Legal due diligence for PE transactions

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Jarryd Mardon | Director | Werksmans Attorneys | mail me |


 

 

 

 

 

 

 

 

 


Wesley Vos | Senior Associate | Werksmans Attorneys | mail me |


Local and cross-border private equity (PE) investors continue to support the growth and development of companies in South Africa and the economy. With an increase in the establishment of PE funds both globally and in South Africa, as well as their appetite for investing in emerging markets, keeping track of the approach of PE funds and M&A lawyers to legal aspects surrounding PE deal-making is becoming increasingly important.

One of these aspects that require careful consideration is the need to conduct a thorough legal due diligence to identify and understand material legal risks associated with the business and affairs of the target company or group.

Whilst investors or the counterparties to a potential transaction will typically have a pre-determined view on the timeframe for the conducting of a legal due diligence and thereafter for the negotiation and closing of the transaction, experience has shown that the amount of time required to conduct a thorough due diligence into the business and affairs of the target is sometimes underestimated by the parties.

Process duration & value

Whereas a projected timeline to conduct a due diligence and close a transaction is important and necessary, it is sometimes the case that sufficient time is allocated for contract negotiations and the preparation of the transaction documents, but that too little time is allowed for conducting a proper legal due diligence investigation.

The reason for this, in some cases, is that a legal due diligence is viewed as a “formality” which could be completed in a short space of time (or which could be completed concurrently with drafting and negotiating the transaction agreements). Some view it as an expensive exercise and misguidedly believe that they can instead “negotiate warranties, indemnities and ask for security” to cover themselves for any risks which would have been identified by the legal due diligence.

This is an over-simplification of the issue because it begs the question: how can one negotiate and draft for the appropriate protections in a contract if one does not have a clear understanding and appreciation for what risks and issues, they are trying to protect themselves against?

Identifying risks

Bearing in mind that a legal due diligence is aimed at identifying risks associated with the target, the outcome thereof will often lead to


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Read the full article by Jarryd Mardon, Director and Wesley Vos, Senior Associate, Werksmans Attorneys, as well as a host of other topical management articles written by professionals, consultants and academics in the October/November 2023 edition of BusinessBrief.


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