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Due diligence in M&A

02.09.2005

It is customary in Estonia to carry out due diligence investigations in relation to corporate acquisitions. However, no duty of due diligence is placed on the purchaser by the law. Only at the point when the purchaser knows or should know about the shortcomings of the object of sale is the seller released from the liability for the object's non-conformity with its contract. Therefore, it is in the seller's interest for the purchaser to familiarize itself with the object of sale.

These rules apply to all sale contracts, whether for a television set, a pair of shoes or shares in large companies. This is probably why due diligence has been adopted from common law into Estonian M&A culture. Due diligence in Estonian M&A transactions relates primarily to the contractual possibilities for the seller to shift its liability for the target company's shortcomings onto the purchaser by describing in the sale contract the efforts that have been made to familiarize the purchaser with the target's affairs or to state in detail in the appendices of the sale contract the target's shortcomings of which the purchaser has been made aware.

Therefore, the ideal solution for the purchaser after conducting the due diligence is to negotiate a waiver in the sale agreement, stating that it can rely on representations and warranties as if it had carried out no due diligence. For the seller the reverse approach is preferable: to insert into the agreement that the purchaser has carried out a full due diligence and is satisfied with the results.

However, in practice, purchasers are almost always equally interested in due diligence investigations in order to make up their mind as to whether the target is worth acquiring and for what price. Therefore, there is a strong mutual interest in almost all M&A transactions in carrying out due diligence investigations, which have become routine in Estonia. 

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