Legal Compliance and Due Diligence

Pakistan Due Diligence Services for Private Clients, Public Companies, Private Companies and SPV’s (Special Purpose Vehicles)

Due Diligence of upcoming Mergers and Acquisitions

Josh and Mak International has developed its due diligence system after many years of careful experienced observations in the field of M&A and our due diligence deal with legal and regulatory issues arising in respect of the proposed acquisition of the equity within the concerned Company, Legal entity of SPV.

Our due diligence reports are known to go the extra mile for our clients. We make it a point to look objectively into a proposed acquisition to ascertain the actual motivation behind the sale and whether the client’s expectations from the equity acquisition in the SPV are well matched with the result of the same. Depending upon the circumstances our team also looks into any previous sale efforts assesses the SPV’s business plans and the complexity of its operations including the reporting hierarchy within its current management. Our team will also look and comment into any related acquisitions or similar transactions in the industry. Additionally as a part of the due diligence exercise; our team also conducts a detailed audit into the Employment agreements, Benefits, Pension Plan Funding etc of the entity.

During the due diligence of any Pakistani SPV structure for infrastructure projects especially in the alternative energy sector we prefer to review the SPV’s structure for factors surrounding its (1) finance-ability; (2) sources of funds; (3) securities and agreements; (4) sovereign support; and (5) credit enhancement. Many of these issues may or may not directly be legal but the answer to them often lies in the actual legal documentation.Our legal services for due diligence involving Private and Public companies are discussed further below.

1.2 Key Points to Consider when reviewing an SPV (Special Purpose Vehicle) for due diligence

  • Corporate/organizational structure of the SPV (This is particularly important because it is important to understand which subsidiary entities are owned by which parent companies, where each one is incorporated, and the ownership of each one. This is an important step in identifying the hidden majority or minority investors buried in the organizational structure of the company.
  • Regulatory matters pertaining to the SPV
  • Loans and security issues pertaining to the SPV
  • Material contracts arising from or in connection to the SPV
  • Property/Asset documents pertaining to the SPV
  • Employment matters (If any)
  • Key litigation or compliance controversies around the SPV, if any
  • Insurance matters pertaining to the SPV.

1.3 Legal Aspects of the Financial Documentation are also examined, for example we would advise the client acquiring equity in an SPV to ideally look for financial statements for the past five years, any legal cash restrictions (for the purposes of performance bonds or letter of credits). The legal status of Disclosures on Audited financial statements is also scrutinized. In connection with this, the legal status of Public filings is also examined for example if a company is publicly held, it must periodically file certain information with the Securities and Exchange Commission of Pakistan. A key area (if applicable) is also the status and period of Contract terminations for the main contracts, in order to determine the remaining stream of payments related to them, when they expire, and the likelihood of obtaining follow-on contracts.

Accounts receivable (if applicable). Our team will review the most recent accounts receivable aging report to see if there are any invoices that are overdue by unusually long periods of time, and find out the reasons why.

1.4 Intellectual Property

Review of any relevant Patents Trademarks, Licensing income, licensing expenses etc.

1.5 Legal Issues pertaining to Equity

  • Shareholder lists along with the share holdings of each one are thoroughly scrutinized, alongwith verification of Classes of stock.
  • Conversion rights if any, within the debt agreements are reviewed to see if the debt holders have the right to convert the debt to shares in the company. It is also important to see whether the expected price per share is likely to trigger any conversions to stock, and what this will do to the controlling interest in the business.
  • The status of options and warrants, unpaid dividends and Stock buyback obligations. Are also scrutinized.

1.6 Taxes

(a) Is the SPV/ company/legal entity continuing to pay taxes and if yes are these the correct amount of taxes?

(b) Are there undisclosed tax liabilities that have never been paid? Many of our clients have expressed profound surprise at this most difficult tax due diligence task, for it addresses the complete absence of tax payments and can be onerous for a lawyer to identity these prior to an acquisition.

1.7 Additional Legal Issues for Private and Public Companies and SPV’s

  1. Current and prior lawsuits, Legal Notices, A Contracts review by the Legal Entity in the past five years. Focus in particular on those requiring fixed payments, royalty or commission payments, or the issuance of stock.
  2. Charter and bylaws (if applicable). We prefer to review all versions of the entity’s charter and bylaws, and compare them for significant changes, which could affect the client interests. These are also important to understand as the voting procedures for key events, such as the sale of the business equity.
  3. Board minutes (if applicable). The board of directors must approve a number of decisions, such as the authorization of more stock, the repurchase of existing stock, certain compensation packages, acquisitions, and so forth. Consequently, we review all board minutes for at least the past five years, and possibly for longer periods of time.
  4. Shareholder meeting minutes.
  5. Audit committee minutes.

The list above is not exhaustive and depends upon the actual facts and instructions for the due diligence request.

Josh and Mak International, provides the following due diligence services For  in Pakistan and legal background check services in Pakistan:

  • Company Background Check
  • Taxation information Checks for a company or individual you wish to deal with
  • Litigation Checks for a possible dispute
  • Immovable Property Background Check

Company Background Check (All over Pakistan)
Our team is able to check the the corporate files of companies maintained as a public record by the Securities & Exchange Commission of Pakistan (SECP) and this allows us to obtain SECP-certified copies of the following documents:

  • Certificate of Incorporation
  • Memorandum & Articles of Association
  • Form 21 (Registered Office Address)
  • Form 29 (Directors & Officeholders)
  • Form ‘A’ (Shareholders & Shareholding Structure)
  • Audited Accounts (including Auditors’ and Directors’ Reports)

Furthermore our team is able to provide corporate due diligence services as follows :

  • Company Address Verification and Search
  • Company Good Standing Check
  • Retrieval of any Corporate Information on file with the SECP

Tax Check (Nationwide)

We are able to obtain the following tax information from the Federal Board of Revenue (FBR):

  • Whether an individual is registered for Income Tax and Sales Tax
  • Name(s) of the tax registered businesses and corporate activities the person is engaged in
  • The Regional Tax Office under whose jurisdiction the individuals tax obligations arise.

Litigation Check (Nationwide )

We are able to obtain the following information/documents from the Courts:

  • Complete Case File (Pleadings & Annexures)
  • Details of Case
  • Name of Court
  • Name of Judge(s)
  • Hearing Dates
  • Court-Certified Order Sheet

Immovable Property Check (Service Available Nationwide)                  

We are able to obtain the following information/documents from the relevant land revenue authorities regarding immovable property:

  • Ownership of Immovable Property
  • Encumbrances or Disputes over Immovable Property
  • Status of Immovable Property (Commercial or Residential)
  • Immovable Property Tax Payment Record (Form PT-1)

DEVELOPING A LEGAL COMPLIANCE PROGRAM FOR A CORPORATE OR ENERGY SECTOR (Public and Private Companies and Special Purpose Vehicles/SPVs)  ENTITY(s) IN PAKISTAN

If you are interested in developing a legal compliance programme for a Company, please send us an email at [email protected]

What does Legal Compliance mean?

Compliance with relevant legislation, rules, regulations, standards, official guidelines and contracts (with Government of Pakistan)

A brief example of our Legal Compliance Program designed for a corporate client in an Oil and Gas sector would ideally include the following:

Ensuring for foreign subsidiaries, implementation of Legal Compliance Process within their companies which is required for the following reasons:

  • Preservation of legal position
  • Liability of the company and its employees
  • Code of Conduct
  • Publicity
  • Reputation of the country as a partner
  • Transparency for the Board of Directors/Supervisory Board/Shareholders
  • System of management and control
  • Knowledge Transfer

A good Legal Compliance System

  • We believe that a failure to comply with the applicable laws, rules, regulations and the petroleum rights related agreements (with the Government of Pakistan), particularly deadlines specified in the applicable laws and contracts can result in adverse judgments having financial impact, penalties and embarrassing notices from the regulators.

How can we help in introducing L-C (Legal Compliance ) at your company :

(1) proposing measures for introducing LC-process in progress; working groups at the level of divisions defined; measures being accomplished

(2) proposing an LC-process including responsibilities and resources approved by management board; decision how to structure legal register, database/Excel, made; action plan for insertions in legal register existent

(3) Ensuring that a legal register is fully established, a legal register for public authorities management, a system of agents/deputies arranged and alive

(4) propose and set up a legal check or independent audit respectively; ensuring that a proper process is implemented and alive; adjustments and preventive measures in the area of L-C are accomplished

Key Elements of Legal Compliance Programs Managed by us :

  • Adoption at the Highest Level
  • Legal compliance registers for each Operated Asset is set up and checklist of requirements is prepared
  • Allocation of responsibilities for each requirement
  • Responsible persons to certify compliance with respect to their part of checklist, each quarter
  • Education and Legal Training of Responsible Persons
  • Legal Compliance Register to be regularly Updated
  • Periodic Audit
  • Enforcement
  • Record-keeping

Working closely with the Commercial / Legal Manager of the company our Firm has, in the past, identified relevant legislation, rules, regulations, standards and contracts for activities performed,  in consultation with Legal Consultant.Training and consultation ensures that under his guidance departments shall scan and confirm compliance with regard to certain aspects of legislation, every quarter, using the Legal Compliance system developed by us, making reference to , for example:

  • Legal – corporate, land, registration, stamping, etc.
  • HR – employment related laws
  • FM – accounting regulations, tax laws, etc.
  • HSEQ – environmental and occupational health and safety laws
  • ADMIN – zoning (CDA), immigration, security
  • PROC – customs, EDB, etc.
  • OPS/ DRL/ ERM– drilling and production operations related laws

As a part of the outsourced unit for Legal Compliance, our team endeavours to

  • seek comments from responsible managers regarding reasons for non – compliance of requirements having legal/ fiscal exposure and estimated time frame for complying with such requirements.
  • address complaints, including anonymous complaints, regarding non – compliance.
  • prepare legal compliance report for the GM, which shall include reasons for non compliance of requirements having legal/ fiscal exposure and estimated time frame for complying with such requirements.
  • submit a monthly legal compliance report to the client company and determine necessary actions in case of non-compliance
  • Regularly monitor action plan and its implementation
  • Distribute Legal Compliance Registers for all of the client company’s Pakistan operated assets.

These legal registers generally include :

  • lists of applicable: federal, provincial and local Law
  • Contracts (PCAs, PSAs, Exploration Licenses, DP Leases, JOAs)
  • Details of other documents, such as international conventions, Decrees / administrative orders, AMIs, Software Licenses, these also include lists of applicable regulators.

There is also a monthly submission of legal (non-) compliance reports listing all matters of non-compliance , which shall include reasons for non compliance of requirements having legal/ fiscal exposure and estimated time frame for complying with such requirements.

Clients are also equipped with a comprehensive and exhaustive compliance check list of legal requirements under about more than 100 Pakistani laws and petroleum rights related agreements (with the Government of Pakistan). This is accompanied by a calendar of deadlines specified in the laws, rules, regulations   and petroleum rights related agreements (with the Government  of Pakistan).