LOOK BEFORE YOU LEAP
By Oludotun Ajamobe
In the world of corporate, financial or operational restructuring and mergers & acquisitions, it is imperative that the interested entity ensures that it is fully informed of all intricacies in the potential “gold mine” it is likely to sit on.
This is where thorough due diligence comes into play: to ensure that the debts, pending and potential litigation, leases, contracts and all other variables about the target company, are carefully taken into consideration.
Here are ten areas to be carefully covered during due diligence:
All pending and concluded litigation files of the target company should be reviewed. The review will also beam its searchlight on matters such as the target company’s potential liability on claims, professional fees of lawyers, the chance of the target company’s success on claims being prosecuted, judgments, arbitral awards or injunctive orders against the target companies.
The benefits of a litigation audit include:
a. Saving the new entity from the embarrassment that comes with levying of execution of judgments.
b. Helping the interested company work out a strategy to efficiently manage litigation portfolios in the new company.
Due to the significant value placed on a company’s assets, an interested company should be well-informed of the location and number of these assets; and whether they are subjects of credit facilities granted to the target company. A step further will be to conduct an inspection and valuation of these assets.
Issues like labour disputes in the company, threatened labour stoppage, compensation owed employees, compliance with the applicable labour or tax laws and all employment-related matters in the target company, must be reviewed to offer an informed opinion on the subject of employment.
Benefits of employment audit include:
a. Knowledge on the expenses to be incurred by the interested company in the payment of employees’ remuneration, health insurance and other benefits.
b. Knowledge on whether there are unresolved labour issues which could result to strikes, lockouts or picketing of the premises, by the labour union.
It is important to find out if the target company, its assets, equipment and real property are insured against claims and perils. The review will also reveal premiums paid and if paid up to date.
Where the target company is a financial institution, it is necessary to examine the facility and security files of the company. This will reveal the asset risks in the target institution, the security power of the collateral, the recovery ratings of those facilities and may propel further inquiry into the capital adequacy or liquidity competence of the target company.
6. CORPORATE RECORDS
These records include the Certificate of Incorporation of the target company, its Memorandum and Articles of Association, Minutes of Meetings, shareholder agreements, register of shareholders, registers of substantial interest in shares, register of charges, the organizational chart of the target company, so as to be well-informed of the corporate structures of the target company.
7. COMPLIANCE WITH EXISTING REGULATIONS
Is there full compliance with the existing laws and regulations, such as the Companies and Allied Matters Act, Investment and Securities Act, Pension Reforms Act, Companies Income Tax Act, Industrial Training Funds Act, National Health Insurance Scheme Act, 2004 and others? The answers to these questions may be gleaned from the books and transactions of the target company.
8. INSIDER-RELATED DEALINGS
It is imperative that thorough investigation is conducted to ensure that the directors have conducted the affairs of the target company in accordance with sound corporate governance principles. For instance, if the directors have abused their positions of trust by awarding contracts made on behalf of the company to themselves or to companies they have interest in, without disclosing to the Board, it may subject the assets of the target company to jeopardy.
These may include mortgages, pledges, leases, joint ventures, debentures, indemnification agreements, employment agreements & exclusivity agreements of the target company. A meticulous look at these agreements will advise the interested company on the potential benefits or burden that may accrue in future.
10. FINANCIAL MATTERS
An audit on the financials, balance sheets, profit and loss accounts, statements of account or annual returns of the target company will be useful to ensure that an uninformed choice is not made, due to lack of expertise on financial matters.