Due Diligence in Merger
MAHESHWARI & CO.
Advocates & Legal Consultants
Telephone: 91-11-2610 1906
Fax: 91-11-2617 1201
Due Diligence in context of M & A
Due Diligence can be defined as the examination of a
potential target focusing on material future matters for
aiming to make an acquisition decision via the principles
of valuation and shareholder value analysis and getting
answers to key questions, including:
Do we buy ?
How much do we pay?
How do we structure the acquisition
Need for Due Diligence
The standard puts the onus on the buyer to conduct a
thorough investigation to ensure he is receiving the
benefit of the bargain. due diligence satisfies the
officers' and directors' fiduciary duty to make sure any
decision made will maximize value for existing
A due diligence audit is the equivalent of checking
references before hiring. In general, a due diligence
audit focuses on information outside of what is freely
Advantages of Due Diligence
Develop Additional Negotiating Leverage
Identify, Access and reduces risk
Improve/validate valuation process
Diligence is about
All these could be avoided by conducting proper due
diligence what we also call 360-Degree Due Diligence
It is a process with a comprehensive approach that
engages all the relevant disciplines in order to address
all the key issues that are embedded in the target to be
Steps of Due Diligence
Compiling of Due Diligence Checklist
Procuring Detailed Information/Documents as per the
Analyzing of Information/Documents
Critically evaluating the analyzed information
Preparing of a Report with suggestive actions
Compiling of Due Diligence
Compiling a due diligence checklist is a resourceful tool
when undergoing a merger and acquisition. The checklist
assists in covering all business components to ensure
that a proper investigation is performed in order to
prevent any delays or complications for the involved
Complete Group Structure and inter group transactions
Nature of Business of all with their status i.e. dormant or
Last three years financials of all as submitted to ROC,
SEBI and SE
Statutory Registers and Minutes Books
List of all loans (inter-corporate or otherwise), agreed
limits, current outstanding and copies of all agreements
and other governing documents and Government/RBI
approvals, as applicable.
Particulars of any debentures, debenture stock, term
loans or other financing arrangements and copies of all
agreements and other governing documents.
Copies of all outstanding mortgages, charges, liens or
similar arrangements, affecting the company or any of its
assets, position of registration of charges with ROC
Title verification of purchased and leased properties.
Land use/ sanctioned plan compliances.
Utilities (electricity/water) compliances.
Examination of leases to ensure Company’s interests is
adequately protected with no hidden potential liabilities.
Proper stamping and registration of property documents
Municipal taxes and local tax compliances
Litigation, Investigation &
Review of all investigations, legal action, disciplinary
proceedings (including pending or threatened) against
the Company and its Directors since its incorporation, by
governmental or other bodies or individuals or
Review of any order, judgment or decree of any Court,
governmental or regulatory body to which the Company
is associated or by which it is bound.
Review of dispute/proceedings, if any, pending before
any quasi-judicial authorities.
Review of any current litigation/arbitration or other
disputes in which the Company is presently involved or
may become involved or any settlements entered into
with respect to any litigation.
Intellectual Property Rights
Review of all copyrights, trademarks, service marks,
patents and other intellectual property (including all
applications thereof) owned/licensed/assigned/registered
and copies of all agreements and instruments relating
to/involving the acquisitions, assignment, licensing,
ownership and registration thereof.
Review of all non-disclosure agreements and/or
confidentiality agreements executed by the Company.
Business activities, office locations & hours of work for
each office of the Company.
Details regarding outsourcing/contract labour:
Do the contractors / outsourcing agency pay wages,
control and supervise their employees, grant leave, do
performance appraisal, take disciplinary action and
otherwise perform all the functions of an employer qua
Whether the Company is exempted from complying with
any Labour Legislations.
Details of registration of the Company with various
statutory authorities (if applicable) for e.g. ESI, PF,
Employment Standing Order’s Act, Shops &
Establishment Act , Factories Act .
How is Provident Fund being paid to the employees
employed by the Company? Details of company’s
contribution to Employees Provident Fund along with the
rates and proof of upto date payment.
Details of Bonus etc. if any of the Company.
Licences, permissions, authorizations and consents from
Details of any breach of any law, code
Details of any environmental management committee
reports (if any)
Hazardous materials, spills, emissions etc. of the
CCI in M & A
All M & A with combined turnover of Rs
4,500 crore or more will require approval
of CCI from June 1, with an objective to
safeguard interests of consumers and
promote industrial growth
Some major Failures
Survey conducted by McKinsey and company shows that
many parent companies often over estimate the value of
target company due to lack of due diligence.
In 1998 the German auto car maker Damlier Benz
merged with Chrysler Group for a value of $36 billion. It
was perceived to be a merger between equal but after a
few years, the value of Chrysler fell to a mere $7.4 billion
and the merger had proved to be a failure
The failure was attributed to inability to conduct due
diligence It over estimated the value of the target
company which led to the merger being unsuccessful.
How due diligence saved a company
from big fraud
A small Canadian exploration firm, Bre-X Minerals Ltd.,
announced that it had made one of the world's largest
gold discoveries containing some 3-4% of the world's
reserves which soared the value of Bre-X shares giving
the company a market capitalization higher than that of
several major mining companies.
Eventually, Bre-X proposed to form a partnership with
Freeport-McMoRan, a U.S. company. Before making a
firm commitment, Freeport insisted on carrying out due
The results shook the mining industry; Bre-X contained
no significant gold After the scam was uncovered, the
Bre-X share price crashed, and disgruntled shareholders
(who lost about $3 billion) began taking legal action
against the company.