Legal

Due Diligence Report

prepared by

Legal Legends Associates

for

(“Acquirer”)

in respect of

(“Target”)

as at

2019
Introduction

1. Background

1.1. Legal Legends has been requested by herein after referred to as (the “Acquirer”) to undertake a legal due diligence investigation of
the business and affairs of ( ” or the “Target”) (the "Investigation").

1.2. The principal aim of the Investigation is to identify any potential or contingent legal risk associated with the Target which may have an impact on the
negotiation, structuring and implementation of the proposed acquisition of 100% of the members interest in the Target by the Acquirer (the “Proposed
Transaction”).

1.3. The scope of the Investigation is limited to the information made available to Legal Legends for the purpose of disclosing confidential information to
the Acquirers and their advisors.

2. Format of this due diligence report ("Report")

This document is divided into four sections:

2.1. this introductory section, including the status of this report and Legal Legends assumptions in preparing this Report;

2.2. the definitions used in this Report;

2.3. the red flag issues report, with key issues and suggestions going forward relevant to the Proposed Transaction; and

2.4. the key issues list, being an executive summary of the material issues described in the Report.

3. Status of this report

3.1. This Report sets out the results of the Investigation and the review performed by Legal Legends in the period from in relation to the various documents
furnished to and reviewed by Legal Legends.
3.2. This Report sets out only those findings which in the professional discretion and opinion of Legal Legends are material issues which have a bearing
on either the implementation of the Proposed Transaction or which would have a material influence on the Acquirers’ decision whether or not to
proceed with the implementation of the Proposed Transaction. In the circumstances, the potential for undisclosed documents, arrangements and
agreements which may constitute a risk for the Acquirers in relation to the Proposed Transaction does exist.

3.3. This Report pertains only to the legal aspects of the documentation provided to us and we have not reviewed or commented on any commercial,
financial, scientific or technical aspects.

3.4. As such, Legal Legends sought to isolate, through the Investigation and based on the documentation provided, those material issues relating to the
Target of which the Acquirers should be aware in order to determine whether the Proposed Transaction should occur.

3.5. This Report is to be considered as part of the overall process of due diligence being undertaken by and on behalf of the Acquirers in relation to the
Target and the Proposed Transaction and is not to be taken in isolation. We do not accept responsibility for assessing the commercial or technical
implications of the documents or information reviewed by us (as such a review would require, among other things commercial and industry knowledge
and expertise as well as a full understanding of the Acquirers’ commercial plans), although we have sought, where possible, to highlight matters which
we consider, in our professional discretion and opinion, to be commercially significant. Accordingly, this review should not be seen as a substitute for
examination of appropriate documents and materials by commercial and technical personnel and advisors.

3.6. This Report does not contain a detailed description of each document reviewed and its purpose is to set out those material legal issues which we
consider, in our professional discretion and opinion, to be material in the context of the Proposed Transaction. Reliance should not be placed solely
on any of the summaries contained in this Report, which are not intended to be exhaustive of the provisions of any document or circumstances. It is
important to note that the Investigation does not consist of a full and comprehensive due diligence investigation.

3.7. Unless otherwise expressly agreed by us in writing, no person other than the Acquirers is entitled to rely on this Report, and we shall have no
responsibility or liability to any party who has access to this Report, whether in contract, delict (including negligence) or otherwise.

3.8. It is recorded that this Report is strictly confidential and may not be released to any person who has not signed the appropriate release letter in favour
of Legal Legends.
4. Scope of the Investigation

4.1. The Target was furnished with a due diligence data questionnaire setting out those documents and information which Legal Legends required for
consideration in the Investigation.

4.2. Documentation was made available via email.

4.3. In accordance with our instructions, any financial, accounting, auditing and tax issues were specifically excluded from the scope of our review.

5. Assumptions

This Report has been prepared on the basis of the following assumptions:

5.1. any photocopies of documentation made available to us are complete and true copies of the originals, that any signatures and/or seals thereon are
genuine and authentic and that agreements were concluded under due and proper capacity, power and authority (to the extent that any of the
documentation and/or information made available to us turns out to be inaccurate, incorrect or false, we make no representation as to the accuracy
and completeness of this Report);

5.2. the information reflected in the documents provided is accurate – we have not verified such accuracy independently;

5.3. there have been no variations to the documentation as presented to us;

5.4. the terms of such documentation have been complied with in all respects;

5.5. all documents reviewed, which were signed on behalf of the parties, were concluded under due and proper capacity, power and authority;

5.6. the reports and opinions expressed are not adversely affected by the laws of any jurisdiction other than those of South Africa;

5.7. the documents and information provided by the Target are all that is necessary in order to address the issues under Investigation or all that is in fact
available; and
 5.8. except where expressly stated by us to the contrary all transfer duties and/or similar duties, taxes or levies relating to the documents and the
transactions contemplated therein have been paid in full on the due date.

6. Disclaimer

6.1. This Report is addressed to the Acquirers solely for its use and benefit and may not be transmitted to any other person without our prior written
consent, except in those instances where the Acquirers may be obliged by law to do so.

6.2. This Report may not be relied upon by any person other than the Acquirers and may not be used for any purpose other than the consideration by the
Acquirers of the Proposed Transaction. We shall accordingly not accept any responsibility for any loss or damage suffered by any person other than
the Acquirers as a result of reliance on the contents of this Report.

6.3. We reserve the right to amend this Report in the light of any new information received but do not undertake any obligation to do so.
General Definitions

The following terms shall have the meanings set out below when used in this Report:

6.4. The following definitions should be used to the extent relevant:

6.4.1. "Acquirers" means ;

6.4.2. “CIPC” means Companies and Intellectual Property Commission;

6.4.3. “Companies Act” or “New Act” means the Companies Act 71 of 2008;

6.4.4. “Distribution Agreement” means the agreement entered into between the Target and (therein referred to as
the Supplier) for the supply and distribution the k product;

6.4.5. “Employment Contract” means the standard form employment contracts entered into between (“ ”) and
( ) and the Target respectively;

6.4.6. “Insurance Policy” means the insurance policy entered into between and the Target in respect of the business of the
Target;

6.4.7. “Lease Agreement” means the agreement of lease in respect of the Premises entered into between and the
Target;

6.4.8. “POPI” means the Protection of Personal Information Act 4 of 2013;

6.4.9. “Premises” means the leased premises situated at ;

6.4.10. “Proposed Transaction” the transaction whereby 100% of the in the Target will be purchased by the Acquirer from
the Seller;
6.4.11. “SADC Countries” means the countries of
;

6.4.12. “Seller” means ;

6.4.13. “Supplier” means (owner of the product name);

6.4.14. “Target” or “Distributer” or ” means Registration number: );

6.4.15. “VAT” means value-added tax in terms of the Value-Added Tax Act 89 of 1991;
Red Flag Issues Report Summary of key findings and suggested actions going forward

1. It is advised that the Acquirer should consider converting the Target which is currently a into a private company post the acquisition
for the various reasons set out in the Report below.
2. The Distribution Agreement poses a risk to the Acquirer. The Targets business is dependent on this agreement been in force, if this agreement is
terminated by the Supplier, the Target will no longer have a business as the Target will no longer be permitted to trade under the name ‘ ’ or to
sell products (which appears to be the principal business of the Target as set out in the founding statement). The risk posed by the Distribution
Agreement is that due to the ambiguity in the wording around the Suppliers right to cancel the agreement, the Supplier can technically terminate this
agreement at any point in time with 30 days written notice. It is advised that the Acquirers and the Target need to approach the Supplier to renegotiate
the terms of the Distribution Agreement surrounding the Suppliers right to terminate this agreement. The Suppliers should be made aware of the Proposed
Transaction and the Suppliers consent to the Proposed Transaction should be a condition precedent to any sale purchase agreement that is executed.
3. The Acquirer to ascertain if insurance is required to cover the business of the Target in areas outside of the Premises and specifically in the jurisdictions
of . If out and about insurance is required, the Acquirer needs to amend the Insurance Policy either prior or immediately following the
Proposed Transaction.
4. From a reading of the Insurance Policy the Target is not currently covered by the Insurance Policy, as the period of insurance cover is only from
and the renewal date is . It is not clear whether the Insurance Policy has been renewed and if it has been
renewed, the dates of cover for the renewal period are not clear. It is advised that the Acquirer should ascertain what period the Insurance Policy covers
the Target and its business, and the Insurance Policy needs to be amended to reflect the correct dates to ensure that the Target is currently covered under
the Insurance Policy.
5. Receipt of a approving the sale purchase agreement must be provided as a condition precedent to the sale purchase agreement;
6. A change of control clause in the Lease Agreement provides that there will be a breach of the Lease Agreement if the is sold as per the
Proposed Transaction. The Acquirers and the Target must obtain the lessors written consent for the Proposed Transaction to proceed which should be
stipulated as a condition precedent to any sale purchase agreement that is concluded. A failure to obtain the lessors consent will result in a breach of the
Targets obligations in terms of the Lease Agreement and the lessor will have the right to terminate the lease.
7. Acquirers to ascertain if the Lease Agreement was validly entered into as the version provided is unsigned and a condition precedent contained in the
Lease Agreement relating to the provision of a deed of suretyship has not been validated. Acquirers to ascertain if the option to renew contained in the
Lease Agreement was exercised. If the option was not exercised the lease is currently operating as a monthly lease capable of termination by either party
 on written notice. This could pose a big risk to the Acquirers who may be forced to vacate the Premises on notice.
8. It is advised that the Acquirers renegotiate the Lease Agreement with the lessor, especially if the option to renew was not exercised. If the Lease Agreement
is renegotiated, a suggestion is made to remove the requirement to provide a deed of suretyship from the Lease Agreement.
9. The sale purchase agreement should contain an indemnity such that the Acquirers will not be held liable for any claims arising from any guarantees or
suretyships or loan accounts which may attach to the members interests in respect of the deed of suretyship that is referred to in the Lease Agreement or
any other loan agreements.
10. The sale purchase agreement must contain standard warranties and indemnitees and specifically set out that all required insurance to run the business
of the Target is currently in place, the Target has complied with all POPI legislative requirements in the running of its business, the Employment Contracts
have not been amended and the Premises are in the same condition in which they were let at the commencement of the Lease Agreement.
 Key Issues List
Part A- Corporate documentation

Key issues/ information Implication and/or possible mitigation

1. Certificate of amended Founding Statement Implication:

It is noted that the Target is a and that the principal business of the
is the “ .”
It is noted that the Target is a
. The Seller holds % of the A is a company with juristic personality

in the Target.

The description of the principal business as set out in the

.
founding documents is the “ .”
The Companies Act No. 61 of 1973 (“Old Act”) did not provide for a similar type of business
entity that promoted the interests of small business owners and, as a result, CCs became
popular in South Africa.

The Companies Act No. 71 of 2008 (“New Act”) which came into effect in May 2011 changed
the regulatory framework applicable to CC’s. Although the CC Act is still in force, as of May
2011 no new CC may be formed under the CC Act and no company may convert to a new
CC. It is important to note the New Act preserves CCs that were already in existence as at
30 April 2011. CCs that are in existence can be converted into private companies but it is not
compulsory for this to take place although it is advised.

The New Act therefore observes the phasing out of CCs by regulating the above-mentioned
position. The reason for this shift in legislation is that, unlike the Old Act, the New Act now
provides for the incorporation of small private companies with director shareholders which
are flexible enough for entrepreneurs who wish to start up a small business with juristic
personality where such small private companies are now offered the benefits previously
associated with CCs and including additional benefits.

Benefits of converting a CC to a private company are as follows:

1. Compete with bigger companies in the same market.

2. Invite other parties to invest as shareholders in the company.
3. Raise more capital.
4. Enable companies and CCs to be shareholders in the Company.
5. Benefit by being regulated by a law (the new Companies Act) that is up-to-date with
international best practice.
6. Administer the company electronically.
7. Ensure that the rights, duties and responsibilities of members are clearly set out.
8. Avoid disputes between members.

Mitigation:

It is advised that the Acquirer should consider converting the into a post
the acquisition.

The conversion from a CC to a company is effected by filing with CIPC a notice of conversion
in the prescribed manner and form along with the required documentation. Registration by
CIPC of the converted CC occurs in a similar way to the registration of a new company.

The effect of the conversion of a CC to a company is that the entity that existed as a CC will
continue to exist as a company. Anything done by the CC is deemed to have been done by
the company. As such, all of the rights, obligations, assets and liabilities of the CC forthwith
vest in the company. This also has the result that any legal proceedings instituted by or
against the CC may be continued by or against the company.
2. Contract of Distribution (“Distribution Agreement”) Implications

Entered into between (owner of the The Target is restricted from selling any other products other than products which
product name and referred to as the “Supplier” are supplied by the Supplier. The Target is therefore not permitted to source
and the Target (referred to as the “Distributer”). The products from any other party other than the Supplier and furthermore the Target cannot
Distributer is granted (in perpetuity) sole agency of sales and expand its business to sell any other products.
distribution of the product described as “ ” in
If the Distribution Agreement is ever cancelled, the Target would lose the right to trade under
“SADC Countries” of
the name and would either be required to change its name or dissolve the .

The Supplier can cancel the Distribution Agreement on ’ notice if

occurs in ‘ ’. This wording is
The Distribution Agreement records that the product name
extremely broad and does not given any examples as to what ‘poor sales performance’ is
belongs to the Supplier and should the contract
defined as or as to what ‘ ” is defined
be terminated for whatever reason the Target would need to
as. The effect of the ambiguity is that the Supplier could technically cancel the Distribution
change its name or be dissolved. The Distribution Agreement
Agreement at any point in time as they could allege, for example, that there is
furthermore restricts the Target from selling any other
, or in a certain area of . There is no mechanism for dispute
products (other than as supplied by the Supplier.
resolution set out in the contract whereby the Target can object to any reasons why the
Payment to the Supplier must be made within days from Supplier is cancelling the Distribution Agreement.
the date of invoice.
Mitigation
The Supplier can cancel the Distribution Agreement in the
The Distribution Agreement poses a big risk to the Acquirer. Essentially the whole of the
event of
Targets business is dependent on this agreement been in force, if this agreement is
. Reasons must be given for
terminated by the Supplier for any reason whatsoever, the Target will no longer have a
cancellation in writing with a notice period however
business as the Target will no longer be permitted to trade under the name or to
there is no mechanism to dispute the reasons provided.
sell products.

The risk posed by this agreement is that due to the ambiguity in the wording around the
Suppliers right to cancel, the Supplier can technically terminate this agreement at any point
in time with written notice.
 Suggest that prior to the implementation of the Proposed Transaction the Acquirer is
introduced to the Supplier and that the Distribution Agreement is renegotiated – specifically
around the terms of cancellation. Clear guidelines need to be set out in the Distribution
Agreement as to what instances the Supplier is permitted to cancel this agreement.
Furthermore, it would be prudent to ensure that the Supplier is made aware of the Proposed
Transaction and consents to the terms of the Proposed Transaction.

3. Insurance Policy- Western Union (“Insurance Policy”) Implications

The “situation of premises” as recorded in the Insurance The Insurance Policy does not cover the territorial areas of . Furthermore
Policy is- all premises used by the insured (the Target) the insurance items for Fire, Office Contents, Theft, Public Liability and Electronic Equipment
situated in the are all limited to . Although there is
i. However it a clause under the Public Liability section which refers to the
appears from the Insurance Policy that the only premises that included in the territorial limits.
are covered are the premises of
The Distribution Agreement includes as areas where the
(the “Premises”).
product is to be distributed and further states that poor sales performance in an area of the
The Insurance Policy records the period of insurance being SADC Countries can justify a termination of the Distribution Agreement. Note this is only
and any subsequent period as per relevant for Public Liability insurance. Therefore, if an incident occurred which required Public
renewal. The policy renewal date is recorded as Liability Insurance in either , the Insurance Policy would not cover this
incident. The Insurance Policy itself is furthermore ambiguous as to whether Public Liability
The Insurance Policy records the following insurance cover:
insurance would be applicable in any area outside the location of the Premises. The
Fire:
implication of this is that if the Target seeks to claim insurance for any item listed under Fire,
Office contents: (the Premises); Theft, Office Contents or Electronic Equipment outside of the Premises - the Target would
not be covered. In regard to Public Liability Insurance it is not clear whether the Target would
Theft: (the Premises)- a requirement for a valid
be covered outside of the Premises. The Target would not be covered in the jurisdictions of
claim is that a burglar alarm is installed.
.

The dates reflected in the Insurance Policy do not align. It appears that the period of
insurance cover was from 1 (been on the month of
 Public Liability: (territorial limits include The renewal date is the 1 . From a reading of this it appears
that the Target was not insured from the period if the
); Insurance Policy was indeed renewed on . If the Insurance Policy was not
renewed on then the Target and its business is currently not covered by the
Motor: : Honda Civic 1.8 LXi A/T 2009
Insurance Policy. The period of renewal is also not clear from a reading of the Insurance
comprehensive insurance for ; Volkswagen Polo
Policy.
Vivo 1.4 5DR comprehensive insurance for
Nissan NP200 1.6 P/U S/C comprehensive insurance for
, Nissan NP200 1.6 P/U S/C comprehensive
Mitigation
insurance for
It is advised that the Acquirer should ascertain if insurance is required in areas outside of the
Electronic Equipment: (the Premises)
Premises. If out and about insurance is required, the Acquirer needs to amend the Insurance
Policy either prior or immediately following the Proposed Transaction.

The Acquirer furthermore to confirm if the areas of are distribution areas

and further if they are distribution areas, whether it is required for insurance to be in place in
these areas. If they are not distribution areas, the Distribution Agreement should carve out
that they are not current areas. If they are distribution areas, the Insurance Policy possibly
needs to be amended to include these areas either for all items or merely for Public Liability
Insurance at the discretion of the Acquirer.

From a reading of the Insurance Policy it appears that the Target is not currently covered by
the Insurance Policy, as the period of insurance is only from 1
and the renewal date is It is not clear whether the Insurance Policy
has been renewed and if it has been renewed, it is not clear what the renewal period is.
Acquirer needs to enquire as to what period ofthe Insurance Policy covers and the Insurance
Policy needs to be amended to reflect the correct dates to ensure that the Target is currently
covered under the Insurance Policy.

4. “Credit Application” Implications

 The current Credit Application form used by the Target Note that certain information requested in terms of the Credit Application is regarded as
requests the following information from the applicant: personal information as defined in the Protection of Personal Information Act (“POPI Act”)
which act governs how a recipient of personal information is required to deal with such
1. ID copies
personal information.
2. Company registration information;
3. Bank letters In terms of the POPI Act it is envisaged that any unlawful retention, distribution, sharing or
unauthorised use of personal information which results in non-compliance with the Act, may
carry onerous penalties of up to R10 million in fines, and could even result in jail sentences
(in some instances of up to 10 years, depending on the seriousness of the breach or non-
compliance). Although it is unlikely that these penalties would be applicable it is noteworthy
to be aware of same.

Mitigation

The sale purchase agreement should contain a warranty and indemnity clause that the POPI
Act has been complied with by the Target in respect of all personal information retained,
distributed or shared by the Target.

5. “Lease Agreement” Implications

Entered into between (“Lessor”) and the From a reading of the Lease Agreement it appears that it has been terminated
Target (or “Lessee”) unless the option to extend was duly exercised on 1 . In
the event that the Lease Agreement has terminated without the option to extend been
The termination date in the Lease Agreement is recorded as
exercised, the lease will be governed on a monthly tenancy basis which is capable of
18 September 2018, whereafter the lease shall continue as
termination by either party giving the other party not less than notice prior
a monthly tenancy capable of termination by either party
to the termination date.
giving the other party not less than 2 calendar months notice
prior to the termination date. There is a change of control clause reflected in the Lease Agreement which states that a
transfer of the members interest shall be regarded as a cession of the lease. A cession of
Monthly rental is which would increase on the
the rights or obligations in terms of the Lease Agreement would be regarded as a breach of
of each year by a sum of %.
In terms of the Lease Agreement, the Lessee shall not, cede, the Lease Agreement permitting the Lessor to terminate the Lease Agreement on months
assign, transfer, alienate or otherwise dispose of any rights written notice.
and/or obligations under the Lease Agreement.
The Lessee is obliged to return the leased premises to the Landlord in the condition in which
Should the Lessee be a company or a close corporation, then they were let.
the transfer of its present issued shares, unissued share
The Lessor has a right to enforce parking charges on the tenants.
capital or future increase share capital of any of its present
It is recorded that the Lease Agreement is of no force or effect until the Lessee has procured
members interest as the case may be, shall be deemed to
and obtained the signatures of such parties as the Lessor requires to a deed of suretyship in
be a cession by the Lessee of the rights under the Lease
accordance with a standard form as supplied by the Lessor. We have not been provided with
Agreement which will result in a breach of the Lease
this deed of suretyship, but presumably the Lessor will require a similar deed of suretyship to
Agreement and permit a termination of the Lease Agreement
be signed by the Acquirers.
by providing months notice.
The Lease Agreement provided is unsigned.
The Lessee shall not make any alterations or additions to the
leased premises without the written consent of the Lessor. Mitigation
Furthermore the Lessee shall at its own expense keep and
Acquirers to ascertain if the Lease Agreement was firstly validly entered into as the version
maintain the interior of the leased premises, and all parts
provided is unsigned, also to ascertain if the deed of suretyship required to be concluded as
thereof, in good order and repair, fair wear and tear
a condition of the lease was entered into. Secondly Acquirers to ascertain if the lease period
excepted, and shall on the termination of the lease redeliver
was renewed and whether the option to renew was exercised. If the option was not exercised
the leased premises to the Lessor in the same good order
this is a monthly lease capable of termination by either party on months written notice.
and repair as at the commencement date, fair wear and tear
excepted. It is suggested that the Acquirers may wish to renegotiate this Lease Agreement with the
Lessor especially if the option to renew was not exercised. If the Lease Agreement is
The Lessee also undertakes in the Lease Agreement, to
renegotiated, a suggestion is made to remove the requirement to provide a suretyship from
insure with an insurance company approved by the Landlord-
the Lease Agreement.
all and any glass whether internal or external, contained in or
on the leased Premises at its sole cost and expense against A change of control clause in the Lease Agreement provides that there will be a breach of the

damage howsoever and whomsoever caused. Lease Agreement if the members interest is sold as per the Proposed Transaction. The
Acquirers and the Target must obtain the Lessors written consent for the Proposed
 In terms of the Lease Agreement, the Lessor has the right to Transaction to proceed failing which the Targets obligations in terms of the Lease Agreement
restrict parking by tenants, their officers, directors, agents will be in breach and the Lessor will have the right to terminate the lease.
and employees to employee parking areas and enforce
The Lessee is obliged to return the leased premises to the Landlord in the condition in which
parking charges (by operation of meters or otherwise).
they were let. It is suggested that the Acquirers obtain a warranty and indemnity in the sale
An option to extend the Lease Agreement for a period of purchase agreements that the leased premises are in the same condition in which they were
year is afforded to the Lessee commencing on let at the commencement of the lease, fair wear and tear excluded.
provided that this option has been exercised by the
Target not later than failing which the
option will lapse.

It is recorded that the Lease Agreement is of no force or

effect until the Lessee has procured and obtained the
signatures of such parties as the Lessor requires to a deed
of suretyship in accordance with a standard form as supplied
by the Lessor.

The Lease Agreement provided is unsigned.

Part B – Employment

Key issues Implication and/or possible mitigation

1.
Employment Contract: ”) Implications

and )
and contracts do not specify the notice period for termination. In terms

A standard template employment contract has been used for of the Basic Conditions of Employment Act the common law position is therefore (as

both and (“Employment Contract”) and have been employed for a period of over year) a required notice

period of 4 weeks would be required to terminate these employees contracts.

The notice period in the termination clause in the

Employment Contract has not been completed. Note that an employee can only claim UIF if he has been retrenched, and not if his contract

is terminated for any other reason. The Employment Contract should therefore carve out that
The Employment Contract states: ‘the parties agree that on
the UIF card should only be supplied upon a retrenchment. This however will not be an issue
termination of the employment contract, the employer shall
in terms of the operation of law.
furnish the employee with a certificate of service and the UIF

card.’ Note that in terms of the Basic Conditions of Employment Act an employer cannot unilaterally

amend the terms of an employment contract.

The Employment Contract contains a provision that the

employer will review the employee salary/wages annually. Mitigation

Enquire from the Target whether the salary/wages have been increased in the year of

as and contracts were entered into in and perhaps include

a warranty in the sale purchase agreement that there have been no amendments to the

Employment Contracts.

Note that if the Target wishes to amend any of the terms of an Employment Contract, this will

need to be amended together with the employee’s consent as the employer is not legally
entitled to unilaterally amend the terms of an employment contract. However, on a review of

the Employment Contracts no red-flags have been identified.