In today’s world business can’t be static, it has to be ever-growing than only you can call it a business in the real sense of the word. And it is no more what Peter Drucker said many years back, `business, that’s easily defined – its other people’s money’.
Mergers and Acquisitions (“M&A”) are many a time used interchangeably but in the strict legal sense or terminology, one can establish different meanings for the said two expressions. Merger or for that matter Amalgamation are synonyms; as the expressions suggest it is a process of unification, joining and confederacy of two or more companies resulting in birth of a new corporate entity. Whereas Acquisition or Takeover are synonyms; and as the expressions imply it is a process of acquirement and purchase, which can be in diverse ways including purchase of shares absolutely or the assets or the undertaking of a target company.
“Chaos is inherent in all compounded things. Strive on with diligence.” Buddha
It is an undeniable fact that lawyers are instrumental to the process of legal due diligence. Consequently, there are innumerable instances where a M&A deal went wrong for the failure at the hands of the lawyers involved in the due diligence. But, the saddening feature is that lawyers are just blamed for their macro incompetence but no effort is directed towards ascertaining the causes at the micro level. The real causes invariably are either the lawyers are involved at a very late stage of the deal or they are not permitted to get deeper into the matter fearing that they may scare away the other side. In order to ensure a proper and comprehensive legal due diligence, it’s imperative to involve the lawyers right at the prelim stage itself when the seed of idea of M&A is sown; further the lawyers have to be given complete liberty and space to conduct due diligence. The fear of lawyers acting as spoil sport is absolutely unfounded and unsound.
Time and again, we notice that the scope of legal due diligence is reduced on the premise that is an unnecessary expense. However, here one must appreciate a famous proven phrase that `the cost of cure is always higher than the cost of judicious prevention’. What you do not prevent today can actually become a colossal malignant quandary requiring huge cost of cure. The whole logic behind due diligence is to minimize risk and maximize value.
Does the legal due diligence have any legal sanctity or statutory requirement? Though, there may not be any statutory pre-requisite for conducting a legal due diligence in any M&A transaction. However, one can derive the requirement of a legal due diligence from the well settled legal concept of `fiduciary duties’ of the directors of a company, which expect the directors and officers of a company to be prudent and exercise reasonable care while managing the affairs of their company.
I may share with you based on my experience that the size and complexities of any document or agreement of merger or acquisition increases enormously if the scope of due diligence reduces. In other words scope of due diligence and clauses of documentation are co-related – one goes down the other goes up.
Now let me discuss the execution part of the legal due diligence. The focus of due diligence is twofold like two sides of the same coin – people and assets. Depending on the nature of the business under due diligence one would resolve on the element of emphasis. Invariably, if the business is more of service oriented like consulting etc. then due diligence will focus more on the human resource whereas if it is a production or manufacturing oriented then the tangible and in-tangible assets take the lead for the purposes of due diligence.
The legal due diligence process should necessarily include the following segments of due diligence – (i) Organization & Corporate Records; (ii) Litigation Records (Actual & Threatened); (iii) Regulatory & Compliance Records; (iv) Intellectual Property Records; (v) Tangible Assets’ Records (Movable & Immovable); (vi) HR/Employee Records; (vii) Contracts (Related & Unrelated); (viii) Environmental Matters; (ix) Investments & Collaborations; (x) Anti-Corruption Mechanism & Compliances; (xi) Clients’ & Customers’ Records; (xi) Public Domain; (xii) Miscellaneous Matters (anything and everything which due diligence team may deem appropriate in a particular situation).
Apart from the above there is an important factor, which will need apt attention and analysis; that is applicable legal provisions for a transaction in hand be it domestic or cross-border.. For instance, if it’s a cross-border merger one would need to examine the viability of such a transaction in context of exchange-control and foreign direct investment laws of the countries involved. Anti-trust laws, competition laws, companies’ laws dealing statutes, securities laws etc. need to be examined as well on case to case basis.
I would close my views by stating that I firmly believe, businesses aren’t acquired by chance, and not only by money but by diligence and care.
Author: Preeti Wahi Batra, Sr. Partner at Kaden Boriss Partners, Lawyers
New Delhi/Gurgaon, India