A Lawyer’s Guide To Due Diligence |Kayode Omosehin, Esq.

A
lawyer will likely be engaged in legal due diligence in the course of his
advisory services to his clients, especially in respect of business
combination, a public offering of securities or regarding a credit facility. A
due diligence is simply the investigation of a target company on behalf of
investor(s) by reviewing the target company’s records, contractual documents,
court documents and interviewing its officials or other persons with useful
information about the target company.

Due
diligence takes two forms: physical and virtual. In physical due diligence, a
lawyer visits the office of a company to examine or review documents
physically. In virtual due diligence, the review or records is done online
through a “virtual data room” to which access is granted to the lawyers using
some security number or password.

1.
Purpose of Due Diligence

Essentially,
the purpose of due diligence is to reveal or identify potential assets and
liabilities of the target company. However, a lawyer should request to know the
focus of a legal due diligence to avoid spending more time reviewing irrelevant
documents. Beyond that, a due diligence should help to achieve the
following:

• To help an investor in better understanding of the
business of the target company;

• To aid the valuation of the business of the target
company;

• To aid the drafting of relevant transaction
documents between the target company and the investor;

• To identify any developments that can impede the
closing of the deal between the parties;

• To assist the lawyers in providing legal opinions to
the transaction parties;

2.
What to look out for during Due Diligence

In
the course of a due diligence, a lawyer is expected to look out for indicators
of value or potential liability or any potential development that may impede
the conclusion of the transaction. There are several material facts that elicit
the foregoing. Suffice to state that experience is a great asset in due
diligence. Few of what should be focused on, of course subject to client’s
specific instructions, are as follows:

i.
All incorporation and pre-incorporation documents of the target company to
determine:

– the shareholders and directors of the target
company;

– the authorized share capital, object clause and
capacity of the target company to enter into the proposed transaction;

– the level board or shareholders’ approvals required
by the target company to enter the transaction;

– the dividend policy or procedure for change;

– the subsidiaries of the company;

ii.
All leases or other contract documents between the target company and third
parties to determine:

– The assignment of rights and liabilities which may
affect the proposed transaction;

– Any required permits and licenses of government
prior to conclusion of the proposed transaction;

– Prohibition clauses against the proposed transaction;

– Outstanding debts or other obligations that may
become due under the contract with a third party before the conclusion of the
transaction;

– Whether any purchase or sale of assets can impact
the proposed transaction negatively;

iii.
All documents showing ownership of assets and liabilities to determine:

– Existence of any mortgage or lien or other charges
in respect of any of the properties;

– Any unpaid land use charges or development levy or
other regulatory fees;

– The value of the property from the title document;

– Any tenant in any of the properties;

– Shareholding interests in any other companies;

– Debentures issued by the company;

– Vehicles and other moveable assets;

iv.
All documents relating to proposed or pending or completed litigation to
determine:

– The potential monetary liability (if any) and
possible defence;

– Outstanding judgement sum;

– The litigation history of the kinds of claims that
have been paid in the past;

v.
All documents relating to labour and employee benefits to determine:

– Any potential or unclaimed redundancy or other
employment benefits;

– Whether there is policy on benefits in the event of
the proposed transaction;

vi.
All documents relating to tax and statutory filings to determine:

– Tax payment compliance;

– That all tax returns filing at the FIRS or the
relevant State tax authority is up to date;

– Annual returns filing at the CAC is up to date
(please note that penalty applies to late filing of annual returns by
companies);

vii. All documents relating finance of the company to
determine:

– If there is an outstanding loan obligation;

– If there is any escrow account, what funds are there
and how the funds will be used;

viii. All documents that relate to compliance with
anti-corruption laws to show:

– If any payments or gifts were given to government
officials or agencies;

– Whether any payment or gift violates any
anti-bribery and anti-corruption laws or other criminal law;

3.
Report of Due Diligence

Report
of due diligence is important to the client, whether it is an investor or
acquiring company in mergers or acquisition or other transactions. A lawyer
should make his or her report as brief as possible without leaving out
significant details. The report should be a summary of the important
discoveries and should address the instructions of the client.

4.
Common Mistakes in Due Diligence

A
lawyer should be mindful of the common mistakes in conducting due diligence.
Few of these mistakes, which must be avoided, are as follows:

i. Lack of understanding of the client’s instructions
or the proposed transaction and the focus of due diligence;

ii. Incomplete due diligence exercise as a result of
fatigue or inadequate time or personnel;

iii. Bias or other improper influence;

iv. Assumptions regarding regularity and statutory
compliance; and

v. Unclear information or misstatement of facts in due
diligence report.

NOTE:
The above is just a guide and may not address all circumstances of due
diligence. Specific enquiries can be made to kayode@koriatlaw.com

Kayode Omosehin

Principal Associate

Koriat Law

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A Lawyer’s Guide To Due Diligence |Kayode Omosehin, Esq.

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