Due diligence is a crucial process for business teams, investment bankers, and legal counsel to investigate the risks of a proposed project.
This investigation can cover various aspects, including legal and financial matters, as well as technical and operational ones.
The findings of due diligence can have a significant impact on a transaction agreement, influencing representations and warranties, indemnification clauses, and even the purchase price or investment amount.
A challenging aspect of due diligence is probity, which focuses on an enterprise's ethical behavior and adherence to principles of accountability and transparency.
A potential buyer can be concerned with how a target deals with regulatory agencies and whether inappropriate behavior is part of its playbook.
The buyer can inherit potential liabilities or suffer a reputational fallout if the target's financial performance is not replicable post-closing.
Assessing probity can be a sensitive and difficult exercise, as representatives of a target may be unwilling to admit to unethical behavior.
Consultants can gather background and anecdotal information, but financial forensic investigation may be necessary to identify suspicious money trails.
A buyer or new investor may need to have a candid discussion about probity with the target or other counterparty, especially in a joint venture scenario.
Understanding local laws on graft and corrupt acts is essential in preparing for this conversation.
Different jurisdictions have varying laws, so a foreign company must determine the relevant local regime compared to its home jurisdiction.
The Philippines has anti-graft-related laws, including the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, and Presidential Decree No. 46.
Bribery is a key red flag, and an investment team must recognize its forms, including direct and indirect bribery.
Direct bribery involves the demand, solicitation, and receipt of gifts or benefits, while indirect bribery involves donating or giving funds to a public officer.
Some anti-graft statutes impose penalties regardless of the nature and value of the gifts or benefits.
The United Nations Convention Against Corruption defines commercial bribery as bribery in the private sector, but no laws have been enacted in the Philippines to impose penal sanctions on private sector bribery.
A probity audit could involve determining if a target has an anti-bribery policy, procedures to ensure transparency, and other safeguards.
Having a policy is one thing, but observing it is another, and a probity audit must assess whether the policy is being followed in practice.
This approach can help identify potential issues and ensure that a target is adhering to principles of accountability and transparency.
