You’ve been assigned a major task—your firm has put you in charge of conducting due diligence for an upcoming merger. Your work will be vital to the deal’s success, as well as to your firm’s relationship with its client. Digging into a potential acquisition, and spotting any red flags in the company’s operations is an essential job for a lawyer.
However, the amount of work that due diligence entails can make a junior attorney unsure about where to begin. The process may seem overwhelming. First things first: you need an M&A due diligence checklist.
Don’t attempt to do eight things at once—without a diligence process structure, this means you could go astray in eight different ways and burnout. With a checklist as your roadmap, you will know what you need to look for, how much time you have to find it, and who to send it to. Your job becomes far more manageable.
Comprehensive M&A due diligence checklist steps
This checklist covers all the major categories of steps needed for both public and private M&A due diligence.
- Handle preliminary matters
- Assemble the due diligence team
- Submit the due diligence request
- Distribute and organize materials
- Communicate and report due diligence findings
- Review key sources of information
- Determine whether specialist review is necessary
Each step is further explained below along with some suggestions and guidelines for making checklists, for both public M&A and private M&A deals.
How do I make an M&A due diligence checklist?
An M&A due diligence checklist should start with the basic requirements of any buyer, but expand to incorporate information pertinent to the deal at hand. A good M&A diligence checklist is adaptive. It takes into account the nature of the merging entities, their management and ownership structures, their marketplaces and their histories.
Making a checklist is the best way to tackle a complex, detail-oriented, and time-sensitive task to ensure more efficient and faster M&A deals.
✓ You need to know what diligence will entail.
✓ Who the key players in the process are,
✓ What the timeframe is,
✓ What types of documents are essential,
✓ and so much more.
There’s something unique about every deal. It could be the nature of the seller’s business, or the complexity of its intellectual property holdings. The deal’s structure may be novel, or a challenge to execute. Regulators may play a determining role in whether the deal gets done.
Consider the two checklists below, which advise on how to conduct due diligence for public and private deals, to be a starting point. They are guidelines to effectively run diligence, giving tips on how to assess, organize, and present all of the resources that you collect during the process.
Use them to ensure that you’re asking the right questions and finding the essential information your deal team needs. Keep in regular contact with senior members of the deal team to ensure that your checklist addresses all issues involved in the transaction.
What should go into an M&A due diligence checklist for public mergers and acquisitions?
A public deal has many moving parts. Shareholder considerations, financial reporting obligations, equity market volatility, and other outside factors can potentially influence the deal’s progress.
Because the company is public, it will have virtual piles of information for a diligence team to go through—securities filings, quarterly reports, regulatory requirements. Lawyers will need to take a host of factors into account while still preparing for surprises along the way, even if it looks like a smooth transaction on paper.
Jump to (Organizing the due diligence process for public M&A deals):
Jump to (Conducting the due diligence review for public M&A deals):
Organizing the due diligence process for a public M&A deal
✓ Handle preliminary matters
Before starting due diligence, answer some key preliminary questions. Do this before you begin talking with a client. You will be able to better craft your diligence review once you have the foundational information in place.
Start with the absolute basics: the deal itself.
- What type of merger is it? (e.g., a reverse merger? a forward triangular merger?)
- What’s the nature of the merger—is it a hostile takeover? A merger of equals? Are the buyer and seller competitive rivals? Is it a vertical merger, in which the buyer is in another line of business than the seller?
- What type of business are you analyzing? Where does it compete—does it have a global footprint, or is it a localized company?
Then it’s time to plan the logistics of your due diligence process. You will need to know:
- The parties involved in diligence. Will third-party consultants be part of the process? If so, what part of the deal are you responsible for?
- The deadlines. Is there a strict time limit by which diligence needs to be completed? Is diligence completion predicated on another process being underway or completed (such as regulatory approval)? Does the client expect regular progress updates?
- The end product. Does the client want an oral or written report? If written, in which style and format? Does the client prefer detailed analyses or a concise summary of where things stand?
✓ Assemble the due diligence team
Before diligence begins, get your diligence team in place. At your law firm, are all necessary internal specialists available, time-wise, to do the work? These often include specialists in:
- Real estate and property issues
- Employee benefits and hiring
- Intellectual property
- Tax issues
- Environmental issues
Some deals may not need a certain specialist (for example, if the seller doesn’t own or lease property, a real estate lawyer likely isn’t needed). Other deals, however, may require more experts than usual: for example, if the deal entails significant antitrust issues.
Once the team is organized, determine how workflow will be handled. This is crucial to keep the M&A process streamlined. You should decide how to track which documents get reviewed, and when, and who is responsible for handling particular materials. You should also determine how results will be communicated to attorneys conducting merger negotiations (see below).
Other questions to answer at this stage include:
- Is local counsel needed? For example, if the target company or its significant subsidiaries are located in a foreign jurisdiction, you’ll likely need someone “on the ground” there.
- Will you need outside specialists (for example, accountants), and how can you ensure that you don’t duplicate their efforts?
- Who is the contact person at the other company’s law firm for due diligence? Does the other firm know how to contact you?
✓ Submit the due diligence request
There will be heaps of information to process during diligence. So be sure that your team is looking for the most relevant pieces to help senior lawyers conducting the negotiations. When you request materials for diligence, you should be looking for answers to these questions, among others:
- What is the target’s management/ownership structure?
- What actions require the consent of the board of directors? Can the board change policies without holding a shareholder vote?
- Who can sign documents on behalf of the target and its subsidiaries?
- Are there restrictions on the ability of the target to borrow, to refinance debt, to guarantee debt?
- What are possible impediments to closing the deal?
- Are there anti-takeover defenses? For example, is there a poison pill, a staggered board of directors, blank-check preferred stock, or onerous advance notice provisions?
- If there’s a poison pill in place, will it need to be amended so that the merger doesn’t trigger a distribution to stockholders?
- Are there restrictions on the target that could impact proposed deal financing? Are there payments or benefits owed to a third party that could affect the deal’s economics?
- Where do the biggest potential liabilities lie? Could anything restrict the target from operating normally after the closing?
You’ll be looking for, among other things:
The target’s governing documents (i.e., certificate of incorporation, by-laws) and records of business (minutes of boards of directors meetings; internal communications).
The target’s current status in the market. How much stock is outstanding? How much is authorized? Are there multiple classes of stock? Can there be further issuances? This entails getting all relevant Form 10-Ks, Form 10-Qs and/or Form 8-Ks; any relevant proxy statements; and any beneficial ownership reports filed on Schedule 13D or Schedule 13G.
Subsidiary information. You need to know the number and types of subsidiaries that a company has, and their nature (wholly-owned, partially-owned, etc.). Which subsidiaries own which assets and which hold liabilities?
✓ Distribute and organize materials
Finding the information is only half of the story. Now the information needs to gets organized and distributed properly. You want the right people involved in the deal to get the right materials they need at the right time, in an easily accessible and searchable format.
Some questions to answer by this stage include:
- How best to organize materials? Are you storing material in databases? Are you using AI for M&A due diligence? Does it make the most sense to classify materials alphabetically, numerically, chronologically, etc.? The more precise your organizational system or software for the M&A process, the easier it will be to find crucial information when needed in negotiations.
- Are you aware of your firm’s record retention policy? Review confidentiality agreements to ensure you’re in compliance with dissemination, retention, and use restrictions.
- If due diligence materials are in a virtual data room, do all relevant members of the deal team have access? Will you need to have tiered levels of access, given the sensitivity of certain materials?
✓ Communicate and report due diligence findings
If you need to prepare and distribute hard copies of any due diligence materials, what are the resources you can use at your firm? Will you need to create a due diligence index (or print an index) from the data site? A paralegal can often help with this process using legal business management platform that integrates with AI tools.
Conducting the due diligence review
✓ Review key sources of information
In a public deal, the target’s SEC filings are critical to diligence review. Even before gaining access to the target’s data room, a diligence team should be going through publicly available materials via the SEC’s EDGAR system. That said, coordinate with senior lawyers to confirm that the merger negotiation is at a stage where it’s appropriate to begin this review.
Among things you’ll need to discover are:
- Has the target company restated or made significant corrections to filings?
- Has the target company restated or made significant corrections to filings?
- Could these risk factors affect the merger or the buyer’s plans for the target’s business post-merger?
- What’s the shareholder landscape? Do any shareholders hold a significant equity position in the target? Have activist shareholders put representatives on the target’s board?
Public companies are subject to the disclosure and corporate governance requirements of the Sarbanes-Oxley Act of 2002 (SOX). As a result, you will need to perform diligence on the target’s protocols and procedures in connection with SOX. This is serious business, as the penalties for non-compliance can be severe. A buyer will have to decide how to address any penalties and legal repercussions from the target’s non-compliance.
Even if the target company goes private via its merger, the buyer will still need to review matters relating to SOX compliance to determine any potential liabilities. Some questions to ask include:
- What is the process for the target’s CEO and CFO SOX certifications?
- What are the target’s internal controls for financial reporting and disclosures? Has the target disclosed significant deficiencies or material weaknesses in its internal financial reporting?
- What is the composition of various essential committees (audit, compensation, and nominating/corporate governance committees)? Are their charters consistent with SOX requirements?
✓ Determine whether specialist review is necessary
It’s important to coordinate with relevant specialists to facilitate the review of relevant materials. Even though specialist documents get reviewed by other lawyers, a lawyer fluent in the particular area will be necessary to ensure this aspect of diligence is fully covered.
Be sure you have enough information about the target to know which specialist areas are of most importance. For example, for real estate specialists, queries will include: Does the target own or lease its properties? Are its properties essential to operating its business? If the target has significant leased property, will the merger trigger any change of control or assignment provisions in the lease agreement?
For IP specialists, queries will include the nature of the target’s IP (whether it’s a trademark or patent or copyright, etc.), whether they own or license a particular IP, and if there are any infringement actions pending, or even threatened, that involve any key IP.
Other considerations for public deals
- Can a third party rely on the due diligence report?
2. Anti-assignment and change of control clauses
Check these other considerations along with the full M&A checklist for Public Mergers and Acquisitions with a free trial of Practical Law.
What should go into an M&A due diligence checklist for private mergers and acquisitions?
When conducting the due diligence of a private company acquisition, your core questions are essentially the same as those for a public merger. The difference is in the details, or, more specifically, the possible lack of them.
In many cases, a private company will not have as much listed documentation to go through as a publicly-owned one, which makes diligence a challenge. It may entail conducting more face-to-face interviews with company officials to acquire critical information, or visiting the target company to go through their accounts and assess their holdings.
Jump to (Organizing the due diligence process for private M&A deals):
Jump to (What to look for when reviewing materials for private M&A deals):
Organizing the due diligence process for private M&A deals
✓ Define the due diligence task
As with public company due diligence, know what your client fundamentally needs. Before due diligence review, establish:
- The amount of the due diligence budget.
- Aspects of diligence review: its scope, its deadlines. If the buyer wants to focus on specific issues (such as the impact of COVID-19 on the target company’s operations), these should be noted.
- Whether outside consultants will be needed.
- The type and nature of the diligence report (oral or written; done in stages or as one comprehensive report, etc.)
- The process of communicating to deal parties. For example, you may be required to communicate through a third party, such as the client’s investment banker.
✓ Assemble the due diligence team
The due diligence team’s make-up depends on transaction specifics, but usually includes:
- accounting, and
- tax specialists.
Depending on the complexity of the transaction and the budget allocated, the team can range from three people to more than 20. Because the team can be comprised of multiple organizations, it is important to have a point person to coordinate the process—this task often falls to a junior lawyer.
✓ Submit the due diligence request
Sometimes a private seller will make diligence materials available at the outset of a deal, but often a buyer needs to submit a request for information. A due diligence request lists questions and makes requests for documents, organized by topic. The initial request is usually supplemented by further ones once negotiations proceed and the buyer learns more about the target.
Counsel should tailor questions to the specific target business and the industry in which it operates. A financial provider will have different material contracts than a manufacturing company, for instance. If a due diligence request is too generic or broad, a seller may not understand what documents the buyer wants. For example, if you request “all material contracts,” the seller may have a different view of what constitutes a material contract than the buyer
✓ Get access to sources of information
In a private deal, the diligence team often lacks such resources as the EDGAR system to track and analyze the target company’s financial statements. They instead will need access to the target company’s privately-held financials, which may only be available on the target’s premises or in a virtual data room.
A private company may be wary of sharing what it considers trade secrets about its operation, particularly if the buyer is a competitor. After all, if the deal doesn’t succeed, the potential buyer will have gained insight into a rival’s operations. This is why specificity matters: know exactly what you’re looking for.
✓ Distribute and organize materials
Especially if the parties are competitors, a private seller may impose substantial restrictions on the dissemination of materials because they’re wary of sharing information (such as customer names) before the deal is consummated. They may demand the right to redact sensitive information or have procedures to limit access to those materials.
So for example, you may agree to review the seller’s documents to search for critical terms (for example, a change of control clause) but be prohibited from sharing any confidential information with your client.
What to look for when reviewing materials for private M&A deals
✓ Categories of materials and common issues
For a private company, ownership documents will be of paramount interest during diligence. You will be looking for such material as:
- Capitalization and equity ownership. Who owns equity in the target business? Is there equity outstanding? Is there pending or ongoing litigation related to equity ownership?
- Will equity-holder votes or consents be required in connection with approving the deal?
- Are there any restrictions on the transfer of equity? Do equity holders have preemptive rights in future issuances?
✓ Specialist reviews
As with public deals, a portion of the due diligence review will likely require legal specialists and outside consultants (such as accountants and insurance consultants). What may seem at first glance to be a run-of-the-mill corporate document could turn out to need specialist input. For example, a supply contract may contain significant provisions relating to the target’s intellectual property holdings, and thus need review by an IP attorney.
Other considerations for private deals
1. Impact on the transaction
2. Recording and communicating the findings
Due Diligence Summaries
Due Diligence Report
3. Assignment and change of control
4. Due diligence considerations for private equity buyers
Check these other considerations along with the full M&A checklist for Private Mergers and Acquisitions with a free trial of Practical Law.
Chris O’Leary is a freelance writer and editor based in western Massachusetts. He is the managing editor of Thomson Reuters “The M&A Lawyer” and “Wall Street Lawyer,” and
is also the author of two books on popular music.
Raees Nakhuda joined Thomson Reuters in October 2021 and is the head of Mergers & Acquisition for the General Counsel’s Office. Prior to joining Thomson Reuters, Raees was a senior associate in the Corporate and Securities group at Blake, Cassels & Graydon LLP, where his practice focused primarily on international and domestic capital market transactions, including public and private financings and mergers and acquisitions. Raees holds a Juris Doctor degree from the University of Toronto and a Bachelor’s of Business Administration degree, with a specialization in Finance, from the Schulich School of Business at York University.
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