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This edtion is led by



















Anthony Kenny
Assistant General Counsel
Corporate and CBS
GlaxoSmithKline



Law Firm Panel Chair
 

















Suet-Fern Lee
Senior Partner 
Stamford Law
 

The new due diligence risks for companies expanding abroad


This edition of TalklawGlobal is led by Anthony Kenny, Assistant General Counsel Corporate and CBS at GlaxoSmithKline. Chairing the law firm panel is Suet-Fern Lee, Senior Partner with Stamford Law in Singapore.

The events in the Eurozone and the wider macro economic landscape have resulted in caution - even reluctance - to engage in M&A activity. In addition, funding is harder to come by and when it is available there are far greater demands for assurances and comfort. More and more transactions involve seeking the views of rating agencies which often adds to the complexity, as well as much greater attention from the regulatory authorities.


All of this means due diligence has become central to any transaction, creating tensions between buyer, seller, funders and advisors as to how the risk associated with valuation of assets is apportioned.



Anthony’s questions for each jurisdiction are:


Question 1) Banks financing a transaction increasingly ask that the due diligence reports provided by advisors of the potential buyer are provided to the financing banks on a reliance basis. What risks does allowing the financing banks to receive a report on a reliance basis create for the advisors? In your jurisdiction will a liability cap included in the reliance release letter protect the advisor and why?
 
Question 2)
Given the increasing challenging economic climate and the onset of more regulation throughout the world, what additional issues should potential buyers and sellers consider in your jurisdiction as part of their due diligence questions?

Question 3)
It is becoming increasingly common for potential purchasers to sell their due diligence reports to other buyers who come later to the process. What risks does this create in your country for the advisor who created the report?

Question 4)
In your jurisdiction, what are the legal issues associated with allowing companies to be named / referenced as the source for information used in an Information Memorandum, or any other document provided to investors?


The legal experts joining Fern on her panel so far are:


Australia: Costas Condoleon, Partner, Minter Ellison

Cambodia, Myanmar, Vietnam: Chris Robinson, Senior Adviser, Nicholas Towle, Regional Senior Adviser, Jerome Buzenet, Partner, DFDL 

China: Kevin Y. Qian, Founding Partner, MWE China Law Offices

Czech Republic: Dagmar Dubecka, Managing Partner, and Jaroslav Mikovec, Senior Associate, Kocian Solc Balastik

England and Wales: Charles Martin, Senior Partner, Macfarlanes

India: Cyril S. Shroff, Managing Partner, Amarchand & Mangaldas & Suresh A Shroff & Co

Indonesia: Ira Andamara Eddymurthy, Partner, SSEK

Israel: Yossi Ben-Dror, Senior Partner, Y. Ben-Dror

Italy: Gianmatteo Nunziante, Partner, Nunziante Magrone

Japan: Akira Kawamura, Of Counsel and Takashi Toichi, Partner, Anderson Mori & Tomatsune

Morocco: Mehdi M. Bennani, Partner, Bennani & Associes

New Zealand: Cameron Taylor, Partner, Minter Ellison Rudd Watts

Singapore: Suet-Fern Lee, Senior Partner, Stamford Law

Switzerland: Florian S. Jörg, Partner, Bratschi Wiederkehr & Buob

Taiwan: Hsin-Lan Hsu, Partner, Lee and Li

Thailand: Pakdee Paknara, Partner, Weerawong C&P

Ukraine: Oleksiy Didkovskiy, Managing Partner, Asters

USA: Robert DeLaMater, Partner, and Melissa Sawyer, Partner, Sullivan & Cromwell LLP


DISCLAIMER: Any opinions, statements or other information expressed in TalklawGlobal by the respective author(s) do not necessarily state or reflect those of TalklawMedia, the chairperson or their employer, the firm to which the author belongs or other panellists. The information submitted by the legal experts is for educational purposes only and does not create an attorney-client relationship between the reader, their firm, or any lawyer in their firm, and does not prevent any lawyer in any firm on this panel, from representing a party in any matter or manner (including taking a different position to that which he/she might have expressed or endorsed in TalklawGlobal) or serving as arbitrator, mediator, dispute board member or in any similar position based on the expression of his/her opinions on the various subjects published on TalklawGlobal. No information published on TalklawGlobal may be quoted or reproduced elsewhere without the prior written consent of the author and TalklawMedia.

 






 

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Costas Condoleon
(biography)    
Partner   
Minter Ellison
Sydney, Australia
Tel: +61 2 9921 4694 
costas.condoleon@minterellison.com 


 

 

Australia:
Costas Condoleon, Partner, Minter Ellison 


Answer 1) In Australia, requests from banks that are financing transactions to rely on due diligence reports provided by advisers is increasingly common.  In considering such a request, the adviser needs to determine if it is willing to expand its potential professional liability risk in respect of its report for no additional reward.  However, it may be difficult for an adviser, from a client relationship perspective, to refuse to grant reliance.  It is not surprising that banks are increasingly requesting reliance as they want to secure every potential avenue for recovery of their funds if a problem were to arise regarding repayment.

If a bank that has been granted reliance suffers loss or damage as a result of the adviser's negligence in preparing its report, that bank may seek to recover such loss or damage from the adviser, subject to the terms and condition of any reliance letter. The adviser may also be statutorily liable to any person entitled to rely on the report, including the bank, for any misleading and deceptive statements or conduct by it under the Competition and Consumer Act 2010 (Cth) (also known and the Australian Consumer Law) and, in certain circumstances, the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). 

But for the usual terms of a reliance letter, granting reliance to any third party, even if liability is capped, clearly exposes the adviser to a greater level of risk and liability.  There are circumstances in which a bank granted reliance may have a claim against the adviser when the client may not. For example, as the client and the bank may have different priorities, concerns and risk profiles, a negligent misstatement in the due diligence report may impact the bank's decision to


 



 


Chris Robinson
(biography)
Senior Adviser
Phnom Penh, Cambodia
Tel: +855 2321 0400
chris.robinson@dfdl.com 







Nicholas Towle
(biography)
Regional Senior Adviser
Yangon, Myanmar
Tel: +95 1 540 995
nick.towle@dfdl.com
  
 
 


Jerome Buzenet
(biography)
Partner
Ho Chi Minh City, Vietnam
Tel: +84 8 39100 072 
jerome.buzenet@dfdl.com 

 
 

Cambodia, Myanmar, Vietnam:
Chris Robinson,  Senior Adviser, DFDL
Nicholas Towle, Regional Senior Adviser, DFD
Jerome Buzenet, Partner, DFDL  



Answer 1) With respect to Cambodiathe situation tends to arise where the financing bank (and the advisor’s direct client) is considering the use of either future or additional financing parties.  Increased risks to an advisor include:
 
a) the advisor’s scope of work may be constrained by the direct client for budget, time or other mandates; 

b) confidential communications between direct client and advisor may be leaked; and

c) conflict of interest issues.  The advisor may attempt to limit these risks by a liability cap, subject to statutory limitations.  


Answer 2) While the Royal Government of Cambodia continues to pursue a reformist agenda and foreign regulations often influence the timing and composition of domestic regulations, the regulatory environment in Cambodia is still at an early stage of development and the authorities and institutions of the Royal Government of Cambodia are still building sufficient capacity and expertise to make its laws fully effective. 

In this regard, buyers and sellers should be mindful that Cambodia is currently in the process of drafting and implementing various laws in line with its obligations under the WTO and various ASEAN agreements, including laws relating to e-commerce, competition and certain intellectual property rights as well as amendments to laws regarding investment, which are likely to impact target companies and their operations.

In light of the evolving regulatory environment in Cambodia and as Cambodia becomes increasingly integrated in the ASEAN region, buyers and sellers are encouraged to remain focused on traditional areas of interest in due diligence investigations, such as title to shares/assets, constituents documents, capitalization and funding, material contracts, the validity of fundamental licenses and permits and labour, intellectual property and real estate matters, as well as the impact of proposed legislation arising from the impending ASEAN economic community.


Answer 3) This approach does not apply to Cambodia at this early stage of its M&A development.


Answer 4) There are no particular issues in Cambodia at this early stage of its M&A development.

 
_____________________________________________________________________________

 

Answer 1) Does not apply to Myanmar at this early stage of its M&A development, M&A deals are up to now self-funded (most financings are still to offshore parent companies and channelled down to Myanmar subs/JVs via shareholder loans) 
 

Answer 2) The legal and regulatory framework in Myanmar is still at a very early stage of development, given that many of the fundamental laws date from the colonial era and newer laws since that time and before 2011 were enacted by successive military governments of different types and are often not fit for purpose.  While more modern laws are now being passed frequently in key areas, the institutions, capacity and experience are not yet in place to make these laws fully effective.  As a consequence, investors and lenders are generally forced to rely on contractual reps and warranties, indemnities and covenants to protect themselves.
 
Recent laws that have come into force and that require some special attention in terms of due diligence include:
 
* Competition law
* Environmental law
* Upcoming changes to Foreign Investment law and Companies Act (the existing Companies Act dates from 1914)
* Labour law (new minimum wage and other laws which more tightly regulate the labour market)
* Anti-corruption
 
Answer 3) Does not apply to Myanmar at this early stage of its M&A development.
 

Answer 4) Does not apply to Myanmar at this early stage of its M&A development.


























Kevin Y. Qian
(biography)    
Founding Partner   
MWE China Law Offices
Shanghai, China
Tel:+86 21 6105 0566
kqian@mwechinalaw.com
 



China:
Kevin Y. Qian, Founding Partner
MWE China Law Offices  


Answer 1) In China, it is not common practice, for a bank to request legal due diligence reports to be prepared by a buyer’s advisor on a reliance basis. If the bank does request it, in practice, the advisors will specify in the due diligence report disclaimer that it is specifically issued to the buyer and may not be provided to other parties without the prior consent of the advisor. If the advisor consents to provide the report to the bank on a reliance basis, the parties may agree on a liability cap. However, if the advisor intentionally provided fraudulent information in the due diligence report, then they could be exposed to liabilities beyond the cap.


Answer 2) The additional key issues in legal due diligence that may have material impact on the transaction process in China may include:

a) Anti-corruption: Anti-corruption in China has become a hot topic in the past few years. This is due to both the Chinese anti-bribery efforts and the US Department of Justice’s more aggressive enforcement of the US Foreign Corrupt Practices Act.

b) Market entry review: Potential buyers may need to consider market entry review, i.e. whether there are any issues or hurdles outlined in the Industry Catalogue for the Guidance of Foreign Investment or outlined in other relevant regulations on foreign investment in certain industry sectors.


 






























Dagmar Dubecka
(biography)    
Managing Partner   
Kocian Solc Balastik
Prague, Czech Republic
Tel: +420 224 103 316   
ddubecka@ksb.cz


















Jaroslav Mikovec
(biography)    
Senior Associate 
Kocian Solc Balastik
Prague, Czech Republic
Tel: +420 224 103 316  
jmikovec@ksb.cz
 



Czech Republic:
Dagmar Dubecka, Managing Partner, and Jaroslav Mikovec, Senior Associate, Kocian Solc Balastik



Answe
r 1) This is not a typical situation in the Czech Republic and one which legal advisers would be reluctant to allow, for a number of reasons. The scope and parameters of a legal due diligence report are clearly defined at the beginning of the DD process to meet the specific investment needs and risk concerns of the client; throughout the course of the DD process, the DD investigation is often adjusted or refocused due to timing, budget concerns or specific material issues and preferences of the client that arise during the investigation. The client may well have a totally different priority of concern or focus from the bank; accordingly, any attempt to transfer the reliance relationship from the client to the bank is problematic and has ethical limitations, as well as exposing the legal advisers to real risks. It is standard practice in the Czech Republic that banks engage their own legal advisers, who typically undertake a limited scope of due diligence focused on the bank’s particular concerns as a lender.

If there is a defined legal risk feared by the bank (e.g. theoretical risk related to real estate title from the past), we would rather advise the client to seek an alternative solution, such as, for example, title insurance of legal risks.

The concept of limitation of damages has only very recently (2012) been introduced explicitly into Czech law, accordingly there is very little experience in practice at present in relation to how a Czech court would interpret or uphold a cap on damages. A reliance release letter by itself would not be sufficient to legally limit liability; an agreement would need to be executed between the legal adviser and the bank under which the bank partly waives its future claims for damages; such a waiver of future claims has some limits similar to such regulation in other jurisdictions (fraud etc.).


Answer 2) Additional issues which are particular to a legal due diligence in respect of a contemplated transaction in the Czech Republic are as follows:

- Particular care is advisable in relation to title verification in real estate matters, especially in the verification of ownership title during the non-democratic periods in the past (i.e. Nazi occupation 1939-45) and the communist era after World War Two.

- Former state enterprises may continue today to be affected by issues arising during the period of privatization after 1989, i.e. whether the privatization process was carried out correctly in relation to e.g. transfer of title to real estate, whether there are minority shareholders (As a result of the so-called coupon privatization that occurred in the early 1990s) and importantly, in the case of manufacturing plants, environmental contamination, which is often an inherited relic of such former state enterprises.

- Investors should be aware of certain corporate law matters which are not generally found in other jurisdictions: a ban on “chaining” of ownership by single member companies (this should be abolished in 2014), formal particulars in relation to board members (ban of employment relationship, mandatory approval by shareholders of all financial remuneration to board members, formalistic and closely defined approach to the manner in which documents can be executed on behalf of the company), extensive regulation on intra-group transfer of assets (mandatory evaluation of price by a court expert, otherwise transfer may be deemed null and void in entirety).

- From January 2014 a completely new civil law is due to come into force, which will also affect existing long-term relations (leases in particular) as well as real estate titles (the currently possible separate ownership of buildings from the ownership of land will be cancelled).


Answer 3) This is a very atypical situation and not at all standard in the Czech Republic. A possible theoretical scenario might be where 2 potential bidders join forces to jointly bid on a tender. However exactly the same risks apply for the legal adviser as we described earlier in relation to banks relying on a legal due diligence report. Legal advisers in the Czech Republic would be generally reluctant to























Charles Martin
(biography)    
Senior Partner   
Macfarlanes
London, United Kingdom
Tel: +44 (0) 20 7849 2335   
charles.martin@macfarlanes.com
 

England and Wales:
Charles Martin, Senior Partner, Macfarlanes



Answer 1) It is very common, if not standard, for due diligence reports prepared by the potential buyer's advisers to be provided to the financing banks on a reliance basis (either through those reports being addressed to those banks alongside the potential buyer or, more commonly, separate reliance being extended to the banks).

If the advisers to the potential buyer allow the financing banks to have access to their due diligence reports on a reliance basis, the advisers will potentially have an increased professional liability risk. For example, if it were to transpire that the contents of those reports were incorrect, the financing banks may then look to take direct action against the relevant adviser. This may be particularly likely if the buyer were to become financially distressed. In addition to the liability risk, advisers will be conscious that, the more people who can rely on their report, the greater the reputational risk to them if the report contains an inaccuracy.

In order to limit the risks to an extent, the terms of the banks' reliance will often be subject to certain limitations and the basis upon which the reports are provided to the banks will be explicitly set out in the letter by which reliance is extended. Such letters will generally include provisions addressing (but not limited to) the following:

- the fact that the advisers have not acted as adviser to the bank and



























Cyril S. Shroff

(biography)
Managing Partner
Amarchand Mangaldas
Mumbai, India
Tel: +91 22 2496 4455
 


India:

Cyril S. Shroff, Managing Partner, Amarchand Mangaldas



Answer 1) It has been seen that third parties, including financial institutions, seek to refer to the due diligence reports prepared by advisors of the buyer/investor – either on a reliance or a non-reliance basis. There are various reasons for which this approach is taken, including crunched timing for completing the transaction and costs. Such a proposition is generally dealt with by Indian advisors in one of the following ways:

(a) the advisor issues a letter to the financial institution allowing it to receive and refer to the report. Usually such a letter would allow reference to the report subject to certain qualifications, such as the report has been prepared as instructed by the investor/buyer; the report has been prepared keeping in mind the client’s requirements (and not the financial institution's) and that the advisor will not be responsible to the financial institution. Such qualifications are the subject of negotiations between the financial institution, the buyer and the advisor.

(b) the advisor issues a reliance letter in favour of the financial institution allowing it to rely on the report, as if the report was originally prepared in favour of the financial institution. In this approach the financial institution can use the report in any proceedings, including any proceedings against the advisor. To limit the exposure of the advisor, the advisor usually incorporates certain carve-outs and qualifications to limit its liability to the financial institution. Again, such carve-outs and qualifications are subject to negotiations amongst the parties.

Usually, it is option














 
 

Ira Andamara Eddymurthy
(biography)    
Partner   
SSEK
Jakarta, Indonesia
Tel: + 62 21 521 2038   
iraeddymurthy@ssek.com


 

Indonesia:
Ira Andamara Eddymurthy, Partner, SSEK


Answer 1) It is uncommon in Indonesia to provide the financing banks with the legal due diligence reports prepared by the purchaser’s legal advisor, in particular on a reliance basis.

In practice, the potential buyer’s advisor will act only as the Indonesian legal advisor to the potential buyer in connection with the proposed transaction of the client. Our liability is limited to the qualifications and assumptions made in the due diligence report; such due diligence report is prepared solely for use by the client in considering whether to proceed with the transaction and it should not be relied upon for any other purpose. The advisor does not accept responsibility for any decision on whether or not to proceed with the transaction or the outcome of such transaction.

It is common practice in any due diligence transaction in Indonesia for the advisory role to consist of a financial advisor, tax advisor and lawyers. We do not believe there is any law firm in Indonesia willing to take the risk of providing financing banks due diligence reports on a reliance basis since professional insurance is not widely recognized in Indonesia.


Answer 2) The purpose of the due diligence report is to highlight those issues that become apparent to us in the course of our due diligence and which we consider as being material in the context of the transaction. Accordingly, in practice, the due diligence report is prepared on a “by exceptions” basis, unless the client requests a full summary of all the documents reviewed during the due diligence process.

The additional coverage is related to:

(a) Foreign capital investment limitations and the potential risks of regulatory changes for specific industries;
(b) Environmental compliance and concerns for specific industries;
(c) Anti-money laundering or foreign exchange controls; and
(d) Anti-Competition Law compliance.

Specifically for the energy and natural resources industries, a site visit to the relevant area of


 
 
 

 





 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Yossi Ben-Dror
(biography)
Senior Partner
Y. Ben-Dror
Herzlia, Israel
Tel: (972) 9-9720801
yossib@ybendror.com  
 
 



Israel:
Yossi Ben-Dror, Senior Partner, Y. Ben-Dror 


Answer 1) In Israel, it is not customary practice to extend a copy of the due diligence reports to third parties. Due diligence reports would typically be addressed only to clients and would usually contain a condition that the report is not to be relied on by any person other than the clients. An example of the typical statement included in a report is as follows: “This report is furnished to you solely in connection with the Agreement and is not to be used, relied upon circulated, quoted or otherwise referred to, for any other purpose or by any other person without our express prior written consent.”

In the event that the advisor consents to provide the reports to the bank on a reliance basis, the parties may agree in a release letter on a liability cap on the total amount of damages for which the advisor could be liable in connection with the reports. While such an allocation of risk may be enforced in the case of an ordinary breach of contract, it is not typically considered acceptable when damages result from fraud, misconduct, bad faith etc.

Furthermore, the Israeli Contracts Law imposes an obligation on parties to a contract, including the legal advisor, to act “in accordance with generally accepted standards and in good faith” in the negotiations leading up to the making of a contract. There is also case law that imposes this duty of good faith on the parties even if the negotiations do not result in a contract. The courts have found the obligation to act in good faith to have been breached where one of the parties failed to disclose material facts. It should be noted that the obligation to act in good faith is particularly broad in Israel.

Certain sections of the Israeli Contracts Laws provide courts with significant legal tools, some refer to the “good faith” principle and provide courts with an important legal tool to interfere with the parties’ free agreement; another section empowers courts to reduce the compensation agreed upon by the parties when found to be not in proportion to the actual damage inflicted.






















Gianmatteo Nunziante
(biography)    
Partner
Nunziante Magrone  
Rome, Italy
Tel: +39 06 695181   
g.nunziante@nmlex.it
 

 

Italy:
Gianmatteo Nunziante, Partner, Nunziante Magrone
 


Answer 1) In Italy, as elsewhere, legal advisors are ever more frequently receiving requests from financing banks to disclose their due diligence reports prepared for a potential purchaser.

Legal advisors are generally reluctant to share their due diligence reports with the banks, partially due to the increased potential professional liability that entails, and partially because due diligence reports are usually drafted and tailored according to  clients’ needs, which may not entirely correspond to those of the banks.

Caps on liability agreed with the bank are usually expressed as a multiple of the legal advisor’s fees. However, it must always be taken into consideration that, under Italian law, any limitation of liabilities is invalid in the case of gross negligence or fraud, though this should not, in principle, occur for legal advisors.


Answer 2) First of all, specific areas of investigation may be essential depending on the sectors in which the target company operates. Such areas might include environment, health and safety, anti-money laundering.







 














Akira Kawamura
(biography)    
Of Counsel
Anderson Mori & Tomatsune
Tokyo, Japan
Tel: +81-3-6888-1028 
akira.kawamura@amt-law.com



















Takashi Toichi
(biography)    
Partner
Anderson Mori & Tomatsune
Tokyo, Japan
Tel: +81-3-6888-1086
takashi.toichi@amt-law.com


 

 

Japan:
Akira Kawamura, Of Counsel and Takashi Toichi, Partner, Anderson Mori & Tomatsune


Answer 1) In Japan, although we have seen many cases for a bank (or other financial institution) to request a buyer for due diligence reports provided to it by its legal advisor, it is still rare for such requests to be made on a reliance basis, particularly where Japanese banks are concerned. In this connection, due diligence reports often contain language to the effect that the reports should not be conveyed to third parties without the prior written consent of the legal advisor preparing the report. The rationale is because these reports are almost always drafted to address the specific needs of the buyer. Where requests for disclosure from the bank are received by the legal advisor, the common practice is to ask the bank to sign a release or waiver attesting to the fact that the report is being conveyed on a no reliance basis. This practice makes sense because the due diligence reports would not have been drafted with the bank’s concerns in mind. Furthermore, although there are no fact-specific precedents in Japan at present, allowing a bank to rely on a due diligence report could create potential liability exposure for legal advisors.

While there are no specific court cases in relation to liability caps, such caps are in and of themselves likely to be valid under Japanese law, save for where the provision contained in the release letter is extremely unreasonable.



Answer 2) In Japan, due diligence carried out by buyers is far more commonplace than due diligence by sellers. Recently, there has been a rise in interest in compliance matters, including compliance with the US Foreign Corrupt Practices Act and the UK Bribery Act. Separately, Environmental concerns, while not new anymore, have in recent times become more important because of their large potential downsides and the sensitivity of the related issues. Finally, in certain industries, antitrust issues are crucial – especially since Japanese companies in several industries have had imposed on them heavy fines and penalties in foreign jurisdictions as a result of antitrust law violations.



Answer 3) In Japan, it is uncommon for due diligence reports to be sold by buyers to potential buyers who arrive later in the process. The discussion in relation to the first question is germane here: as each due diligence report is drafted for the benefit of a particular buyer, while there may be overlaps in the areas of concern addressed, the report may not suit the requirements of a buyer later in time. Given that the situation here parallels that with disclosure to banks, the use of releases and language of “reliance” is not common.



Answer 4) In relation to public offering documents, should a prospectus registered at the relevant authority be found to contain false information, the legal advisors preparing the same could be exposed to liability.

Private placement documents are not usually governed by any specific provisions and


 
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mehdi M. Bennani
(biography)
Partner
Bennani & Associes
Casablanca, Morocco
Tel: +212 -522 95 96 02
mbennani@bennaniassocies.com
 
 



Morocco:
Mehdi M. Bennani, Partner, Bennani & Associes 


Answer 1) It is not common practice in Morocco for a bank to request legal due diligence reports prepared by a buyer’s advisor on a reliance basis.

In general, advisors provide a disclaimer in the due diligence report stating that it is specifically issued to their client, and that any distribution of the report to anyone other than the client requires prior approval from the advisor.


In practice, banks have internal legal departments and internal rules to directly assess the risks attached to financing a transaction.

Moreover, legal advisors are reluctant to provide their due diligence reports to the banks, mainly because:

(i) the legal advisors do not derive any benefit from sharing the due diligence report with the bank;

(ii) sharing the due diligence report may potentially increase their professional liability; and

(iii) the due diligence reports are usually drafted to meet the specific requirements of the client and are tailored to the clients’ needs.























Cameron Taylor
(biography)    
Partner     
Minter Ellison Rudd Watts
Auckland, New Zealand
Tel: +64 9 353 9749   
cameron.taylor@minterellison.co.nz
 


New Zealand:

Cameron Taylor, Partner, Minter Ellison Rudd Watts


Answer 1) Although not a common occurrence, we are increasingly encountering requests for legal due diligence reports prepared by purchaser's solicitors, and sometimes accountants, to be provided to financing banks on a reliance basis.

If these advisors to the potential buyer allow the financing banks to have access to their due diligence reports on a reliance basis, the advisors will potentially have an increased professional liability risk. For example, if the target business and/or the buyer were to become financially distressed, the financing banks may then look to alternative sources to recover on their loans. This could potentially result in a financing bank making a professional liability claim against one or more of the advisors.

The risks for the advisors who prepared the reports in these situations are dealt with by way of reliance release letters entered into with the financing bank.  This allows the advisors and the bank to agree, as a matter of contract, the basis on which such reports will be provided and the limitations that will apply. Such letters will generally include provisions addressing (but not limited to) the following:

- the fact that the advisors have not acted as advisor to the bank and have acted only on instructions from their purchaser client;

- the that scope of the due diligence was set by the purchaser client and as a result the due diligence report and its findings have been tailored to suit that client’s concerns and considerations (as well as budget and























Suet-Fern Lee
(biography
Senior Partner
Stamford Law
Singapore
Tel: +(65) 6389 3030
suetfern.lee@stamfordlaw.com.sg
 


Singapore:

Suet-Fern Lee, Senior Partner, Stamford Law
(Panel Chair)


Answer 1) The provision of legal due diligence reports prepared by purchaser’s solicitors to the financing banks on a reliance basis is not a common occurrence, although we are increasingly encountering such requests in our transactions.

If the advisors of the potential buyer allow the financing banks to receive the due diligence reports on a reliance basis, the advisor may find itself at significantly higher risk in professional liability. If the target business and/or the buyer were to become financially distressed, the financing banks may then look to alternative sources to recover on their loans. This will increase the possibility that the financing banks may make a professional claim against the adviser.

In addition, the scope of legal due diligence for an M&A transaction is usually defined after close consultation with the client (in this case, usually the Purchaser). As a result, the due diligence report and its findings are usually tailored to suit the Purchaser’s concerns and considerations (as well as budget and time-table), and the advisor may then be exposed to a professional claim if the due diligence report was deficient in covering or did not address a material concern of the financing banks.

Including a liability cap in the reliance release letter would help to protect the advisor as the advisor’s maximum liability can be tied to the advisor’s professional liability insurance cover. The Law Society of Singapore, the regulatory body having oversight of conduct of lawyers called to the Singapore Bar, allows






























Florian S. Jörg
(biography)    
Partner     
Bratschi Wiederkehr & Buob
Zurich, Switzerland
Tel: +41 58 258 10 00   
florian.joerg@bratschi-law.ch
 

Switzerland:

Florian S. Jörg, Partner, Bratschi Wiederkehr & Buob


Answer 1) Banks financing M&A transactions in Switzerland increasingly (at least in large transactions) request reliance letters of the buyer's solicitors (hereinafter "Advisor" or "Advisors") in order to be able to rely on the due diligence reports, as if the financing banks had likewise mandated the Advisors. Specifically, in the light of the financial risks assumed by the financing bank as a third party, it demands that the reliance letter covers the legal consequences in case the due diligence report or any material information related to the concerning transaction is deficient and may cause financial losses. Consequently, the provision of legal due diligence reports on a reliance basis increases the liability risk of Advisors.

However, the Swiss courts have not yet decided on which legal basis the financing bank may claim reimbursement of any monetary damages against the Advisors, if an M&A transaction turns out to be a failure. According to Swiss legal doctrine, the reliance letter neither constitutes a contractual relation between the Advisor and the bank nor does it form a relevant ground for non-contractual indemnification under tort law. In respect of the possibility to obtain compensation for damages on contractual grounds specific types of contracts, e.g., third-party beneficiary contracts and contracts with protective effects for third parties, are at least considered in theory but not supported. As the reliance letter is deemed to be a specific foundation of trust, one argues that there might be a good chance to hold the Advisor liable on grounds of the so-called "Vertrauenshaftung" ("obligations based on trust").

Taking this legal uncertainty into consideration, it is highly recommended to include liability caps into the reliance letter issued by the Advisors. Advisors are, nevertheless, required to take the following aspect into account:

Even though liability caps are admissible, it is not clear yet, to which extent the exclusion of liability will be valid. In general, any agreement purporting to exclude liability for unlawful intent or gross negligence in advance is void. In more-specific cases, since the service of Advisors are deemed to be conducted under official license, an advance exclusion of liability for minor negligence may, at the discretion of the court,

























Hsin-Lan Hsu
(biography)    
Partner     
Lee and Li
Taipei, Taiwan
Tel: +886 2 2715 3300 Ext.2551  
 


Taiwan:

Hsin-Lan Hsu, Partner, Lee and Li


Answer 1)
Although it is not a common occurrence in Taiwan, we have encountered that the banks financing a transaction request to review our due diligence. If the legal advisor allows the financing banks to receive the due diligence report on a reliance basis, the legal advisor would be exposed to additional risk of professional liability as the financing bank would be entitled to claim against the legal advisor on the reliance basis.  In addition, the due diligence report created for the buyer in an M&A transaction is often a tailor-made report for the buyer’s special concerns and needs and not aimed to address the concerns and needs of the financing banks. Thus, the legal advisor would be exposed to increasing risk of professional liability by allowing the financing banks to rely on its due diligence report should the due diligence report is deficient in address the major concern of the financing bank.  

Taiwan laws, regulations and disciplinary rules are silent on liability cap. However, as the legal advisor and the financing banks is a contractual relationship, it is possible to include a liability cap in the reliance letter. Including a liability cap in the reliance release letter would help to limit the liability amount of the advisor; otherwise the advisor would be exposed to the risk of double claims by the buyer and the financing bank.


Answer 2) Issues that potential buyers and seller should consider when conducting a M&A transaction include:

-    Tax compliance
-    Foreign investment laws and application for foreign investment approval


 

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pakdee Paknara
(biography)
Partner
Weerawong C&P
Bangkok, Thailand
Tel: + 66 2 264 8000
pakdee.p@weerawongcp.com

 



Thailand:
Pakdee Paknara, Partner, Weerawong C&P 


Answer 1) It is common for banks to request and be provided with the due diligence report of the buyer’s advisor, even though the scope of the report may not exactly align with the bank’s purpose of financing, and the scope of the due diligence may be different from the bank’s requirements. The bank’s own advisor may also ask to review the due diligence report.  A reliance letter may or may not be requested by the bank.  We have seen both situations, though where an international bank is involved they normally require that a reliance letter be issued.  
The risk and liability of the advisors would certainly increase if the bank is provided with the due diligence report on a reliance basis, and a liability cap would at least reduce the advisor’s liability.  A liability cap can be included in the reliance letter, with the cap amount being subject to negotiation between the bank and the advisor. Notwithstanding the above, actions against advisors are not common in Thailand.


Answer 2) Areas that are not always adequately covered in due diligence exercises, or are often overlooked altogether, include:

a) An investigation into compliance with anti-bribery legislation and information requests related to steps that have been taken related to corrupt practices;

b) An investigation into compliance with money-laundering legislation and internal controls (e.g. customer checks) implemented to ensure compliance; and

























Oleksiy Didkovskiy
(biography)    
Managing Partner     
Asters
Kyiv, Ukraine
Tel: +380 (44) 230 6000   
oleksiy.didkovskiy@asterslaw.com
 

Ukraine:

Oleksiy Didkovskiy, Managing Partner, Asters


Answer 1)
Ukrainian law does not have any specific rules regarding reliance letters or associated matters: neither has been established by the Ukrainian National Bar Association. The general rules of the Civil Code of Ukraine and Commercial Code of Ukraine or, alternatively, the law governing the reliance letter, must apply, that’s to say, a bank receiving a due diligence report on a reliance basis from a legal adviser will be entitled to require damages from the adviser if the bank manages to prove that such damages were incurred as results of incorrect legal conclusions made in the report, or failure to make a conclusion which had to be made based on the documents and information provided to the adviser during the due diligence.

Ukrainian law allows the parties to an agreement to fix a liability cap. Such caps are almost always used by professional legal advisers when they issue reliance letters. Quite often such caps constitute the amount of the advisors’ professional liability insurance cover. It should be noted that attorney professional liability is not mandatory in Ukraine.


Answer 2) The general approach to legal due diligence has not changed. As usual, legal advisers cover all aspects of the target's activity and assets, and check title of shareholders to shares/equity interests in the target. The new trend, which our law firm has started to implement in order to satisfy clients' need in the rapidly changed Ukrainian economic, political and legislation environment, is describing potential risks for the target's business in the event of adoption of the most commonly discussed and supported legislative acts and/or conclusions by Ukraine of certain treaties with








 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Robert DeLaMater
(biography)
Partner
Sullivan & Cromwell LLP
New York, NY, USA
Tel: +1-212-558-4788
delamaterr@sullcrom.com
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Melissa Sawyer
(biography)
Partner
Sullivan & Cromwell LLP
New York, NY, USA
Tel: +1-212-558-4243
sawyerm@sullcrom.com


 

USA:

Robert DeLaMater, Partner and Melissa Sawyer, Partner, Sullivan & Cromwell LLP
 


Answer 1)
 In the United States, it is not uncommon for legal advisors of a potential buyer to share with financing sources a due diligence report prepared for the potential buyer, but the practice is to do so on a non-reliance basis.  U.S. law firms generally will not permit non-clients such as financing sources to rely on due diligence reports prepared for a client, and such due diligence reports will usually include language restricting disclosure to third parties and expressly stating that the report was prepared for, and is intended to be used solely by, the potential buyer.  However, U.S. law firms will typically allow disclosure of all or a part of a due diligence report to financing sources on a case-by-case basis, conditioned upon the financing bank executing a non-reliance letter acknowledging that the recipient is not entitled to rely on the due diligence report for any purpose and that the provision of the report is not intended to induce any action on the part of the recipient, as well as releasing the law firm from liability with respect to the report.

The U.S. practice of providing legal due diligence reports only on a non-reliance basis arises out of the view that due diligence reports are tailored to the potential buyer’s needs and requirements, with consideration given to factors such as the potential buyer’s knowledge and commercial decisions regarding risk allocation and the relationship and experience between the law firm and the buyer as its client, and may not have the scope, detail or materiality thresholds appropriate for a financing source’s due diligence focus and needs.  Moreover, allowing third party reliance on a due diligence report could potentially expand significantly a law firm’s liability with respect to the report, as the report would no longer be within the context of an ongoing attorney-client relationship where the law firm’s liability to the client is determined according to standards of professional responsibility and ethics, taking into account the client’s instructions regarding scope of review and other constraints. Thus, non-reliance letters required by U.S. law firms from financing banks often include an acknowledgment that the report was prepared to address the needs of the firm’s client and not that of the financing source (or other third party recipient of the report) and that there is no attorney-client relationship with the financing bank.

Additionally, U.S. law firms generally are limited or prohibited by professional ethics rules from setting a liability cap with respect to clients.  Professional ethics rules in the United States do not address whether law firms can limit potential liability to non-clients, and ethics experts generally view the requirement of a non-reliance letter from non-clients as not being violative of the rules of legal ethics in the United States.  However, there remains some uncertainty with respect to whether a liability cap included in a reliance release letter would be enforced in the United States.


Answer 2) The regulatory due diligence questions that potential buyers and sellers need to consider will depend on the specific industry, activities and operations of the target company and the buyer.  In general, however, areas of regulatory due diligence that are frequently relevant in the United States include obtaining information relating to compliance with the Foreign Corrupt Practices Act, business activities of the target with countries and persons subject to economic sanctions, use of conflict minerals, environmental liabilities (particularly with respect to real property) and compliance with U.S. securities laws and regulations.