Monty Python may not have expected the Spanish Inquisition but a more inquisitive approach to an acquisition can be business saving.
The scenario
A successful overseas company acquired a majority of shares in a small UK leisure related company (the Target). The earn-out was however far from small. The Target only had a small number of contracts for the provision of services. The Target only had a small number of receivables, each of which was business critical and comprised a large element of the purchase price. The acquisition due diligence was conducted by an experienced firm. What could go wrong?
It went wrong…
Very wrong.
- The contracts that were business critical were found to be fake.
- The receivables were found to be non-existent.
- The third party verifications of the existence of the contracts were fake.
- The third party verifications of the receivables under the contracts were fake.
- Domain names with similar text to a real entity were set up by the vendor for the purposes of the verification process (as an illustration (and these were not the real names) where the real domain name would be www.wedlakebell.com, the fake domain name and email would be www.wedlake-bell.com or similar).
- The bank statements of the Target were forged to show a fantastical receivables record.
What did we do?
We applied to court for emergency freezing orders against the sellers and launched various claims of fraud to recover the loss suffered by the buyer.
What are the simple lessons?
1. If the circumstances dictate, be more like the Spanish Inquisition. When acquiring shares or assets, be inquisitive. Don’t always accept the word of the vendor and do not ask the vendor to advise of the contact details of the third party who can verify: do this independently. Test the data. Test the vendor. Be thorough and don’t be afraid to ask questions.
2. Fairly rudimentary checks can demonstrate whether there are any concerns about the validity / existence of contracts, email addresses and indeed people.
3. Ensure you have engaged an experienced due diligence agent with knowledge of the relevant jurisdiction and industry.
4. Demand direct access to any third party for the purposes of verification (do not rely on the vendor to provide access to a third party contractor).
5. It is easy for a fraudster to intercept emails – so pick up the telephone to the third party. Yes, an email produces a convenient paper trail, but that is less than worthless if it is not correct.
6. Consider the structure of the completion proceeds – deferred consideration gives further time for areas of concern to be flushed out.
Simple message, simple steps. It is much easier to get it right pre-acquisition than to piece it all together after the event and then chase the money.
For further information please contact Edward Starling at estarling@wedlakebell.com.