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Avoid investment fraud with essential due diligence

11 January 2022 #Commercial


It is well known that a high percentage of transactions or investments fail to meet their expected targets. Case studies suggest that this can most often be mitigated by a proper due diligence exercise.

The importance of due diligence

For a buyer or an investor, due diligence offers the chance to truly understand the ins and outs of their potential target, and the associated risks and pitfalls that may accompany ownership or investment. For a seller or founder, this critical evaluation of its business is a crucial opportunity to identify and make good any issues prior to buyer/investment involvement and will help deliver a smooth path to completion.

There are great risks of running an insufficient or inaccurate due diligence, our experience confirms that this often remains an overlooked, or underestimated, part of the investment, or transaction, timeline.

The Theranos founder conviction

Recently, the media has been dominated by the conviction, by a Californian jury, of four counts of fraud by Elizabeth Holmes founder of Theranos. The meteoric rise and capitulation of Theranos, the purported life-changing health technology company, makes for a fascinating case study.

Founded by Ms Holmes in 2003, the company claimed to have created blood-test technology that required only a very small sample to provide automated and rapid results for conditions such as cancer and diabetes. By 2015 the technology’s validity was under huge scrutiny from medical researchers and investigative journalists.

Exposes were published and by 2018 the company had dissolved. By this point however, Ms Holmes had already raised $700 million from investors, including some very high-profile and influential individuals. Investor fraud was alleged, and, at the beginning of this year, Ms Holmes was convicted.

Whilst the fraud charges relate to the information provided to the Investors, and are not a reflection of the investors themselves, this remains a good reminder of the importance of robust financial and legal due diligence.

How to conduct due diligence?

HIt is important to have the support of an experienced advisors in this area, and together go through the due diligence checklist

Three types of due diligence include:

  • Legal due diligence -lawyers will check the legal contracts that the business has legal title to sell, ownership of all the assets and that regulatory and litigation issues are fully addressed
  • Financial due diligence - checking the numbers and making sure consistency and no hidden financial issues
  • Commercial due diligence - finding out the business' place in the marketplace, checking competitors and the regulatory environment
    Whilst by no means a guarantee of protection against criminal actions, any ability to mitigate the risks associated with investing into a business should have a high value attributed to it.

Due diligence is most often the key to reassuring the buyer/investor that financial, operational and legal processes have been complied with and whether there are any areas which need to be addressed or which may impact their decision to proceed. If you are involved in a merger or acquisition, contact our commercial lawyers.

Clarkslegal, specialist Commercial lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Commercial matter please contact Clarkslegal's commercial team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Jacob Montague

Jacob Montague
Solicitor

E: jmontague@clarkslegal.com
T: 0118 960 4613
M: 0790 9964 585

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Commercial team
+44 (0)118 958 5321