The document outlines a due diligence framework, detailing the concept of due diligence as a comprehensive investigation into the various aspects of a business transaction. It emphasizes the importance of structured processes, team assembly, and continual reevaluation to effectively manage the complexities of due diligence, particularly in sensitive transactions. Additionally, it describes the different functional types of due diligence and their specific purposes in mitigating risks associated with acquisitions and financings.

1. Creating a Due Diligence Framework
Presented by:
Brian Abraham
brian.abraham@fmc-law.com
604-443-7134
LinkedIn
March 15, 2010
1

2. Creating a due diligence framework
• What is due diligence?
• What is a due diligence framework?
• Creating a due diligence framework
2

3. What is due diligence?
• The investigation into the business, legal and financial affairs of
an entity (the “target”)
• This “target” investigation occurs in connection with a wide
variety of transactions, including financings and acquisitions of
shares or assets
• Due diligence is essentially a detailed risk assessment
3

4. Functional types of due diligence
• Market/commercial due diligence
• Legal due diligence
• Financial due diligence
• Accounting due diligence
• Operational due diligence
• Environmental due diligence
• Tax due diligence
• Regulatory due diligence
• Legal element to all types of due diligence
4

5. Different purposes for due diligence
• some due diligence is “target” focused, this type of
investigation attempts to address the risks and or issues
regarding what is being acquired
– e.g. existence of loan agreement
• transactional due diligence addresses the risks and or issues
concerned with getting the deal done
– e.g. loan agreement requires consent of bank for transaction
5

6. Why due diligence?
• Due diligence investigation plays an integral role in any
business deal for counsel and client
• Time and cost constraints will often be important factors for
clients and counsel
6

7. Due diligence expectations
• Time and cost constraints will often be important factors for
clients and counsel
• It is important to establish reasons for the parts of the due
diligence process at the outset
• Denote specific expectations and processes to be carried out,
and specific reasons why certain processes and searches will
not be carried out
• These due diligence expectations and processes should be set
out in writing for both counsel and client and should be re‐
assessed as new information is learned and evaluated
throughout the process
7

8. What is a due diligence framework?
• A due diligence framework proposes a structured approach to
due diligence investigations which attributes clear deadlines
and informational objectives
• A due diligence framework process apportions responsibility to
different people and or groups who work as a collective team
to pool the information from the related due diligence
investigations
• A due diligence framework carefully sets out what the
necessary steps to the due diligence work
8

9. What is a due diligence framework?
Here is an example of a suggested due diligence framework
for biotech companies interacting with large pharmaceutical
companies. It is basic and relevant to the coordination of any
due diligence work
1. Knowing what you "need" to know
2. Assembling the due diligence team
3. Preparing the “target” for the diligence event
4. Managing interactions between firms
5. Using the collected information to create value in both firms
9

10. What is a due diligence framework?
1. Knowing what you "need" to know
• be aware of the pertinent types of due diligence to the
particular transaction
• time is an important factor
• the best due diligence work is well focused and efficiently
allocated
• familiarity with the type of transaction, special knowledge of
the industry, or extensive experience with the type of due
diligence to be carried out can also be useful in planning what
information ‘needs’ to be known
10

11. What is a due diligence framework?
• What you ‘need’ to know regarding a particular transaction or
target will likely change as the investigation continues but it is
important to organize these new goals with the overall
established objectives of the investigation
11

12. What is a due diligence framework?
2. Assembling the due diligence team
• The due diligence team is important to the transaction
because the team will be directing the strategic analysis of
the target or transaction, they may also be interacting with
the ‘target’ which is an opportunity to create a more positive
relationship
• Industry knowledge, experience carrying out due diligence
investigations, and an awareness of roles, responsibilities and
deadlines for the due diligence work are all important factors
to consider when choosing the due diligence team members
12

13. What is a due diligence framework?
The due diligence team will also need to search for information
in a matter sensitive to the particular transaction
– e. g. certain employees of Company A may not know that assets are
being sold, these employees might react negatively to the transaction
(Company A has been courting with Company B). If the employees find
out in the preliminary stages of A and B’s deal, this could frustrate the
continuations of due diligence process and jeopardize the deal.
13

14. What is a due diligence framework?
3. Preparing the “target” for the diligence event
• Deciding with the “target” what data is needed for
assessment, how it will be collected and for what purposes,
who will have access to it, and where it will be stored
• Denoting these specifications at the outset helps the due
diligence process run smoothly
14

15. What is a due diligence framework?
4. Managing interactions between firms
• “target” focused due diligence and transaction focused due
diligence investigations occur at very sensitive periods and
often involve sensitive and confidential information
• A need to balance between sharing proprietary information
and the knowledge that the deal may not occur
• Important to clearly define of roles and responsibilities of
staff, actions for each stage of the process and information
upload goals for a data room
• Must have clear understanding of the management process
of the data room
15

16. What is a due diligence framework?
• Must have clear plan in place to manage the release of
information in stages of required knowledge and advancing
stages of negotiation
16

17. What is a due diligence framework?
5. Using the collected information to create value in both firms
• Information gleaned from the due diligence investigation can
be valuable to both parties because the information and
issues found can be addressed prior to a deal, and/or included
and indemnified in the closing agreements
• Due diligence can lead to less reliance on Representations and
warranties and a clearer idea of
1) The general state of the business;
2) The way the business has been run in the past;
3) Whether the business has been operated according to industry
standards or in a unique fashion because of certain factors,
rights or assets that the purchaser may or may not acquire;
17

18. What is a due diligence framework?
4) Actual and contingent liabilities;
5) third‐party interests.
• Sometimes due diligence searches can turn up unanticipated
information which indicate that the transaction should not go
through for a balance of reasons, walking away from a bad
deal before sharing confidential information is a luxury for
businesses who have created a comprehensive due diligence
framework that shares sensitive information as it is needed
for the due diligence investigation
18

19. What is a due diligence framework?
Continuous
re-evaluation
until deadline
or sufficient
evaluation
completed
19

20. What is a due diligence framework?
• The information sought from the due diligence framework is
also constantly re‐evaluated to determine further investigation
into certain issues if it is warranted
20

21. Miscellaneous Matters
• Confidentiality agreements
• Proprietary data
• Professional obligations to disclose
• Overlapping agreements
• Technical matters need experts
• Access to key people
• Material undisclosed information
• Cultural differences
• Fraudulent activities
21

22. Brian E. Abraham
brian.abraham@fmc‐law.com
+1 604 443 7134
LinkedIn

23. The preceding presentation contains examples of the kinds of
issues companies dealing with due diligence could face.
If you are faced with one of these issues, please retain
professional assistance as each situation is unique.