Answer ... (a) Commercial/corporate
Specific issues to watch out for in the due diligence exercise in Nigeria include examining the legal status of the target, the directors, the shareholders (which are revealed by conducting a search at the Corporate Affairs Commission (CAC)) and the statutory books for compliance with applicable law. The shareholding is also important, especially in share acquisitions, in order to ensure that the shares are free from encumbrance. The target’s material contracts and constitutional documents should also be examined to ascertain whether there are clauses therein that may impact on the deal or render the consent of any third party a prerequisite for the deal. It is also important to consider the general regulatory and sector-specific regulatory approvals that will be required for the transaction.
(b) Financial
Scrutiny of the debt portfolio of the target is very important, to discover:
- the target’s unpaid debts;
- the kinds of debts owed by the target (ie, subordinated or unsubordinated, secured or unsecured); and
- the nature of security given (if any).
The buyer will be concerned (especially where the seller is a shareholder) about whether:
- a certificate of capital importation has been issued to the seller (which is a foreign investor) in respect of the seller’s investment in the company; and
- there are understamped documents that will further expose the buyer to financial risks.
(c) Litigation
Claims by or against the target before various courts and tribunals are analysed to ascertain whether the target is exposed to any contingent liability or whether the transaction will be adversely impacted by such litigation. For example, where the target is a licensed company (eg, a bank licensed by the Central Bank of Nigeria or a telecommunications company licensed by the Nigerian Communications Commission), and there is a claim for the suspension or revocation of the target’s licence, such an action will be red-flagged in the due diligence exercise. The judicial system in Nigeria is generally slow and the actual risks may be brought to the fore only after completion of the litigation, when the transaction will most likely be closed.
(d) Tax
The target’s compliance with tax and other statutory payment obligations will be checked (eg, income tax, value added tax, withholding tax, tertiary education trust fund, industrial training fund). Nigerian tax collectors are aggressive and can act capriciously (eg, by imposing outrageous taxes on companies), and the Nigerian courts show them more sympathy than many courts elsewhere do.
(e) Employment
Attention is usually paid to remittance of group life insurance, national housing fund, industrial training fund and pension contributions, and contributions to the Nigeria social insurance trust fund for the benefit of employees. These in total can exceed 20% of the net wage bill. An acquirer will also want to know:
- the key employees;
- whether there is any stock option plan; and
- provisions in employment contracts that confer an unusual advantage on any of the employees.
(f) Intellectual property and IT
The target’s IP portfolio will be reviewed, including the date of registration, expiration date and whether the expired registered intellectual property has been renewed. In Nigeria, the effectiveness of the registration of service marks is debatable and there is no substantive patent examination system.
Also, the target’s IT infrastructure will be examined to ascertain matters such as its nature, compatibility, applicable licences and outstanding obligations in relation thereto (eg, outstanding licence or renewal of such licence).
(g) Data protection
The acquirer will usually be concerned about the target’s compliance with the Nigeria Data Protection Regulation, 2019 (NDPR) with respect to data protection. This regulation is broadly similar to the EU General Data Protection Regulation.
(h) Cybersecurity
Consideration is usually paid to the target’s cyber risk management and the framework in place to guard against cyber insecurity in compliance with the NDPR and the Cybercrimes Act, 2015. The authorities have been aggressive in investigating and prosecuting violations of the legislation, but violations are believed to remain rampant.
(i) Real estate
The target’s real estate portfolio (owned and leased real estate) will be examined. The target’s documents of title will be reviewed to ensure that the target indeed has title to real properties it purports to have and ascertain whether there are any encumbrances thereon. This will naturally include carrying out searches at the lands registries of the relevant States and, in some cases, physical inspection of the properties.