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What is due diligence?

Have you been talking about software company acquisitions, and the phrase "due diligence" came up? Are you wondering just what "due diligence" means?

Most legal definitions of due diligence say something like "due diligence is a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depends on the relative facts of the special case." In other words, to a potential acquirer, due diligence means "making sure you get what you think you are paying for."

Practically speaking, for any company acquisition, due diligence would include fully understanding all of the obligations of the company: debts, pending and potential lawsuits, leases, warranties, long-term customer agreements, employment contracts, distribution agreements, compensation arrangements, and so forth. Furthermore, for software company investments and acquisitions, due diligence also includes:

  • Understanding any ownership issues relative to the software. For example, did the company really develop the software themselves, or if they bought the technology, were the rights conveyed properly? Does a former contract programmer have a potential claim on the technology?

  • Does the software depend on a library for which royalties must be paid, or for which the owner might withdraw the rights? Might the software infringe someone else's patents, perhaps inadvertently? Did all employees execute confidentiality and non-compete agreements? Were copyrights and trademarks registered properly?

  • Will there be any special issues in maintaining the software? In integrating the software with the acquirer's existing products?

  • Will the software be made obsolete quickly by hardware, software, market or competitive changes?

"Due Diligence" typically takes the form of the acquirer's list of several hundred questions and/or requests for copies of documents that you, as the potential seller, must answer for the seller on or before some date.

Companies Mediation

mediation a form of alternative dispute resolution, whereby parties attempt to resolve their differences without going to court. Some court systems utilize voluntary or compulsory mediation, especially in family matters. Mediators are trained in the necessary skills and some are lawyers and some are not. Often the result of a mediation will be encapsulated in legal form to prevent the deal being unstitched. It is used in disputes as varied as child custody and international disputes.

The attempt to settle a legal dispute through active participation of a third party (mediator) who works to find points of agreement and make those in conflict agree on a fair result. Mediation differs from arbitration in which the third party (arbitrator) acts much like a judge but in an out-of-court less formal setting but does not actively participate in the discussion. Mediation has become very common in trying to resolve domestic relations disputes (divorce, child custody, visitation), and is often ordered by the judge in such cases.

Mediation also has become more frequent in contract and civil damage cases. There are professional mediators, or lawyers who do some mediation for substantial fees, but the financial cost is less than fighting the matter out in court and may achieve early settlement and an end to anxiety. However, mediation does not always result in a settlement.