We live in a milieu where even after our best attempts we can’t remain unaffected by what the corporate sector of the country does. Besides on the national level but even actions of global brands have tremendous impacts upon the trade deals which, if viewed on a micro level have domino affects upon various aspects of the economy which further affect the lives of people. The horizon of the business industry is so wide that we have a complete different branch of law for its governance. Adding to this, the industry is pretty competitive in nature too due to its sensitive but ambitious profit making objectives. To fulfil those similar goals the companies constantly look for expansion methods, and merger and acquisitions is one of the most commonly used paths by these business organisations to spread their services and operations. Vodafone-Idea merger is one of the major examples which India has seen recently. What we need to focus on is that the whole affair of such big organisations entering into such major transitions requires a lot of technicality. Since such mergers not only means the integration and expansion of the corporates involved but also the responsibility of the acquired or merged company’s reputation, liability, legal status, organisational structural, financial position etc. To tackle the process smoothly discrete legal obligations and processes are initiated. Before all the official merger or acquisition paperwork begins there is a crucial condition of due diligence which takes place. Due diligence is the process where relevant resources of a given company are collected, investigated and analysed so as to determine the legal risks involved. This process is crucial as it is important for the merging or acquiring companies to know the exact performance position of the target company so that they know the consequences transaction in which they are planning to get into.
It is important to note that before this due diligence process, a non-disclosure agreement is signed between the companies. The reason behind this step is that a considerable amount of information in the forms of documents, accounts, finances and even personal interaction is revealed and analysed. Within these resources there is a lot of critical info that if made public may lead to losses in terms of finances or even may put the company in a tight spot in terms of its competition with the rival companies. Thus to cover up for it and prevent any kinds of confidential information leaks the non-disclosure agreement is signed so that no such tough conditions may arise and even if they do , proper legal remedy may be seeked for the damages caused. After the initial process of due diligence a report is prepared comprising of its assets, accounts, shares, capitals, contracts, taxation, insurance, exports and imports, obligations and liabilities, legal proceedings and compliance and non-compliance with the statutes and provisions, third party rights, its shareholders, customers etc. On the basis of this report a final opinion is made by the buyer company in regard to the merger or acquisition of the concerned company. Legal opinions of the attorneys are also taken for the same. The basic objective is to inspect the different types of risk involved which the company might have to cater to if they decide to move forward with the transition. These risks are studied and determined from various aspects and resources. If we may talk about the legal risks, firstly we may take notice of the dispute and reputational risks. Here, any kind of dispute which the target company might have with its competitor or even with its customers is taken into account. Ways of solving that dispute is inspected and any sort of future challenge involving that dispute is determined since such sort of legal burden bear the potential to cause huge reputational as well as financial damage. Secondly, we may look into non contractual obligations. Under this specific emphasis is put conflicts relevant to Intellectual Property rights, trademark or copyright infringement committed unknowingly during the course of business. These might also include negligence, misrepresentation, fraud etc. These can be committed by any member of the staff and might have grave consequences for the acquiring firm if revealed in the future. Thirdly, the report also might include compliance and regulatory risks which may arise due to non-compliance of any specific relevant law or statute. Non abidance to any concerned regulatory frame work is also included within its ambit. If we view the process of legal due diligence from a wider scope, we may see that it also includes Business due diligence and accounting due diligence. It is the combination of these diverse aspects that make up an appropriate report which shall later on aid the process of decision making regarding the merger or acquisition.
Briefing up about business due diligence, usually in this process specific information related to investments of the target company is collected. The main goal is to figure the operational and logistical risks which could be involved after the main transaction takes place. Further, accounting due diligence at the same time is a very crucial aspect where accounting information relevant to the company is digged into. Financial statements of the company is analysed to determine and scrutinise any kind of inconsistency which might come into view. Since monetary defaults may cause major inconveniences after the deal has been finalised. With all of this being mentioned it is important to note that such an elaborate and rigorous process involves multiple steps since there shall be no scope of mistake that should be left. The process begins at the stage of basic preparation where the company has selected their targeted company and a dialogue has been initiated about it. This lays a foundation of mutual understanding among the companies after which the follow up steps can be taken up. After this understanding has been formed a non-disclosure agreement comes into the picture, it is important because within the due diligence process there be involvement of a lot of both internal and external information which puts the company in a vulnerable position due to which to protect the company from any kind of exploitation in the future the non-disclosure agreement is signed. In furtherance of this a due diligence team is formed to take hold of the different branches of the due diligence project, since it is an elaborate task thus it cannot be performed by a single person. After the team is formed the execution stage comes up, it’s the stage where the actual collection, analysation and evaluation of data in the form of documents, accounts, reports etc is done. After this is done the final stage comes up which is the closure stage. Here the final report is presented to the management authorities highlighting all the pros and cons of the transaction with which a legal opinion is also provided. Upon the basis of this report a final decision of merger and acquisition is taken.
Since a vast amount of information is reviewed so any kind of discrepancy or inadequacy within this process can lead to serious legal consequences for the company. As the end result of any kind of wrong move can bring the company into scrutiny under company law, SEBI, investment law, competition law, and even RBI guidelines. To avoid any such inconvenience it is important that not only proper due diligence is conducted but also it is conducted efficiently. The report will not only eliminate such legal risks but also helps to set the right expectations from the company. Having read their accounts and relevant information thoroughly one tends to get in a much better position to form a fair negotiating agreement. The clear picture of working conditions, obligations, liabilities, capabilities and risks involved within the company also gives the acquiring firm to plan for a solution oriented approach towards the problems. If metaphorically put its like mixing two food component into each other where the due diligence is present to test for their purity. It is equally important to mention that this whole process can be outsourced too and the other way to go about is the legal team of the firm itself conducts it. Lastly, having analysed the whereabouts around it there is no denial of the fact that due diligence is a crucial aspect from a company’s position point of view. But since these corporations work like a web in the market and have various connections within the industry due to which their actions work like a domino effect which means that on a broader level they if any losses are occurred due to a failed merger or acquisition it shall also affect the economy as a whole and that is something which is specifically not desirable. Thus the concept of due diligence is one of those legal conceptions which endeavours to prevent similar unwanted circumstances.
The Article was originally published here