Purchasing Construction Company According to Due Diligence - Belarus

Acquisition of business has several stages, including gathering of information about acquired company, preparing of documentation, negotiation, execution and closing of transaction. The quality of research and investigation in the acquired company affects not only on the position of the buyer and seller in the negotiations, but also the company's activities in future.

Due diligence is the process of investigating and estimating a company before buying it, comprehensive analysis of legal, financial and management documentation.

Usually the procedure of Due Diligence has the following order. First of all, the list of information and documents (check list), which the seller must provide the buyer for Due Diligence should be prepared and sent to the seller. As a rule, for Due Diligence is necessary requires at least the following information:
1) corporate documents;
2) entitled documents (e.g., copies of powers of attorney);
3) licenses;
4) accounting and financial documents;
5) documents relating related to the assets of the company;
6) information on the rights to intellectual property;
7) all commercial contracts and agreements;
8) information on labor relations;
9 information about insurance;
10) information about disputes and litigation, administrative proceedings;
11) other documents relating directly related to the company.

Construction business has many features, so Due Diligence in this sphere of activity is carried out in several directions. Apart from the above information, you must also find a number of other aspects of the construction company. Except the information set forth above, it is necessary to find out a number of other aspects of activity of the construction company.

Firstly, observance of all license requirements and conditions, the absence of gross violations of licensing requirements are of the great importance. In particular, it is necessary to ascertain:
1) whether there is a management system and (or) a quality control of the works (services) which are carried out by the construction company;
2) how effectively operate occupational safety and health administration operate;
3) availability of basic production assets (in ownership, economic management, operative administration, according to the lease agreement) required to carry which are necessary for carrying out works (services) performed by the construction company.

Secondly, it is necessary to conduct research on compliance with the requirements of environmental protection and rational use of natural resources, and preservation of historical and cultural heritage and conservation of especially protected natural territories.

Thirdly, unlike other kind of activities, construction companies are obliged to observe not only the legislation in the sphere of construction, but also the requirements of technical normative legal acts. Moreover, this obligation extends to all phases and stages of construction (preparation for construction, development of design documentation, execution of construction works), to the acceptance of construction projects, as well as on the process of its operation during the warranty period. Therefore, the buyer of the acquired company shall objectively assess objectively what complaints and claims may be brought against him during the warranty period and how to minimize risks associated with non-compliance by the seller of with the requirements of legislation by the seller.

Fourthly, the most important issues in of the construction business are the issues of receiving of all agreements, approvals, permits, fulfillment of directives and instructions, such as:
• coordination of the object location and construction permit for survey works;
• availability of architectural planning task, the opinion of coordination organizations;
• obtaining of technical specifications for engineering and technical maintenance of the object;
• availability of state expert opinions on the design documentation;
• availability of permit for the involvement of co-investors in the construction of residential houses;
• conclusion of the land lease agreement through tender or bidding;
• compliance with the instructions issued by the organs bodies of state construction inspectorate on removing of discovered defects and (or) the violations that endanger the deformation or collapse of buildings, its parts, engineering services, structure;
• many other permits issued for each type of construction.

Fifthly, it is necessary to find out whether there were construction accidents and destruction, whether the order of their investigation was observed, what actions has have been taken for their elimination and prevention. It is also reasonable to explore the possibility of potential construction accidents and destruction of objects in the further operation of the objects because a buyer will bear the responsibility for the finished construction will bear a buyer.

And iIt is not the whole list of issues for checking during Due Diligence in the sphere of construction. As we see, Due Diligence in construction requires involving in the research process not only an independent legal consultant to conduct a legal due diligence, but also a technical specialist in construction.

The process of documents research can be realized either through unimpeded access to the acquired company, or by allocating a separate room with a collection of all documents (data room). In the first case, the person conducting the Due Diligence has the opportunity to explore the “unfiltered” information and freely communicate freely with employees of the company. Despite the transparency of this method, it does not guarantee the confidentiality of information and complicates the process of obtaining of the required documents, especially if the company has many departments and divisions.
In the second case, the seller prepares a separate room (Data room), in which will be presented where all the requested documents will be presented. Applying the second method it is recommended to appoint an employee of the company for collecting documents and their systematization.
In the process of Due Diligence the person conducting the study should communicate as much as possible with employees who are responsible for this or that area of activity in the acquired company.
Results of investigation are fixed in the report, containing information about company’s activity and potential risks. It should be remembered noted that strategic management decisions will be made on the basis of this report will be made strategic management decisions, so it should be treated with due care and objectivity.

Negotiations. Representations and warranties.

The strategy of negotiations of both parties depends entirely on the results of Due Diligence. If the analysis of the acquired company indicates that the seller may have some risks, the buyer tries to reduce cost and increase the warrantees provided by the seller. Such warranties as a rule are fixed in a separate agreement and considered as an integral part of the principal contract. Therefore, in the process of negotiating the main task of the buyer is to obtain as many guarantees from the seller as possible, while the buyer is interested in avoiding any warranties.

Instead of conclusion

Conducting of Due Diligence is a key step in acquiring a construction company. Due Diligence can identify all possible risks, minimize losses and avoid further litigation.
In the process of Due Diligence is important to investigate not only the legal issues, but also to obtain information on observation of all technical requirements. It is reasonable to involve a technical specialist or expert in the sphere of construction.
Sellers should not be afraid of Due Diligence procedure, and provide all the assistance and support to the research in the company. Informing about the problems and difficulties of the acquired company rather convince the buyer to the seller's honesty and transparency of the transaction. Settlement of the existing problems in the company is compensated by the guarantees offered by the seller to the buyer.

AUTHOR: Eugenia Urodnich, Associate at Law Firm GLIMSTEDT

Copyright Glimstedt Law Firm
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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