THE DNA OF DUE DILIGENCE

PRESENTATION OUTLINE
• Transaction outline • Property
• Due Diligence and its types • Assets
• Purpose of due diligence • Finance
• Employment
• Common terms in a due diligence
• Material Litigation
• Reporting requirements in a due diligence • Intellectual Property
• Due diligence sections • Data Protection
• Corporate • Competition
• Material Contracts • Questions
• Regulatory
• Environment, Health and Safety
COMMON TRANSACTION OUTLINE

Auction sale - involves

Bilateral transaction - the seeking bids for the target
seller negotiates the company or business from
transaction with one several prospective buyers
prospective buyer in a competitive tender
process
Key Steps in an Auction Sale

Establish an internal Sourcing and evaluating Preparing the data

deal team
Appointing advisers potential bidders
Seller due diligence room

Preparation of
transaction documents Submission and
- confidentiality, info First round indicative
Invitation to bid Bidder due diligence evaluation of final
memo, bid process letter, bidding
the acquisition bids
agreement etc

Selection of preferred
bidder and Signing, fulfilment of Post completion
negotiations to conditions and compliance and
finalise acquisition completion integration
agreement
DUE
DILIGENCE
• The detailed examination of a
company and its records to
enable the buyer decide
whether the proposed
acquisition represents a sound
commercial investment
Types of Due Diligence

Full fledge DD - Covers everything Exceptions Only / Red Flag DD - Only

looks at what would affect the deal
 • understand the business of the target;
• identify of risks / skeletons in the closet;
Role of Due • determine the viability of the transaction;
• determine the reps, warranties & indemnities
Diligence needed; and
• identify third party consents and governmental
approvals
Common terms in a due diligence
Information/Investment Memorandum - a document prepared in relation to the target company to provide a
comprehensive overview of its business to prospective investors

Term Sheet - Also known as a heads of terms or letter of intent or memorandum of understanding

Confidentiality agreement - imposing contractual controls on the prospective bidders' use and disclosure of any
confidential information relating to the target business that they are given access to during the auction process

Vendors Due Diligence Report – report prepared by a third-party advisor at the vendor’s request
Common terms in a due diligence
Virtual Data Room - a secure online space that acts as a repository of a
company's documentation, allowing users to share critical business information
with clients, investors and company leadership

Information Request List or Q&A – document used by parties in the DD process

to track requests for documents and information

Materiality Threshold - a threshold set by the purchaser that is indicative of the

matters that it would consider material for purposes of the transaction
Reporting Requirements

The status of compliance i.e.

The legal requirement
has the company complied?

Consequences of non- Actions that would be

compliance on the company required to ensure
and also on directors compliance
 Reporting
Requirements
• Risk mitigation/recommendation in the
context of the transaction
• seller to provide documents for
review;
• condition precedent;
• Indemnities;
• Warranties;
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• post completion obligation;

• client/investor to note
 • Corporate Records
• Certificate of incorporation
• Articles of association - limitations or other
restrictions on a disposal of the shares
• Shareholders Agreement - does it include any
Corporate requirement for shareholder consent for the
proposed transaction?
• Statutory Registers – members, directors,
secretaries, debentures, charges and
beneficial owners.
Corporate
• Other Company Documents
• Annual returns
• Bank signatories and signing mandates
• Financial statements
• Letter from company secretary that records are up to
date
• Declarations of trust
• Powers of Attorney – signature and stamping
• Official third party search
• Insolvency search - carried out a search of the register
of winding-up petitions filed at the High Court of Kenya
in Nairobi
Material Contracts
• Consider materiality threshold
• Governing Law
• Restrictions in relation to transaction – requirements
for consent or notification
• Execution
• Stamping
• Note to summarise contract terms

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Regulatory

Regulatory Sector licenses

What product is sold or what service is offered
by the company?
Is the sale of these products or the offering of
services regulated under law?
Is the storage or transportation of the products
regulated?
How does the company source for the products?
 Review of Licenses

1 2 3
Confirm if the company has Review the relevant law and Confirm if license is current
the required licenses- if not license conditions to
specify the applicable penalty determine if there are any
and how much it would cost restrictions in relation to the
and how long it takes to obtain transaction e.g. requirements
one for consent or notification to
the regulator
Review of Licenses
• Business permit – separate for each county;
• Fire clearance certificate – separate for each
county; and
• Outdoor advertising license - county approval
required for billboards, wall branding and car
branding.
 Environment, Health and
Safety
• Licenses and Permits
• Environmental Impact Assessment License – whether the company
was required to obtain one in relation to its operations
• Air emission License – required in respect of a controlled facility that
emits certain pollutants in excess of the set limits
• Effluent discharge license- in connection with the discharge of any
effluents or other pollutants into the environment
• Water abstraction permit - requirement to obtain a ground water
abstraction permit for any borehole within its premises from the Water
Resource Management Authority
• NEMA license to transport waste – unless target has contracted a third
party
• NEMA license to own/operate waste treatment plant/disposal
Environment, Health and
Safety
• Reports
• Environmental Self-Audit Reports – required in respect of
projects for which an environmental impact assessment
study report was made
• Energy Management Audit Report – audit report required
from owners or occupiers including lessees of factories,
commercial buildings, and institutional buildings, local
authorities
 • Others – often applicable if target is involved in manufacturing
• Steam receiver/steam container examination certificate –
examination every 2 years and certificate issued
• Steam boiler examination certificate – annual
Environment, examination and certificate issued
• Air receiver examination certificate - examination every 2
Health and years and certificate issued

Safety • Chains, ropes and lifting tackle examination certificate –

examination every 6 months and certificates issued
• Cranes/Lifting machine examination certificate – annual
examination, certificate issued
• If applicable - cylinder for compressed, liquefied and
dissolved gases examination certificate
• Evidence of payment of all fees required under various licenses
Health and Safety

• Licenses, certificates and permits

• Certificate of Registration of a Workplace – all
premises used as workplaces
• Food hygiene license - selling, preparing,
packaging, storing, or displaying for sale any food
• Employee health certificates and records –
medical examination of all persons employed at a
food plant prior to employment and annually
• Safety and health policy statement
• Fire safety policy
Health and Safety
• Reports – whether they have been prepared, filed and confirm if they reveal
any material findings
• Occupational safety and health audit – annual audit, submitted to DOSH
• Fire Safety Audits Reports – annual audit, submitted to DOSH
• Air Quality Report – where hazardous substances are used,
measurements to be done annually by a certified air quality monitor
• Noise Survey Report – company required to carry out measurements of
noise annually in order to determine the prevailing noise conditions at its
premises
• Risk assessment report
• Display of Abstracts
• List of Safety and Health Committee Members - where there are twenty or
more employees
• General Register required under the OSHA
Property
• Whether the company owns or leases its premises
and how many premises there are
• If owned
• Copies of title
• Development permission for any structures on
land
• Building approvals
Property
Leases
• Whether formal leases are in place and whether they are properly executed
• Whether the leases are registered - unregistered leases would not bind third parties who may
subsequently obtain an interest over the property
• Leases not revenue stamped – cannot be adduced as evidence in a court of law
• Expired leases – need to be renewed
• Underlying titles - to ascertain whether any special conditions apply to the properties under
such title e.g. specific development restrictions or designated use
• Any restrictions in relation to the transaction e.g. landlord consent

Rent and rates payment

Property
• Searches
• Whether property is listed for conversion;
• Official search – to confirm whether results conform
to the copy of the title provided; and
• Ndungu Land Reports.
Assets

Obtain details of motor vehicles owned or hired by the Carry out searches to confirm ownership
target company, together with logbooks and insurance
arrangements
Finance
• Consider materiality threshold
• Request for details of all facility agreements and security documents
• Consents or notifications be required - whether any of the finance
documents include change of control provisions
• Confirm whether the target company has given security over any of its
assets or shares
• Events of default – whether proposed transaction would amount to an
event of default and possible consequences e.g. does the loan become
immediately due and payable?
• Execution
• Stamping – does not affect validity but difficult to enforce as the
agreement would not be capable of being adduced as evidence in a
Kenyan court
• Note to summarize terms under the facility agreements
Employment
• Sample employee contracts – whether it complies with
Employment Act
• Human Resource Policy Manual – may contain additional
guidance on matters above
• Statement on the rights of an employee - the rights of
the employee as prescribed under the Second Schedule
• Sexual harassment policy – if more than 20 employees
• Disciplinary rules – if more than 50 employees
• Recognition Agreement - an employer is required to
recognise a trade union for purposes of collective
bargaining if the trade union represents a simple majority
of unionisable employees
Employment
• Collective Bargaining Agreements
• whether the company has entered into any CBA with the relevant
union
• whether the CBA has been registered with the Employment and
Labour Relations Court as required under the Labour Relations Act
• any change of control or consent requirements in relation to the
transaction
• Pensions schemes – check trust deed for change of control or consent
requirements
• Work permits
• NSSF, NHIF and NITA registrations and remittances
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 Material Litigation
Obtain particulars of any existing and threatened arbitration or
litigation, or similar proceedings or disputes relating to the target
company or its assets, together with details of sums involved

Obtain details of any judgments affecting the target company or its

assets

Conduct searches and obtain pleadings if possible

Google checks for media reports on cases against the company

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Intellectual Property
• Identify intellectual property rights owned by the target company
• IP not owned by the seller or target company but used in the target
company's business under a license
• Confirm if licensed and review terms of license to determine any
consent or notification requirements
• Confirm whether any IPR are shared with other members of the
seller's group
• Details of any disputes or prospective or alleged infringement by third
parties of IPR owned or used by the target company
• Ownership of IPR created by employees and consultants
• Domain names – identify names used and confirm whether they are
registered

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Intellectual Property
• Computer software
• Whether the target company owns the copyright to
any of the software that it uses
• If owned by the company and developed by
employees or consultants - confirm terms of
employment or consultancy contract
• If licensed from third parties - whether the licenses
contain change of control provisions
• Identify any IT services provided by another member of This Photo by Unknown author is licensed under CC BY.

the target group to the target or vice versa

Data Protection
• Confirm if target processes any personal data or
sensitive personal data or personal data relating to a
child
• Confirm if registered as data controller or data
processor if applicable
• Agreements with third parties for the processing of
personal data – change of control provisions
• Data protection consents - e.g. for sending marketing
materials etc
• Data protection policy - determine whether they
contain the information rights set out under the DPA
• Any infringements or compensation claims from
individuals concerning data protection infringements
• Details of any investigation
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 Any restrictive trade practice from material contracts e.g. exclusivity,
price fixing

Exemptions obtained in relation to any RTPs

Merger approvals in respect of any past transactions

Competition Agreements with suppliers – must contain the requirements prescribed

under the Competition Act i.e. terms of payment, payment date, interest
on late payment, termination and variation clause, dispute resolution
Details of any investigations or inquiries by CAK or COMESA Competition
Commission

QUESTIONS?
Questions?