An eye for a deal

A comprehensive due diligence exercise is crucial to a successful M&A deal. Sourish Mohan Mitra details the key elements

Mergers and acquisitions (M&A) began to gather pace in India about 15 years ago when large ticket transactions came into prominence. In a typical M&A transaction the acquirer enters into a preliminary agreement, usually through a term sheet, letter of intent, or memorandum of understanding, which allows it to conduct due diligence of the affairs of the target company. The target is obliged to disclose documents to the acquirer through the due diligence carried out by the acquirer’s advisers including lawyers. The laws applicable to an M&A transaction depend on the type of transaction, industry, etc. Mergers require the approval of the National Company Law Tribunal, which recently replaced the jurisdiction of high courts. Mergers may also come under the purview of the Competition Act, 2002, if the thresholds under it are attracted.

A strong foundation

Various aspects of a legal due diligence make it an important element in the lifecycle of an M&A deal. Chances are that the fundamentals of the deal are shaken if it goes wrong.

Understanding the target company. Due diligence is the first step to understand the target company and its business. The company’s documents, such as financials, corporate compliances, agreements, leases, litigation matters, licences and registrations, which could be available internally or in the public domain, provide a starting point to determine the focus areas of the target’s business, its core business strategies, strengths and weaknesses, growth plans, etc. After obtaining initial documents, either through a physical or virtual data room, the next step is to ask questions and, clarifications from the target’s management. The due diligence process leads to digging deeper into the target’s affairs. The rosy picture provided by some target companies at the time of signing the preliminary agreement is dispelled when core inner issues pertaining to the target are brought to the fore.

Identifying issues. This is the crux of a due diligence exercise and should produce analysis on issues that are vital to the acquirer who is keen to know how the business will fare if it goes ahead with the acquisition.

The review of documents provided by the target followed by further probing helps in getting to the bottom of the target’s issues and non-compliance areas. When such an exercise is conducted in India, the chances of finding some non-compliance – especially in areas such as corporate compliances, stamping of instruments and employment law related compliances – are always high.

In cherry picking issues it is possible to miss out on areas that could be vital for the acquirer. An analysis of all the non-compliances will allow the in-house team of the acquirer to consider those which are critical for its management.

Building support

External lawyers who are brought in to support an acquirer’s in-house team can add considerable value. The in-house team is responsible for equating the issues identified with the acquirer’s business feasibility and it is interested in a variety of angles and perspectives, such as how the post-acquisition integration will be carried out.

Sourish Mohan Mitra is an India-qualified lawyer and works in the in-house team of a global technology research and advisory firm in Delhi. The views he expresses are personal.