In mergers and acquisitions (M&A) transactions, the buyer typically conducts a detailed review through qualified experts of the target company, whose shares or assets are subject to acquisition. Commonly referred to in practice as “due diligence”, this process is carried out to assess the target company’s legal, financial, and operational status. Accordingly, it constitutes one of the most critical stages for the buyer in identifying potential risks. By revealing the target company’s true condition in all its aspects, this review enables the buyer to determine which risks it will assume during the contract negotiations.
The Purpose and Importance of Due Diligence
Due diligence, which has become an indispensable element of modern M&A practice, is crucial for buyers as it mitigates the information asymmetry between the parties, making potential acquisition-related risks more manageable. On the other side, from the seller’s perspective, it serves as a mechanism that limits potential liability exposure. Therefore, due diligence is not merely a review exercise; it is a fundamental tool for establishing a proper allocation of risks and the establishment of a balanced liability framework between the parties.
Conversely, an incomplete or superficial due diligence process may lead to unexpected liabilities, indemnification claims, and prolonged disputes in the subsequent stages of the transaction. In certain cases, an undiscovered liability or a deficiency in regulatory compliance may result in significant financial consequences in the post-acquisition period. For this reason, a comprehensive review affects not only the security of the transaction but also the overall success of the acquisition.
In conclusion, due diligence is not only a preparatory step in the acquisition process; it is a strategic mechanism that directly shapes the content of the acquisition agreement, the scope of the parties’ liabilities, and the overall transaction security.
The Outcomes of the Due Diligence Review
The due diligence process primarily enables the identification of risks, thereby playing a decisive role in shaping the allocation of risks between the parties. The findings obtained through the review may, in some cases, lead to a reassessment of the purchase price or the inclusion of additional protective mechanisms in the agreement.
In practice, due diligence findings are often directly reflected in the transaction documents. Identified risks are negotiated between the parties and incorporated into the agreement in the form of conditions precedent, warranties, indemnity provisions, or purchase price adjustments. In this way, the outputs of the review not only provide information but also establish the economic and legal balance of the agreement.
As regards the seller’s liability, a comprehensive due diligence review also defines the boundaries of the buyer’s duty to ”know”. Pursuant to Article 222 of the Turkish Code of Obligations no. 6098 (“TCO”), the seller is not liable for defects that the buyer knew or could have known through reasonable inspection. Accordingly, the review concretely narrows the seller’s scope of liability, as the seller can no longer be held responsible for defects that the buyer knew or ought to have known as part of the due diligence process.
For detailed explanations regarding the due diligence review and its impact on the seller’s liability for defects, as well as comprehensive assessments of its application under Turkish law, you may refer to our Managing Partner Dr. Zahide Altunbaş Sancak’s book titled “Seller’s Liability for Defects in Share Acquisitions of Joint Stock Companies.”
Key Considerations for Buyers Who Do Not Conduct Due Diligence
Acquisition transactions carried out without a due diligence review create significant uncertainties for the buyer. Lacking sufficient information regarding the financial, legal, or operational condition of the target company, the buyer must compensate for this gap through contractual protections. Therefore, in cases where no review is conducted, the negotiation and drafting of the agreement must be approached with utmost diligence.
First and foremost, the representations and warranties provided by the seller should be drafted as comprehensively and concretely as possible. Although, pursuant to Article 222 of the TCO, the seller is not liable for defects that the buyer knew or ought to have known through reasonable inspection, the parties may agree otherwise under the contract. Accordingly, the buyer should ensure that the seller provides extensive representations or warranties on all material aspects of the target company. These may range from the accuracy of financial statements and tax compliance to contractual relationships and pending litigation.
In addition, the buyer may require the seller to expressly assume indemnification obligations with respect to certain risks. Such mechanisms help mitigate the uncertainties that may arise in the absence of a due diligence review. In particular, specific indemnity provisions regarding legacy liabilities, the existence of licenses required for the company’s business operations, environmental obligations, or tax penalties are crucial for safeguarding the buyer’s position.
Moreover, the buyer should expressly regulate the seller’s duty to disclose within the agreement. Although the TCO does not impose a general obligation of disclosure on the seller, such an obligation may be contractually agreed. Including a provision requiring the seller to disclose any information, documents, or circumstances that may affect the buyer’s decision helps prevent future disputes.
Finally, in transactions where no review is conducted, the buyer must continue to exercise careful oversight after the acquisition and, pursuant to Article 223 of the TCO, notify the seller of any defects as soon as possible in the ordinary course of business. Otherwise, except in cases of gross negligence on the part of the seller, the buyer is deemed to have accepted the asset as is and risks losing its rights arising from such defects.
In conclusion, although acquisitions conducted without due diligence involve significant risks, the buyer can manage these risks to a large extent through contractual safeguards. At this stage, provisions on warranties, indemnity clauses, conditions precedent, and disclosure obligations are not merely contractual details but fundamental elements ensuring transaction security.