May 25, 2018

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 Omosehin 
Principal Associate
Koriat Law 
Source - LinkedIn