Pre Transaction Due Diligence in Mergers and Acquisition

Mergers and Acquisitions (M&A) refer to a range of corporate restructuring transactions through which companies combine, consolidate, or transfer ownership and control of business operations or assets. A merger typically involves the fusion of two or more companies into a single legal entity, often with the objective of achieving operational synergies, expanding market reach, or strengthening competitive positioning. An acquisition, on the other hand, occurs where one company purchases a controlling interest in another company, either by acquiring its shares or assets, thereby assuming ownership and, in most cases, managerial control, while the acquired entity may continue to exist as a separate legal entity or be absorbed into the acquiring company.

In commercial practice, M&A transactions are strategic tools used to facilitate growth, diversification, risk management, access to new markets or technologies, and corporate reorganization. Due to their complexity and potential legal, financial, regulatory, and operational implications, M&A transactions are typically preceded by comprehensive pre-transaction due diligence to identify risks, verify value, and inform decision-making.

Pre-transaction legal due diligence is a critical stage in mergers and acquisitions (M&A) transactions in Nigeria. It involves a comprehensive investigation of the target company’s legal status, assets, liabilities, compliance history, and contractual obligations before the transaction is completed. The objective is to identify legal risks, confirm ownership and authority, assess regulatory compliance, and ensure that the acquiring party is fully informed before assuming control or investing capital.

In the Nigerian M&A landscape, where regulatory oversight, sector-specific approvals, and historical compliance gaps are common, legal due diligence is a risk-management tool that can influence transaction structure, pricing, warranties, indemnities, and even the decision to proceed with the transaction at all.

Legal Framework Governing M&A Due Diligence in Nigeria

In Nigeria, the obligation and scope of due diligence derive from several statutory and regulatory regimes, including:

-The Companies and Allied Matters Act 2020 (CAMA 2020)

-The Investment and Securities Act 2025 (ISA)

-The Federal Competition and Consumer Protection Act 2019 (FCCPA)

-Sector-specific regulations issued by bodies such as the Central Bank of Nigeria (CBN), Nigerian Communications Commission (NCC), and Nigerian Upstream Petroleum Regulatory Commission (NUPRC)

-Courts have also consistently recognised that parties to commercial transactions are bound by the principle of caveat emptor, subject to disclosure obligations and contractual representations.

Objectives of Pre-Transaction Legal Due Diligence

Legal due diligence in M&A transactions typically seeks to:

a) Confirm the legal existence, ownership, and corporate capacity of the target company
b) Identify actual and contingent liabilities
c) Assess regulatory and statutory compliance
d) Verify title to assets and intellectual property
e) Review material contracts and employment obligations
f) Detect pending or potential litigation and disputes
g) Inform negotiation of transaction documents

Scope of Legal Due Diligence in Nigerian M&A Transactions

Corporate and Corporate Governance Review
This aspect focuses on the target company’s incorporation documents and internal governance framework. Key documents reviewed include:

a) Certificate of Incorporation and status reports from the Corporate Affairs Commission
b) Memorandum and Articles of Association
c) Share capital structure, allotments, and share registers
d) Board and shareholder resolutions
e) Compliance with filing obligations under CAMA 2020

Failure to comply with corporate formalities may expose the transaction to post-completion challenges.

Shareholding and Title to Shares
Due diligence must confirm that selling shareholders have good title to the shares being transferred and that no encumbrances exist. This includes reviewing share transfer instruments, shareholders’ agreements, pre-emption rights, and restrictions on transfer.

In Yalaju-Amaye v. A.R.E.C. Ltd (1990) 4 NWLR (Pt. 145) 422, the Supreme Court emphasised the binding nature of corporate resolutions and proper authority in company transactions, which shows the need to verify internal approvals during due diligence.

Regulatory and Statutory Compliance
Regulatory approvals are often transaction-critical in Nigerian M&A deals. Legal due diligence must identify whether:

a) Merger notification and approval is required under Sections 92–96 of the FCCPA
b) Securities of a public company are involved, triggering compliance with ISA and Securities and Exchange Commission rules
c) Foreign participation requires registration with the Nigerian Investment Promotion Commission under the NIPC Act
d) Sector-specific consents are mandatory

Failure to obtain required approvals may render the transaction void or expose parties to sanctions.

Contracts and Commercial Obligations

Material contracts reviewed during due diligence include:

a) Supply and distribution agreements
b) Loan and security documents
c) Joint venture agreements
d) Leases and guarantees

Special attention is paid to change-of-control clauses, termination rights, and consent requirements.

Employment and Labour Matters
Employment due diligence assesses compliance with the Labour Act, pension obligations under the Pension Reform Act 2014, and employee benefit schemes. Issues such as severance obligations, trade union agreements, and pending employment disputes are critical as employment rights and obligations may survive corporate restructuring, making employment review essential.

Litigation and Dispute History|A thorough search of pending and threatened litigation is conducted to identify risks that may crystallise post-completion. This includes reviewing court processes, arbitral proceedings, and regulatory investigations.

Under Nigerian law, liabilities arising from litigation may transfer to the acquiring entity, depending on transaction structure.

Property and Asset Title Review
Legal due diligence verifies ownership of land and property in accordance with the Land Use Act 1978, including governor’s consent, perfection of title, and existing encumbrances.

In Savannah Bank Ltd v. Ajilo (1989) 1 NWLR (Pt. 97) 305, the Supreme Court held that failure to obtain governor’s consent renders certain land transactions ineffective. This is a risk that can be identified during due diligence.

Tax Compliance
Tax due diligence examines compliance with federal and state tax laws, including company income tax, VAT, withholding tax, and stamp duties. Outstanding tax liabilities may survive acquisition and attach to the target company.

Impact of Due Diligence Findings on Transaction Structure

The outcome of legal due diligence directly influences:

a) Purchase price adjustments
b) Conditions precedent
c) Representations and warranties
d) Indemnity provisions
e) Choice between share acquisition and asset acquisition, etc.

Where significant risks are identified, parties may restructure the transaction or withdraw entirely.

Conclusion
Pre-transaction legal due diligence is an indispensable component of mergers and acquisitions in Nigeria. It provides clarity, exposes hidden risks, and ensures compliance with Nigeria’s complex regulatory environment. Given the potential for inherited liabilities and regulatory sanctions, parties who neglect thorough legal due diligence do so at considerable risk.

For investors, acquirers, and merging entities, engaging experienced legal advisers at the pre-transaction stage is essential to achieving a legally sound and commercially successful M&A transaction.