HOW TO CONDUCT LEGAL DUE DILIGENCE FOR COMPANY MERGER, ACQUISITION, PURCHASE OR JOINT VENTURE IN RWANDA

HOW TO CONDUCT LEGAL DUE DILIGENCE FOR COMPANY MERGER, ACQUISITION, PURCHASE OR JOINT VENTURE IN RWANDA

• THE CONSTITUTION OF THE REPUBLIC OF RWANDA AS AMENDED
• THE Law no 17/2018 of 13/04/2018 governing companies
• CONTRACT ACT
• LAND LAWS
• INVESTMENT CODE ACT
• AMONG OTHERS
• Please note that the laws applicable depend on the nature of the company.
• legal due diligence is reasonable verification and investigation touching the transaction at hand  and parties involved through which vital information is obtained to guide one on arriving at informed decision of whether or how to proceed with the transaction at hand
• It is usually a systematic research effort used to gather the critical facts and descriptive information which are most relevant to the transaction upon which  an informed decision on the matter is made .
• The nature of work performed in due diligence largely depends on the nature of the concerned transactions.
• For example, corporation, due diligence will consist in conducting an intensive investigation of a corporation as one of the first steps in a pending merger or acquisition. In a company acquisition, due diligence will include fully understanding all of the obligations of the company like debts, pending and potential lawsuits, leases, warranties, long-term customer agreements, employment contracts, distribution agreements, compensation arrangements, etc.
• Legal due diligence is the heart of all transaction though out ignorance or fear to pay fees some people do away with it.  
• A transaction can be defined as dealing between or among persons with a clear intention of binding themselves e.g. commercial transaction. Land transactions. Domestic transaction among others
• Before a company, individual or group individuals enter(s) into any transaction, it should conduct legal due diligence. There are so many transactions going on around the world daily, some parties loose in those transactions simply because they did not have vital information which could guide them on how to proceed with the transaction at hand.
• Regardless of whether you are buying business as corporate merger, asset purchase, a division purchase, a company stock purchase, or having joint venture for purposes of executing particular business you through your transactions lawyer  must conduct due diligence on the target company or business.
• Due diligence involves an in-depth investigation of the entity/ business. It requires review of a lot of documents by your transactions lawyer and a review of the financial reports and tax returns by your financial advisor or accountant.
• By conducting due diligence on the target business, you and your transactions lawyer  will have a thorough understanding of the business including being better and able to ascertain relevant issues, a fair purchase price of the business, business liabilities for which you may be liable after you become the business owner.
• Due diligence also is important because, depending on the outcome of the due diligence, you  may want to incorporate certain seller obligations in the term and conditions  of the transactions i.e. clearing any liens on the assets of the business, obtaining required third party consents, extent of liability before during and after the transaction etc.
• As commercial transaction lawyer, before embarking on  legal due diligence, you should meet with your client to:
• Understand transaction i.e. why is the client making that deal? Assets.  
• Discuss operations, risks, plans and concerns

• Agree on the scope of your review
• Agree on timing
• Agree on how you will report and agree on format of report and timing
• Agree addressees of report
• Identify areas to be reviewed by others
• Depending on the nature and scope of legal due diligence, doing it in a team may be needed and in such cases a commercial transactions lawyer needs to:

 Communicate clear instructions and time frame

 Distribute relevant documentation after careful consideration

 Team leader to prepare transaction briefing note

 Distribute report template and definitions

 regularly update on progress and timing

 Communicate with other advisers when need arise (e.g. accountants, engineers, doctors etc as the case may be)

• A good and complete legal due diligence ends with drafting a report.
• In case the intended business to purchase is a limited liability company or corporation, the followed should be reviewed
• COMPANY /INCORPORATION DOCUMENTS LIKE
• Articles of association and memorandum of association, corporate files, minutes of Board of Directors meetings, minutes of shareholders meetings, resolutions adopted, Shareholders identities, Return of allotment, Company Annual returns from the year of incorporation to date, Filled company forms, corporate structure, Shareholders/members register, instruments of transfer of shares, resolutions to issue shares, Deeds of issue of shares, among others. State corporate filings like statutory annual reports ,corporate governance related policies including conflicts of interest and ethics authenticating instruments among others
•  AGREEMENTS, CONTRACTS, COMPANY POLICIES, PROCEDURES AND HAND MANUALS.

You need to review:

• all agreements and contracts like distributor, supplier and customer agreements, all confidentiality and non-compete agreements, all intellectual property agreements (licenses into and out of the company), and all equipment leases
• Corporate insurance coverage and Insurance Policies ,review all insurance policies carried by the company/business you intend to purchase business to determine whether the current police and coverage is adequate for the business operations as they stand.
• Policies and third party agreements relating to non-disclosure of confidential information and ownership of intellectual property created by employees and contractors.
• All agreement relating to borrowed money or lines of credit , Agreements relating to any loan or guarantee of obligations of any third party, whether affiliates or not Agreements for the granting of a mortgagor other security interest (s) in the company’s assets or properties, Main terms and conditions of securities: Registration of securities,  mortgage deeds, Inter-company or inter-group indebtedness and securities or guarantees given in connection therewith
• Grants likely to have Intellectual property provisions
• Joint venture agreements regarding production, transfer of know-how, technical assistance and similar agreements
• Agreements of joint research and development if any
• contracts and other agreements relating to intellectual property and computer software to which the organization is a party or a third party beneficiary
•  Positive or restrictive covenants relating to the use of any property of the company
• Sales agreements (whether conditional or not)
• Purchase agreements including supply agreements and service agreements
• Agency agreements, marketing agreements, distribution agreements
• Lease or hire purchase agreements
• Joint venture agreements
• Non-competition agreements
• Standard forms of purchase and sale orders of the company
• General sales conditions and general purchase conditions of the company
• Employee manuals, handbooks and policies
• Distinction between employment contracts, agency contracts and independent contractors
• Employment contracts and appointment letters
• Procedures and practices for use of temporary workers
• Procedures and practices for terminating employees
• Employees benefits and compensation policy
• Main terms of labour agreements
• contracts and schedule notification of contract renewal dates
• Compliance with representations and warranties
• Policy for internal contract review, external review by counsel and execution of contracts
• Proprietary information that should be protected
• Contracts with related parties and compliance with procedures for disclosing conflicts of interest
• Business relationships not covered by a written agreement
• Internal/external audit procedures
• Internal control procedures
• A list of all banks with which the company has a relationship, including a description of the type of account and the account number
• contracts and other agreements relating to intellectual property and computer software to which the organization is a party or a third party beneficiary
• Procedures for maintaining confidentiality of trade secrets
•  REAL ESTATE OF THE TARGET COMPANY OR BUSINESS:
• You need to review all property purchase agreements and respective  certificates of title whether , freehold or  leases of real property entered into by the target company;
•  you should further ascertain whether any consent is needed for the intended company /business sale or merger ,
•  You need to know how much the rent liabilities are and if there are sufficient term(s) remaining on the lease(s) of whether land or machines, among others
• Licenses, contracts and other agreements relating to intellectual property and computer software to which the organization is a party or a third party beneficiary
• Positive or restrictive covenants relating to the use of any property of the company

4. LIST OF COMPANY LIABILITIES AND ASSETS/PROPERTIES BOTH TANGIBLE AND INTANGIBLE AMONG OTHERS.

• you need to know what the business/ company on sale  owns and owes like real properties ,trademarks, copyrights, patents, domain names, and other proprietary rights among other intellectual, properties, notes and accounts receivables, cash, securities, equipment, inventory.
• Liabilities may include judgment debt due to lost suit, bank debt, employee benefits and bonuses earned and not yet paid, terminal benefits, pending and current lawsuits, licensing violations, fines/penalties, losses, property rent. Lease arrears among others. All names of employees, their work position, qualifications and current salaries..

5. Company Tax Returns.

• You need to look at RRA TAX RETURNS for some years depending on how long the company or business has existed because you may be liable for tax liabilities incurred in the years prior to the company/business purchase.

6. BUSINESS/COMPANY FINANCIAL STATEMENTS.

• you should be provided with detailed financial statements including balance sheets ,profit and loss statements since the incorporation of the business if the business is small however if business is  medium or big   request for audited financial statements prepared and certified by a certified public accountant.

7. LICENSES AND PERMITS.  

• You need to examine the terms and conditions of the current permits and licenses of the intended business or company with the local and national authorities such that you know what to do. You need to obtain all copies and determine which licenses may require the seller’s obtaining prior consent for the contemplated sale, merger or joint venture of the business.  

8. CUSTOMER PROBLEMS.

You need to also find out if the business customers have any problem with the intended business/company.

9. GENERAL INQUIRE

You will need to do general inquire of

• Compliance of existing of tax laws
• Compliance of procedural tax laws
• Past cases of interests, fines and penalties for non-compliance of tax laws 
• Documents evidencing title to all material assets
• Leases of assets among others

Author is A regional transactions legal consultant (ADVOCATE) at NOA REGIONAL ASSOCIATED ADVOCATES AND LEGAL CONSULTANTS.

+250787311255,+256788105242,+256782105042
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Email address: onlinetransactionconsultancy@gmail.com
NOTE: whereas the author has made necessary efforts to ensure the accuracy of this post, it is not intended to provide specific legal advice to a particular individual as individual situations may differ.

For specific legal transaction advice on this subject matter and related subject, You may the author at online consultancy fee, or any transaction legal consultant of your choice.
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