Meaning
Systematic investigation of the ownership structure ensures that the rights being sold are valid and unencumbered. Conducting equity due diligence involves a thorough review of capitalization tables, share issuance records and voting agreements. This procedure protects the interests of both the purchaser and the seller by uncovering potential liabilities before a deal closes.
Verification Protocol
Reviewing the sequence of share transfers confirms the legitimacy of the current holding. During equity due diligence, the investigator examines stock purchase agreements and board minutes to verify that every issuance followed proper corporate governance. This scrutiny ensures that the cap table is accurate and free from clerical errors.
It also involves verifying that all previous shareholders waived their preemptive rights before the new securities were issued.
Risk Identification
Potential claims from former employees or forgotten advisors represent a significant threat to a transaction. The process of equity due diligence highlights these risks by searching for missing signatures, unexecuted options or incomplete board minutes. Identifying these issues early allows the parties to resolve them through indemnities.
Transaction Validation
Final approval of a merger or acquisition relies heavily on the technical findings of the investigative team. When equity due diligence is complete, the price is set. The thoroughness of this review determines the level of post closing protection required by the buyer.
