Due Diligenceby

Obianuju Ifebunandu

Meaning• Due diligence is an investigation of a business or person prior to

signing a contract, or an act with a certain standard of care• It is the process through which a potential acquirer evaluates a target

company or its assets for an acquisition• This type of investigation contributes significantly to informed

decision making by enhancing the amount and quality of information (facts; issues; law) available to decision makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs, benefits, and risks

o History -  United States’ Securities Act of 1933 section 11 – “due diligence defense”

o Purpose – this determines what you look at – Offerings; Schemes; Conveyances; Lending

o Team - Ideally by a team with variety of skills. o GECo Team – 5 lawyers with different levels of experience

(subject to company’s size); agreed form “dd report” to input in; laptops vs writing pads?

o Integrated or noto Prior to dd exercise – NDAs; Checklist

Theory

Types of DD• Legal – This is a a full assessment of the possible legal status and risks

related to the target company• Commercial – This is a futuristic outlook obtained by investigating the

company and its market by obtaining information from the company and other sources

• Financial - Historical look into the company’s financials to determine the profitability of the target. Aims to assess the extent to which historical performances may be a guide in the future. FDD is not an audit on the target and does not recommend whether or not to do the deal

Varieties • “Exceptions only” -  the due diligence report may be a fairly informal report focusing only on

matters material to the transaction• “Long-form” it will comprise a complete audit of the target's business including an in-depth

summary of the target's material contracts• “Fatal flaw” – it an evaluation completed to determine the viability of a proposition or

opportunity which requires an effort less extensive than that put forth in a typical due diligence investigation

• “Vendor’s due diligence” - to fix problems; for several bidders• “Buyer’s due diligence” - evaluating and verifying information received from the target and

analyzing it; deal breakers• “Integrity due diligence” -• Generic reports – SEC; PENCOM; CBN; NAICOM; CAC; Lands; Trademarks

DD Report• Introduction• Executive Summary• Corporate – Constitution, Shareholding, Corporate Governance• Regulatory – compliance with sector specific regulator; tax – CITA, PITA,VAT,

WHT; PENCOM; NHF; ITF; ECA • Assets (land; subsidiaries; Tangibles; intangibles - IP)• Contracts (labour; IT; leases; supply; sales; entry, exit and usual terms) –

restrictions; termination; assignability; duration• Disputes – Poison pills that may impact the other DD; reliance on information

from the target • Recommendations

 Sources

o Site visito Searches – Registries, Regulatorso Interviews – management; other officers o Data roomo Questionnaires/listso Interneto Target’s other lawyers – litigation fileso Documents received from Target, Purchaser

or Vendor

Limits • Qualifications – availability, verification and exclusivity• Law/fact• Risks – deal breakers; curable• Mitigation (warranties; indemnities; disclosure

schedules; Condition Precedent; Condition Subsequent)• Escrow Structure – for payment of purchase price• Structure – sale of assets may become sale of shares

Liability

• Claims• Fraud• Negligence

• Flow of Information - Always keep your client informed on the information you have – Infiniteland v Artisan – Information supplied to the Purchaser’s adviser was imputed to have been given to the Purchaser. (obiter)

Approaches around the world

• Cavet Emptor or Uberrimae Fidei• USA; UK; Australia; South East Asia and Nigeria –

detailed due diligence and detailed documentation • Continental Europe – light due diligence and light

documentation except where American and English lawyers are involved; light documentation but more detailed due diligence. In communist countries, there is no culture of disclosing information