Due diligence is the examination of the business of a company such as its legal and financial records, level of compliance with regulations, contracts, etc. Corporate entities usually engage in lending, investing, restructuring, financing and other important transactions. These transactions, by their nature, require due diligence exercise to be carried out by the corporate entities. Due diligence conducted on a corporate entity involved in a transaction usually reveals a lot of vital information about the activities of such a corporate entity and would inform the decision of the other party in going on with the transaction or refraining from it. As such, the importance of conducting due diligence cannot be over-emphasized.
Basically, two types of due diligence may be conducted by the entities involved in a corporate transaction. These are financial and legal due diligence. Financial due diligence would be conducted by reviewing and examining the financial records such as the audited financial statements of the entities while legal due diligence is conducted by lawyers or solicitors by reviewing the legal and other incorporation documents of the entities including particulars of directors, list of shareholders etc. conducting necessary searches at other relevant registries including intellectual property registries and determining the extent of statutory compliance of the entities with applicable laws.
The corporate transactions that a company may be involved in at any point in time may be merger and acquisition, takeover, share purchase, investment, etc. and are usually multi-million Naira transactions. Parties to corporate transactions conduct due diligence for various reasons.
They include the following:
- A properly conducted due diligence will reveal the track record of a corporate entity in its particular business line and reveal whether it is failing or succeeding.
- It would reveal the extent of compliance of a corporate entity with rules and regulations and to determine whether the entity is legally restricted in anyway.
- It would assist in determining the appropriate value of the corporate entity to be acquired in a merger transaction or deal for instance.
- It can assist an acquiring corporate entity from being embroiled in litigation during or after the acquisition of a target entity.
- Through due diligence exercise, it is possible to determine if an entity is in administration or being dissolved or wound up.
Conclusion
Due diligence is greatly advised in corporate transactions so as to forestall the possibility of any risk, liability or sanction which would not have been discovered in the absence of due diligence. Any failure to conduct proper due diligence in a corporate transaction may end up being catastrophic as the acquiring, financing, investing or borrowing entity may end up with loss, risks, and liabilities. Depending on the nature of the transaction, all parties to corporate transactions are required to conduct their own separate due diligence exercise.
