Due diligence and disclosureScope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
In the context of South African private M&A transactions, it would be unusual to proceed with a transaction without having first completed a high level legal and financial due diligence exercise so as to give the buyer a level of comfort regarding the assets that are the subject of the transaction, and to identify any risks that would need to be mitigated by way of additional warranty and indemnity cover. The scope of due diligence varies from deal to deal depending on the specific requirements of the buyer. In South Africa, buyers tend to opt for a limited scope ‘red flags only’ due diligence that seeks to confirm title to the shares or assets that are the subject of the transaction; identify any change of control provisions in material contracts that may be triggered by the proposed transaction; and identify any material undisclosed risks and liabilities.
In the context of a controlled auction process, it is not uncommon for the successful bidder (and its funders for purposes of the proposed transaction) to be given reliance on the due diligence report prepared on behalf of the vendor. However, liability is usually limited to loss arising from the negligence of the person that prepared the report only.Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
A party induced to enter into a contract by a material pre-contractual misstatement intended for this purpose can use a restitutionary remedy to either uphold the contract or claim restoration of any performance that has already been made in terms of the contract. Liability for misrepresentation can, however, be excluded by agreement between the parties (for example, by way of an ‘as is’ clause).
Furthermore, a party may be liable under the law of delict (tort) for any fraudulent or negligent misrepresentation that induces the buyer to enter into the agreement. While negligent misrepresentations may possibly be excluded by agreement between the parties, parties cannot contract out of liability for fraudulent misrepresentation.Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
Publicly available information on private companies in South Africa is relatively limited. Accordingly, it is unusual for prospective buyers to enter into definitive transaction agreements without having completed some level of diligence (unless the transaction agreements themselves are conditional on the completion of a due diligence).
South African private companies are required to register with the Companies and Intellectual Property Commission (CIPC). The publicly available information held by the CIPC is relatively limited and includes elementary details such as registration dates, directors’ names and addresses, and a company’s financial year end. No details are provided on a company’s assets or its shareholding. Copies of a company’s constitutional documents may also be uplifted from the CIPC, although requesting and obtaining this is currently still a time-consuming process. The CIPC has, however, introduced a new automated system to enable online document requests for companies that have registered profiles on its platform.
In addition, any person can, in terms of the Promotion of Access to Information Act, 2000, request documents from a private body, provided that such person follows the relevant procedural steps in requesting the information and can show that it requires the information in order to exercise or protect a right. There may, however, be grounds for refusing such access to a requested document (or part thereof), for example where information is in fact confidential or where information amounts to personal data.Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
As a general principle, a party’s actual or deemed knowledge will not preclude it from bringing a claim for breach of a warranty (unless the agreement expressly provides that actual or deemed knowledge precludes such a claim). However, where a buyer enters into an agreement in manifest bad faith (eg, knowing that a particular set of circumstances exist, which the other party is unaware of, that would make a warranty untrue), a court may refuse to enforce the claim on the basis that to do so would be inimical to public policy (see question 10).