By: Eric Ofori KWAAH
Corporate restructuring is an action taken by a corporate entity to significantly modify its capital structure or operations.
This has been further elaborated in our article on ‘What is Corporate Restructuring and the Role of the Board in Ghana’ authored by our Senior Associate of VINT and Aletheia, Attorneys and Consultants.
In Ghana, corporate restructuring, such as mergers, acquisitions, and divestitures, is essential in shaping the business environment. However, these transactions carry inherent risks and complexities, making thorough due diligence necessary.
Due diligence helps assess these risks, validate financial and operational conditions, and ensure compliance with legal and regulatory frameworks. This article explores the primary objective of due diligence in corporate restructuring in Ghana.
What is due diligence?
Due diligence in corporate restructuring means verifying, investigating, or auditing a potential deal or investment opportunity. This is essential for confirming all relevant facts and financial information, as well as validating any other claims that arise during a corporate restructuring or investment process.
The primary objectives of due diligence, as it pertains to a company subjected to corporate restructuring, include:
- Identifying potential risks and prospects;
- Assessing liabilities and obligations of the target company to be restructured;
- Evaluating legal and regulatory compliance to be completed;
- Verifying the accuracy of financial records provided by the company; and
- Understanding the cultural and organizational alignment of the target company.
Due diligence is performed before a deal is finalized to provide certainty on the value of a company. By conducting a comprehensive risk assessment, companies can develop strategies to mitigate or eliminate identified risks before completing the transaction.
It is therefore conducted in some cases by the target company to be restructured as a check-measure on themselves to make informed decisions on an investment deal, and for an investor, to identify any potential liabilities and assets they will inherit.
Why does due diligence matter?
Conducting due diligence helps identify and evaluate potential risks associated with the target company. These risks may involve financial liabilities, legal disputes, regulatory non-compliance, and operational inefficiencies.
Through a thorough risk assessment, companies can develop strategies to mitigate or eliminate these risks before finalizing the transaction.
Key areas of due diligence in restructuring transactions
Effective corporate restructuring depends on thorough due diligence to evaluate a company’s financial, legal, and technical standing.
This process helps identify risks, ensures regulatory compliance, and uncovers hidden liabilities, enabling a smooth transition and well-informed decision-making. Key areas of focus for this article include: legal due diligence and financial due diligence.
- Legal due diligence
Legal due diligence is the process of collecting and assessing all of the legal documents and information relating to the target company. It gives both the buyer and seller the chance to scrutinize any legal risks, such as lawsuits and, or intellectual property, before closing the deal.
In Corporate Restructuring, legal due diligence ensures that businesses comply with relevant laws and regulations and obtain the necessary approvals from appropriate regulatory authorities, such as the Registrar of Companies for all types of companies and the Securities and Exchange Commission (SEC) for financial institutions.
It involves verifying compliance with provisions related to mergers, acquisitions, and takeovers. Legal due diligence helps businesses mitigate risks and enhance their corporate governance structures in line with statutory requirements.
For listed companies, due diligence ensures that they adhere to the Ghana Stock Exchange’s listing requirements.
These requirements include timely disclosure of material information, maintaining a minimum number of public shareholders, and upholding the corporate governance guidelines set by the Ghana Stock Exchange.
In Ghana, corporate restructuring transactions are required to adhere to several industry-specific legal and regulatory frameworks, including:
- The Companies Act, 2019 (“Act 992”) for all companies (private and public, limited and unlimited, profit-making and non-profit making.)
- The Corporate Insolvency and Restructuring Act, 2020 (“Act 1015”) (“CIRA ACT”)
- The Ghana Stock Exchange Rules (for listed companies)
- The Securities Industry Act, 2016 (“Act 929”)
- The Banks and Specialised Deposit-Taking Institutions Act, 2016 (“Act 930”) (for financial institutions)
- The Ghana Revenue Authority (GRA) Tax Regulations
- The Corporate Governance Code for Listed Companies 2020.
To conduct this legal due diligence, lawyers are consulted to audit the legal standing of a target company, to determine their compliance with contractual obligations, intellectual property rights, and corporate governance standards. Key components of legal due diligence include:
- Reviewing corporate structure and ownership;
- Examining ongoing and potential litigation;
- Ensuring compliance with regulatory requirements;
- Evaluating contractual obligations with stakeholders; and
- Reviewing Employment Contracts.
This exercise provides the compliance status of a business in relation to applicable laws. In practice, during this period, a business may find it necessary to secure all requisite approvals from the relevant regulatory authorities, including the Registrar of Companies, or the Securities and Exchange Commission (SEC), or the Bank of Ghana, where necessary, for financial institutions to ensure that the final report does not state their non-compliance.
Reviewing corporate structure and ownership- This audit involves a comprehensive examination of a target company’s corporate structure and ownership to ensure that the business operates within the correct legal framework.
This involves examining the company’s organizational framework, shareholding structure, and governance processes to ensure they align with statutory requirements.
For example, if the business is registered as a company limited by shares, whether they have a board of directors and hold board meetings as required under the Companies Act.
It also includes verifying whether they have shareholder agreements, pass board resolutions, and keep records of decisions taken by the board and shareholders. Furthermore, whether there are any potential ownership disputes that may impact business operations or future transactions.
Examining ongoing and potential litigation- This includes reviewing any court cases, arbitration proceedings, and regulatory enforcement actions that may affect the company’s legal standing and financial health.
Identifying and assessing the risks associated with these legal disputes is critical in determining their potential impact on the business and ensuring compliance with applicable laws.
Ensuring compliance with regulatory requirements- This is a fundamental aspect of legal due diligence. In Ghana, the first step conducted by lawyers engaged to conduct due diligence is to write to all relevant Regulatory Authorities to confirm the compliance status of the target company.
It ensures the objective confirmation of businesses’ adherence to industry-specific regulations, licensing obligations, tax compliance, and corporate governance standards. Companies must maintain updated filings with the Registrar of Companies and obtain necessary approvals from their relevant regulatory bodies. Failure to meet these regulatory requirements may result in legal penalties or operational restrictions.
Evaluating contractual obligations with stakeholders– This involves reviewing existing contracts with suppliers, customers/clients, financiers, and other key stakeholders to identify potential legal and financial liabilities.
This includes assessing the enforceability of agreements, termination clauses, indemnity provisions, and dispute resolution mechanisms.
Ensuring that contractual obligations align with the relevant laws such as the Contracts Act helps mitigate risks associated with non-compliance or contractual breaches.
Reviewing employment contracts– A key aspect of legal due diligence is analyzing employee agreements to ensure compliance with labor laws and mitigate risks.
This includes reviewing non-compete clauses for enforceability, assessing severance terms to understand financial obligations tied to layoffs, and ensuring all exit packages meet legal requirements.
Additionally, it is essential to evaluate pension schemes and employee benefits, such as health insurance and retirement benefits, to confirm compliance with statutory obligations and avoid inheriting undisclosed liabilities.
- Financial due diligence
Financial due diligence provides insight into a target company’s operations, assets, and liabilities, to ensure accurate valuation and smooth integration during a corporate restructuring.
This process involves a thorough examination of financial statements, cash flow, revenue models, debts, assets, and financial forecasts of a target company. The primary goal is to confirm that the financial position of the target company aligns with the expectations of the prospective investor. Key considerations include:
- Revenue trends and profitability analysis: Evaluating the company’s revenue trends to understand its profitability.
- Debt obligations and liquidity assessment: Assessing the risks related to loans, contracts, or pending litigations that may impact the restructuring process.
- Valuation of assets and liabilities: Evaluating the company’s assets and liabilities, which determine the ultimate value of a target company to guide restructuring decisions. It also helps identify underutilized assets that can be sold or repurposed to enhance financial efficiency.
- Identifying risks and liabilities: Financial due diligence uncovers hidden liabilities, such as tax exposures, contingent liabilities, and underreported debts. In Ghana, the statutory body responsible for assessing and collecting taxes is the Ghana Revenue Authority governed by the Ghana Revenue Authority Act of 2023 (Act 1096); therefore a prospective investor can verify a company’s tax liabilities through this Authority.
- Identifying financial irregularities and potential fraud: Financial due diligence plays a crucial role in uncovering inconsistencies in financial records that may indicate misstatements, manipulation, or fraudulent activities. This includes scrutinizing discrepancies between reported revenue and actual cash flows, identifying suspicious transactions, detecting instances of overstated assets or understated liabilities, and reviewing compliance with accounting standards and regulatory requirements. Additionally, it involves assessing the integrity of financial reporting practices and internal controls to ensure transparency and accuracy.
Challenges in conducting due diligence
Despite its importance, due diligence in corporate restructuring faces several challenges, such as:
- Limited access to accurate information: Some target companies may withhold financial data, understate liabilities, or lack proper documentation. For example, an acquiring firm might discover after a transaction that the target company failed to disclose pending tax obligations, which could lead to unexpected financial burdens. This was evident during the banking sector cleanup by the Bank of Ghana from 2017 to 2019, where some banks had concealed non-performing loans and inadequate capitalization, only becoming apparent after regulatory intervention. This is why conducting searches at the various Regulators is very important to confirm the compliance status of a target company. Investors relying on disclosures from the target company only, could face significant financial risks.
- Time constraints: Due diligence is often conducted under strict deadlines, particularly in competitive acquisitions. A rushed evaluation may overlook discrepancies in revenue recognition, as seen in cases where inflated earnings reports mislead investors, resulting in post-acquisition losses.
- Regulatory complexities in cross-border transactions: Companies restructuring across different jurisdictions in Ghana must navigate a complex regulatory framework. For instance, the acquisition of Vodafone Ghana by Telecel in 2023 required approval from multiple regulatory bodies, including the National Communication Authority (NCA), and registration with the Ghana Investment Promotion Centre (GIPC), demonstrating the challenges in aligning with local laws and policies.
- Resistance from management and employees: Employees of the target company may resist restructuring due to fear of job losses or operational changes. In some cases, key personnel resign before the transaction is completed, disrupting knowledge transfer and business continuity.
Conclusion
Due diligence is a crucial part of corporate restructuring because it offers essential insight that informs strategic decisions.
By performing comprehensive financial, legal, operational, tax, and regulatory due diligence, companies can mitigate risks, optimize value, and ensure a successful corporate restructuring.
>>>the writer is a Junior Associate at VINT & Aletheia Attorneys & Consultants
