Corporate Law II

by Annu Verma

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 CORPORATE LAW - II

.TION AL LAW SC:HOOL

I OF INDIA U IVERSITY

,.._,.
Bongfllore

DUE DILIGENCE - ITS SIGNIFICANCE IN

CORPORATE TAKEOVERS AND

MERGERS

Name - Annu Verma

ID . No. - 1963

III Year B.A LLB. (Hons.)

Date of Submiss on - Ma I 8 2015

 TABLE OF CONTENTS
INTRODUCTION..................................................................................................................... 3

RESEARCH METHODOLOGY .................................................................................................... 4

CH.APTER - l ................................................................................................................................... 5

MERGER AND ACQUISI ONS .................................................................................. 5

MERGERS ANO ACQUISTIONS IN INDiA .......................................................................... 5

CH.APTER - 2 ....................................................................................................................... 9

o u· E DILI GE.NC E ......................... ...... ........... .. ... ,..,... ,..,....,., ....,. ,.,, ... ,..,..........., ......................... 9

"CONDUCTING DUE DIIL GENCE.........................................................................10

CHAPTER - 3 .............................................................................................................. 13

SIG NIFICANCE OF DUE DIUGENCE ..................................................................................... 13

TYPES OF DUE DILIGENCE ................................................................................................. 16

CH.APTER - 4 ................................................................................................................................. 20

STEPS INVOLVED IN DUE DILIGENC................................................................. 20

CONCLUSION ................................................................................................................................ 22

BJBLIOG RAPHY ........................................................................................................................... 24

2
 INTRODUCTION
It is tbe process b,y hich •confidential legal, financial and other materia l infonnation is

exchanged, rev iewed and appraised by it parties to a busilless transac.tion which is done
p,ior to tbe tra ns actio n. Due diligence' is an anal_ sis and risk assessment of an impend ing
business tra nsactio n. It is the car•efol and me thodo logical inves tigation of a business o r
persons, or the pe1fonnance of an act wit h a certain standa rd of care to ensure thatinformat ion
is accurate, and to uncover information that ma affect the outcome of the transaction. It is
basica lly a "background check" to make sure that the pa,t ie s to the transaction have the
:r,equired information they need, to procee,d ith the transaction.

Due dil,i gence is used to invest igate and evaluate a busines s opportunity . The term due
diligence descri bes a general duty to exercise care in any tramac tio n. As such, it spans
investi gation into all rele vant aspects of the past, present, and pred ictable futu re of the
business ofa target company.

Due dilige nce report should provide in formation and insight Oil aspects such as the ris ks of a
transaction, t be alue at i.: hich a transa ction should be under taken, the, arranties and indemnities
that needs be obtained from the vendor etc.

3
 RESEARCH METHODOLOGY
AIM AND OBJ CTIVE -
9 e paper looks into tl1e prnvis i.o ns tl1at are connected witli Mergers and Acquisitions to
understand -
• Meaning , nature, obJectives, sign ificance, scope of due diligence, need for due
dilig ence.
• Types of Due diligence
• Steps involved in due diligence .

SCOPE AND LIMITATION -

The Paper looks into the laws governing Merge1'.s and Acquisitions that wiJl be use ful in
un derst anding tbe meaning of Due. Diligence.

RESEARCH QUE TIONS -

L What is due dil igence?

2. What are the pro isions under Indian a, ?
3. What is the im pmta nce of Due di ligence?
4. What i the process of c nducting Due diligence .

SOURCES OF DATA

Thi paper has drawn data from secondary s w·ces books, journals, and newspaper.

STYLE OF WRITING

An anal ytical an d descriptive style of writin g has been used by the researcher.

MODE OF CITATION

The NLS Legal C itatio n Gu ide has been fol,io ed.

4
 CHAPTER-I
MERGERS AND ACQUISITIONS
Mergers and Acqui ition ha· e become method that are favoured for the expansion of

business, both nationally and inte rnationally . Nowadays companies around it world are
competing to acquire or merge with other companies to e ·pand their busine . Multi-billion
dollar fra□sactio ns like HCA or AOL and Time Warner are exam ples of such activit ies.

a
The market is ve,y competitive and it is very common to neglect the investigation that should
preclude any acquisition decisi on.1 Idea lly, .acquiring corpo rations should careful[
:investigate all information pertaining to the business to be acquired before either pa1ty
discusses the possibility of an acquisi tion . In the real \;\,·, orld, many deals are sealed with
signed letters of intent2 or tenn sheets, with bu ers having only limited kno, ledge of the
seller , often based on public informat io n. in these cases the buyer expects the lawyers,
accountant , and other investigator: to gather in£ rmati n to confirm the buyer s expectation
of value and potential synergies as quick ly as possible so tJ1e deal can be finalized.

Whether the invest igati.o n occurs before the prelimina1 handshake or a.fte1· the offering price
and significant terms ha e already been agreed to, the buyer should use due diligence to
investigate the company to be acquired before the transaction is consumma,te d and
docu mented.. This i□vest igatoi y process is similar regardless of wbetlie r the strnct m-e chosen
is an asset purchase, stock acquisi tion , or merger. The process is also necessary regardless of
whethe r the seller and buyer operate exclusively i11 one country, m if foreign entities and laws
" II be implicated.

MERGERS AND ACOUISTIONS IN INDIA

Ever since the Indian Economy opened itself to the foreign market after tJ1e economic
Hberalization refonn of 1991, Merger s and Acqui iti ns have become a common

1
Wend y B.E. Dav is, Tlie Impo rtan ce of D11e Diligence In vestigations: Failed A,fergers and Acquisitions of the
Uni.le d States' Compani es, A NK A RA B AR R EVlEW , 5 (2009) availa ble at
http:/ vww.ankarnbarosu.org. tr/sidt er/AnkaraBarRe vie\v/tekma kal 2009-1/1. pdf. (L ast isi t.ed o n M'ay 15,
2015).
2
A letter of i.nient. is generally a n.on-bin d ing proposal to agree, wilh no liability incurred by e.ither par ty if the
trans acti on is not consummated.

5
 3
phenom.enon throughout India. [n a highly competitive glolbal environment mergers and
acquisiti on have turned out to be one of the fas-test trategic option for companies to gain
competitive advantage. W11-ile a merger is a combination of two com panies with o ne
compa,n merging itself into the other and losing its identity, hile the othe r prominent
compa ny gains more importance and either absorbs the othe1· co mpany or consolidates. itself
v. th the other company, an acquisition is tile action wberelby the acqui1i ng company
purchase the interes of the acquired company hareholders and ceases to have an
interest or tight after the acquisition.
II
Merger is an arrangement that assimilates the assets oft\ o or more companies and vests their
contm l under one company.4 Acquisition simpl means buying die ownership in a tangible or
intangib le asset such as purchase by one company of controlling interest in the share capita]
of another company or in the voting rights of an existing compan . In the merger conte;,,.1
both compa ni es pool their interests, , hich mean tl:iat the shareholde rs of both companies still
hold 0 11 to their portfolio interest s from their compan and also gets interests in the other
ente1p rise.

The term amalgamatio n' is used synonymously wit h the tenn merger and both these terms
are used in terchangeably butg th the e terms are not precisely defined in The Companie
Act, 1956 or in 2013 Act.5 Oxford Dictiona1 defines both these words i..e . merger and
amalgamatio n a · combination carrying a sense f mixing or uniting n o or more things
together or in t he corporate ense, uniting or combining two under taking s together .6 Under
the Old Act i..e. 1956 Act S. 391 to 396 deal with Comp rornis es Arrangements and
Amalgamation , wherea Chapter XV of the ne,:1.r Act enc mpa sses S. 230 to 240 governing
Com promise s., Arrangements and Amalgamations. Although substa ntial changes have
incorporated in the Ne,:i.r A ct, several ke pro . isions remain unchanged. For example , the
acceptance of a scheme or merger or amalgamation by tluee-fomths of the shareholders like
in S. 39 l(2) of the Old Act,7 i.s s till a pre-condition to a me rger or ama lgamation. The power

-D>---- -
3
- II
Role of D11e Diligence in Merger!i and Acquisition, .July 18. 20 13 av a ilable al http:/. vwwJ ega.lindia.com/role-

4
of-d ue -dil ige nce-in-mergers-and -acquisitio 11/ (Last visited on May 17. 2015).
5 111
• • Verm a; CoRPORAT"EMERGERS, A iM.;\ LGAMATIONS AND T AKEOVERS, 173 (5 edn., 200 8).
(, co rding to Halsb ury' s Laws of England, ··ama lg amation is a blending of two or mor e exis t ing unde rta kings

1
.in to one undertaking , the share holders of each blend i.ng company beco ming s ubs tanifally ihe shareholde rs in the
c-o y whic h is to carry on the blended und ertaki ng s. There may be a ma lg amat io n either b transfer of two or
mo I de rta kin gs to a new comp any or by lra nsfer of one or more und ertak ings to an exist ing comp anies.
7
S.391,(2 ) - If a major ity in number representing three- fourths in value of the credi tor s. or class of cre ditors. or
members, or cla!lS of members as the case may be, present and voting e ither in person or, where proxie s arc

6
of the Central Gove rnm ent to order a merger m amal gamation in the intere st of the nation is
untouched and 1s placed in S. 237 of the Ne, Act.8 Fwt her, the obligation to maintain
recmds of the merger amalgamations is retained in S . 23 9 as its impm1ance ca n no t be
ignored.9 O ther matters H ·e c nvening meeting , obtaini ng the permi io n of the regulate
author itie s and the Central Government in cases of me rgers m amal gamat io ns re ma in
unalte red.

II
However , the Income Tax Act, 1961 defines the term ' amalga matio n' under section 2( I B) of
the Act as the me,rger of one or more companies to form one com pany in such a manner that
all the properties and liabilities of the amalgamatin" compan (s) become the properties and
liabilities of the amalgamated company, and not less than three-foutth shareholders of the
arnalgam.ating company become the shareholders of the amalgamated com pan y.10

•- - - - - - - - - - - - - - -
allowed I u nder the rules made unde[ section 643). by proxy, at the meeting. agree to any compromise or
arrange ment. t he compromise or arrangement s hall, if sanc tioned by th e Court. be bin d- ing on all the creditor s.,
all the cr editors of the class, all the members, or all the memb ers of the cla ss , as the case may be, and also on the
company& , in the case of a company wh ic h is be ing wound up, on the liq u id ator and contributories of lhe
company. a
S. 2.37' - Power of the Central G1n •er n ment to prnvid e for amalgamation of cempanies in public inter est
( I ) Where the Central Government is ·atisfied that it is essential in the public inter est that two or more
compa nies should ama lgamate, the Central Government may, by order notified in the Official Ga zette. provide
for the amalgamation of those compa nies into a singl e co mpany with &uch constitution . with such property,
powe.rs. rights. interests, authorities and privi leges. and with such liabi lities. duties and obligatio ns, as may be
specdied in the order.
(2) The order unde r su b-sectio n (I) may also provide for the continua tion by or against the transferee company
of any legal proce edings pending by O[ against any transfero[ company and such consequent ial, mcidental and su p.ple
mena1.Provis io ns as ma , in the opini on of the Centra l Government. be necessary lo give effect lo the amalgama
tll
'> S . 23'9 - Preservation of books and papers of amalgamated companies - The books and papers of a
co mpany which has bee n amalgamated with, or whose shares .have been acquired by. another company unde r
this Chapter shall not be disposed of without the prior permission of the Ce ntral Go vernment and before
gran ting s uch permission, th at Government may appoint a person to exami ne the books and papers or any of them
for the purpose of asce rtaining whether they contain . an evidence of the commis ion of an offence in co
nnection with the promotion or formation, or the 1. agement of lhe affairs, of the transferor company or its
amalgamation or the acq uisi tion of its shares .
10
Defin iti.on of ma l,g11m11ti on -« Amalg amation". in [elation to companies. means the merger of one or more
companies with another company or the merger of two or more companies to form one company (the company
or companies which so merge being referred to as the amalgamating company or companies and the company
with which they merge or which is formed as a result of the merger. as the amalgamated company) in such a
manner thal-
l . all the property of the amalgamating company or companies immed iately before the ama lg amation
become5 l.he property of (he amalgamated company by virtue of U1e ama lgamation
2. all the liabilities of the amalgamating company o:r companies immediately before U1e mnalgamat1on
become the liabilities of the amalgamaled company by virtue of the amalgamation
3. shareholders holding not less than l.8[three- fourthsJ in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the amalgamation
by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the
amalgamated company by virtue oflhe amalg amation ., otherwise ihan as a result of the acquisition of
the property of one company by another company pursuant to the purchase of such property by the

7
II
Under Section 5 of the Competition Act. 2002, " combina tions ' are defined with reference to
asset and turno er of merging companies located exclu ively in lndia or located in lndia and
outside [ndia. Section 6 of the Competition Act , 2002 states that, no person or enterprise shall
enter into a combination ,.-.vhich cause or is likely to cause an appreciable adver e effect on
competjtion witllin the relevant market in India and such a combination shall be void. Alt
types of in tra-group com bina tion s, mergers, demerger s reorganizations and other similar
transaction are thus wit hin the purv,ie of the Competition Act 2002 un]ess specificall
exempted .

Furt he r, mergers and acquisitions are also gove rned by the SEBI Take Over Code , 1994 and
requires mandato1y pennis ion from High Courts of the respective jurisdiction of uch
compa mes to enable an scheme of amalgamatio n or merger or arrangement to come
through.

o ther company or as a result of the distrib uti on of such property to the other company after the wind ing
up of the first. mentioned company.

8
 gCHAPTER-2
DUE DILIGENCE
Due Diligence can be widely defined as a broad spectrum of investigative procedures in
relation to an acquisition of a company's shares or of assets in a commercial co nte x1.:, a joint
venture project, a financing transaction , the issue of securities and other general pre-
contractual inquiri,es. 11

Due Diligence has become a sophisticated and in tr.ic ate process requirin g very specia] skills
on which the most delicate business decisions are founded. As defined above due diligence
r,equires a whole lot of inves tigation int o affairs and health of a company .. In India there is as
such ao law· or case law on due diligence. fo risprnde.nce of Due Diligence is closely
associated with concept of Notice.. A noti.ce can be actual, constructive or imputed.
e
Section 3 of the Transfer of Property Act provides that "a person is said to have notice " of a
fact when they actua lly k.nm: that fact, or when but for wilful abstention from an inquiry or
search tbey ought to have made, or gross negligence , they w uld have kt10, n it.

Thus the statute cat a duty to find whether the fact presented is true or not and it presume s
that every prudent man before makin g investment in any form of prope11y will find whetJ1er a
clear title to such prnpetfy exists, or whether any debt m litigatio11 is attached to it or ,;vhethe r
it is in any form going to prove not to be a wise decision.

Now in case of bi.g companies and multinational corpora tions \ ben one company buys or sell
any company or its assets tl1e whole canvass is very big· lot of people lot of docume nts , .lot
of money i.s involved and it is bere that need for due diligence arises.

Due Diligence is no find ing deserved place in Indian Statues. Mandatory provisions have
been introduced for the conduct of due diligence under the ecurities and Exchange Board of
India (Mutual Funds) Regu latio ns 1996 and offshore offerings of securities by Indian
compa nies through Ame1ica11 or global depositor y receipts

11
Milind Kumar and Charu Mathur, Ind ia ; Legal. Due Dilig ence, July 30111 2002, available al
hup://www.mondaq .com/indialx/1 7241/0 pera i.iona l+ Pe rformance+Ma nagemen i/Legal+Doe+Diligen ce (Last
visited on fay l6 , 20 l 5).

9
a
Due Dilige nce is duty to take care. Many In dian statutes dealing with economic matters like
S. 24 SCRA, 1956, s.53 MRT P, 1969, S.27 S BI 1992 , S.278B IT Act, 1961 contain a
standa rd sectio n on offenses committed by compa nies .

Due diligence impl ies a particular standard of care. In tJ1e ] ndiall c rnite:-1.. , md inar ily t11ere is
neither a po iti e tatutoiy duty on the pa1t of the buyer t exerci e due diligence nor a
c1·imi11al lia bility for a failure to exerc is e due diligence.

CONDUCTING DUE DIILIGENCE

By conducting due diligence before. finalizing any merger or acqui sition helps in evaluating
and structuring the transaction and identify legal or contractual imped iments that might
impact the end result. It also helps to validate the business plan and mitigate any risks that
seem im.mi nent and fonnulate solutions to deal with various issues. The first step in
conducting due drn. ce is to plan the due diligence so that the bu iness transaction can
unde rgo smoothl y. Liaisons \ ith Regional Legal Advisor/General Coun sel, Contracting
Officer/OAA, Program Office, or other office to plan an efficient approach toward
conducting the due diligence should be conducted to determine and plan the due dlligence
memo. Secondly , information should be gathered about tl1e compan y from pu blic domains uch a
ne'V s a1ti cles, compan y reports and ubscription-only resources, such as Dun & Bradstreet
Lexus-Nexus Facti.va etc. Constitutional documents of tile Company, annual
:rep o1ts and annual returns filed \:t.rith statut authorities, giving informat ion on
shareho ldings di rectors s hou ld also be anal ezed includin g qua.t1erl and half- yearly re ports,
in the ca e of listed compan ies (in accordance wit h the standard listing agreement prescribed
by the SEB[). Govern ment resources should be checked fo see if there are particular issues
concerning the busines s, relationship with a particular country government or client or
other policy concem .12

The top managers or board members of the c mpan can also be scrutinized by conducting a
search involving sens itive information to determ ine if the compan y indi vidual is eligible for a
visa to the US, v hich is one, ay to ident if y risks to the agency .1 By conducting web

12
Gautam Ahuja, Vvhy Mergers and Acqusitio ns fails ,, June 22, 20IO available at hup://ww
w.legalservicesindi a.co m/articlefa rticlefwhy- mergers-a nd-acquisi tions-fail-228- I .html (Las t v is ited on
?vlay 17, 2015).
n Mergers & Acquis it io ns and Private Equity. ALlvIT Legal Advocates and Solic itors avai lab le at http://almtleg
al.co m/practice/mergers-acq uisi tions.htm {las t visited on May 1 7, 20I 5 ).

!O
searches about the company untapped infonnation about tl1e company may also become
evident hich \.Vould be helpful in :forthering the bu ine s transaction. Local searches should
a]so be conducted to gather infonnation about the company's current customers, su ppliers ,
and/or pri ate ector or government partner , relevant local associations and to assess the
overall reputation of the company . Thirdl y after all tbe info1mation about the compa ny has
been obtained the same must be analyzed to unde1,stand the business opemtion and the key
trength and weakne s of ente ring int any scheme of merger or acquisition ith uch
compa ny.

II
Fourth ly the stock exchanges where merging and merged companies are li ste d should be
illfonned about the merger prop sal. r m time to time, copies of all notices, re olutions, and
orders should be mailed to the concerned stock exchanges. Fifthly, the due diligence rnemo
mu t be prepared and di cus ions held, ith the company to bring out the trne nature of the
transa ction process and finalize the h"ansaction. The Memorandum of Understanding (MOU)
must be drafted thereafler and reviewed by the Agenc deciding official ell before serious
alliance di.sc ussio ns begin with the potential partner. The Boa rd of Directors of each
compa ny mus t approve tbe d raft me rger proposal and pass a resolution autbo riz..ing its
director executives to pursue the matter further.14

Although it might seem that due diligence has come to an end after the draft merger pmposa]
has been approved by both the companies however , due diligence is an ongoing prncess and
may continue right throughout the existence of the amalgamated or merged company to
evaluate any risk that ma crop up at any point of fone during the alliance . Conclusion Once
the Memorandum of Understanding and merger proposal has been approved by both the
compa nies , each company should make an application under tl1e Companies Ac 1956 to the
High Court of the tate wbere its registered office is sit uated so that it can convene the
meetings of share holders and creditors for passing the merger proposal. 15

Thereafter notices must be dispatched to the shareholders and credi tors of the company to
convene a meeting and such meeting must be subsequent ly held wbe1·e at least 75% of
hareho lders of the compan,y ho vote either in person or by prox'Y must approve the scheme
of merge. Once the scheme of merger has been approved by the creditors and shareholders,

14
Diljee t Titus, M,_(cA Regulations i11 India INDIA LAW JOURNAL, Vol. ] available al
http:/ vww .indiala wjoum al.co m/volume l / issue _ l /m_a_regnlalion s.html {Las! vis ited on May 17, 20 I S).
IS LM. Sharma , AlvtALGM(ATIONS M ERGERS T AKEO VERS ACQU!SITIONS, 73 1997).

u
another petition to High Comt to confirm the scheme of merger must be presented and
notice regarding tbe same publi hed in r;:vo ne, spapers. After the High Coutt passes an
or der approving the sc heme or merger or amalgamation tl1e ce1tified true copies of the orders
mu t be ent to the registrar of the cv nies and as ets and llabilitles of the companies
stands tran sferred to the amalga mated company .16 H has bee11 repo rted tba.t mergers and
acquisitio ns take about .a three to fou r month s for completion although the SEB] Takeover
Regulation require tbe acquirer to complete all procedures relating to the public offer
'including payment of consideration to the shareholders who have accepted the offer, within
90 da s from the date of public announcement However, ultimately,, . hatever the time limi t
might be mergers .a nd .acq uis itions definitely help the companies to strengthen and expand
thei r bu iness operations to increase profitability and con olidate the business structure. With
strjct due diligence in place companies can definitely hope to tackle the risks in vo lved and ma
e the end result s ucce s£ul for effective merger and acqu isiti ons.17 Today, India pre ents the
right opportunities for companie s to engage in cross-cultural transactions and amalga
mations and Indian ma rkets are regis tering massive growth m merger s and acquisition with
consolidation of internatio nal bu inesses in India and :fierce competition amongst busi ness ho
uses who a1:e seeking to expa nd the ir market.

15
Supra Note 14.
11
Supra Note 12.

!2
 CHAPTER-3
SIG IFICANCE OF DUE DILIGENCE
Misrepresentations and fraudulent dealings are not always obvious m stmight. These are to
be unco ered, e peciall in a maj r busine transaction , a ,it ould create a major impact on
the business. Proper due diligence serv ices explore and asses the details behind the same and to
become fully informed about the financials , business internal systems, profitability , key
operational a pect , management team, pr moters and other material factors that wiU help in
making an informed decision about an inve s tmen t. Due diligence is designed to protect the
.interests of tbe Company by providing objective and reliable information on the target
company befor,e making any , ritten commitments . Due diligence is an investi gative process
for providing, the desired comfoit level about the potential investmentand to minim ize the
risks such as hi.dden uncovered Ji.abilities poor growth prospects price claimed for proposed
.inve tment being on higher side etc. Due diligence is also necessazy to en ure that there are
no onerous contracts or other agreements that could affect tlie acquirer's return on investment. The
procedures and analyses ultimately represent a windm into the tar get Compan y' s
uccess and potential , includin,g hat opportunities exi t to grow the business further to meet
yo ur goals and objectives. Due diligence exercise is needed to confirm that tbe nature and
genuine11e s of a busines , Identif defects/\:t.reakne s in the target company and to avoid a
bad business transaction to 9 1er information tl:iat is required for valuation of asse ts, and to
18
negotiate in a better manner. In nutshell due diligence is a SWOT anal sis, of an investment
w hich is essentially required to make an informe d decision about a potential investme nt.
Due di.ligence is neces sary to allo\ he investigating party to find out everything that one
needs to knov about tbe ubject of the diligence. The bjective is to aJlO\ the investigator to
cons ider the foll.o wing options considering the fads found in tlie course of due diligence.
• Withdrawa l of deal - if the due diligence uncovers information that disclosed the
i11ve tment , loan or participation, a ri k or unde irable one and hich cannot be
adequately resolved then the investigator may \vithdraw from tbe deal.
• Adjusting the aluation of the. investment - the investigato r may revise his valuation of the
company or reassess the price at \;\·/ hic!'-t it will prnvide services . More often, the

IS A scan of the internal and external envi:rrnunenl is an important part of the strat egic pla nning p rocess.
Environmenta l factors int,ernal to the firm usua lly can be classified as strengths (S) or weaknesses ), and
those external to the firm can be classified as oppommities (0 ) or threa ts (T). Such an analysis of the strategic
environment is referred to as a S'i OT a n.alysis .
The SWOT analysis provid es informatjon thal is helpfol in matching the firm's resources and capabilities to the
compe titiv e environment in which it operates. As :such, ii is in.stmmental in s trateg y for.mufatio.n and selection.

!3
 info nnat.io n will be adverse and therefore the valuation will go down or the price will
go up .
• Solvi ng of problems uncovered - it ma y be possible for a prnblem lmcovered by the due
dihg,ence to beif lv ed before the deal goes ahead. For example, unpaid stamp duty could
be paid,, compan filin°s could be put in order or, if negative in formatio n
:is unco,v ered on a principal of the target company, the investor may put pressure on
the target is put into a state that the in vestigator is happier with before it deals with it

II
WHY MERGER ND CQU[SIT[Oi ?

Me rgers and Acquisitions is an impo rtant way for companies to grow and become stm nger
and better organization . The main rea ns underlying uch operations are:

• Enhanced reputatio n in marketplace or with stakeholders

• Rceduction of operating expenses or costs
• Access to management or technical talent
• Access to new product li nes
• Growth in market sha re {comp lemen e>.."tend c urrent business)
• Quick acce s to new markets or entry intone, indus try (diver ification)
• Reduction in number of compet itors
• Acee s to ne technology, manufacturing capacity or upp1iers 1

Now , ev,en though Mergers and Acquisit ions ha e several advantages , but the risks involved are
equival.e nt too. The real motive behind me rger:s o r acquisi tions should be on the tab.le fo r all
the parties concerned to ensu re real s ucce ss of such merger or acquis itio n. The post im
plementa tio n phase is a veiy critical part where several mergers m acquisitions fail and before
onset of any deal, most com panies s ho uld conduct due diligence to ascertain the rea] ris ks
and profitability of such deals. Due Diligence in Mergers and Acquisit io ns is the process of
evaluating and investigating a prospective business decision by getting info nn ation about the
financ ial, legal, intellectua l and other material info.rmat ion fro m the other party.2°

1
Supra Note 3.
20
Ed.ward l Buch holz, Disposing of nwanted Asse ts in Corporate ergers and Acqu isition,s THE T A X
LAWYER,VOL. 38(1 available at. h ttp:// www jstor .org/s 111ble/20769004 (L ast v is ited on May 17, 201S).

!4
The ult imate goal of such activitie s is to make sure that there are no hidden drawbacks or
trap as ociated " ith the business transaction under consideration. By perlormlng d ue
dilige nce, a perfect strategy can be evolved to carry out the merger or acquisitio n. Failure to
exerci e due diligence prior to entering int a transactio1 of enormou proportions such as a
merger or acquisition may lead to a precariou s situ ation where tbe asset acquired, ma y be
mall"ed by encumbranc.e lmrges and other liabili ties which get automatically transferred to
the acquirer as a result of uch acquisition. While the cost involved in performing a due
dilige nce is on the higher si de as it us ually involves the services of a CA and an attorney, the
importance of conducting a thorough due diligence before undertaklng a transaction cannot
be undenn ined under any circumstances .21 To any company involved in merger or
acquisition, the due dilige nce in . e tigation, ill attempt to reveal all material facts and
potentia] lia bilities relating to the targ et compan /uni business .

The purpose of due diligence is to confirm that the business actually is what it a ppears to be.
While gaining information about the busi.ness, the com pan_ conducting the due diligence can
definitely identify deal killers and eradica te them. Furthe r, information for valuing assets defining
rep 1.,ese ntations and \ ammties, and/or negotiating price concessions can also be obtained vide
due diligence. Tbe information learned, :vhile conducting due diligence will further help i11
draft i ng and negotiating the transaction agreemellt and related ancill ary agreements.

This info1111ation · ill also be helpful i.n allocating risks in regards to representations and
warmnties , pre-closing assurances and post-closi ng indemnification rights of the acquirer,
organizational documents to determine the stockholder and other approvals required to
complete the transactio n, contrncts including assignment clauses, and permit s a11d licenses,
to detennine · hether the t ransaction is contractually prohibited or" hether specific consents
are required, regulatoty requirement s., to dete rmine if any governme nta l approvals are required,
and debt instruments and capital infusions , to determine repayment requ ireme11ts. Why Due
Diligence? Mergers and Acquisitions revolve around certain specific steps and due

21
H. Stephen Brown, Franchising Due Dil.ig ence, JOUR AL OF TIIE FORUM COJ-.;[M]TTEE ON F RANCHISING, Vol.
3 2) available at http:/lwww,js toLo[g/stable/29541195 (Last v isited on ay 17. 2015).

!5
II
diligence 1s the first step to make the end business successfol.22 Due dilige nce helps in
under standing the following ab ut the company:

• Capital struct ur e including shareholdin g pattern.

• Compo it ion of board of directors .
• 1 ares foJ· example , on voti ng rights or
S ha reho ld ers' agreement or restrictions on the sl1
the right to tran fer the shares.
• Le,v el ofi ndebtedness .
• Whether any of its assets have been offered as securi ty for rais ing any debt
• Any s ignificant contracts executed by it.
• The status ofa ny statut ory approvals, consents or filings with statuto ry autho rities.
• Employee details.
• Signific ant litiga tion , s how ca use notices and so on rela6ng to d1e tnrget a nd/or its
a rea ofbu ine .
• Intellec t ual. P roperty of the Company
• A ny other liability, exi ting or p tential.
II
;TYPES OF Dl'E DILiGK\('
In business transaction s the due diligence process va ries for differeut ty pes of companies .
The relevant a reas of concem may include the financia l le gal labo ur, tax environment and
111.arl:Ge, co mm ercia l s it uation of tl1e com pan y. Other areas illclude intellectual property real
and personal property, i.nsurance and lia bil ity cove rage, debt instmment revie w, emplo y ee
benefits and labour ma tters, immi gration , and international transacti ons. he most im pott ant
types of Due Diligence are Busin es s Due Diligence - operational, sh·ategic , technical
envi ronm en tal huma11 reso urce, informa tion , sec urity due dili gence and egal Due Diligence
and Fina ncial !Due Diligence.23

Bu in Due Diligence

22
Vik rant Pachn and a and V in eet Unnikri.s hnan, D ue dilige nce iss nes t hat face J\IJ&As, T HE PRAc1·1c AL L AWYER
ava il a ble al
h ttp:// www .su pre me couricases.com/inde x 2. php?op!imi=com_co ntent&it emid =S&do_pdf= I & id=22277 (Last
Visit ed on May l ?, 20 15 _
21, P rab hans hu, Laws Relatin g lo Me rge rs and Acquisi tio ns tn India, June 1 1, 2010 ava ilab le al
h ttp:// www .leg alserv iceindia .c om/article/1463-Laws- Regula i.ing-M ergers- & -Acqu isi Uo .n- In-ln dia.html (Last
visited on fay 1 7 , 2015).

l6
Bus iness due diligence involves l. ing at quality of part ie s to a transac tion , business
prospects and quality of in. estment. It involves ,

• Operational due diligence

Ope ratio na l due diligence aim s at the assessment of tlie functional operations of the
target company, connecti . ity ben:veen perations, technological up gradation in
ope rational process financ ial impact on operat ional efficiency etc. It also uncovers
e, ects 011 operationa, l eakness, inadequacy of control mechani ms etc .
• St rateg ic due diligence
Strategic due diHgence test t he strategic rationale behind a proposed transaction and
analyses whethe r the deal is commercially via ble, whether tl1e targe ted value would
be reali zed. It con iders factors such as value creation oppo1tuniti es, competiti ve
position c1i tical ca pab ili ties .
• Tec hnical Due Diligence
Technical due diligence covers-
1. inte, llec tual property due diligence ; and
II. technology due diligence .
L Intellectual Property due diligence
The recen t concept of valuation of in tangible assets related to Intellectual Property
like Patents, Copyrights , Design, rademarks , Brands etc., also getting greater
importance as these In tellec tual Pr operties of the business are no, ofte n sold and
purchased in the m.arket by itself, like any otJ1er tangible asset. Many I ndian
, co m panies and corporate entities ho, eve r do not give much imp01tane-e to the
portfol io management of heir Intellectual Property Rights (IPR). The ma in objective
of inte.llectual property due diligence is to a ce1taln the nature and scope of target
company's right over the intellectua l property , to evaluate the validity of the same and
to en ure whether there is no infringement claim s.
2. Technology due diligence
Technology due diligence considers aspects such as current level of technology,
compan y' existing techn 1 g , futther investments required etc. T echno logy is a ke
component of merger and acquisi tion activities· if s im perative to look at IT
con ide ration .2 4

2
• Supra Not.e 22.
 II
• Environmen tal Due Diligence
En iromnental due diligence analy ses en ironmental risks and liabilities associated with
a11 org a nisa tion.. This investi gation is usually undertaken before a merger , acquisition ,
ma na gement buy-out, corporate restructure etc. Envi ronmental due di.ligence provides
the acquirer with a detailed assessment of the histo ric, current and potential fut,u re en
ironmental risks associated, ith the target organisation's sites and operat ions. It
involves risk identification and assessment with respect to:
L re, iew the environmenta l setting and history ofthe site
2. assessment of the site conditions
3. ope ratio ns a11d management of sites
4. confirm legal compliance and pollution checks from regulatory authoiities etc.

• Human Resource Due Diligence

Human Resource Due Diligence aim s at people or re.lated issues. Ke managers and
scarce talent leave unex pectedly. Valuable o peratin g s_ nergies gets distur bed, when
cultural difference bet, een companie aren t w1derstood or are simply ignor ed. lt l
11 cial to co nsider cultural and emp loyees issues upfront, for success of any vent ure.
• Information Security Due Diligence
Information security due diligence is often undertaken during the information
technolog y procurement process to ensure that risks are uncovered.
• Ethical Due Diligence
Ethi,ca] Due Dil igence measures ethica l character of the company and identify the
po ibrntie of •ethical ri ks, whic h is a non-financial ri k. lt may relate to reputation,
governance , ethical values etc. It helps an organiz ation to decide whether the partne r
is ethica1ly viable. This is an effective reputation managernent tool for any type of
business decisions.

Legal Due Diligen ce

A legal due diligence co er: the legal aspects of a busines transaction, liabilities of the target
compa ny, pote11tia l legal pitfalls and o he r related issues. Legal due diligence covers intra-
corporate and intercorpo rate tran action . It includes preparation of regulatory check1ists
meet ing with perso11nd , independent check with regulatory autliorities etc. a.part frnm
document verification.

!8
Financial Due Diligence

Financi al due dili gence provides peace of mind to both corpornte and fina ncial buyers, by
analysing and validating all the financial , c mmercial, operational and strnteglc assump tion s
being made . Financ ial Due Diligence includes ,eview of account.i11g policies , 1·evie w of
inte rnal audit procedures, q uality and sustaina bility of earnings a11d cash flow , condition and
alue of a ets, potential liabilitie , tax implications of deal structures, examination of
info nn ation systems to establish the reliability of financial infonnation, internal control
systems etc.

The ta' due diligence compri es an anal of: -

• ta,-x complia nce

• tax contingencie s and aggressive positions

• transfer pricing
• identification of risk areas
• tax plannin g and oppo rtu nities

!9
 CHAPTER-4
STEPS INVOLVED IN DUE DILiGE CE
Th,ere are four distinct levels of a due diligenc,e hich a company looks into before it goes in
for a merger or an acquisition. This move acts as a safe gua rd fo.; the acquirer company in its
future prospects .

Investigation of the indust is the first level of due dili gence. It applie not only to the
bus iness but also to the tec hn ical and human resource a nal ysis and is the investigation done
by the acquirer compan y of the indus try t,o hich the target compan belongs . For example,
if the acquisi tion 1s of an airline corporation , the acqu ire; sliouJd first study the aviat io n
industry a to whether it is ubject to government regu lations , ho are the potentia l investors
in the industr y scope of FD[ and if any restric tions m:1 the same financial results for
25
comparable companies, IPR iss ues, etc. This analysis would have a greater .impact on
ertical and conglomerate mergers ince the acquirer ould be entering a ne,. industry that
he 1s not ve ry familia r with .

[n estiga tio n around tbe target is tl1e seco nd level of due diligence \ liicb deals di rectly with the
net wo,th of the target compa ny in the ind ustry. The directors in this stage are d ut -bound either
by themselves or by s peciali sed agencies to assess the compa ny ' s market position , r,eputation,
potentia l for gro th and o ther al.li.ed factors. For instance,, :vhen Procto r & Gamble acquired
Gillette it is not sufficient ju st to invest i0 ate on Gille tte but also require P&G to do a
thorough analys is of the target by going through their business management eva luation,
financial condit ion, customer o pinions, etc. Thus tfos stage is even more im por tant for
ve,ti cal and conglomerate mergers.

[nvestigation of the documen ts is the third leve l of due diligence and also the most critical
stage of the d ue dil ig ence process . In this leve l, the acquirer has a direct commu nicatio n of
info nn ation and documents i,; ith the target company. The acq ui1-e1· first expresses his
intentio n to go abead for the acquisition and thereafter solic its the req uired documents from
the target company. The acqui1:er's due diligence chec k-list for tJ1ese 1-equired docume nts is

2.l. K.R.
Sampath, L AW AND P ROCEDURE ON ME RGERS/ AMALGAMATIONS, T AKEO VERS, J OJNf VENTURES LLPs
AND CORPORATE R ESTRUCTURE, 983 (7"'ed,n 20 11 ).

20
given as an annexure for examination , ·hich reqm,e.s all documents con nected to the
corporate records and licensing regulations of the c mpany, regula tory filings, :financia l and
ot her bus iness related infonnation, investment s litigation, taxation issues amo ng others.
There may be ca e, · here the target company ma not di clo e the comple te information, for
inst ance, in matters related to pending litig ation. Thus a st rin gent veri fi catio n of the document

and the informat i n procured i very important t overcome such problems. 26

[nvestigation for public records is the fourth level of in vestigation v-1hich i·equire s the acquirer
compan ,, examination of the public d cuments whic h mainly consi ts of a revie of the
inco1p oratio11 documents, outstanding debts, pending litigat io n, HR iss ue s retireme nt pla ns
among others.

Thus, the ·e four levels constitu te the due diligence procedure which is undertaken by
cor poratio ns before entering into an acquisition. In orde r to ensure that this procedure is
undertaken successfully, corporations engage experts from outside the organisa tion as well
for example. tax consultants for ta'Caition issues, lawy ers fo.r pending li tigatfou and other legal
issues and HR management agencies for labour and HR related ma tters.

6
l Mil iand Antan i, Legal due diligence : Key 10 successful M&As in pharma industry, Express Pharma available
at ltttp://www .nis hithd esai.. c om/fileadmi.n/user_upload/pdfs/Lega l_due _di lige.nce_---K
' e y_to_successfu l_ M-
As_in_phanna_industry.pdf (Last Vis ited o n May 17, 2015).

21
 CONCLUSION
The due diligence review should provide an overall evaluation of the viability of the target
business. The due diligence report will form a valuable tool for the new owners of the business
in providing overview of the business and identification of areas of weaknesses and threats
which will have to be addressed .
Each due diligence reviwe, is unique but the overall aim is to provide the investor with
sufficient, relevant and timely information in order to assist in the investment decision. The due
diligence exercise is not simply a number crunching exercise but involves collation of strategic
non financial information which is likely to be crucial in the overall investment decision.
The successful performance of a due diligence in litigation is dependent upon the scope
planning, co-ordination and the use of a high skilled team. The cost of the preparation of a
quality due diligence exercise is insignificant when compared to the cost of a bad acquisition.

With globalization increasing, the number of corporations growing inorganically in the form of
mergers and acquisitions is also increasing thereby consolidating the market with fewer and
larger entities. Therefore, success of M&A is important and strategies that increase such
chances for success need to be mastered . India , which has seen many major M&A activity
within the country, is slowly spreading its wing across the border. There have been
significant acquisitions overseas by Indian companies in Europe, US and Asia Pacific regions
recently. While international banks are flushed with liquidity, financial markets on the other hand,
are flooded with products like credit- linked notes that help bank to ease off their risk. The
risk appetite of private equity players and investment banks has now increased and they are
willing to fund companies growing either organically or inorganically. Many firms like GE,
Nokia, Infosys and Google are focusing on delivering higher organic growth from internally
created innovation within their core business .

Thus in our opinion, due diligence is a very essential procedure for a corporation and when
suitably conducted, attaches a high degree of fairness to the whole transaction and also leads to a
significant reduction in he risks associated
, with a cross-border acquisition of a foreign
company ,_ A future generation due diligence s stem and strategy, ill lead to a significant
improvement financial performance , strengthen competitive positions, expand organization
more effectively, preserve human performance and develop internal know - how . With the
application of these improvements companies will be better equipped to expand and

22
develop through mergers and acquisitions, spin-offs and alliances. It pumps in fresh blood into
the economy as well as advances its abilities and success rate, lien acquiring or
merging.

23
 BIBLIOGRAPHY
BOOKS -

L J.C. Verma, Co RPORATE M ERGERS, A MALGAMA TIONS AND T AKEOVE RS ]73 ( 51h edn.
2008)..
2. K.R. Sampath , L AW AND PROCEDURE ON M ERGERS/ AMALGAlvlATIONS T AKEOVERS,
th
Jo JNT V ENT URES LLPs A ND C ORPORATE REsTR CTURE 983 (7 edn., 20 l l ).
3. L.M. Sharma, N vfALGAMA TIONS M ERGERS T AKEOVERS A CQUISITIO S, 73 (]997).

(The researcher has used tbe e books to read about the provisions that deal with Mergers and
Acquisition in the nd1an Law).

4. Weinberg and Bl.ank on Takeovers and Mergers , Vol. I (5th edn.., 2014).

RTICLES -

L Wendy B.E. Davi , The Importance of Due Diligence Investigations : Failed Mergers
and Acquisitions of the United Stales' Companies A NK ARA B AR R E VIE W 5 (2009)
available at
http ://WW\v.ankarabamsu.org. tr/site ler/AnkaraBa rReview/tekmakale /2009- l /l .pdf
(La t vi ited on April I3, 201S).
2. Role of Due Diligence in .Mergers and Acquisition July ]8 2013 availa ble at
http://www.legalindia.com/role-of-due-diligence-in-mergers-and-acquisition/ (Last
visited 011 May l 5, 2015).
3. Gautam Ahuja Why Mergers and Acqusitions fails?,, Juue 22 2010 available al
http:/lwwv•,.legalse rvicesindia.coi article/article/why-mergers-and-acquisitions -fail-
228-L htm l (Last vis ited 011 May 17 2015).

(T hese aitides have been used by the researcher to unde1·stand the importance of Due
Diligence).

4. Milind Kumar and Charu Mathur, India. Legal Due Diligence, July 30lh 2002,
.available at
http:// ww.mondaq.com/1ndi ,· 1724!/ 0 perationa l+Perfotmance+Manag emen Lega
l+Due+Diligence{Last visited 011 May 16, 20 15).

24
 5. Prabha nslm Laws Relating to Afergers and Acquisitions in India, June I l, 20]0 available at

htt p://\:i., .legal ervice india.con articl 1463- a . s-Regufating-Mergers- &-Acquisit io

n-[11-l ndia.htm l (Last vis ited on May 17 2015).

(These articles have been used by the researcl1er to 1md,e1s tand the position of Due Diligence
in India}

6. Mergers & Acqui ifron and Private Equi ty, ALM Legal Advocates and Solicitors
available at http://alm tlegal. co practic merger -acquisition .htln (lat visite d on
May 17, 2015).

7. Diljeet T itus , 1\tl&A Regulations in India , [ ND IA L AW Jo AL Vol. [ available at

http://www.in diala wjournaLco1 olume1/iss ue _1/rn_a_regulatio ns..html (Last vis ited

on May 17 , 2 015).

(These articles has been u ed by the re earcher to understand Mergers and Acquisi tions
reg ulat io ns i n [nd ia ).

8. Miliand Anta ni, Legal due diligence·. Key lo successful NI&As in pharma indushy
Express Pharma available at
http ://w w.v..nishithde sa i..com /fileadmi , user _uploa pdfs/Legal _due_diligence _-
_Key_ to_successful_ M-As_in _ pharma_ industry .pdf (Last Visited on May]7, 2015).

(Thi article i used by the re earcher to under tand the concept of due diligence) .

9. Vikrant Pachnanda and Vineet U nn i kris hnan , Due diligence issues that face 1&As,
THE PRACTICAL L AWYER available at
http:// ww.su premecou rtcases.c o,1 index2.php?option =com_content&itemi d=5&do_
pdf= l& id =22277 (LastVisitedonMay n, 2015}.

(Thi articles is used to understand tl1e pr blem s that may be arise with reference to Due
diligence).

lO. Edward J. Buchl10lz , Disposing of Unwanted Assets in Corporate Mergers and

Acquisition , THE TAX LAWYER. VoL. 38(1) a aiJable at
http ://w w.vj stor .o rg/s1ab!e/20769004 (Last visited on May 17, 20] 5).

25
 l L H. Stephen Brow n, Franchising Due Diligence, Jo NAL OF THE F OR UM Co 11\{IT'fEE

ON F RANCHISING, Vol. 3(2) available at http,://, ;vj stor.org/stabJ 29541195 (Last

visited on May l7, 2015).

(These arti.cles an: used to under stand the concept of due diligence Ill Mergers and
Acquisitions).

26
Corporate Law II
ORIGINALITY REPORT

20 %
SIMILARIT Y INDEX
20%
INT ERNET SOURCES
7%
PUBLICAT IONS
14%
ST UDENT PAPERS

PRIMARY SOURCES

www.legalindia.com
1 Int ernet Source 5%
bruschambers.net
2 Int ernet Source 3%
www.icsi.in
3 Int ernet Source 3%
law.incometaxindia.gov.in
4 Int ernet Source 3%
goliath.ecnext.com
5 Int ernet Source 1%
Submitted to Gujarat National Law University
6 St udent Paper 1%
legalplug.in
7 Int ernet Source 1%
"Legal Due Diligence Process.",
8
University/Law/Commercial Law, 2004-07-11
1%
Publicat ion

www.ankarabarosu.org.tr
9 Int ernet Source 1%
Submitted to Institute of Technology, Nirma
10 University
St udent Paper 1%
www.icsi.edu
11 Int ernet Source <1%

EXCLUDE QUOT ES ON EXCLUDE MAT CHES < 30 WORDS

EXCLUDE ON
BIBLIOGRAPHY