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Due Diligence

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Legal Due Diligence

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Due Diligence

  1. 1. APURVA AGARWAL Partner UNIVERSAL LEGAL The Institute of the Company Secretaries of India February 15, 2008
  2. 2. Meaning of Due Diligence <ul><li>There is no legal definition of the term &quot;due diligence&quot;. </li></ul><ul><li>Simply put it is a detailed investigation of the affairs of a company. </li></ul>
  3. 3. Meaning of Due Diligence <ul><li>It is the process of carrying out an investigative analysis of the financial, legal and operating activities of an entity in connection with a proposed transaction that would result in a significant change in the ownership or the capital structure of the entity. </li></ul>
  4. 4. Aim of the Due Diligence Process <ul><li>Identify problems within the business, particularly any issues which may give rise to unexpected liabilities in the future. </li></ul>
  5. 5. Ingredients of a successful Due Diligence <ul><li>Must be unbiased </li></ul><ul><li>Should be carried out by independent professionals. </li></ul><ul><li>Requires the management’s co-operation </li></ul><ul><li>Done with a positive attitude </li></ul>
  6. 6. Purpose of Due Diligence <ul><li>Assess the reasonableness of historical and projected earnings and cash flows; </li></ul><ul><li>Identify key vulnerabilities, risks and opportunities; </li></ul><ul><li>Understanding the company and its market </li></ul>
  7. 7. Purpose of Due Diligence <ul><li>4. Setting in motion planning for post-IPO operations </li></ul><ul><li>Highlight changes required in the company’s tax, legal, corporate or shareholding structures </li></ul><ul><li>Check whether the Company has complied with all the laws </li></ul>
  8. 8. Need for Due Diligence in IPO’s <ul><li>Going public increases the number of shareholders. </li></ul><ul><li>Board performance subject to closer scrutiny. </li></ul><ul><li>Institutional investors look for increases in share prices,achievement of profit targets and dividend pay-outs. </li></ul>
  9. 9. Need for Due Diligence in IPO’s <ul><li>Investors require assurance of a system of strategic planning and budgeting,financial reporting and management information </li></ul><ul><li>The SEBI disclosure requirements are met through the due diligence process </li></ul>
  10. 10. Key Areas of Focus <ul><li>Financial statements – to ensure their accuracy </li></ul><ul><li>Assets - confirm their value, condition existence and legal title </li></ul><ul><li>Employees – identification and evaluation of the key movers </li></ul><ul><li>Sales strategy – analyzing the policies and procedures in place </li></ul>
  11. 11. Key Areas of Focus <ul><li>Marketing – what is driving the business and is it effective? </li></ul><ul><li>Industry in which the company operates – understand trends and new technologies </li></ul><ul><li>Competition – identify the threats </li></ul><ul><li>Systems – how efficient are they? Are upgrades required? </li></ul>
  12. 12. Key Areas of Focus <ul><li>Legal and corporate and tax issues – is the shareholding structure robust? Are there any tax issues which need to be resolved? </li></ul><ul><li>Contracts and leases – identify what the risks and obligations are; </li></ul><ul><li>Suppliers – are they expected to remain around? </li></ul><ul><li>Intellectual Property - protected and to what extent? </li></ul>
  13. 13. Legal Issues <ul><li>Licenses and Permissions </li></ul><ul><li>Litigation </li></ul><ul><li>Real Estate and Moveable Property </li></ul><ul><li>Company Law </li></ul><ul><li>5. Employees, Consultants, Labour Relations </li></ul><ul><li>6. Environmental Permissions </li></ul>
  14. 14. Gap Analysis <ul><li>The due diligence helps identify areas where the company exhibits weaknesses </li></ul><ul><li>Eg: It may highlight deficiencies in the company’s management structure or an inefficient tax structure. </li></ul><ul><li>Therefore pre-IPO due diligence process will result in a gap analysis between the present status of the company and the company that should be floated. </li></ul>
  15. 15. Filling in the Gaps <ul><li>Gaps identified assist the directors in: </li></ul><ul><li>divesting of non-core, non-profitable activities. </li></ul><ul><li>critical analysis of the control, accounting and reporting systems </li></ul><ul><li>critical appraisal of key personnel. </li></ul><ul><li>identify the value drivers of the company </li></ul>
  16. 16. Consequences of Misrepresentation in Offer Documents <ul><li>Civil liability under S. 62 of the Companies Act, 1956 for misstatements. </li></ul><ul><li>Liability is in the form of compensation to any person who has sustained loss or damage due to such misstatement. </li></ul>
  17. 17. Persons liable under S. 62 <ul><li>Every director holding office </li></ul><ul><li>Every person named in the offer document as a director or a proposed director </li></ul><ul><li>Every promoter of the Company </li></ul><ul><li>Every other person who has authorized the issue of the prospectus </li></ul>
  18. 18. Criminal Liability <ul><li>S.63 of the Companies Act, 1956 provides for punishment in the form of imprisonment and fine upto Rs. 50, 000/- for any untrue statement. </li></ul>
  19. 19. Persons Liable under S. 63 <ul><li>Any person who has authorized the issue of the prospectus except: </li></ul><ul><li>An expert who has given his consent to have his statement recorded in the prospectus </li></ul><ul><li>Auditor, legal advisor, attorney, solicitor, banker or broker who has given his consent to include his name in the offer document in any capacity. </li></ul>
  20. 20. <ul><li>ANY QUESTIONS </li></ul><ul><li>????? </li></ul>
  21. 21. <ul><li>THANK YOU </li></ul>
  22. 22. <ul><li>Universal Legal Advocates </li></ul><ul><li>5th floor, Kimatrai Building </li></ul><ul><li>77/79, Maharshi Karve Road, </li></ul><ul><li>Mumbai-400002 </li></ul><ul><li>Ph: + 91 22 22034293-95 Fax: + 91 22 22039845 </li></ul><ul><li>Email: apurva@universallegal.firm.in </li></ul>

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