Due diligence
Due diligence (also known as
due care) is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party or himself. Failure to make this effort is considered
negligence. Quite often a
contract will specify that a party is required to provide due diligence.
A (U.S.) example of a "due diligence report" is a Phase I Environmental Site Assessment (ESA), which is performed to determine potential environmental conditions that may cause harm to the surrounding
environment.
In finance, due diligence may refer to the process of research and analysis that takes place in advance of an investment,
takeover, or business
partnership. The potential investor generally uses in-house resources or hires a consulting firm that specializes in due diligence and corporate investigations to investigate the background and
principals of the target company.
A due diligence assignment generally includes reviewing press and
SEC filings, checking for regulatory and
licensing problems, identifying
liens and judgments, and uncovering civil and criminal litigation matters. Sophisticated investigators will also search for conflicts of interest, insider trading and press and public records that identify problems that may have occurred under the principal's "watch."
The investigative results may be prepared in a "due diligence report" that the investor uses to understand risks involved in the investment. For example, if negative information is uncovered on a principal of the target company, the investor may put pressure on the target firm to replace that individual.
In addition to identifying risks and implications of an investment, due diligence may include data on a company's solvency and assets.
Due diligence can also refer to the ongoing activities of pension or investment fund managers in keeping track of the operations, solvency, and trustworthiness of the managers of a
corporation in which their fund is invested, or those of the managers of an acquiring corporation toward a target corporation.
In UK legal terms, Due Diligence is the process by which a purchaser of or an investor in a company or business investigates the records of the target to support its value and find out whether there are "skeletons in the cupboard". Professional reports from accountants and solicitors may be included. The due diligence process is covered by confidentiality undertakings and supported by warranties.
In lay terms,
due diligence is the responsibility you have to investigate and identify issues, and
due care is doing something about the findings from
due diligence.
Due Diligence is a process through which a potential acquirer evaluates a target firm for acquisition.
[Hoskisson, Hitt & Ireland, 2004, Competing for Advantage, p.251]In
criminal law, due diligence is the only available defense to a crime that is one of
strict liability (i.e. a crime that only requires an
actus reus and no
mens rea). Once the criminal offence is proven, the defendant must prove on the
balance of probabilities that they did everything possible to prevent the act from happening. It is not enough that they took the normal standard of care in their industry - they must show that they took every reasonable precaution.
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