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Encyclopedia > Due diligence

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.[1] In tort law, the standard of care is the degree of prudence and caution required of an individual who is under a duty of care. ... Acquisition redirects here. ...


Origin of the term "Due Diligence"

The term "Due Diligence" first came into common use as a result of the US Securities Act of 1933. // Congress enacted the Securities Act of 1933 (the “1933 Act,” the Truth in Securities Act or the Federal Securities Act) 48 Stat. ...

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. A broker-dealer is an institution that has registered with the SEC in order to have the ability to buy and sell securities for customers as well as for its own account. ... Securities are tradeable interests representing financial value. ...

So 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 failed to be uncovered in the process of that investigation. The Court of Chancery, London, early 19th century This article is about the concept of equity in the jurisprudence of common law countries. ...

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

Due diligence in capstone refers to performing the needful amount of effort, as in 'doing diligence'. The capstone is the highest rock or mount of a structure. ...

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, 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 labor matters, immigration, and international transactions.[2] In economics, a business (also called firm or enterprise) is a legally recognized organizational entity designed to provide goods and/or services to consumers or corporate entities such as governments, charities or other businesses. ...

Consider the somewhat related business terms of malfeasance and nonfeasance. The American Heritiage Dictionary defines these terms as such: malfeasance is misconduct or wrongdoing esp. by a public official. Nonfeasance as failure to perform an official duty or legal requirement. Furthermore the term misfeasance means to perform a duty or responsibility inadequately or poorly.

Due diligence for hedge funds

An insight in-detail review of a hedge fund's activity in order to ensure ultimately that the fund is in compliance with its prospectus. It is a roadmap for a potential investor in understanding whether a specific fund will meet his/her investment horizon, Risk tolerance and investment strategy. [3] and for an existing investor; a roadmap as to whether a fund has performed the way it claimed it would. In a non exhaustive list the due diligence will look into: The term hedge fund dates back to the first such fund founded by Alfred Winslow Jones in 1949. ... A hedge fund is a private investment fund that charges a performance fee and a management fee. ...

  • A Fund snapshot
  • Disclosed Investment Strategy
  • Historical returns
  • Assets under Management (A copy of the funds portfolio from the custodian is usually requested
  • Audited Financial statements if the Fund is SEC regulated
  • Funds terms and Details
  • Regulatory registration if any.
  • Risk Factors
  • Valuation

Every investor is going to have different investment horizons and risk tolerance, as well as a strategy preference. It thus follows that there is no "best" hedge fund, but a fund that closer matches investors preferences. An investor should almost always: [4] A custodian is a person that cleans and maintains large buildings. ... SEC is a TLA which can refer to: In general context, an abbreviation for second. ...

  • Request consultation from a professional,
  • Read the funds prospectus or offering memorandum
  • Understand how a fund's assets are valued
  • Understand how fees are charged
  • Understand any limitations towards the redemption of shares
  • Research the backgrounds of hedge fund managers

As a concept in civil litigation

Due diligence in civil litigation (also known as due care) is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party. Failure to make this effort may be considered negligence. This is conceptually distinct from investigative due diligence, involving a general obligation to meet a standard of behaviour. Quite often a contract will specify that a party is required to provide due diligence. Negligence is a legal concept usually used to achieve compensation for injuries (not accidents). ... A contract is a legally binding exchange of promises or agreement between parties that the law will enforce. ...

It is not correct to confuse due care and due diligence. Due care should be spelt out in full as duty of care. It is a legal concept by itself. Duty of care may be very wide, far reaching, and also a grey area subject to argument. Basically, parents owe their infant a duty of care in everything. As the infant grows to be a child, to be an adolescent, an adult, the duty of care and its scope become less and less. Fundamentally, a duty of care is a moral duty to care. When legal acknowledgement is extended to this moral obligation, then this duty becomes a legal requirement. Inversely, the legislature sets the duty in the statute. Then we consider this duty as legal and amoral ["a-", without, not having to consider the moral aspect].

When read carefully, care is the passive mode; diligence is the active mode.

First the duty of care (due care) arises, making it a requirement. In order to fulfill this duty, due diligence is exercised. The flow may be continuous, but these two concepts are different. When due diligence is called for, then there will be a set of demands to be complied with, depending on the context. For example, before a surgery, what should be done and who should be present in the theatre? After the surgery, what must be done to the patient, equipment, facilities?

As a matter of independent inquiry, whether by a court of law or professional body, the line of investigation is: (1) Is there a duty of care? How is this duty of care imputed? (Previous case law, statute, new case) (2) If the duty of care exists, what are the applicable standards? In other words, what due diligence (and the components that go to make it a comprehensive due diligence) is required?

The last issue is always considered in light of specific circumstances of the case. If brain surgery is involved, the standards are those required of competent brain surgeons. If deep sea welding is involved, the standards are those required of competent deep sea welders. In an auction of a Picasso, due diligence standard must be comparable with an international auctioneer to authenticate an art object. In the sale of a diamond, due diligence may be necessary from human rights and political aspects. As such, expert opinions are often considered.

For supplier quality engineering

Due diligence is a term used for a number of concepts involving either the performance of source inspection or source surveillance, or the performance of quality duties such as PVA (Process Validation Assessment) or System Audits with a certain standard of care.

Due diligence in Supplier Quality (also known as due care) is the effort made by an SQE professional to validate conformance of product provided by the seller to the purchaser. Failure to make this effort may be considered negligence. This is conceptually distinct from investigative due diligence, involving a general obligation to identify true, root cause for non-compliance to meet a standard or contract requirement.

As a criminal defense

In criminal law, due diligence is the only available defense to a crime that is one of strict liability (i.e. a crime that only requires an actus reus and no mens rea). Once the criminal offense is proven, the defendant must prove on the balance of probabilities that they did everything possible to prevent the act from happening. It is not enough that they took the normal standard of care in their industry - they must show that they took every reasonable precaution. The term criminal law, sometimes called penal law, refers to any of various bodies of rules in different jurisdictions whose common characteristic is the potential for unique and often severe impositions as punishment for failure to comply. ... Strict liability is a legal doctrine in tort law that makes a person responsible for the damages caused by their actions regardless of culpability (fault) or mens rea. ... The actus reus — sometimes called the external element of a crime — is the Latin term for the guilty act which, when proved beyond a reasonable doubt in combination with the mens rea, i. ... The mens rea is the Latin term for guilty mind used in the criminal law. ... Burden of proof is the obligation to prove allegations which are presented in a legal action. ...

Environmental due diligence

Environmental due diligence during commercial real estate transactions can include Phase I and Phase II Environmental site assessments. Such assessments are often undertaken in the United States to avoid liability under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as the "Superfund law". Any piece of real estate can be the subject of a Phase I ESA. A Phase I Environmental Site Assessment is a report prepared for a real estate holding which identifies potential or existing environmental contamination liabilities. ... Checking the status of a cleanup site Superfund is the common name for the United States environmental law that is officially known as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. §§ 9601 to 9675, which was enacted by the United States Congress on December 11...

Information security due diligence

Information security due diligence is often undertaken during the information technology procurement process to ensure risks are known and managed, and during mergers and acquisitions due diligence reviews to identify and assess the business risks. Information and communication technology spending in 2005 Information Technology (IT), as defined by the Information Technology Association of America (ITAA), is the study, design, development, implementation, support or management of computer-based information systems, particularly software applications and computer hardware. ... Look up Procurement in Wiktionary, the free dictionary. ... Acquisition redirects here. ...

See also

Know Your Customer (KYC) is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. ... Public Liability is part of the law of torts which focuses on civil wrongs. ...


  1. ^ Hoskisson, Hitt & Ireland, 2004, Competing for Advantage, p.251
  2. ^ Gary M. Lawrence, Due Diligence in Business Transactions, ( Law Journal Press 1994, updated as needed). ISBN 9781588520661.
  3. ^ hedge Fund.net
  4. ^ SEC
American Lawyer Media or ALM, publishes magazines and newspapers targeting primarily the legal industry, but also business, real estate and finance. ...

  Results from FactBites:
What is Due Diligence - Why is Due Diligence Conducted - Due Diligence Basics - Astute Diligence - Chicago, Illinois (1030 words)
Thorough detailed due diligence is typically conducted after the parties involved in a proposed transaction have agreed in principle that a deal should be pursued and after a preliminary understanding has been reached, but prior to the signing of a binding contract.
Due diligence costs are based on the scope and duration of the effort, which in turn are dependent on the complexity of the target business and other factors.
Due diligence may also reduce legal issues by alerting a purchaser or investor to potential liabilities that can be mitigated in various ways prior to closing the transaction.
Due diligence - Wikipedia, the free encyclopedia (511 words)
Due diligence (also known as due care) is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party or himself.
In finance, due diligence may refer to the process of research and analysis that takes place in advance of an investment, takeover, or business partnership.
Due diligence can also refer to the ongoing activities of pension or investment fund managers in keeping track of the operations, solvency, and trustworthiness of the managers of a [corporation] in which their fund is invested, or those of the managers of an acquiring corporation toward a target corporation.
  More results at FactBites »



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