Recently we have engaged with an American public company, which desired to purchase technological business activity in Israel. Within the transaction, we performed due diligence regarding the Israeli company for them.
During the examination, we revealed a quite broad scope of material information regarding the acquired business activity which was critical for the purchasing company.
For instance, patents which expired since they were not renewed on time. In addition, it turned out that a substantial amount of unpaid debt is pending against the Israeli company (the seller) by virtue of court ruling given within claim submitted against it.
After all of the details became clear and obvious, our clients (the purchasing company) decided to execute the transaction despite the aforesaid, given appropriate reference to the information which was revealed within the assets purchase agreement.
As part of the due diligence process, we addressed the clients to the accountant who cooperated with us for the purpose of completion of the due diligence in the financial, tax and accounting aspects.
We supported the clients all along the process of the due diligence, negotiation on the assets purchase agreement’s conditions, the completion, and execution of the purchase transaction and we still support them within their activity in Israel.
The acquisition process of a company or a busssiness activity begins with due diligence.
The due diligence includes encompassing and intensive inquiry, aimed to present, as much as possible, a complete picture of the company’s history and past.
On the one hand, due diligence is critical for the seller, in order to avoid false or inaccurate declarations but on the other hand, it obviously essential for the buyer, who invests his money and prefers as little as possible “surprises” along the way and following the transaction execution.
When the purchaser purchases a company, it is being purchased including all its “history” and obligations as well (including past debts, pending assessments against tax authorities, liabilities toward employees, third party claims for damages previously incurred to it, etc.).
Due diligence is required either when purchasing the company itself, or when purchasing business activity. The reason for that is that the creditors of the company from which the business activity is acquired might claim that assets were smuggled from them or sold below market value in order to avoid paying them.
Due diligence includes inquiries of details regarding engagements with suppliers, clients, claims, allegations or demands, agreements between shareholders, liabilities toward third parties, the financial status of the company, bank credit, monetary obligations, real estate condition, liabilities toward employees and so forth.
Due diligence includes:
- Examination of Company’s capital:
Who holds the company’s shares, whether there are options to purchase shares, whether there are liabilities to allocate shares, or other securities of the company, agreements relating to the company’s capital, including investment agreements, shareholder agreements, etc.
- Officers and shareholders in the company
All documents connected with engagements with shareholders and officers in the company: employment agreements, loan agreements, or any liability of them towards the company or inversely.
- Management of the company and its businesses
Documents which backup the declarations presented to the buyer by the company, all agreements and documents connected with the company’s activity: regarding suppliers, clients, anyone who owes money to the company, or anyone to whom the company owes money. Engagements with entities or governmental authorities, documents connected with licenses or permits.
- Company’s assets
All company’s assets, including physical assets such as: real estate, devices and machines, but not less important, assets of intellectual property: patents, copyrights and trademarks.
- Subsidiaries and affiliates
Documents regarding engagements with subsidiaries, fellow subsidiaries or parent companies.
- Company’s employees
Company’s employees are one of the most material assets. Many times they hold most of the company’s know-how and skills.
It is of great importance to know all kinds of liabilities towards employees: salaries, working conditions, employment duration and all other liabilities given to employees orally or in writing.
- Liabilities towards third parties
Mortgages, encumbrances on assets, liabilities, predicted foreclosures, guarantee letters signed by the company or any legal or commercial third-party liability.
- Finance and insurance
The company’s insurance policies, the company’s credit against the bank or other entities from which the company borrowed money – what the reimbursement conditions are, Copies of the company’s financial statements, trial balances of the company – enable to know the condition of liabilities and assets of the company as well as reflect the company’s performance. It is recommended to deliver these reports to an examination of an Israeli accountant.
- Legal procedures
Legal procedures within which the company is the plaintiff or the respondent: status of procedures, statistics for the company’s loss or gain, criminal risks, disciplinary procedures against authorities, etc.
According to the examination results of the nine aforementioned elements, further questions occasionally rise; further clarifications or information is required in order to complete the picture.
Our firm has vast and significant experience in support and care of merger or acquisition or sale transactions of companies in Israel, activity acquisition (or sale) and of course performance of due diligence prior to acquisition or sale.
Are you interested in consulting or in additional guidance? Please contact us.
Note:
This article provides general and preliminary information only and should not be construed in any event as legal counseling and/or as a substitute for legal counseling in respect of any case and its circumstances.
The above should not be relied upon without consulting with an Israeli lawyer before taking any action or making any decision. The above is true as of the date of its composition, and its veracity may change from time to time.
Distribution and/or duplication and/or photocopying of this document and/or part thereof without permission are prohibited.
