. 126
( 131 .)


munication and feedback.
Comments on application for small SMEs:
Being sensitive to the risks the enterprise is facing both short and long
term is essential even if formal processes do not exist.
People strategy Future requirements for people:
A leadership succession plan.
Plans for key skill groups.
A people plan linked to the business plan.
* Individual goal setting, appraisal and development planning:
Regular personal performance coaching between leaders and
key staff.
Feedback from employees (or by company mentor) to head of
Distinct review of directors by their (internal) peers.
* Basic training:
Induction and formal training courses.
Training courses, both interpersonal and skills based.
Comments on application for small SMEs:
In very small companies the acquisition of skills may be less
formal. External providers may be used for specific skills
Appendix G “ CBC framework for corporate governance for SMEs

Communication * Identification of stakeholders: Recognising those parties “ other
and engagement than the owners of the business “ that have a legitimate interest in
an enterprise such as employees, suppliers, customers of funding,
tax and regulatory authorities and local communities.
* Timely communication and provision of appropriate information to
investors and stakeholder groups. Interaction with stakeholders on a
basis that involves genuine and proactive dialogue.
Conflicts of Recognition by management of their duties to the owners of the
interest business.
Avoidance of conflicts of interest.
Maintenance of a register of business and financial interests of
directors and senior staff and their immediate family.
Compliance Compliance with all relevant laws, regulations and codes of best
practice. These include both local and international markets.
Control Adequate internal control systems.
environment and * Periodically reviewed by independent (external) auditors.
processes * Open disclosure of internal control weaknesses or failures, with
formal remedial action.
Comments on application for small SMEs:
All but the smallest, non incorporated entities should be subject to
independent external audit.
Transparency * Quarterly financial reports prepared by internal accounting and
and disclosure approved by the Board.
* Annual financial statements audited by independent external audit-
ors and approved by Shareholders™ Meeting.
Comments on application for small SMEs:
For very small companies the financial statements may be very simple
in nature and largely cash flow based.
Business partners Encouragement and promotion of good standards of corporate
and Contractors governance among partners, suppliers, contractors and customers.
As progress is made, subcontractors should also be considered.

OECD policy framework for
H OECD policy framework for

The OECD in setting out a ˜Policy framework for investment™ (2006) has defined
a set of questions concerning what needs to be in place to support good corporate
governance and to promote responsible business conduct. These questions are
reproduced below.
Corporate governance:
1. What steps have been taken to ensure the basis for a corporate governance
framework that promotes overall economic performance and transparent
and efficient markets? Has this been translated into a coherent and consist-
ent regulatory framework, backed by effective enforcement?
2. How does the corporate governance framework ensure the equitable treat-
ment of shareholders?
3. What are the procedures and institutional structures for legal redress in
cases of violation of shareholder rights? Do they function as a credible deter-
rent to such violations? What measures are in place to monitor and prevent
corporate insiders and controlling owners from extracting private benefits?
4. What procedures and institutions are in place to ensure that shareholders
have the ability to influence significantly the company?
5. By what standards and procedures do companies meet the market demand
for timely, reliable and relevant disclosure, including information about the
company™s ownership and control structure?
6. How does the corporate governance framework ensure the board plays a cen-
tral role in the strategic guidance of the company, the effective monitoring of
management, and that the board is accountable to the company and its
shareholders? Does the framework also recognise the rights of stakeholders
established by law or through mutual agreements and encourage active
cooperation between corporations and stakeholders in creating wealth, jobs
and the sustainability of financially sound enterprises?
7. What has been done, and what more should be done in terms of voluntary
initiatives and training, to encourage and develop a good corporate govern-
ance culture in the private sector?
8. Has a review been undertaken of the national corporate governance system
against the OECD Principles of Corporate Governance? Has the result of that
review been made public?
Appendix H “ OECD policy framework for investment 707

9. How is the ownership function of state-owned enterprises (SOEs) structured
to ensure a level playing field, competitive market conditions and independ-
ent regulation? What are the processes in place to ensure the state does not
interfere in day-to-day management of SOEs and that board members may
effectively carry out their role of strategic oversight, rather than to serve as a
conduit for undue political pressure? How are SOEs effectively held account-
able to the government, the public and to other shareholders (if any)?
This page intentionally left blank

Transaction due diligence
I Transaction due diligence

Types of documents
In a transaction such as the sale of a business the materials and main docu-
ments will typically include some of the following documentation:

Due diligence preliminary enquiries, further enquiries and the seller™s responses
to them;
Heads of agreement;
Due diligence terms of reference “ engagement letter “ accountants;
Instructions for accountants™ short and long form report;
Due diligence terms of reference “ engagement letter “ lawyers;
Environmental audit “ engagement letter;
Exclusivity agreement;
Confidentiality agreement;
Data room letter;
Due diligence rules of engagement;
Funding comfort letter;
Environmental comfort letter;
Due diligence reports;
Report on title; and
Legal opinion of foreign lawyers.

Exchange of contracts
Disclosure letter;
Sale and purchase agreement;
Tax indemnity;
Service agreements;
Intellectual property assignments and licences;
Real property transfers;
Assignment of contracts; and
Directors™ meeting minutes;
Appendix I “ Transaction due diligence documentation 711

Shareholders™ resolutions and circular;
Letters to customers;
Stamp duty and company registry forms;
Governmental consents;
Release of charges, guarantees; and
Closing agenda.

Ongoing action for the due diligence teams regarding
the transaction documentation
Throughout the transaction, the legal due diligence team leader for both the
seller and the buyer needs to peruse any transaction documentation which
might affect the due diligence exercise. Each draft of the documentation should
be checked for any amendments made affecting the due diligence. One docu-
ment that the legal due diligence teams on both sides are usually responsible
for is the disclosure letter. As will be seen from the discussion below, following
the initial meeting with the client, the buyer or seller and its lawyers will have
a number of tasks to undertake, including:
Selecting and instructing other advisors;
The preparation of legal due diligence enquiries;
Agreeing terms of engagement and reference with them and any in-house due
diligence teams;
Planning the campaign;
Agreeing various preliminary documents with the other side, including:
Heads of agreement;
A confidentiality agreement;
A lock-out agreement; and
Rules of engagement;
Project and data management; and
Starting the data acquisition/disclosure process.

Typical transaction procedures
Comment has already been made regarding the usual due diligence process.
However, the due diligence process may vary according to the following situations:
Sale by auction; or
Sale by treaty.
In the case of both a sale by auction and a sale by treaty, a number of prelim-
inary steps may be taken:
The seller will obtain a valuation of the target and possibly instruct a cor-
porate financier to find a buyer;
Appendix I “ Transaction due diligence documentation

The seller will:
Instruct its corporate financier (if any), accountants and lawyers to do
some analysis of the target to identify any major issues to be addressed
(such as subsidiaries to be hived out);
Analyse the taxation ramifications of the sale for the seller; and
Commence the grooming of the target for sale;
The seller may prepare an information memorandum regarding the target for
potential interested parties;
The seller will require any interested parties to execute a confidentiality
agreement before issuing the information memorandum to them;
The buyer may undertake some basic due diligence into markets, political
risk, compatibility of organisational cultures; and
The buyer may also involve its accountants in some preliminary analysis of
the seller™s financial accounts.

Sale by auction or tender
It is evident that the seller can improve the terms of its sale by creating a com-
petitive environment where a number of bidders are given access to the due
diligence data and make bids for the target. In many cases the sale is not strictly
an auction in that the seller is not obliged to accept the highest bid. The typical
sequence of events in a sale by auction is as follows:
With the issue of the information memorandum the seller may request that
bidders respond by a specified date with an indication of the price to be
offered and the assets desired;
The seller is likely to issue a data room agreement to each bidder;
Each bidder will be allotted a certain amount of access to the data room and
possibly to target personnel for additional information;
The bidders may submit requisitions for further information which the seller
may respond to;
The buyer™s in-house due diligence team, if any, prepares their due diligence
The buyer™s accountants prepare their draft due diligence report. Often, this
is sent to the seller for comment on any inaccuracies;
The buyer™s lawyers may provide a due diligence report, which is not usually
provided to the seller;
The bidders submit their bids;
The seller will select one or more bidders with whom to continue negoti-
ations unless a bidder persuades the seller to enter into an exclusivity agree-
ment whereby the seller agrees not to negotiate with any other party for a
period of time or not to conclude a sale with any other party;
The buyer may negotiate basic heads of terms with the seller;
The buyer may be permitted additional time to undertake due diligence;
The negotiations concerning the warranties, which have been ongoing for
some time, are finalised close to exchange of the sale and purchase agreement;
Appendix I “ Transaction due diligence documentation 713

The seller™s lawyers produce a draft disclosure letter, exempting facts and
documents from the warranties.
It should be appreciated that this is a basic structure for the process of conduct-
ing a sale by auction or tender. All of these should, of course, be amended to
reflect the individual circumstances of the transaction. Similar comment
applies to the discussion of sale by treaty below.

Sale by treaty
The typical sequence of events in a sale by treaty is as follows:

The buyer may negotiate basic heads of terms with the seller;
The buyer may insist that the seller enters into an exclusivity agreement
whereby the seller agrees not to negotiate with any other party for a period of


. 126
( 131 .)