When the Acquirer first brings its outside lawyers into a proposed M&A deal, they will immediately produce a “Due Diligence Checklist.” Typically encyclopedic in content, such a checklist is a useful roadmap of potential issues as well as of the basic materials to be reviewed with diligence. But the lawyers rarely make an attempt to give the Acquirer a sense of the priorities among the materials in the checklist.

A Due Diligence Checklist, however well prepared (and they typically are very well prepared), is no more than a preliminary roadmap. The focus of your due diligence will as ever depend on the circumstances of the deal, as elaborated in the Acquirer’s discussions with its thoughtful lawyer, as summarized here.

Portions of the Due Diligence Checklist will likely turn out to be irrelevant or warranting very little attention, and other portions will turn out to need more detailed review than they suggest. This is not a failing of the Checklist: if due diligence was a mechanical and purely repetitive process, there would be no need for lawyers to perform it!

In the modern world, the virtual data room tends to be the location of the due diligence process, Gone are the days of spending weeks holed up in a windowless room in Boise (typically known as the “Data Room”) sifting through almost unlimited papers! Now the internet is in service of the due diligence process.

When the Target begins to respond to the admittedly wide-ranging Due Diligence Checklist, the materials pulled together need to be reviewed.

The Virtual Data Room improves the Data Room process tremendously. The Target’s banker or its lawyers prepare the its responses to the Due Diligence Checklist and upload them online. The Acquirer and its banker or its lawyers will be given a password, and can access the Virtual Data Room wherever they have internet access. Hopefully, the online documents will be organized congruently (or close to it) with the Due Diligence Checklist.

The principal downside is the absence of a human interlocutor. In an old-fashioned Data Room, the Target’s representatives were normally down the hall or even in the Data Room with you. As questions came up, they could be addressed in real time. Now, all questions arising out of a Virtual Data Room need to be emailed to the appropriate Target’s representative, and followed up until answers are forthcoming. That can be a time-consuming process.

In addition, Virtual Data Room contracts and documents are regularly incomplete in some manner. Exhibits and Schedules are omitted, or amendments missing. Again, follow up is the key. No review of a contract is complete until the complete contract has been reviewed.

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