COMPANY LAW II

Assignment: Due Diligence

Submitted by
Sharvi Dua
Division D
PRN: 15010324334
Class 2015-2020
Of
Symbiosis Law School, Hyderabad
Symbiosis international University, Pune
In
March, 2018

SYMBIOSIS LAW SCHOOL HYDERABAD

SYMBIOSIS INTERNATIONAL UNIVERSITY

 DUE DILIGENCE:

HOW AWARE ARE YOU?

Caveat emptor – ‘Buyer bewares’ concept, is one of the most important concepts in law. A
person who is entering into a contract with another must have a basic prudence while
proceeding. A Due Diligence process is the evaluation of a prospective business decision by
obtaining and reviewing the legal and commercial state of a target. In other words, Due
Diligence is the process of research and analysis that is done before an investment merger,
acquisition, business partnership or bank loan in order to determine the value of the target
firm and to analyse and investigate. It prevents a company from making a costly mistake in
the event of existence of any major or potential issues. The process of Due Diligence is
performed by disinterested third party on behalf of a party contemplating a business
transaction for the purpose of providing information with which the advantages and the risks
are brought forth. It creates a trust between two parties to confirm all material facts related to
the business to assess the risks and opportunities of a proposed transaction, to reduce the risk
of any unpleasant surprises in the future and to finally come to a negotiating price.
Due Diligence is finding deserved place in Indian Statues. Provisions have been introduced
for the conduct of due diligence under the Securities and Exchange Board of India (Mutual
Funds) Regulations 1996 and offshore offerings of securities by Indian companies through
American or global depository receipts (ADRs/GDRs).

WHY IS IT IMPORTANT
 To investigate into the Affairs of Business as a prudent business man would
 To confirm all material facts even remotely related to the Business
 To assess the Risks and Opportunities of any proposed transaction.
 To reduce the Risk of post-transaction surprises
 To confirm that the business is infact what it appears.
 To create a trust between two Parties
 To identify potential deal killers defects in the target and avoid a bad business
transaction.
 To gain any information that will be useful for Valuing Assets or assessing any
liability that may occur.
 Negotiating Price Concessions
THE PROCESS:
Step 1- Pre-Due Diligence:

1. a memorandum of understanding between the transacting parties for disclosure is

made
2. There is an establishment of timelines
3. There is commencement with pre-arranged check-list(s) where the target company
provides information and documents to the best of its ability and knowledge
4. Interview with the relevant personnel of the target company during

Step 2- Diligence:

1. Independent checks with the statutory and regulatory authorities, libraries, corporate
documents, banks and third parties that do business with the target company
2. Transaction Checks
3. Discussions with the acquirer on findings and discoveries
4. Finalisation of the LDD Report (‘LDDR’)
5. Preparing an Analysis and Strategy and finally,
6. Rectification of Non compliance.

Step 3- Post-Diligence:

Diligence process can lead to various tasks like filing petition for compounding of various
offences to filing an application or negotiating agreements.

Types of Due Diligence:

 Operational Due Diligence: Operational Due Diligence aims at the assessment of the
functional operation of the Target Company.

 Strategic Due Diligence: Strategic Due Diligence tests the strategic rationale behind
a proposed transaction and analyses whether the deal is commercially viable.

 Technology Due Diligence – Technology Due Diligence considers aspects such as

current level of technology, company’s existing technology, further investment
required etc.
  HR Due Diligence It looks at the organization’s structure, employee benefits,
management and personnel, and labour matters.

 Environmental Due Diligence Environmental Due Diligence analyses

environnemental risk and liabilities associated with an organization.

 Legal Due Diligence- A Legal Due Diligence covers the legal aspects of business
transaction liabilities of the target company, potential legal pitfalls and other related
issues. Legal Due Diligence covers intra-corporate and inter-corporate transactions.

 Intellectual Property Due Diligence -Review & diligence of intangible assets like
patent, copyright, design, trademark, brands etc. getting greater importance.

 Financial Due Diligence- provides peace of minds to the both Corporate and
Financial buyers, by analyzing and validating all the financial, commercial,
operational and strategic assumption being made. Financial Due Diligence includes
review of accounting policies, review of internal audit procedure, quality and
sustainability of earning and cash flow, condition and value of Assets, potential
liabilities and tax implication on Deal Structure.

In this article we focus mainly on the legal Due Diligence

LEGAL DUE DILIGENCE – THE PROCESS

STEP -1

“the buyer should always hire the specialized services of a legal advisor or a consultant as
this process is in itself complicated wherein both business and the industry issues need to be
understood and one would be certain that the right questions are being put up and the
probable risks are uncovered”.1  Therefore any company which needs  to do legal due
diligence could do so with professional experts/ consultants for the conduct of legal due
diligence such as lead investors, legal staff (attorneys), investment bankers,
corporate/business development staff, financial staff (accountants), loan officers etc.

STEP -2

RESEARCH INFORMATION

1
Justin Levy, Partner at Winston & Strawn,
For any legal due diligence process, for the success of both the parties’ i.e. Buyer and Seller
must cooperate with each other and understand the bigger picture first. Before entering into
any legal agreements, the buyer needs to go through following legal documents:

 Agreements between stockholders or members of the Company relating to ownership,

management, or control of the Company.
 A list of Subsidiaries of the Company whether related directly or indirectly.
 Memorandum and Articles of Association and Certificate of Incorporation
 Minutes of meetings of the Company’s stockholders or members, board of directors,
or any committee thereof, for the last 3 years.
 Documents entered into with respect to any prior financings or equity issuances of the
Company, including, Stockholders Agreements Stock Purchase Agreements, and
Registration Rights Agreements etc
 All correspondence and agreements between or among the Company and the directors
or officers of the Company relating to indemnity, employment, loans, or advances.
 Capitalization of the Company showing the number of authorized shares of each class
or series of capital stock, the number of issued and outstanding shares of such stock,
and the record owners of such shares.
 Stock books, stock transfer ledgers, and other stock records of the Company.
 A list of options, purchase rights, and warrants issued by the Company specifying the
name of the holder, the number of options, rights or warrants issued, the date granted,
the option or purchase price, and the position of the holder with the Company,
together with copies of option, right or warrant agreements.
 An address list of the locations of all land, buildings, and other improvements either
leased or owned by the Company.
 All material governmental permits, licenses or authorizations, and related
correspondence, of the Company.
 Other than customer contracts, any agreements with any federal, state, or local
regulatory authorities to which the Company is a party.

STEP -3

THE ANALYSIS
As the buyer company or its hired professional completes the Step – II of the legal due
diligence process, they must now analyse all the findings of the company in a systematic
way. ‘casus belli’ or any questionable or a suspicious document found in the process of
investigation to its root is looked for. All due diligence questionnaire must be prepared and
highlighted, all the key areas that are needed to be examined. In this way, the core areas
which are to be investigated and examined give a better picture. The purpose of filling the
questionnaire is to help the company to make sure that all the major areas of the legal due
diligence are considered.

The time process of legal due diligence normally varies depending upon the size of the target
company. It can take place for a few days, for a smaller target company to a several months if
the target company is big and has more complicated transactions. The process of legal due
diligence ends when the buyer company is adequately satisfied and had analysed all the
relevant documents and issues related to the target company and is able to understand the
market fairly well. Every buyer company would try to complete the due diligence process
before carrying out the primary agreements with the seller company.

STEP -4

THE ANALYSIS REPORT

An analysis report of the legal due diligence findings is presented to the buyer company by
the hired professional. As the buyer company would be unfamiliar to the legal nomenclature,
the analysis report should be presented in the easiest and the most user-friendly way. the legal
due diligence findings should be presented in a detailed format listing, all the documents
investigated, key issues discovered and the solutions thus suggested for resolving the issues.
The buyer company should specifically convey to its professional advisors about his priorities
and expectations from the deal in order to get a more streamlined analysis report highlighting
the main concerns and keeping them at a top priority.

As mentioned above, the concept of caveat emptor is one of the most important concepts
defined in law. A company, as a corporate body, needs to be aware about its actions and the
consequences of these actions. This can be done by the process of Due Diligence. The
process, though complicated, is a fruitful one.