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 an attempt to reduce costs, there is more red flag due diligence being carried out as opposed to narrative and comprehensive reports being issued for such purpose.
Specific consideration is given to matters such as:
- anti-fronting laws and foreign ownership restrictions;
- real estate ownership restrictions and hidden costs;
- change of control provision in material agreements; and
- employee gratuities and pension schemes.
It has become customary for the seller to organise a virtual data room (VDR) onto which documentation of a legal and financial nature is uploaded. The use of VDRs makes the process much more efficient, particularly if the VDR service provider is a sophisticated one. Generally, sellers are also more open to adopting a full disclosure approach, after having the comfort of executing non-disclosure agreements with potential buyers. However, it is not very common to produce vendor due diligence reports except in large-scale deals owing to the cost involved.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 seller can be liable for pre-contractual misrepresentation or misleading statements. Under the Civil Code, misrepresentation is ‘when one of two contracting parties deceives the other by means of trickery or word or deed which leads the other to consent to what he would not otherwise have consented to’ (article 185, Civil Code). Therefore, misrepresentation does not include statements made innocently or negligently. It requires a deliberate act, including deliberate silence or omission, and the burden of proof can be quite high. Article 185 of the Civil Code only applies between the parties to a contract. The parties to an agreement can exclude any liabilities except that resulting from fraud, gross negligence and wilful misconduct.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?
Very little information on private companies incorporated in the UAE is publicly available. In particular, a private company’s articles of association and licences do not form part of any publicly available record in the UAE. To conduct an effective due diligence on the target is, therefore, not possible without the cooperation of the target and its management and shareholders.
It is possible to carry out a limited search for a company in person at the local Chamber of Commerce in Dubai and Abu Dhabi. Practices differ between emirates, but a business report providing a brief company profile will generally be available.
In addition to reviewing information provided by the seller, legal review will involve conducting appropriate searches and investigations at public registries and authorities; however, this would require the cooperation of the seller and target company.
For certain free zones, limited information on companies are accessible through the relevant free zone authority website.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?
If proven, actual knowledge may adversely impact claims a buyer may seek against a seller; however, deemed knowledge would be assessed by the courts on a case-by-case basis, unless it relates to any wilful misconduct, gross negligence or fraud.