31 Aug Key Elements of a Due Diligence Report

In our previous post on importance of Legal due diligence, we mentioned that a Due Diligence is the process of collecting, understanding and assessing all the risks associated with a transaction. It is an investigation into a business by reviewing documents, collating information and ascertaining whether such information poses a material risk to a transaction.

We further mentioned that a legal due diligence investigation is seeking information about the business to make sure that the investment or purchase is beneficial. The investigation seeks to reveal all important facts and potential liabilities. Once the facts are collected and analysed, an informed decision can be made.

We shall in this document be listing some of the key elements of a due diligence report.

A due diligence exercise traditionally covers three main areas; the financial risk profile, the legal risk profile and the technological risk profile of the entity under scrutiny.

A Due Diligence Report is usually utilized as a risk assessment tool at the crucial stage of the transaction and it also serves as a guide for all the related parties to the transaction.

The approach of a due diligence expert is to inquire into all relevant aspects of the past, present and predictable future of the entity for the sole benefit of the interested investors.

The following is a summary of the key elements in a due diligence report:

1. CORPORATE INFORMATION: This will include the following:

• Incorporation date of the entity;
• Registration information;
• Corporate history of the entity;
• Corporate structure (information here will include listing if the entity has subsidiaries, associate companies, joint ventures, shareholders, share capital history, shareholding structure, directors, directors’ interest and related party transaction etc);
• Evidence of compliance with regulatory authority;
• Evidence of Company Seal & Memorandum & Articles of Association of the Entity;
• Statutory Books of the Company – This will include Register of Members, Registers of Charges, Minute books for the general & board meeting, Register of Directors & Secretaries, Register of Director’s interest in shares and debentures.

2. REGULATORY & TAX MATTERS: The required information here will include:

• Any regulatory information of the entity;
• Tax registration ( i.e Companies Income Tax, Directors Personal Income Tax, Value Added Tax, Education Trust Fund, Industrial Training Fund, Pay as you earn, withholding tax etc);
• Tax history and status;
• Information on appropriate licenses where applicable (The purpose of this aspect is to confirm compliance with the associated regulatory authority).

3. INTELLECTUAL PROPERTY & TECHNOLOGY: The investor is usually interested in the extent and quality of the target entity’s technology and intellectual property. This will include:

• Ownership & Evidence of domestic or foreign patents;
• Trademark registrations & certificates;
• Material exceptions restricting license/transfer of intellectual property rights;
• Evidence of infringement on any third party’s intellectual property rights;
• Information on indemnities to third parties on intellectual property rights.

4. MATERIAL CONTRACTUAL OBLIGATIONS: Here it is important to note the following in reviewing a due diligence report:

• Shareholders Agreement (Some important clauses here will be, Parties, Date, Duration, Dividend Payment, Exit Option, Drag Along & Tag Along rights, Termination etc.);
• Information Technology Related Agreements;
• Maintenance Agreements etc.

(It is pertinent to note that in reviewing these agreements, particular notes should be taken of the following, liabilities, warranties, limitation clauses, unenforceable contracts, deferred consideration which may affect valuation of the entity etc.)

5. DISPUTES & CLAIMS: This will include:

• Pending Litigation: A risk analysis of all pending litigation will be conducted;
• Any judgments or award of the court that may affect the entity;
• Pending Arbitration Matters;
• Pending claims and contingent liabilities of the entity.

6. ASSET VERIFICATION: This should be conducted for both movable and immovable properties.

For immovable properties the following documents are reviewed:

• Deeds of Assignment
• Title documents
• Lease Agreements
• Deeds of Trust & Mortgages

In reviewing the property documents, the following must be included in the report: Location of Property, Description of property, registration details, details of encumbrances on the property etc.

7. HUMAN CAPITAL: This will include information of the employees of the entity. Some documents to be reported here will include:

• Management Contracts;
• Employee Contracts;
• Employee Handbook;
• Pension, Insurance & Medical history (where applicable);
• Labour matters (where the entity’s staff belong to a trade union) and labour disputes.

8. INVESTMENTS, CORPORATE ACQUSITIONS AND DISPOSALS & DEBT/CREDIT INFORMATION: The aim of reviewing documentation and including this in a Due Diligence report is to identify if any, investments and acquisitions of the entity, any outstanding obligations owed under any previous agreements for the sale or purchase of the entity’s assets and any debt and credit information of the entity to ascertain the current financial strength and credit risk of the entity.

In conclusion while the above list and element is not exhaustive, it is advised that interested parties seeking to acquire an entity or property should contact legal experts to ensure a smooth process serving the best interests of both parties to the transaction.

• Berkeley Legal has extensive experience across a broad range of industries in providing due diligence services.