It’s not obvious to get a
chance to review documents
after a company takeover
A buyer who has reviewed documentation in connection with a company takeover is not entitled to obtain the documentation, unless explicitly stated in the contract.
According to a ruling from the court of appeal, a buyer who has reviewed documentation in connection with a company takeover is not entitled to obtain the documentation from the seller other than that which automatically comes with the company, such as the share register, the articles of association and applicable agreements, unless otherwise stated. In order to have access to this documentation, the parties must have explicitly agreed on this issue in the contract. If this is not agreed in the contract, there may be undesired consequences for a buyer in the event of any future dispute.
Negotiated share acquisitions
Shares can be acquired in different ways. When acquiring a large block of shares or all the shares in a company, the buyer often carries out a corporate due diligence review in order to obtain clearer information about various aspects of the company’s operations. The complexity of the agreement procedures depends on factors such as the target company’s ownership, industry, operations and size.
Before negotiations begin between the seller and the buyer, the parties normally enter into a preliminary agreement, known as a letter of intent, which governs the forthcoming procedure. At this stage, the parties usually also enter into a confidentiality agreement which covers the information exchanged during the negotiations. The buyer then begins an in-depth review.
The information obtained in connection with this review then forms the basis for the agreement negotiations between the buyer and the seller, resulting in e.g. discharges, guarantees or other terms relating to the assignment of risks in connection with specific issues discovered by the buyer during the review.
The due diligence process
The corporate review, or the due diligence review as it is often referred to, is the actual operational process and method used to gather and analyse information about the target company. This can be carried out in different ways. The buyer can either be given access to a document room, known as a data room, filled with folders containing information compiled by the seller, or be given access to the material in digital form, either on CD or by logging in to a virtual data room.
The documents are normally compiled on the basis of a list of questions compiled by the buyer, and contain information about the target company’s structure, assets, financial position, supplier and customer agreements, employees, intellectual rights and other conditions of relevance to the buyer’s evaluation of the target company. The due diligence review is carried out and reported on for the buyer by the buyer’s various consultants, including lawyers, auditors and technical advisers. Additional information is provided through, for example, oral information from the seller and the management of the target company, and through site inspections.
Many of the documents contained in the data room belong to the target company, and are therefore included with the business on handover. If the buyer completes the acquisition, he therefore gains access to these documents. In order to be able to make a subsequent assessment of the seller’s responsibility, however, it must be known exactly what information is included and excluded in the data room.
The court of appeals ruling
In the case in question, the buyer (Fly Scand Group AB) of the shares in the target company Falcon Air AB wanted to have the acquisition declared invalid on the grounds that the seller (Posten AB) would have fraudulently deceived Fly Scand on entering into the agreement. According to Fly Scand, Posten had concealed important circumstances, and therefore petitioned the district court for Posten to release documents that Fly Scand had reviewed prior to the acquisition.
Fly Scand’s claim did not, however, relate to invalidity, referring only to the concept of material production in accordance with the rules of the Code of Judicial Procedure, which in this case only involved a request that the district court should oblige Posten to hand over the documents.
The court of appeal did not deem the cited procedural rules to be applicable. The reason for this was that the agreement between the seller and the buyer did not include the necessary support for the requested documents to be issued. The buyer did not therefore have ownership of the requested documents, and had not secured the right to obtain them in any other way.
Another contractual element
The court of appeals ruling provides clear instructions in terms of drawing up agreements in connection with share acquisitions. The information obtained by the buyer in connection with the due diligence review of the target company should therefore be specified and should constitute part of the contract.
This applies not only to documents provided by the seller, but also to oral information provided by the seller and noted specifically. The documentation reviewed should either be stored by a third party for as long as guarantees are applicable or copied out so that both parties have access to the materials compiled. If the buyer fails to secure the rights to the documentation, this may result in significant losses in the future.