Due diligence is the investigation a buyer carries out into a target company before an acquisition, an investment or a financing. In Dutch law it is not a statutory obligation, but it interacts directly with the allocation of risk between the parties.
Why it matters legally
Dutch law places a duty to investigate on the buyer and a duty to disclose on the seller. Where the two collide, the duty to disclose generally prevails: a seller who knows of a defect and stays silent cannot usually hide behind the buyer’s failure to find it. But a buyer who was told where to look, and did not look, will find it harder to invoke error under Article 6:228 of the Dutch Civil Code or non-conformity under Article 7:17.
That is why the data room and its index matter beyond the commercial review. What was disclosed, and when, decides later who carries a risk that materialises.
Scope in practice
A legal due diligence typically covers corporate documentation and the chain of title to the shares, material contracts and change-of-control clauses, employment including pensions and any collective agreement, real estate and leases, intellectual property, litigation and disputes, permits and regulatory compliance, data protection, and financing and security. Red flags are usually not exotic: an unsigned lease, a customer contract terminable on a change of control, a director who never resigned.
How findings translate into the contract
Findings end up in one of four places. They adjust the price, they become a condition precedent to be resolved before completion, they are covered by a specific indemnity where the risk is identified and quantifiable, or they are left to the general warranties. A known risk left only to the warranties is usually not covered at all, because disclosure against the warranties removes it.
Related terms
See also shareholders’ agreement and private limited company.
Our corporate law practice runs legal due diligence and negotiates the resulting contractual protection.
