In South African private M&A transactions, purchasers typically conduct legal, financial, and operational due diligence investigations to identify risks that would need to be mitigated by way of the inclusion of conditions precedent, additional warranty and indemnity cover. The scope varies based on purchaser needs and industry specifics.
In South Africa, the prevalent approach is the "red flag" due diligence, focusing on aspects like title confirmation, change of control provisions, regulatory consents, and material contract risks.
Comprehensive due diligence tends to result in more focused seller warranties, while limited due diligence prompts purchasers to seek extensive warranties and indemnities.
In larger transactions where the seller has shortlisted several potential purchasers, the seller may commission an independent vendor due diligence report, which report is then made available to the shortlisted purchasers. This allows for an “auction style” sale process. In these instances a duty of care is arguably owed by the person preparing the report to the purchaser.
Ultimately, conducting a due diligence is essential for mitigating risks, making informed decisions and ensuring the success of an M&A transaction.