What is due diligence in the sale of assets or shares?

Both in Canada and in Quebec, it is strongly recommended that, before proceeding with the purchase of a business or a corporation , whether through an asset purchase or a stock purchase, to make it a precondition of such proposed transaction that the buyer be permitted to conduct due diligence to its satisfaction within a certain timeframe, particularly with respect to specific aspects of the seller’s business operations and activities.

Due diligence covers all essential information related to the operations of the target business or corporation; it must enable the buyer to make a fair and satisfactory assessment of the financial, tax, and legal situation of that business or corporation.

In Quebec as well as in Canada, the scope of due diligence may vary depending on the nature of the business or the corporation; it should focus, in particular, on the points mentioned below; when purchasing shares, all the points described below should be subject to said due diligence or an in-depth review, whereas in the case of an asset purchase, some of these elements may be less necessary to examine, since the buyer does not acquire the liabilities, debts, and obligations of the target business or company :

• Legal status;
• Financial statements;
• Assets, such as equipment, inventory, and ;
• Permits, rights, and licenses necessary for operations;
• Inventory status;
• Mortgages and other encumbrances affecting property and assets;
• Customers and accounts receivable;
• Major contracts and suppliers;
• List of employees, employment contracts, collective bargaining agreement (if applicable), and the company’s file with the CNESST;
• The lease agreement, if the business operates from rented premises;
• Debts and contingent liabilities;
• Payment of payroll deductions (D.A.S.) and taxes (T.P.S. and T.V.Q.), as well as amounts due for tax returns;
• Current insurance policies;
• Existing or potential disputes;
• .Applicable laws and regulations, etc., and compliance therewith.

Given that much of the information provided is confidential, a confidentiality agreement should be signed by the parties involved in such a proposed transaction in order to protect the confidentiality of this information, preferably including non-competition and non-solicitation clauses and provisions for penalties in the event of a breach of these clauses.