2. 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
3. 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 not
o Prior to dd exercise – NDAs; Checklist
Theory
4. 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
5. 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
6. 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
7. Sources
o Site visit
o Searches – Registries, Regulators
o Interviews – management; other officers
o Data room
o Questionnaires/lists
o Internet
o Target’s other lawyers – litigation files
o Documents received from Target, Purchaser or Vendor
8. 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
9. 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)
10. 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
