The role of due diligence in corporate restructuring transactions

In Ghana, corporate restructuring is vital for the business environment. This includes mergers, acquisitions, and divestitures. However, these transactions come with risks and complexities. Therefore, thorough due diligence is necessary. Due diligence assesses risks and ensures compliance with laws.

What is Due Diligence?

Due diligence means verifying or auditing a potential deal or investment. It confirms relevant facts and financial information during corporate restructuring. The main objectives include:

- Identifying potential risks and opportunities.
- Assessing liabilities of the target company.
- Evaluating legal compliance.
- Verifying financial records' accuracy.
- Understanding cultural alignment of the target company.

Due diligence occurs before finalizing a deal to confirm a company's value. Companies can develop strategies to mitigate identified risks through this process.

Why Does Due Diligence Matter?

Conducting due diligence helps identify risks associated with the target company. These may include financial liabilities, legal disputes, and operational inefficiencies. A thorough risk assessment allows companies to create strategies to address these issues before closing the transaction.

Key Areas of Due Diligence in Restructuring Transactions

Effective corporate restructuring relies on thorough due diligence. This evaluates a company's financial, legal, and technical standing. Key areas of focus include legal due diligence and financial due diligence.

Legal Due Diligence

Legal due diligence involves collecting all legal documents related to the target company. It allows buyers and sellers to assess any legal risks before closing the deal. This process ensures compliance with laws and regulations.

For example, businesses must obtain approvals from regulatory authorities like the Registrar of Companies or SEC for financial institutions. Legal due diligence also verifies adherence to merger provisions.

In Ghana, several laws govern corporate restructuring transactions:

- The Companies Act, 2019 (“Act 992”)
- The Corporate Insolvency and Restructuring Act, 2020 (“Act 1015”)
- The Ghana Stock Exchange Rules
- The Securities Industry Act, 2016 (“Act 929”)
- The Banks and Specialised Deposit-Taking Institutions Act, 2016 (“Act 930”)
- Ghana Revenue Authority Tax Regulations
- Corporate Governance Code for Listed Companies 2020

Lawyers are consulted during this process to audit compliance with obligations and rights.

Key Components of Legal Due Diligence Include:

1. Reviewing corporate structure and ownership.
2. Examining ongoing litigation.
3. Ensuring regulatory compliance.
4. Evaluating contractual obligations.
5. Reviewing employment contracts.

This exercise provides insight into a business's compliance status regarding applicable laws.

Reviewing Corporate Structure and Ownership

This audit examines a target company's structure to ensure it operates legally. It checks governance processes align with statutory requirements under the Companies Act.

Examining Ongoing Litigation

This involves reviewing court cases that may affect the company's standing or finances. Identifying these risks is crucial for ensuring compliance with laws.

Ensuring Compliance with Regulatory Requirements

Lawyers write to relevant authorities confirming a company's compliance status as part of due diligence.

Companies must maintain updated filings with regulators like the Registrar of Companies to avoid penalties or restrictions.

Evaluating Contractual Obligations with Stakeholders

This review identifies potential liabilities in existing contracts with suppliers or clients. It assesses enforceability clauses that help mitigate non-compliance risks.

Reviewing Employment Contracts

Analysing employee agreements ensures compliance with labor laws while mitigating risks associated with layoffs or benefits packages.

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Financial Due Diligence

Financial due diligence examines a target company's operations for accurate valuation during restructuring. This includes reviewing financial statements, cash flow models, debts, assets, and forecasts.

Key considerations include:

1. Revenue Trends: Evaluating profitability through revenue trends analysis.
2. Debt Obligations: Assessing loan-related risks impacting restructuring.
3. Valuation of Assets: Determining asset values guides decisions on underutilized resources.
4. Identifying Risks: Uncovering hidden liabilities such as tax exposures through assessments by Ghana Revenue Authority (GRA).
5. Identifying Irregularities: Scrutinizing records for inconsistencies indicating fraud or misstatements in reporting practices.

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Challenges in Conducting Due Diligence

Despite its importance, conducting due diligence faces challenges:

1. Limited Access to Information: Some companies may conceal data or lack documentation.
2. Time Constraints: Strict deadlines can lead to rushed evaluations that overlook discrepancies.
3. Regulatory Complexities: Cross-border transactions require navigating complex regulations across jurisdictions.
4. Resistance from Management: Employees may resist changes fearing job losses which disrupt continuity during transitions.

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Conclusion

Due diligence is essential in corporate restructuring as it informs strategic decisions effectively while mitigating risks involved in transactions.


The writer is a Junior Associate at VINT & Aletheia Attorneys & Consultants