence


Category: Lawyers’ services
Type of service: Business-attorney: services to legal entities
Posted: 14.02.2013
The author: Honorary Advocate of the Russian Federation Yuri Anatolyevich SHCHEGLOV


Due Diligence is a procedure, which represents a comprehensive expert examination of the company activity with the involvement of independent experts, aimed at the definition of its financial attractiveness, current and projected positions on the market, the possible legal and financial risks, with the subsequent statement and justification of the work results in the consolidated report.
The necessity of carrying out the Due Diligence
The basis of this procedure were laid down in Switzerland in the field of banking, initially represented as a system for collecting and analyzing the information on potential or existing customers and partners, collected by banks in order to protect the property from possible damage.

Today the examination of Due Diligence is understood more broadly and is applied in the following cases:
• For the execution of transactions on acquisition, the purchase of a share in the company:
o on the part of a buyer: in order to assess the benefits and identify possible for the buyer’s financial, legal risks.
o on the part of a seller: to support the value of the company.
• In case of the other transactions: for the collection of information about the partner, his reputation, reliability, position on the market.
• While making the decision on possibility of granting a loan.
• In preparation for the procedure of Due Diligence to be conducted by the investor.
• While venture capital financing.
Aims of conducting a Due Diligence
The main purpose of this procedure, of course, is the identification of the real value of the object of the transaction.

Along with this, the other tasks are often put before the experts, such as:
• assessment of the possibilities of successful integration of acquired companies in the activity of the holding company,
• drawing up a business-plan of reorganization of the acquiree,
• evaluation of expediency of investment or venture funding.

Increasingly, principals come to our law bureau, wishing to carry out a procedure of DueD in relation to its own companies with the purpose of:
• determine the extent of the company’s investment attractiveness;
• form a price policy more reasonably ;
• identify internal problems of the company, impeding economic growth;
• identify possible financial, legal risks of the activity, taking into consideration the changes of the current legislation;
• assess its competitiveness.

For whom Due Diligence procedure is actual
Carrying out of DueD is indicated for any company, both Russian and foreign. The procedure is relevant at any stage of the company development, but especially during its restructuring.

Mutual Due Diligence at the merging of the large companies, as, for example, at the merging of the British Airways and the Spanish Iberia (i) is becoming more popular.

Of particular importance Due Diligence procedure becomes for foreign companies, only entering the Russian market or leading activities on the territory of the Russian Federation and seeking to strengthen its position in the market.

It’s not a secret, that conducting of business activity in Russia for foreign companies deals with a number of risks posed by the activities of unscrupulous contractors, such as:
• the use of various financial schemes with the purpose of misappropriation of the foreign company capital;
• possibility of cooperation with the so-called firm of one album, which endangers the implementation of such a counterparty of its obligations and may cause adverse effects in the sphere of taxation, as well as adversely affect the business reputation of a foreign company.

Important! Carrying out of Due Diligence timely minimizes the risk of adverse consequences for foreign companies, especially just entering the Russian market.

Law bureau «Shcheglov and Partners» had to deal with the problems of foreign investors, the issues of the return of their investments in joint with Russian companies business. The absence from the side of foreign investors preliminary Due Diligence of the company, selected by them for joint business, led many of them to the negative financial and legal implications. Some unscrupulous Russian partners, abusing lack of knowledge of the Russian legislation with their foreign counterparts, registered constituent documents and other partnership agreements exclusively in their own interests. This circumstance complicates and often deprives of the ability to protect the interests of foreign investors in the procedure established by law through arbitration courts.

The order of carrying out the Due Diligence procedure
Depending on the goals and objectives of the experts, the way of carrying out the procedure may be different. So, for example, the examination may be held as confidential, so openly and with the assistance of the audited the counterparty. In the case of open expertise it’s often required the presence of the performers of Due Diligence at the enterprise (the object of the study) for more detailed collection of information, as well as interviewing with the management and other employees of the company.

You should take into consideration the possibility of a negative reaction on the part of the counterparty and even his straight unwillingness to cooperate with the specialists. The conducted review could be considered by the counterparty as an open expression of mistrust on the part of the buyer.

Advocates and lawyers of the law bureau «Shcheglov and Partners» always recommend to their clients, in the case of such an opportunity to discuss the need and the order of the expertise with its partners. This will help eliminate the negative reaction on the part of the seller, will contribute to the establishment more trusting relationship between the parties.

In case, when such mutual cooperation is not possible, advocates and lawyers of the law bureau «Shcheglov and Partners» provide you the utmost confidentiality. We protect all the information relating to our principals.

Terms of carrying out the Due Diligence procedure
Dates of the DD can be different, depending on the peculiarities of the subject of the research and the tasks assigned to the executors.

Law bureau «Shcheglov and Partners» always takes into account the wishes of the customer of DD procedure and makes all possible to conduct the procedure in the shortest terms in case of necessity.

However, it should be noted that the examination of Due Diligence often requires a sufficiently long period of time.
So, it seems appropriate to start this procedure still in the planning stages of the transaction.

Who is the executor of the Due Diligence
Due Diligence procedure is carried out with the participation of independent experts at least in three directions:
• specialists in the assessment of business (financial analysts);
• auditors;
• lawyers.

This is not an exhaustive list. The other specialists may be involved, it depends on the individual features of the expert examination object.

In the course of the examination the individual tasks are stood in front of each group of specialists.

So, for example, the purpose of the work of appraisers is obvious — revealing the market value of the object.

Auditors, in their turn, carry out a financial assessment of the enterprise activity through the study and analysis of the main indicators of the company activities, the accounting records, accounts receivable and payable, assets and liabilities of the company.

The purpose of activity of the specialists in the sphere of jurisprudence is the legal analysis of the company’s management system, the contractual relationship and transactions with its participation, property rights, domestic labour relations, as well as the identification and assessment of the outcome of litigation involving the company.

Only joint efforts of highly-qualified specialists in each field can provide the most objective opinion on issues of conducted expertise.

Advocates and lawyers of the law bureau «Shcheglov and Partners» are ready to carry out the legal examination in the conditions of the Due Diligence, as well as to assist its clients in the selection of specialists in the sphere of assessment, financial analysis and audit.

The law bureau  «Shcheglov and Partners» has a staff of highly skilled lawyers in various areas, allowing to conduct a Due Diligence procedure on a high professional level.

Private types of Due Diligence
Our principals can order both a general (classical) procedure of Due Diligence and certain kinds of expertise, such as:

  • Legal Due Diligence
  • Operational Due Diligence
  • Tax Due Diligence,
  • Financial Due Diligence
  • Marketing Due Diligence

You should remember that, in spite of significant reduction of costs in the production of certain kinds of expertise, only a comprehensive analysis of the facility’s activities allows to receive the customer the maximum objective conclusion.


If you want to order the services of a lawyer or need a consultation in the Due Diligence procedure you can
contact the head of practice of Due Diligence in the law bureau «Shcheglov and Partners» Sheglov Yuriy by tel:
+7 (495) 748-00-32  or by sending your request on e-mail>>>


i — http:/top.rbc.ru/economics/12/11/2009/345342.shtml

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