Due Diligence

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Due diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. Some common examples of due diligence in various industries include:

  • The process through which a potential acquirer evaluates a target company or its assets for acquisition.[1]

Origin of the term "Due Diligence"

The term "Due Diligence" first came into common use as a result of the US Securities Act of 1933.

The US Securities Act included a defense referred to in the Act as the "Due Diligence" defense which could be used by Broker-Dealers when accused of inadequate disclosure to investors of material information with respect to the purchase of securities.

So long as Broker-Dealers conducted a "Due Diligence" investigation into the company whose equity they were selling, and disclosed to the investor what they found, they would not be held liable for nondisclosure of information that failed to be uncovered in the process of that investigation.

The entire Broker-Dealer community quickly institutionalized as a standard practice, the conducting of due diligence investigations of any stock offerings in which they involved themselves.

Due diligence in capstone refers to performing the needful amount of effort, as in 'doing diligence'

Originally the term was limited to public offerings of equity investments, but over time it has come to be associated with investigations of private mergers and acquisitions as well. The term has slowly been adapted for use in other situations.

Due diligence in business transactions

In business transactions, the due diligence process varies for different types of companies. The relevant areas of concern may include the financial, legal, labour, tax, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions.[2]

As a concept in civil litigation

Due diligence in civil litigation (also known as due care) is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party. Failure to make this effort may be considered negligence. This is conceptually distinct from investigative due diligence, involving a general obligation to meet a standard of behaviour. Quite often a contract will specify that a party is required to provide due diligence.7

For supplier quality engineering

Due diligence is a term used for a number of concepts involving either the performance of source inspection or source surveillance, or the performance of quality duties such as PVA (Process Validation Assessment) or System Audits with a certain standard of care.

Due diligence in Supplier Quality (also known as due care) is the effort made by an SQE professional to validate conformance of product provided by the seller to the purchaser. Failure to make this effort may be considered negligence. This is conceptually distinct from investigative due diligence, involving a general obligation to identify true, root cause for non-compliance to meet a standard or contract requirement.

As a criminal defense

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 offense 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.

Environmental due diligence

Environmental due diligence during commercial real estate transactions can include Phase I and Phase II Environmental site assessments. Such assessments are often undertaken in the United States to avoid liability under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as the "Superfund law".

Information security due diligence

Information security due diligence is often undertaken during the information technology procurement process to ensure risks are known and managed, and during mergers and acquisitions due diligence reviews to identify and assess the business risks.

Articles and Resources

References

  1. Hoskisson, Hitt & Ireland, 2004, Competing for Advantage, p.251
  2. Gary M. Lawrence, Due Diligence in Business Transactions, ( Law Journal Press 1994, updated as needed). ISBN 9781588520661.

Related SourceWatch Articles

Wikipedia also has an article on Due Diligence. This article may use content from the Wikipedia article under the terms of the GFDL.