If you are considering merging business partnerships or acquiring a company in Nigeria, then you have likely come across the term “due diligence.” Due diligence is an investigation carried out before business combinations such as mergers, acquisitions, takeovers, investments, or disposals. In commercial and investment transactions, this process is conducted to uncover risks early and evaluate the value of a target company.
Legal due diligence in Nigeria is important because it involves collecting, understanding, and evaluating all legal risks associated with a target company before completing a business transaction. Depending on the purpose of the investment, you can uncover any liabilities or potential risks associated with the subject matter early on. Through proper reviews, investigations, searches, and interviews, investors gain clarity and avoid costly mistakes.
Categories of Due Diligence Applicable to a Company
Due diligence cuts across different areas of a company’s operations, from tax to financial to legal. Each category plays a critical role in revealing the true condition of a business before any major transaction. We shall examine them below.
1. Tax Due Diligence
Tax due diligence involves reviewing a company’s tax status across all applicable tax jurisdictions, including the Federal Inland Revenue Service (FIRS), State Internal Revenue Service, or the Local Government Tax jurisdiction in Nigeria. It identifies the taxes payable, compliance status, and potential liabilities.
The process involves reviewing tax filings, outstanding liabilities, tax exposures, and the target company’s relationship with tax authorities. The outcome gives an investor a clear understanding of tax risks and potential liabilities that may affect valuation or future operations.
2. Finance Due Diligence
Financial due diligence examines the financial health, structure, and performance of a company. It provides insight into assets, liabilities, cash flow, debt structure, and profitability. The goal is to assess the company’s financial history and present condition to identify risks that could affect the investment. A well-conducted financial due diligence helps assess whether a company is financially stable to generate sustainable profit.
3. Legal Due Diligence
Legal due diligence is the review of a company’s legal, regulatory, and contractual affairs. It helps investors gain a complete understanding of the company’s:
- Debts, liabilities, and contingent obligations
- Assets and property ownership
- Tax compliance and exposures
- Pending or potential lawsuits
- Corporate governance and regulatory compliance
The findings help investors decide whether to go ahead with, renegotiate, or back out of the transaction.
4. Operational Due Diligence
Operational due diligence evaluates the day-to-day operations of a target company to ensure its management, processes, and systems are efficient, compliant, and sustainable. It focuses on how the company runs and whether operations support long-term growth and profitability.
Some key operational areas usually investigated include:
- Management and Organizational Structure
- Business Processes and Systems
- Supply Chain and Vendor Relationships
- Technology and IT Systems, including data management and cybersecurity protocols.
- Compliance with Operational Standards, including adherence to industry, health, safety, and environmental regulations.
- Identify operational risks that could affect legal compliance, etc.
5. Human Resource Due Diligence
HR due diligence examines the people, policies, and labour compliance of a company to identify hidden risks and assess workforce strength. It involves reviewing employment contracts, staffing structure, compensation and benefits, HR policies, company culture, training programmes, and compliance with labour laws.
The process also evaluates employee relations, turnover, and any pending disputes or liabilities. Overall, it helps investors understand workforce stability, legal exposure, and the company’s ability to support long-term growth.
How to Conduct Due Diligence on a Company
As discussed earlier, conducting corporate legal due diligence involves reviewing a target company’s legal, regulatory, and contractual standing to identify risks and ensure compliance. The process includes the following steps:
1. Reviewing Documents Provided by the Target Company
The first step involves analyzing the company’s internal documents, including incorporation records, corporate governance documents, contracts, licenses, permits, intellectual property registrations, and financial agreements. This review helps assess ownership, contractual obligations, compliance, and potential legal exposures.
2. Interviewing Key Personnel
Discussions with executives, legal counsel, and other personnel familiar with the company’s operations help clarify uncertainties in documentation, identify potential risks, and gain insights into ongoing or historical legal matters.
3. Conducting Searches at Regulatory and Public Authorities
Searches are conducted at the Corporate Affairs Commission (CAC), land registries, courts, and other relevant regulatory agencies to verify the company’s registration, property ownership, litigation history, regulatory compliance, and sanctions, if any. These searches help confirm the accuracy of the company’s representations.
4. Visiting Relevant Locations
Physical visits to company offices, factories, warehouses, or other operational sites allow the due diligence team to inspect assets, verify operational activities, and assess potential risks related to property or business operations.
5. Scrutinizing Public Records
Examination of government filings, statutory returns, and other public records ensures that the company is meeting its regulatory obligations and highlights any discrepancies or potential liabilities.
6. Carrying Out Media and Internet Checks
A review of online sources, news articles, and industry publications helps uncover negative publicity, reputational risks, or potential regulatory issues that might not be evident from internal documents.
7. Evaluating Ongoing or Potential Litigation
Assessment of current lawsuits, disputes, or potential claims helps determine exposure to legal risks that could affect the company’s financial stability or the viability of a proposed transaction.
8. Engaging Legal Experts
Hire a qualified corporate lawyer to conduct the due diligence on your behalf. The lawyer will review all documents provided by the target company, verify their authenticity, and assess for legal risks.
They will also carry out physical searches at regulatory bodies such as the CAC, land registries, and other relevant agencies, and may visit the company’s premises to confirm operational and legal representations. At the end of the process, the lawyer will provide you with an accurate report detailing findings, risks, liabilities, and recommendations to guide your decision-making.
Conclusion
Conducting due diligence on a Nigerian company is highly beneficial for investment or partnership decisions. However, the process can be challenging due to delays in obtaining necessary documents, misleading information, slow regulatory verification, poor records, and hidden liabilities. These issues can frustrate the process and expose an investor to unforeseen risks.
This is why engaging a law firm is advised. A law firm can navigate these challenges, verify documents with regulatory bodies, identify red flags, uncover hidden liabilities, and provide a clear, reliable report to guide your investment decisions. Therefore, if you plan to conduct due diligence on a Nigerian company, contact a reputable law firm to manage the process professionally and safeguard your interests.
