In the modern world of business, due diligence is a detailed process of verifying the subject of a transaction, conducted before concluding it. Its primary goal is to identify all possible risks—especially in legal, financial, and operational areas. Such analysis allows investors to gain a complete picture of the company's situation and make informed decisions, reducing the risk of adverse surprises after the transaction is finalized.
The concept of "due diligence"
The concept of due diligence originates from the law and contractual practices of Anglo-Saxon countries, where it is understood to mean what Polish law means by "due diligence." A key background for its development was the principle of caveat emptor ("let the buyer beware"), which requires the buyer to thoroughly examine the purchased item because the seller is generally not liable for its defects.
Today, due diligence is a well-established practice in business sale and merger or acquisition (M&A) transactions, both in asset deals and share deal models. This process involves conducting an examination and review of a company's operations—conducted with due diligence required in professional transactions, and, as needed, with the participation of specialists from various fields—in order to clarify various legal, organizational, financial, etc. issues, as well as risks related to the condition of the company being transacted. [1] The goal is to identify potential risks and accurately value the business, which cannot be determined solely on the basis of publicly available data.
Due diligence process
Due diligence is a multi-stage process that begins with initial discussions between the parties to the transaction to get to know each other and assess interest, without access to confidential data.
The next step is to sign a confidentiality agreement (letter of intent), which allows the seller to share detailed information about the company, the disclosure of which to unauthorized persons could expose the company to irreversible losses.
The actual analysis is typically conducted by external experts (lawyers, financial and tax advisors) and includes document analysis, answers to questions contained in checklists, and a review of materials stored in a secure online space ( virtual data room) . Some data, such as technological data, cannot be transferred electronically, and on-site analysis may be necessary.
Another important element is conversations with management and key employees, as well as verification of information in independent sources.
The due diligence process culminates in the preparation of a final report by the potential buyer's advisors. This report summarizes key information that forms the basis for determining the company's value, including an assessment of risks, development opportunities, and the reliability and completeness of the data provided.
Based on the report, the investor makes further decisions—often without independently analyzing the materials. Therefore, the individuals assigned to prepare the report bear significant responsibility. They are tasked not only with researching the entity being transacted but also with interpreting the data, including its risks.
The report is prepared before the actual negotiation phase begins, which is often time-consuming and involves multiple stages. Therefore, the document may need to be updated.
Based on the collected data, negotiations are conducted, which may result in the signing of a sales agreement and closing of the transaction, involving the transfer of shares or ownership of the company to the buyer.
Due diligence after closing – importance, warranty and evidentiary function
For an entity planning to take over an enterprise, the information disclosed during the acquisition constitutes the basis for:
- enterprise valuation,
- identification of risk areas,
- clarifying the provisions of the contract, especially in terms of guarantees and security.
After signing the business sale agreement (closing), due diligence changes its nature – it becomes a tool for securing the buyer's warranty rights. Pursuant to Article 563 §§ 1 and 2 of the Civil Code, the buyer is obligated to thoroughly inspect the purchased property and immediately inform the seller of any defects. Failure to do so or conducting a superficial inspection may result in the loss of warranty rights.
In the case of legal defects, the obligation to notify the seller only exists in specific situations, for example, when a third party files a claim against the company. At the same time, if the buyer conducted an inspection before closing and was aware of the existing defects (e.g., legal or technical defects), the seller may be released from liability, in accordance with Article 557 § 1 of the Civil Code. However, conducting an inspection alone does not automatically exclude warranty coverage – the exemption applies only to defects known to the buyer at the time of conclusion of the contract.
Citing an error
The Polish legal system does not provide buyers with adequate protection if they later discover circumstances that negatively impact the value of the enterprise [2] . However, in certain cases, courts do allow the possibility of invoking an error under Article 84 of the Civil Code.
While it may seem that the party that fails to conduct due diligence retains more rights in the event of defects, the actual benefit is to those who identify problems early and adjust the transaction terms accordingly. Knowing the risks not only allows for a better valuation of the contract but also for preparing for potential difficulties – including procedural and financial ones.
Moreover, due diligence serves as evidence – the documentation collected during the investigation allows us to demonstrate the state of the company at the time of negotiations and conclusion of the contract, and, if necessary, to reveal any disloyal actions of the seller.
Literature:
The importance and function of due diligence in the sale of a business, Dr. Robert Lewandowski
W. Borysiak (ed.), Civil Code. Commentary, 33rd ed., 2024
M. Stec (ed.), Commercial Contract Law. The Private Law System. Volume 5A, 2020
[1] SA in Katowice of 7 June 2017, I ACa 1131/16
[2] T. Czech, Error as to the reputation of the acquired joint-stock company. Commentary on the judgment of the Supreme Court of 29 October 2010, I CSK 595/09, Glosa 2013, no. 1, pp. 20-24.
This article is for informational purposes only and does not constitute legal advice.
The law is current as of July 21, 2025.
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