Is your transaction trust-proofed?
Business is comprised of a series of transactions, some minor, others major and pivotal. These transactions entail the buying or selling of a commodity, service, currency, asset, share/stock, loan, time, etc. Impliedly, transactions involve two main parties both of which give and receive something to/out of the arrangement, and because of this, all necessary ingredients for success should be considered. One key ingredient is trust - an important virtue that underscores every successful transaction and arguably the most important currency in business
Although the consummation of a transaction may be an event, there is typically a process leading to it, and likewise, subsequent actions to ensure its intended objectives are realized. From origination to consummation and through to the actualisation of any transaction, there must be trust to ensure success: a level of assurance between the transacting parties is essential, similarly the process itself has to be trusted, as well as the deal’s rationale, to the end that it will reign in the intended benefits to the transacting parties. As such, there need to be deliberate measures to trust-proof the transaction.
In the process leading to the transaction, the parties go through a time of acquaintance to know more about each other, the proposed transaction, its merits, and implications. This is facilitated by the exchange of information/data in various forms (verbal, written, visual, etc). This information/data must be secured to the extent that it should not fall into the wrong hands. Information leakage can be a deal-breaker, and even if not, it can bias the outcome of a transaction and interrupt its due, fair and consensual realisation. It is also important that the information exchanged is comprehensible to both parties and that their respective advisors can draw the necessary insights and recommend requisite safeguards. Withholding, redacting, falsifying or hiding of critical transaction data can prove detrimental to the transaction and its aftermath.
At the start of the familiarization process, a robust obligation should be created on both parties to maintain confidentiality and provide assurances that data/information exchanged will be used solely for the stated purposes of the transaction. New information created during the transaction ought also to be preserved confidential to protect the integrity of the transaction and its aftermath. Several safeguards relating to the mode of exchange, remedies for breach, the responsibility of parties, etc., can be enumerated in a written and executed instrument between the parties. One such instrument is a Non-Disclosure Agreement (NDA). Such an instrument should not be misconstrued to imply a lack of trust; rather it embodies the presumed trust and is an authoritative reference on confidentiality throughout the transaction’s data story.
Another way of trust-proofing a transaction is the elimination of conflicts of interest. A conflict of interest arises when a person (natural or otherwise) becomes unreliable because of a clash of personal (or self-serving) interests and professional responsibilities/duties. All parties involved in a transaction ought to thoroughly assess themselves to establish if any such conflicts exist right from the onset and all through the transaction’s life cycle. If conflicts of interest exist with a member(s) or advisors of one or both of the parties concerning the transaction, its history, anticipated results, related parties, and/or circumstances, then prudence demands that these are declared and mitigations implemented to ensure that trust is not compromised.
It should also be assessed if any independence issues may arise especially regarding the advisors to the project. The Association of Certified Chartered Accountants defines independence as “the avoidance of being unduly influenced by a vested interest and to being free from any constraints that would prevent a correct course of action being taken ... an ability to ‘stand apart’ from inappropriate influences and to be free of managerial capture, to be able to make the correct and uncontaminated decision on a given issue.”. The advisors of the project should assess and eliminate any threats to this independence, such as self-review (through and after the transaction’s life cycle), intimidation, self-interest, cross-directorships, etc. as may apply to a particular transaction. It is therefore imperative to determine the independence requirements in a transaction and to confirm the status of the advisors relating to this. Mitigations of threats to independence could include shuffling of teams, instituting of firewalls, or change of advisors. The non-executive directors of either party should also ideally be independent in the context of the transaction and its aftermath, and as such cross-directorships, share options, etc should be examined for these. Independence is paramount in a transaction because it embeds objectivity, and thus enhances trust within and between transacting parties.
Finally, the parties should be able to trust the infrastructure of the transaction - the objectives, process, location, technology, methodology, timing, and execution need to be robust to support the transaction’s success; the experience, technical abilities and soft skills of the people in the thick of the transaction need to be strong as well, and thus these people ought to be selected carefully – this also applies to the advisors. Relatedly, the transacting parties should be able to trust each other to fulfill their obligations throughout the transaction’s lifecycle and its aftermath. Most importantly, the transaction agreements should be properly structured (commercially and legally), thoroughly reviewed and duly executed to ensure enforceability. Transactions can succeed or fail purely on the premise of quality of infrastructure; therefore it is important to ask the right questions when setting it up.
All the above need to be considered within the context of the complexity and materiality of the transaction. It is vital to trust-proof transactions to protect their integrity and to give them a stronger foundation to achieve the transacting parties’ intended objectives. It is also imperative that the parties consistently and intentionally cultivate a culture of individual and corporate trust and behave in a manner that exudes this, embedding confidence in all their transactions.
The writer is a corporate and project finance specialist at Frontier Advisory Partners.