The phrase “Due diligence” sounds complicated but in reality, it is simply the process of doing your homework before you make a major commitment, either on a business or personal level. Due diligence can be as simple as just asking the proper questions and making sure that a situation is “not too good to be true.” This idea of checking into the facts behind a transaction to ensure it is fairly valued is the source of the old adage, “let the buyer beware.”[i]
Most of us practice due diligence even though we may not think of it that way. For example, most people these days will do some research on the internet before making a major purchase, like buying a car. We scan websites to get an idea of a fair price, the dealer cost, and any low interest financing deals so we can be prepared to counter the ”rock bottom price” offered by the car salesman. In this process, we are doing our “due diligence” to get the best deal possible.
Due Diligence as a Defense
There are important legal uses of the term “due diligence.” It began as a term describing a legal defense in the Securities Act of 1933. Its purpose in that Act was to give broker-dealers a defense against an accusation that they had not disclosed information in a securities transaction. If they had performed “due diligence” in researching the company, they could not be held liable for information they did not discover.[ii] … Continue reading