Module 1 · Chapter 1
What Due Diligence Is For
Before a buyer agrees to buy a company, its lawyers find out what is inside it. This chapter explains why, and the four things a buyer can do with each problem they find.
In this chapter
- Why a buyer investigates a company before it signs
- The four things a buyer can do with each problem it finds
- What a red-flag report is, and what the junior lawyer does
1.1Due diligence in one paragraph
Before a company buys another, its lawyers read that company's documents, ask the seller questions and search public registers. That investigation is due diligence, or DD, and its report can change the deal before it is signed. This workbook follows one review on one deal. You are a junior lawyer at Blackwood & Steel LLP, the law firm acting for the buyer.
Key point
Diligence is a tool for decisions. Each problem it finds must change something: the price, the contract, the timetable, or the buyer's decision to go ahead.
1.2Why a buyer has to look for itself
When you buy shares in a private company, the seller generally has no duty to tell you what is wrong with it, and keeping quiet is usually not treated as a false statement. The rule is called caveat emptor (“let the buyer beware”). So the buyer protects itself in two ways. It investigates before signing, and it takes promises in the contract, the share purchase agreement (SPA).
The SPA holds two kinds of promise. Warranties are the seller's statements that facts about the company are true, and the buyer can claim if one is false. Indemnities are promises to pay for a named problem, euro for euro, if it ever costs the buyer money.
A warranty is no reason to skip the investigation. A warranty claim comes after the deal, within caps and time limits. And if the seller told the buyer about a problem in writing before signing (a disclosure), the buyer usually cannot claim for it at all. So the buyer is better off finding the problem first, while it can still change the deal.
1.3The deal in this workbook
The buyer is Atlas Payments Group plc, a payments group based in London. In 2026 it agreed to buy Solaris Digital Assets Europe Ltd for €42 million. Solaris is an Irish company that provides crypto-asset services. Ireland's financial regulator, the Central Bank of Ireland (CBI), supervises it.
Much of Solaris's value lies in that regulated status, so anything that troubles the regulator matters to the price. The seller is Meridian Fintech Ventures Ltd, and the deal was code-named Project Sunrise. Atlas's lawyers reviewed Solaris for ten weeks, and their report is on this site: the Sunrise DD report.
| Who's who | What they do |
|---|---|
| Atlas Payments Group plc (“Atlas”) | The buyer, and your firm's client. |
| Solaris Digital Assets Europe Ltd (“Solaris”) | The company being bought, often called the target. |
| Meridian Fintech Ventures Ltd (“Meridian”) | The seller. It owns all the shares in Solaris. |
| Blackwood & Steel LLP | Atlas's lawyers, and your firm. It runs the legal review and writes the report. |
| Marcus Feld | The partner at Blackwood & Steel responsible for the review. He signs the report. |
| Farrow & Kent | Meridian's lawyers. |
Each firm of lawyers acts for one side only, never for the deal as a whole.
1.4Four things a buyer can do with a finding
A finding is a fact the review turns up that matters to the deal. The buyer can price it, fix it, cover it in the contract or accept it. If none of those works, it can walk away. The Sunrise report puts the rule like this:
This is the bridge from diligence to drafting: every finding should land somewhere — in the price, in the documents, in a fix, or in a conscious decision to accept it.Read in the DD Report →
“A conscious decision” is the phrase that matters. Accepting a risk is a choice the client makes with the facts in front of it. A finding that is reported and then goes nowhere is the one wrong answer.
| Response | The Sunrise finding | What happened |
|---|---|---|
| Price it | Two senior managers are due bonuses of €350,000 in total if Solaris changes hands | Counted into the price (report §6.2) |
| Fix it | A former contractor never signed over his rights in code Solaris still uses | A signed transfer of the rights, before signing (§7.2) |
| Cover it | A CBI letter about past failures in Solaris's anti-money-laundering checks | An indemnity from Meridian of up to €8 million (§5.1) |
| Accept it | Five customers bring in 62% of revenue | Already in Atlas's own model, and accepted (§4.2) |
Nobody walked away from Sunrise, but buyers sometimes do. A review that ends with the buyer saying no has done its job.
1.5What diligence can and cannot do
New lawyers often expect diligence to prove that nothing is wrong. It cannot, and its limits shape the job:
- It is not an audit. Lawyers read what the seller provides and ask questions. Nobody recounts the money.
- It has agreed limits. The client sets the review's scope and how big a problem must be to be reported.
- It is not insurance. It reports only what the documents showed, as at a fixed date.
- It does not take the seller's word. The seller chooses what to show, so the buyer checks what matters.
The size below which a problem usually goes unreported is the materiality threshold. On Sunrise it was €250,000 (report §2.2). A smaller problem is still reported if it shows a pattern or touches the regulator. Chapter 3 shows how a team sets these limits.
Watch out
“The seller confirmed it in Q&A, so we can rely on it.” A Q&A answer is a written reply from the seller's side, often drafted fast and rarely backed by a warranty. On Sunrise, the first answer about letters from regulators said there was “no material correspondence”, and it had to be corrected once the CBI letter appeared (report Appendix B, Q-087). Answers guide the review, but the documents decide.
1.6Who investigates what
On a real deal, diligence is several reviews running side by side, each done by a different profession:
- Legal DD. Lawyers review ownership, contracts, regulation, staff, data and disputes.
- Financial and tax DD. Accountants test the figures, the debts and the tax position.
- Commercial and technical DD. The buyer's own people, or specialists, test the market and the technology.
The reviews depend on each other. A right to end a customer contract looks routine until the commercial team says that customer brings in nearly a third of the revenue. So before you rate a legal finding that turns on a number, ask the people who own that number.
In vendor due diligence (VDD), the seller pays for a report on its own company, often to run a sale with several bidders. Bidders read it and then check only what it leaves open, and the winner usually gets a reliance letter letting it claim against the authors (Chapter 2).
1.7Where diligence sits in the deal
Diligence runs between agreeing a deal in outline and signing it. Before it starts, the buyer signs a confidentiality agreement (NDA), promising not to use or pass on what it reads. The parties also agree non-binding heads of terms, which record the intended price and main terms.
| Stage | What happens | On Sunrise |
|---|---|---|
| 1. Confidentiality agreement | The buyer promises to keep the seller's information secret | Signed before Atlas saw any documents |
| 2. Heads of terms | The parties write down the price and main terms, without binding themselves | A price of €42 million |
| 3. Due diligence | The buyer's advisers review the company and report | Ten weeks of review, then the report |
| 4. Signing | Both sides sign the SPA, which now reflects the findings | The SPA carried the indemnity and the other protections |
| 5. Completion | The shares and the money change hands | Only after the CBI approves Atlas as the new owner |
The report must arrive before signing, because its advice can change the deal only while the buyer is still free to walk away. The time is also short. A seller will not allow an open-ended examination, so the team spends its hours where the risk is.
1.8What a red-flag report looks like
The Sunrise report is a red-flag report, and it says so in its first paragraph. The other kind, a full-scope report, describes each area in detail. Some lenders and regulators still ask for one, but deal teams usually want decisions rather than description.
This is a red-flag report: it describes only findings that in our view could affect the price, require protection in the transaction documents, require action before or after completion, or delay or prevent completion. It is not a summary of every document reviewed.Read in the DD Report →
Each test points to a response: price it, cover it, fix it, or plan the timetable around it. The report then gives its overall view (§1.2) and lists the problems by rating, as Appendix C defines them. It also says what the team did not find (§12.2), because a list of problems means little without it.
1.9Your job
Diligence is the part of a deal where junior lawyers do the most important work. The partner agrees the scope with the client and signs the report. Juniors read the documents, keep the list of findings, chase incomplete answers and check every late upload.
On Sunrise, the CBI letter appeared in the data room, the online store of Solaris's documents, six weeks into the review. It was found on a second read of the compliance folder, which everyone else thought was finished (report Appendix A). Chapter 4 tells the story.
- Log every finding with its document reference, its rating and the response you suggest.
- Check each answer from the seller against the documents.
- Check every late upload, even in a folder you have already reviewed.
Key takeaways
- A seller of shares need not reveal problems, so the buyer must look for itself.
- Every finding is priced, fixed, covered in the SPA, or knowingly accepted.
- Diligence reviews what the seller provides, within an agreed scope and materiality threshold.
- A seller's answer guides the review, but the documents decide.
- The report must arrive before signing, while the buyer can still change the deal.