DUE DILIGENCE HEART OF A PRIVATE EQUITY TRANSACTION

DUE DILIGENCE HEART OF A PRIVATE EQUITY TRANSACTION

DUE DILIGENCE: WHAT WHY WHO WHEN WHAT IS DUE DILIGENCE? Black s Law Dictionary defines Due Diligence as a measure of prudence or activity to be expected from, and ordinarily exercised by a reasonable or prudent man under the particular circumstances, not measured by an absolute standard but dependent of the relevant facts of a particular case. Due diligence is used to investigate and evaluate a business opportunity. It spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company. 2

WHY DUE DILIGENCE IS NECESSARY? To confirm that the business is what it appears to be; Identify potential "deal killer" defects in the target and avoid a bad business transaction; Gain information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions; and Verification that the transaction complies with investment or acquisition criteria. 3

WHO CONDUCTS DUE DILIGENCE? Lead and co investors, corporate development staff, attorneys, accountants, investment bankers, and other professionals involved in a transaction may have a need or an obligation to conduct independent due diligence. WHEN IS DUE DILIGENCE CONDUCTED? Detailed due diligence is typically conducted after the parties involved in a proposed transaction have agreed in principle that a deal should be pursued and after a preliminary understanding has been reached, but prior to the signing of a binding contract. 4

Due Diligence Process Understand the checklist Getting the data room ready Report the findings/ take corrective actions Incorporate findings in the transaction documents 5

Due Diligence Heart of the PE Transaction Pre deal Deal Post deal 6

AVOIDABLE EVIL vs. NECESSARY EVIL MYTH Need for due diligence can be eliminated by Warranties or Indemnity Protection Only investors need to conduct due diligence Due diligence is all about compliance and legal liabilities review FACT DUE DILIGENCE IS A TOOL TO Evaluate the valuation of the Target Company Structure the deal Effectively manage Issues and Risks Assist in creating a Road Map for future 7

EFFECTIVE DUE DILIGENCE Clearly establishes objectives Effectively provides for issues and risk management Suggests post deal improvements 8

India Vs. West Fact finding mission Vs Risk allocation exercise No set pattern or formula No implied representations and warranties Difficulty/Delays in enforcing warranties and indemnities 9

CRITICAL AREAS TO LOOK FOR IN DUE Capitalisation of the Company Related Party Transactions Business Contracts Vendor Contracts Customer Contracts OEM Contracts DILIGENCE Ownership of IPR (if IPR is critical to the business of the Company) Patents, Trademarks, Copyrights Approvals and Licenses Loan Agreements/ Line of Credit 10

AT THE CORE ISSUES CONDITIONS PRECEDENT DUE DILIGENCE RISK WARRANTIES LIABILITY INDEMNITIES & PRICE RETENTION 11

EXAMPLE OF CONDITIONS FINDINGS OF DUE DILIGENCE The Company has entered into a loan agreement with a bank which requires the Company to take prior approval from the bank regarding any change in control and management of the company. The Company does not have enough authorised share capital to issue shares/ debentures to the Investor. PRECEDENT CONDITIONS PRECEDENT There will be a condition precedent as per which the Company will be required to take approval from the bank for the proposed investment. There will be condition precedent requiring the Company to increase its authorised share capital before the investment. 12

EXAMPLE OF WARRANTY FINDINGS OF DUE DILIGENCE The application for registration of trademark of the Company is pending. WARRANTY A warranty shall be taken from the Company that it owns all the intellectual property belonging to the Company and it does not infringe the rights of any third party. The Company represents that it does not have any pending litigation however the representation is not absolute as it is not possible to find out if any litigation is pending in the trial courts. A warranty shall be taken from the Company regarding absence of any litigation and indemnity to the Investor in case any loss is incurred on account of any litigation. 13

EXAMPLE OF RELATED PARTY TRANSACTIONS FINDINGS OF DUE DILIGENCE Daughter of one of the directors is employed as executive assistant and she is drawing much more than her prescribe salary by way of additional perks. REMEDIAL ACTION There will be condition precedent requiring the Company to terminate the employment agreement of the related party. The company has entered into a rent agreement for one of its warehouse with the relative of the director. It will have to be verified that the rent for the warehouse is on arms length basis. 14

ROLE OF LAWYERS AND COMPANY SECRETARIES PRE DEAL Regulators for the transaction Facilitate transaction Advice on Structuring Risk evaluators and managers Sensitize parties to cultural deal approach issues (Cross border transactions) POST DEAL Monitor conditions subsequent Do necessary filings with the Reserve Bank of India and other regulatory authorities 15

LIMITING FACTORS Dependent on information shared by the Target Company Pressure to conclude transactions Competition in the PE world Time and Cost Transactions based on good faith Viewed as an obtrusive and time taking exercise 16

QUESTIONS 17

THANK YOU Contact: GAURAV DANI gaurav.dani@induslaw.com 18