The importance of conducting Due Diligence in the UAE

January 11, 2021

By Mahmood Shakir, Senior Associate

Due diligence is commonly defined as an investigation, audit or review performed to confirm the facts of a matter under consideration. In the financial and legal world, due diligence typically requires an examination of original certificates, accounts, pending or threatened litigation and details of assets, to name a few. The due diligence stage is an essential element to a successful transaction as it allows the buyer to assess and verify the veracity of the relevant facts and information pertaining to the business in order to determine whether or not to proceed with the transaction.

In our experience we as a firm have seen that business relationships can turn sour as one party failed to conduct a thorough due diligence of the other, whether a person or a company, before finalising the commercial transaction. This is the reason that we routinely advise our clients to conduct thorough due diligence, both financial and legal, to ensure that they have a clear and concise picture of the facts pertaining to the commercial transaction they are entering into.

For instance, when the transaction involves an individual as the other party, the due diligence typically involves investigating if the person has any litigation pending against them before the local courts in the UAE, whether civil or criminal. At this stage, it may be discovered that a person has bounced cheques lodged against them in a police station, or an embezzlement case has been filed against them before the civil courts. In our experience, while conducting such due diligence it has previously been discovered that the concerned individual has been convicted under the UAE Penal Code and an order of deportation has been issued. Therefore, it is essential that a thorough due diligence is carried out on individuals before entering into an agreement. It is even more important to do so before accepting any cheques, as certain details discovered at this stage may indicate that the concerned individual poses a flight risk.

For companies, we would devise a comprehensive strategy to conduct a due diligence on behalf of our clients. This is because gathering all the relevant information is usually not very straightforward especially when it comes to businesses with complex corporate structures. As such, the following aspects, amongst others, are routinely scrutinised when performing a legal due diligence on a company:

1. General corporate matters;
2. Claims, litigation and arbitration;
3. Consents, regulatory issues and compliance with laws;
4. Personnel and employee benefits;
5. Intellectual property rights;
6. Real/tangible property;
7. Insurance;
8. Financing and banking;
9. Contracts;
10. Financial accounting and expenditures

However, please note that the above list is for illustrative purposes only and is strictly non-exhaustive. There is no one-size-fits-all approach to conducting an effective due diligence and a professional law firm must be engaged to carry out the same.