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. 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.

Origin of the term “Due Diligence”

The term “Due Diligence” first came into common use as a result of the Securities Act of 1933.

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.

So as 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 was not discovered in the process of that investigation.

The entire broker-dealer community quickly institutionalised, as a standard practice, the conducting of due diligence investigations of any stock offerings in which they involved themselves.

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. The relevant areas of concern may include the financial, legal, labour, tax, IT, 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 labour matters, immigration, and international transactions.