Legal And Financial Due Diligence In Zimbabwe – Corporate Governance

Due Diligence – An overview

The word ”diligence” appears three (3) times
in the Companies and Other Business Entities Act Chapter
24:31 (hereinafter, “the Act”). It first appears
under section 17 of the Act where the Companies Office or Registrar
of Companies is absolved of any liability arising from failure by
Companies Office employees to exercise diligence in carrying out
their duties. Section 54(1) on duty of care and business judgement
rule requires managers and directors of companies and private
business corporations to conduct themselves in a manner that a
diligent business person would do under similar circumstances.
”Diligence” also appears under Section 220(1) of
the Act where it provides for corporate governance guidelines to
public companies in that board charters should include diligence
conduct by board members in reviewing materials. The Cambridge
dictionary defines ”due diligence” as
‘‘action that is considered reasonable for people to be
expected to take in order to keep themselves or others and their
property safe’‘. It follows that due diligence is
closely linked to the duty of care and business judgement rule of
directors and mangers as given in Section 54(1) of the Act.

Performing due diligence

The duty of care and business judgement rule calls upon
management and the board to act in good faith where decision making
should be done in the best interests of the company. Due diligence
requires application of care, skill and attention, attributes that
management and board members should possess. The barometer of
performance is that of a diligent person, which means management
and board members should be fully aware of a business’s income
earning structure to provide meaningful direction to its strategy
and operations.

Sources of reliable information for due
diligence

Decisions that protects an organisation’s interests, other
people, property as well as the decision makers themselves should
be based on reliable information and credible sources. Independent
auditors, lawyers and independent experts provide reliable
information to management and the board, which they can rely on
with regards to legal and financial due diligence where complex
decisions are required. Decisions to do with irregular
transactions, partnerships, investments, buy-outs, take-overs and
mergers where value is not easily ascertainable require expert
advice in terms of analysis, drafting and interpretation. The
ever-changing economic and legal landscape in Zimbabwe which has
seen evolvement of local currency to the current Zimbabwe Gold
(ZiG), use of multi-currency system, blocked funds and/or legacy
debts and various statutory instruments supporting the same, makes
it imperative for management and directors to seek and use reliable
information in order to make sound decisions. Company boards should
comprise of members who possess the various skills which would make
it possible for proper legal and financial due diligence where
required.

Fulfilling due diligence role

In Zimbabwe, due diligence should be fulfilled by meeting the
prescribed measuring barometer that of conduct expected of a
diligent person under similar circumstances. Management and the
board should perform due diligence and consult when in doubt. There
is need to act in the best interests of the organisation, avoid
personal interest and/or conflict of interest, be fully informed
and believe that judgement is in the best interest of the company.
The key aspect is for management and the board to ensure that there
is no indemnification from company by-laws or articles of
association as well as the Act. Appreciation of relevant articles
in the print and electronic media, summaries of recent legislation
and statistical data on inflation and exchange rates all help
achieve the set barometer for due diligence.

Conclusion

The national code on corporate governance in Zimbabwe of 2014
includes due diligence as part of the role and function of the
board under chapter 3. The due diligence role is infused with the
concept of Ubuntu/Hunhu which should be the guiding
principle for management and the board. It calls for directors to
be knowledgeable about a company’s operations and operating
environment. The central role of the Company Secretary should
ensure that management and board members are well developed through
induction and continuous development seminars to positively impact
on the organisation’s performance. Legal and financial due
diligence in Zimbabwe remains key to overall success of an
organisation.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.