Maximising value: The strategic role of vendor due diligence in controlled auction sales

Introduction

A growing trend in controlled auction sales in Singapore to prepare a company for sale is the conduct of a strategic due diligence exercise on the target company prior to sale, known as vendor due diligence (VDD). This allows the vendor to identify and mitigate potential risks and exposures that could impact the deal, and can also reduce the scope of buyer due diligence (BDD) significantly.

The vendor would commission third-party advisors to issue a vendor due diligence report (VDDR) highlighting issues that would be material to a prospective buyer. This would require the vendor's advisors to review various aspects of the target company's business, covering areas such as financial, tax and legal due diligence, and, depending on the industry sector, specialist matters such as data protection or insurance. The VDDR is then shared with prospective buyer(s) who will assess if they are reasonably satisfied with its scope, to determine the extent of BDD required to be undertaken by their own third-party advisors.

Use of VDD in controlled auction sales in Singapore

In Singapore, we have seen an increase in the use of legal VDDRs in the context of controlled auction sale processes. The legal VDDRs are typically provided to prospective buyers on a non-reliance basis. Thereafter, the winning bidder of the auction sale may be provided with reliance on the legal VDDRs, prior to or simultaneous with the signing of the sale and purchase agreement. Such reliance is typically provided pursuant to the terms and conditions of reliance letters issued by the relevant advisors and will usually include monetary caps on the advisers' liability and other customary limitation of liability provisions.

Merit and considerations

VDD offers numerous advantages that help streamline the sale process and manage expectations for both vendors and prospective buyers / bidders. A key benefit of VDD is that it allows vendors to address the common issue of initial inflated bids from bidders pitching "blind" - i.e. bidders offering high bids to gain exclusivity, only to later lower their bid after uncovering issues from conducting their own BDD. With VDD, bidders have early access to information on key areas identified in the VDDR, enabling them to provide more realistic bids that are less likely to vary significantly from the final sale price - this minimises the risk of vendor frustration and re-negotiating the deal down the line.

Furthermore, VDD:

1. enables the vendor to expedite the sale process, as confirmatory due diligence conducted by bidders and/or their advisors will likely require less time and incur less costs for management, as compared to a full BDD review conducted by multiple bidders;
2. can result in a higher transaction value, as it provides the vendor with an opportunity to identify and mitigate any risks and liabilities that could be perceived by bidders as weaknesses. For example, any unresolved matters uncovered during VDD, such as pending litigation, can be factored into the bid price. This reduces the risk of significant price adjustments later in the sale process; and
3. assists the vendor and its advisers in the preparation and negotiation of transaction documents - although VDDRs typically focus on factual reporting instead of advising on how to rectify or address the issues uncovered (which are typically included as recommendations in a buyer's due diligence report), it nonetheless increases the efficiency of negotiations as it allows:
   1. the bidder's advisors to propose recommendations in respect of the issue(s) identified, e.g. to address material risks and liabilities by way of representations and warranties or indemnities; and
   2. the vendor's advisors to advise the vendor on the protections that they foresee will be requested to be incorporated in transaction documents by the bidder and/or its advisers in respect of the identified issues.

Conclusion

While the VDD process increases the preparation time spent by vendor's management prior to the start of the sale process and also requires the vendor to bear upfront costs covering the fees of its external advisers, such an initial investment in both time and cost may be worthwhile as VDD (a) streamlines the sale process by providing bidders with the opportunity to make early go/no-go decisions based on their review of material issues identified in the VDDRs, and (b) offers potential cost savings overall by consolidating data analysis into a single comprehensive review. This proactive approach ultimately benefits both the vendor and prospective buyers, as the VDDR provides bidders with an insight into the condition of the target company's operations and business which results in the offer of more realistic bids.