Due Diligence is widely defined as a broad synopsis of investigative procedures in relation to an acquisition /financing of a company's shares or a joining joint venture project. The jurisprudence of due diligence is closely associated with the concept of notice which can be constructive or implied.
Legal due diligence is the process of collecting, understanding and assessing all the legal risks associated during the Financing/M&A process. During due diligence, the acquirer reviews all the documents pertaining to a target company and interviews people associated with it. Normally the team consists of senior legal professionals along with CA, Valuers and technical experts who should be independent, neutral, unbiased, and without foregone conclusions.
BENEFITS
Firstly, it gives the acquirer a better opportunity to understand the target company and its operations before acquisition. Also both investor and target companies' legal counsels meet and coordinate the diligence process which affords an opportunity of both parties legal compliances and other transactions.
Secondly, the buyer can use the information obtained through legal due diligence to determine the right amount to pay for the transaction. It also gives a chance for the buyer to closely analyze the financial, structural and operational aspects of the business including Human capital and IPR assets.
Thirdly, the information obtained during the legal due diligence process can help both the buyer and the target company to draft appropriate merger and acquisition documents and other documents. It also plays a role in negotiating the right value for both parties, based on the legal obligations of the target company.
Fourthly where ironically it is said "knowledge is power" due diligence ensures that there is no imbalance/inadequacy of knowledge. It also ascertains risk in any transaction one can negotiate terms.
Finally, it is a great opportunity for two corporates join together ended in a single entity which will all the time benefits investors and stakeholders apart from improved brand image, reputation, goodwill and other value additions.
MODUS OPERNDI - Preparation
1. Due diligence process begins when the acquiring company and the target company have reached an initial understanding for their M&A deal may be in a form of a letter of Intent or memorandum of understanding. . Draw up the legal boundaries and limitations by way of confidentiality agreement and non-disclosure agreement where they set the ground rules and limitations. Also in certain circumstances, the legal experts shall act based on certification by CA/CS/Valuer/Expert to ensure expediency.
2. Constitution of due diligence team: Due diligence cannot be conducted by a single person. It is best performed by a team (comprising legal/finance/technical experts) that is put together for the specific task of performing due diligence
3. Execution: The Execution stage will have the due diligence team collecting the information, analysing and evaluating them, and finally sharing the results of their analysis or evaluation, as appropriate. Also, certificates from various agencies shall be taken as a matter of record to substantiate the strengths of the target company.
Some pitfalls and obstacles may occur due to non-availability of documents/information and the team should successfully encounter them with possible alternatives.
4. Closure: After finishing up the due diligence process, it is time to disclose the results of the review to the management, who will then make the final decision.
Conclusion
Due diligence is finding place in Indian statutes and few economic laws contain mandatory provisions including SEBI rules.
Disclaimer: The content of this article is intended to provide general guidance. Specific advice should be sought for any specific circumstances.
The author is a senior legal professional /arbitrator with exposure in corporate affairs/governance presently located at Danville CA USA.
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