Due diligence is the careful investigation a buyer conducts before purchasing a business or shares. The goal: to obtain a complete picture of what you are buying, identify risks, and align the price and terms accordingly.
What do you investigate? A thorough due diligence investigation covers several areas:
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Legal: contracts, disputes, liabilities, intellectual property, compliance.
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Financial: annual accounts, cash flow, debt, receivables, inventory.
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Tax: outstanding tax assessments, tax positions, transfer pricing.
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Commercial: customers, suppliers, market position, non-compete obligations.
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Operational / IT / HR / ESG: systems, personnel, employment conditions, sustainability, environmental permits.
How deep do you go? That depends on the size and complexity of the deal, the time available, and the budget. In a large acquisition, you often conduct months of intensive investigation with specialized advisers. In a smaller transaction, a brief red-flag review may be sufficient. The scope is determined in consultation with the seller: which documents will you get in the data room, which questions may you ask, and whom may you speak to?
Why is it so important? A properly conducted due diligence investigation protects the buyer from surprises afterward. In principle, everything that has been sufficiently addressed during the investigation cannot later give rise to liability on the seller’s part. Conversely, the absence of due diligence, or due diligence performed poorly, can even lead to director liability if the acquisition fails and the director has acted negligently.
The legal core: duty to disclose versus duty to investigate
Under Dutch law, the starting point is clear: the seller’s duty to disclose generally prevails over the buyer’s duty to investigate. In other words, a seller who stays silent when they should have spoken cannot rely on the argument that the buyer should have searched better.[1]
Why does the duty to disclose carry more weight?
The Supreme Court of the Netherlands has repeatedly held that, in legal transactions, you may rely on what your counterparty says [2]. When entering into an agreement, you are not required to be suspicious by default. A failure to investigate will generally not have adverse consequences if the seller has breached its duty to disclose.[3]
The correction: contributory negligence (article 6:101 Dutch Civil Code)
Still, the duty to disclose is not a license for laziness. Article 6:101 DCC provides a corrective mechanism: if the buyer has also been negligent in its investigation, the court may reduce damages on the basis of contributory negligence. Even if the seller withheld information, a buyer who walks into the trap with eyes open bears part of the damage itself.[4]
Practical example: suppose a seller fails to disclose that an important customer is about to leave. The buyer does conduct due diligence, but does not ask about customer relationships and does not review the customer list. After the acquisition, the customer leaves and revenue collapses. The court holds that the seller breached its duty to disclose, but reduces damages by 30% because the buyer could easily have asked about the stability of the customer base.
Rules from case law: who has to do what?
The relationship between the duty to disclose and the duty to investigate can be summarized in a number of clear rules of thumb [5]:
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The duty to disclose and the duty to investigate coexist. The fact that the buyer should have investigated does not release the seller from its duty to disclose. Conversely, the fact that the seller must disclose does not mean the buyer may sit back and do nothing.
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You may rely on what the other party says. The duty to investigate does not go so far that you must verify everything. In general, you may assume that statements made by your counterparty are correct.[6]
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The duty to disclose carries more weight. The failure to investigate generally remains without adverse consequences if the counterparty breached its duty to disclose on those points.[7]
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Contributory negligence can correct the outcome. Even if the seller withheld information, the buyer may have to bear part of the damage if it failed to investigate properly.[8]
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Contractual arrangements prevail. The parties can contractually determine how they want to shape the duty to disclose and the duty to investigate. Due diligence and warranties are the main tools for this.
How to approach due diligence: step-by-step and practical tips
Step 1: Define the scope and make arrangements
Discuss with the seller what information you need and in what form. Prepare a due diligence protocol: which documents will be placed in the data room, which questions may be asked, whom may you speak to, and what is the timetable?
Tip: be specific and systematic. A vague request such as “provide all relevant information” is not helpful. Ask targeted questions about contracts, disputes, tax positions, personnel files, and so on.
Pitfall: do not go too broad or too narrow. Too broad costs unnecessary time and money; too narrow leaves critical risks undetected. Adjust the depth to the deal: in a strategic acquisition worth millions, you go deeper than in a small management buy-in.
Step 2: Conduct the investigation
Assemble a team of lawyers, accountants, tax advisers, and, if necessary, specialists (IT, HR, environmental). Work through the data room systematically, ask follow-up questions, and conduct interviews with management and key employees.
Tip: prepare a findings report with red flags, yellow flags, and green flags. Prioritize: not every risk is a deal-breaker.
Pitfall: do not blindly trust what is in the data room. Missing documents are often just as important as documents that are present. Ask follow-up questions if something is unclear.
Step 3: Translate the findings into the deal
Use the findings to adjust the price, negotiate warranties, agree indemnities, or even walk away from the deal.
Tip: record what you have investigated and what you found. That helps later if there is a dispute about what you did or did not know.
Pitfall: do not assume that due diligence is a guarantee. Even after thorough investigation, surprises can still emerge. That is why warranties and indemnities are a useful supplement.
When are warranties an alternative or a supplement?
In business, certainty matters. Warranties are concrete statements by the seller about the condition of the business, for example: “there are no pending disputes above €50,000.” If a warranty turns out to be inaccurate, the seller is liable, regardless of whether the buyer could have discovered it.
Warranties are especially useful in:
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Limited due diligence: if you have little time or access, you can cover risks with broad warranties.
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Specific risks: think of tax positions, environmental liability, or intellectual property that are difficult to investigate.
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Risk allocation: warranties explicitly shift the risk to the seller, which creates clarity.
Note: warranties do not replace due diligence. A seller will only give warranties for matters they themselves know and control. In addition, warranties are often capped in amount and time.
Case study: what happens if the seller withholds information and the buyer investigates only minimally?
Situation: BV Holding sells its subsidiary Productie BV to Koper BV. The data room contains annual accounts, contracts, and personnel files. Koper BV performs limited due diligence: the accountant reviews the numbers, and the lawyer skims the main contracts. No one asks about pending disputes.
After the acquisition, it turns out that Productie BV had been involved for months in a liability dispute with a customer, which ultimately costs €200,000. The seller knew about this, but did not disclose it. It was also not in the data room.
Legal analysis:
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Duty to disclose breached: the seller should have disclosed that a serious dispute was ongoing. Staying silent about such a material risk is contrary to the pre-contractual duty to disclose [9].
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Duty to investigate: the buyer could have asked about pending disputes. That is a standard due diligence question. By failing to do so, the buyer was partly negligent.
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Application of article 6:101 DCC: the court holds that the seller is liable for the damage, but reduces the compensation by 25% because of the buyer’s contributory negligence. The buyer therefore receives €150,000 in compensation.
Lesson learned: even when the seller is at fault, a buyer pays a price for poor investigation. Had the buyer explicitly asked about disputes and the seller then lied or withheld information, the contributory negligence deduction would likely have been lower or zero.
Checklist: what should you focus on in due diligence?
Use this checklist as a memory aid when setting up your investigation:
- Legal
- Are all key contracts available and valid?
- Are there any pending or threatened disputes?
- Are intellectual property rights properly documented?
- Are there compliance issues (GDPR, competition law, sanctions)?
- Financial
- Are the annual accounts correct and audited?
- What is the quality of receivables and inventory?
- Are there hidden debts or contingent liabilities?
- What is the position on cash flow and working capital?
- Tax
- Are tax returns up to date and accepted?
- Are there tax risks (transfer pricing, VAT, wage tax)?
- What tax positions exist (losses, reinvestment reserves)?
- Commercial
- Who are the main customers and how stable are those relationships?
- How dependent is the business on suppliers?
- What is the competitive position and market environment?
- Operational / HR / IT / ESG
- Are IT systems up to date and properly secured?
- What about personnel: contracts, collective labor agreements, pensions?
- Are there environmental or sustainability risks?
- Are permits and certifications in order?
- Process
- Has the scope been clearly agreed with the seller?
- Are all relevant documents in the data room?
- Have follow-up questions been asked and answered?
- Has a findings report been prepared and discussed?
Contractual arrangements: how do you regulate this?
The law provides a baseline, but in business you want certainty. That is why parties in acquisitions almost always make contractual arrangements. The main instruments are:
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Due diligence protocol: sets out which information the seller provides, in what form, within what time frame, and with what limitations (for example: no employee interviews without consent).
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Warranties and indemnities: the seller warrants certain facts (for example: “the financial statements give a true and fair view”) and indemnifies the buyer for losses if the warranty proves incorrect. Often subject to a cap and a threshold (franchise).
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Disclosure letter: the seller explains where warranties do not apply because certain facts were already disclosed during due diligence. This avoids later disputes about what the buyer did or did not know.
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Liability regime: the parties agree how long warranties apply, what the maximum liability is, and how claims are handled (for example via an escrow account).
By recording this contractually, you give clear shape to the duty to disclose and the duty to investigate and avoid legal uncertainty.
Takeaway: investigate carefully and disclose clearly
Due diligence is not a formality, but an essential tool for managing risk in an acquisition. The law is clear: the seller must disclose what the buyer reasonably needs to know, and the buyer may generally rely on that. But a buyer who closes its eyes runs the risk of bearing part of the damage itself through contributory negligence.
Practical advice:
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For buyers: always conduct proper due diligence, tailored to the size and complexity of the deal. Ask focused questions, follow up on unclear points, and record what you have investigated. Supplement the investigation with warranties and indemnities.
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For sellers: be transparent and proactive. Withholding information does not pay: it is likely to come out, and then you may be liable. By being open and setting up a proper data room, you build trust and avoid claims later.
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For both parties: make clear arrangements in the due diligence protocol and the purchase agreement. That way everyone knows where they stand and the chance of disputes is reduced.
Would you like to know more or need help with an acquisition? Then get in touch. An investment in good preparation more than pays for itself.
Sources
[1] District Court of The Hague, 14 September 2016, ECLI:NL:RBDHA:2016:11026, para. 4.7: “A failure to conduct one’s own investigation cannot in principle be held against the buyer by a seller who remained silent where they should have spoken.”
[2] Supreme Court, 15 November 1958, NJ 1958, 67 (Baris/Riezenkamp); Supreme Court, 21 January 1966, NJ 1966, 183 (Booy/Wisman): a person who wishes to conclude an agreement may in general rely on the accuracy of statements made by the counterparty.
[3] Supreme Court, 30 November 1973, NJ 1974, 97 (Van der Beek/Van Dartel); Supreme Court, 21 December 1990, NJ 1991, 251 (Van Geest/Nederlof); Supreme Court, 10 April 1998, NJ 1998, 666 (Offringa/Vinck and Rosberg); Supreme Court, 16 June 2000, NJ 2001, 559 (Jansen/Hamer).
[4] District Court of Amsterdam, 12 September 2012, ECLI:NL:RBAMS:2012:BY1169, paras. 5.7.1 to 5.7.8: breach of the buyer’s duty to investigate can, even where the seller breached its duty to disclose, lead to a reduction of the compensation obligation on the basis of contributory negligence (article 6:101 DCC).
[5] AG Opinion, 7 October 2016, ECLI:NL:PHR:2016:1004, paras. 2.7 to 2.14; AG Opinion, 24 March 2000, ECLI:NL:PHR:2000:AA237, para. 2.9.
[6]Supreme Court, 15 November 1958, NJ 1958, 67 (Baris/Riezenkamp); Supreme Court, 21 January 1966, NJ 1966, 183 (Booy/Wisman).
[7]Supreme Court, 10 April 1998, NJ 1998, 666 (Offringa/Vinck and Rosberg); Supreme Court, 16 June 2000, NJ 2001, 559 (Jansen/Hamer).
[8]Court of Appeal of The Hague, 20 April 2021, ECLI:NL:GHDHA:2021:914; District Court of Amsterdam, 18 July 2012, ECLI:NL:RBAMS:2012:BY0025.
[9]District Court of The Hague, 14 September 2016, ECLI:NL:RBDHA:2016:11026, para. 4.7; District Court of Amsterdam, 12 September 2012, ECLI:NL:RBAMS:2012:BY1169, paras. 5.7.1 to 5.7.8.