The Board’s Role in Legal Due Diligence

By Dr. Vedula Gopinath, vgnath@gmail.com

JVs, acquisitions, and financing are exciting moments for Boards as they signal growth. The Boards have to consider the propositions carefully with due diligence for all six stakeholder groups. The first step in this regard is legal due diligence.

Due diligence is widely defined as a broad synopsis of investigative procedures in relation to an acquisition or financing decision. 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 with the financing or 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 CAs, 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 the acquisition. Also, both the investor’s and the target company’s legal counsels meet and coordinate the diligence process, which affords both parties the opportunity to comply with legal requirements 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 the buyer a chance to closely analyse 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 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 that “knowledge is power,” due diligence ensures that there is no imbalance or inadequacy of knowledge. It also ascertains risk in any transaction based on which one can negotiate terms.

Finally, it is a great opportunity for two corporations to join together as a single entity, which will always benefit investors and stakeholders apart from improved brand image, reputation, goodwill, and other value additions.

MODUS OPERNDI: Preparation

1. The due diligence process begins when the acquiring company and the target company have reached an initial understanding for their M&A deal, which may be in the form of a letter of intent or memorandum of understanding. Draw up the legal boundaries and limitations by way of confidentiality agreements and non-disclosure agreements, where they set the ground rules and limitations. Also, in certain circumstances, a legal expert shall act based on certification by the CA, CS, valuer, or expert to ensure expediency.

2. Constitution of the due diligence team: Due diligence cannot be conducted by a single person. It is best performed by a team (comprising legal, financial, and 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 it, 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 the non-availability of documents or 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 its place in Indian statutes, and few economic laws contain mandatory provisions, including SEBI rules.

Disclaimer: The content of this article is intended to provide a general guide. Specific advice should be sought for any specific circumstances. The reader shall obtain a proper legal opinion before taking any action. The expert and the publisher expressly deny any liability for loss arising out of reliance on the content published.

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