Due Diligence in Carve-Out Operations: Identify Hidden Risks Before Divesting

In the business world, carve-out operations are becoming increasingly relevant as a divestiture strategy.

A carve-out involves the sale or separation of a business unit, division, or subsidiary from a parent company. While this strategy can be advantageous for both parties, it is essential to carry out thorough due diligence to identify hidden risks before proceeding with the divestiture.

Due diligence is understood as the audit or legal review process that entails an analysis to evaluate all the legal aspects of a business transaction. It is conducted at the corporate, contractual, tax, administrative, labor, intellectual property, data protection, and environmental levels, among others. The scope of such legal review will depend on the business of the company being acquired.

In the context of a carve-out process, due diligence not only focuses on the tangible assets of the unit to be sold but also on hidden liabilities, contractual relationships, and any other factors that may influence the transaction.

Importance of the Due Diligence Process in Carve-Outs

Identifying operational risks in advance allows buyers to make informed decisions. Such risks are extraordinarily diverse, ranging from legal problems, such as pending litigation or extrajudicial claims, to operational issues, such as excessive reliance on shared resources with the parent company.

It is also essential to determine the scope of the transaction and clearly understand which assets and liabilities are being transferred and which are not.

Ensuring the continuity of operations is crucial. Due diligence helps assess whether the business unit has the necessary resources to operate independently or whether it will depend on the parent company after the carve-out.

Tax implications can be complex in a carve-out. A detailed analysis of tax obligations and regulatory requirements can prevent surprises after the transaction.

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Recommendations for Effective Due Diligence in Carve-Outs

Establish a multidisciplinary team: It is essential to have legal, financial, tax, and operational experts to cover all relevant areas.

Develop a detailed due diligence plan: The plan should include all key areas of review, from financial to technological and human resources.

Maintain clear communication: Good communication between the buyer and seller can facilitate the identification and resolution of potential problems.

In summary, the due diligence process in a carve-out is a critical tool to mitigate risks and ensure a successful transaction. By identifying potential issues before divestiture, both the buyer and seller can ensure that the transaction is carried out smoothly and without setbacks.

To expand this study, we propose reading several rulings on purchase and sale processes where a legal review process has occurred: Barcelona Provincial Court (Eleventh Section, Case No. 160/2008, Ordinary Trial No. 494/2006), Supreme Court, Civil Chamber, Judgment No. 505/2020, dated October 5, 2020.

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