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. For the English law, see Standard of care in English law. In Tort law, the standard of care is the degree of prudence and caution It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for acquisition. [1]
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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. Congress enacted the Securities Act of 1933 (the "1933 Act" the "Truth in Securities Act" or the "Federal Securities Act", enacted 1933-05-27
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. A broker-dealer is a company that trades securities for customers as well as for its own account A security is a Fungible, Negotiable instrument representing financial value
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'. A capstone or coping stone is one of the finishing or protective stones that form the top of an exterior
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. A business (also called firm or an enterprise) is a legally recognized organizational entity designed to provide goods and/or services to The relevant areas of concern may include the financial, legal, labor, 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]
Consider the somewhat related business terms of malfeasance and nonfeasance. The American Heritiage Dictionary defines these terms as such: malfeasance is misconduct or wrongdoing esp. by a public official. Nonfeasance as failure to perform an official duty or legal requirement. Furthermore the term misfeasance means to perform a duty or responsibility inadequately or poorly.
Due diligence for hedge funds
An insight in-detail review of a hedge fund's activity in order to ensure ultimately that the fund is in compliance with its prospectus. A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment It is a roadmap for a potential investor in understanding whether a specific fund will meet his/her investment horizon, Risk tolerance and investment strategy. [3] and for an existing investor; a roadmap as to whether a fund has performed the way it claimed it would. In a non exhaustive list the due diligence will look into:
- A Fund snapshot
- Disclosed Investment Strategy
- Historical returns
- Assets under Management (A copy of the funds portfolio from the custodian is usually requested
- Audited Financial statements if the Fund is SEC regulated
- Funds terms and Details
- Regulatory registration if any. The US Securities and Exchange Commission (commonly known as the SEC) is an independent agency of the United States government which holds primary responsibility
- Risk Factors
- Valuation
Every investor is going to have different investment horizons and risk tolerance, as well as a strategy preference. It thus follows that there is no "best" hedge fund, but a fund that closer matches investors preferences. An investor should almost always: [4]
- Request consultation from a professional,
- Read the funds prospectus or offering memorandum
- Understand how a fund's assets are valued
- Understand how fees are charged
- Understand any limitations towards the redemption of shares
- Research the backgrounds of hedge fund managers
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. Negligence (Lat negligentia from negligere to neglect literally "not to pick up" is a legal concept in the Common law legal systems usually used to 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. A contract is an exchange of promises between two or more parties to do or refrain from doing an act which is enforceable in a court of law
It is not correct to confuse due care and due diligence. Due care should be spelt out in full as duty of care. It is a legal concept by itself. Duty of care may be very wide, far reaching, and also a grey area subject to argument. Basically, parents owe their infant a duty of care in everything. As the infant grows to be a child, to be an adolescent, an adult, the duty of care and its scope become less and less. Fundamentally, a duty of care is a moral duty to care. When legal acknowledgement is extended to this moral obligation, then this duty becomes a legal requirement. Inversely, the legislature sets the duty in the statute. Then we consider this duty as legal and amoral ["a-", without, not having to consider the moral aspect].
When read carefully, care is the passive mode; diligence is the active mode.
First the duty of care (due care) arises, making it a requirement. In order to fulfill this duty, due diligence is exercised. The flow may be continuous, but these two concepts are different. When due diligence is called for, then there will be a set of demands to be complied with, depending on the context. For example, before a surgery, what should be done and who should be present in the theatre? After the surgery, what must be done to the patient, equipment, facilities?
As a matter of independent inquiry, whether by a court of law or professional body, the line of investigation is: (1) Is there a duty of care? How is this duty of care imputed? (Previous case law, statute, new case) (2) If the duty of care exists, what are the applicable standards? In other words, what due diligence (and the components that go to make it a comprehensive due diligence) is required?
The last issue is always considered in light of specific circumstances of the case. If brain surgery is involved, the standards are those required of competent brain surgeons. If deep sea welding is involved, the standards are those required of competent deep sea welders. In an auction of a Picasso, due diligence standard must be comparable with an international auctioneer to authenticate an art object. In the sale of a diamond, due diligence may be necessary from human rights and political aspects. As such, expert opinions are often considered.
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. The term criminal law, sometimes called penal law, refers to any of various bodies of rules in different Jurisdictions whose common characteristic is the potential Strict liability is a Legal doctrine that makes a person responsible for the damage and loss caused by his/her acts and omissions regardless of Culpability (or fault e. a crime that only requires an actus reus and no mens rea). Actus reus, sometimes called the external element or the objective element of a crime is the Latin term for the "guilty act" which when proved In Criminal law, mens rea the Latin term for "guilty mind" is usually one of the necessary elements of a Crime. 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. Burden of proof (onus probandi is the obligation to prove Allegations which are presented in a Legal action. 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. A Phase I Environmental Site Assessment is a report prepared for a real estate holding which identifies potential or existing environmental contamination liabilities. 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". The United States of America —commonly referred to as the Superfund is the common name for the United States environmental policy officially known as the Comprehensive Environmental Response Compensation and Liability Act
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. Information technology ( IT) as defined by the Information Technology Association of America (ITAA is "the study design development implementation support Procurement is the acquisition of goods and/or services at the best possible Total cost of ownership, in the right quantity and quality at the right time in the right place
See also
References
- ^ Hoskisson, Hitt & Ireland, 2004, Competing for Advantage, p. Know your customer ( KYC) is the Due diligence and Bank regulation that Financial institutions and other regulated companies must perform Public liability is part of the law of Tort which focuses on civil wrongs 251
- ^ Gary M. Lawrence, Due Diligence in Business Transactions, ( Law Journal Press 1994, updated as needed). ALM (formerly American Lawyer Media) is an Integrated media company focusing on legal and Real estate subjects ISBN 9781588520661.
- ^ hedge Fund. net
- ^ SEC
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