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Due Diligence in Financial Transactions: A Critical Review for South African Businesses
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As businesses in South Africa navigate complex financial transactions, it has become increasingly important to conduct thorough due diligence investigations to mitigate risks and ensure a smooth deal-making process. In this article, we will delve into the world of due diligence, exploring what it entails, its importance, and best practices for initiating such investigations.
What is Due Diligence?
Due diligence is a comprehensive investigation into the legal and financial affairs of an entity, typically carried out by commercial attorneys, intellectual property specialists, financial auditors, banks, and reputation specialists. The scope and depth of the investigation depend on the purpose of the transaction and the nature of the business.
For instance, a due diligence study for a simple business deal may focus on liquidity, pending litigation, and general risks that could impact the business relationship. However, in more complex transactions, such as long-term off-take agreements involving commodities, the investigation would need to delve into health and safety, environmental, and compliance issues.
An essential aspect of due diligence is general compliance, which ensures that the client does not enter into an unlawful or illegitimate agreement. In merger and acquisition deals, the investigation will focus on all aspects of the business, as both parties will share liability depending on how the transactional agreements are drafted.
Review Checklist: Identifying Key Areas of Investigation
A review checklist can be drawn up to specify the fields of investigation, which typically include:
- Corporate structure
- Constitutional documents (MOI and shareholders’ agreements)
- Share registers and certificates
- Human resources
- Litigation landscape
- General corporate, fiduciary, and statutory compliance
- Intellectual property rights
- Material contracts and agreements
Why Due Diligence Matters
Due diligence is crucial in identifying potential risks that may not be immediately apparent during the transaction process. For example, an entity may disclose a liability, but upon investigation, it becomes clear that the loan is tied to a convertible preference share that could lead to unforeseen consequences.
Once identified, these risks can be mitigated in the transaction agreements, ensuring that both parties are aware of and prepared for potential issues.
When and How to Initiate Due Diligence
Best practice is to seek advice on any material or substantial transaction, such as large contracts, new business ventures, or mergers and acquisitions. It’s essential to begin with a confidentiality undertaking and procure legal advice and assistance as early as possible in the process.
Barnard Inc’s Due Diligence Team: Expert Guidance
At Barnard Inc, our team of specialists in commercial and due diligence fields is equipped to coordinate a comprehensive investigation. With experience in these investigations, we provide expert guidance to ensure that your financial transactions are conducted with confidence and precision.
Originally Published 19 January 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.