Process of conducting legal due diligence and report writing

1. Steps involved in the diligence process

1.1 Let’s get started –

(a) Organizing a team

(b) Provide background of the proposed transaction, background of the target, nature of
review and timelines

(c) Key points of contact (Client / Target / Internal)

2. Nature of proposed transaction and scope of legal due diligence

Before starting the legal due diligence, team must understand the scope of the following:

2.1 Nature of the transaction and purpose of review :

(a) Mergers and acquisitions/ strategic and private equity investments/ joint ventures –
investment or purchase?

(b) Securities offering

(c) Project finance

(d) Other debt financing – secured or unsecured lending

(e) Share v. asset acquisition

2.2 Nature of the target

(a) Listed v/s unlisted company, private vs. public

(b) Size of business

(c) Subsidiaries and joint ventures

2.3 Business of the target

(a) Manufacturing

(b) Services

(c) Retail

2.4 Mandate

(a) Detailed diligence report or focus on specific aspects – tax, litigation, contracts

(b) Red Flag/Issues diligence report

2.5 Timelines

2.6 Confidentiality
2.7 In case consultants are engaged for tax, environment, technical diligence – avoid overlap

3. Background information

Prepare before starting a diligence by taking the following steps

(a) Ascertain the law(s) applicable to the proposed transaction

(b) Understand the sector of the target company

(c) Know basic FEMA regulations for cross-border transactions

(d) Review earlier publicly available information about the company e.g. annual report,
stock exchange filing/s, website of target

4. Due Diligence Questionnaire

4.1 Use format of the standardised due diligence questionnaire and make necessary
modifications depending on the nature of the target company and the kind of transaction.

4.2 Circulate the questionnaire to the client first and thereafter to the target!

5. Checklist of broad heads of a Legal Diligence Report

5.1 Corporate Structure

(a) Status- name, incorporation, change in names, registered office etc.

(b) Capital structure:

(i) Authorised and paid up share capital

(ii) Types of securities

(iii) Shareholding of the Company

(c) Issue of shares duly authorized and shares are fully paid

(d) Tracing history of holding of instrument? – relevant for share transfers

(e) Memorandum of Association (MoA) - sector, power to consummate the transaction

(f) Articles of Association (“AoA”) - special provisions in the AOA affecting the
transaction (e.g. ROFR), board structure, special powers

(g) Corporate compliance

(i) review board minutes and shareholders minutes :

2
 check authorization/s for appointments, execution of contracts, loans, leases
etc., charges on assets;

(ii) review annual returns, filings forms and review registers

for ensuring corporate compliance

(h) Related Party Transactions - Contracts in which directors are interested

5.2 Contracts

(a) determine revenue chain – what are the material contracts

(b) determine procurement chain – what are the material contracts

(c) rights and obligations under various contracts

(d) provisions for novation/assignment

(e) consents and authorisations required

(f) receipt or provisions of goods/services at concessional rates

(g) exclusive contracts

(h) change of control provisions

(i) absence of any material breaches

(j) receipt of notice in relation to an alleged breach

(k) validity of contracts

(l) termination provisions

(m) stamp duty

5.3 Employees

(a) HR structure

(b) terms and conditions of employment

(c) contractual/statutory obligations – transferring/altering terms of employment

(d) whether contract labourers are permanent – registration of contract labour, returns,
outstanding liabilities

(e) HR related registrations and returns

(f) payments to and terms of various funds (provident fund, gratuity and superannuation)

(g) existence of unions and wage settlements with them

(h) disputes with unions or individual employees

3
 (i) existence of employees stock options

5.4 Financing

(a) details of borrowings (standard and special terms)

(b) finance facilities, letters of credit, sanction letters

(c) compliance with obligations under facilities

(d) charges over assets and procedure for their release, filings relating to charges

(e) prior consent or notice to creditors for the transaction

(f) Onerous clauses which our client should be aware of prior to entering into the
transaction

(g) contingent liabilities - existence of guarantees and their continuation after transfer

(h) loans provided to related parties

5.5 Licenses and approvals

(a) Approvals and licenses from the government or other administrative / regulatory
bodies / authorities

(b) Existence and validity of licenses and permissions

(i) Sector specific

(ii) environmental laws

(iii) industrial laws

(iv) HR related

(v) asset related

(vi) Tax related

(c) Adequacy of existing licenses

(d) Termination and expiry provisions

(e) Any notice received or action pending in relation a breach of conditions contained in
any license

(f) Impact of transaction on licenses

(i) procedure for transfer of licenses

(ii) provisions relating to change in control

4
 (iii) notification/ approval of the authority

5.6 Immoveable Property

(a) What properties are owned, leased or licensed

(b) Title to property- whether freehold or leasehold

(c) Provisions of lease/leave & license where interest is leasehold- validity/currency of

lease

(d) Impact of transaction

(i) lessor’s consent/notification for the transaction

(ii) assignment/change in control provisions

(iii) procedure for transfer

(e) Existence of requisite planning permissions, occupancy certificate and structural

stability certificate

(f) Existence of easements

(g) Independent title searches

5.7 Intellectual Property

(a) Ownership of intellectual property and registration (existence of licenses to third

parties)

(b) Issues relating to assignment

(c) Rights pursuant to license agreement - validity and assignability

(d) Infringement of IP rights

(e) Infringement of third party rights by Target

(f) Independent searches, if required

5.8 Litigation

(a) determination of disputes

(b) defence taken

(c) Determination of the materiality of the dispute

(d) Assessing the impact of adverse decisions - monetarily & on business

(e) review of counsel’s opinion on risk assessment

5
 (f) determination of any threatened litigation on the basis of review of correspondence

(g) due diligence questionnaire to define litigation very broadly to include actions before
regulatory and quasi-judicial authorities

5.9 Tax

(a) Check filings of tax returns

(b) Notices received from the tax department

(c) Existing or threatened disputes relating to payment of tax

(d) Entitlement to any tax holidays, benefits, exemptions or deduction and whether they
will continue after transfer to Purchaser

5.10 Insurance

(a) Adequacy of insurance cover given market practice

(b) Cover for business interruption

(c) Validity of insurance policies

(d) Provisions for assignment

(e) Exclusions in each policy

(f) Any claims raised by the Target under any of the policies and status of such claim

6. Review of Data

6.1 Online Data Room

(a) Registration for all team members to use the data room

(b) Assign a team member to verify update/s of documents on the data room

(c) Identify documents for review

(d) Documents to be saved till conclusion of transaction

6.2 Receipt of information

(a) Executed versions of contracts

(b) Undated copies?

6.3 Allocation of responsibilities

(a) In terms of specific sections of the due diligence report

(b) Dependent on volume of information

(c) Sensitive areas to be reviewed by senior members

6
6.4 Order and prioritization of documents - on the basis of the nature/business of the target

6.5 Materiality of review - transaction specific, to be done in consultation with senior

associate/partner and client

6.6 Follow-up information - Record of information provided, additional information sought,

additional information provided etc. to be maintained

6.7 Translations of documents in the vernacular - Translations certified by target may be relied
on for most documents. Independent/court translations may be sought for critical documents.

6.8 Communication with the Client – Do not wait until end of diligence. Highlight key issues
from time to time

6.9 Discussions with Target Company – Obtain clarification from the target prior to
highlighting key issue/s and/or submission of report.

7. Further Information Requests

7.1 Review the responses and copies of documents provided by the target and raise further
questions if required

7.2 Ensure the questions are –

(a) relevant

(b) explicit

(c) complete

7.3 Avoid

(a) generic questions

(b) repetitions

8. Writing the Diligence Report

8.1 While writing a diligence report write ensure that short sentences that are simple, clear and
easy to understands

8.2 Forms of reports

(a) Red flag

(b) Detailed report

8.3 Structured approach:

(a) Identify issue

(b) Asses risk/consequences (quantify if possible)

(c) Suggest solution in context of transaction as a whole