The Rights of the Deceased: Moral Rights Incidental to Copyright Law
- Vanshika Agrawal
- 2024-04-25
By- Rajan Gupta
Investors and big investment houses who are planning to invest in emerging startups should perform due diligence check. It helps identify or prepare against any possible exposure to risk. Assessment is carried out in various scenarios, such as mergers and acquisitions, partnerships, joint ventures, and IPOs. Assessment is carried out to ensure adherence to distinct legal and regulatory compliance requirements. Due diligence is important to avoid bad transactions, identify issues within the company, and verify the background of the business.
Table of Contents
I INTRODUCTION…………………………………………. 1
II WHY DO WE NEED DUE DILIGENCE CHECK…...... 2
III WHO CARRIES OUR DUE DILIGENCE………………. 4
IV WHAT ARE THE DOCUMENTS REQUIRED FOR
CONDUCTING DUE DILIGENCE………………………. 4
V TYPES OF DUE DILIGENCE……………………………. 5 - 8
VI CHALLENGES IN CONDUCTING DUE DILIGENCE… 9
VII DUE DILIGENCE: ITS CONCEPT AND SCOPE UNDER
INDIAN LAW……………………………………………….. 10 - 12
VIII CONCLUSION……………………………………………… 13
I.
INTRODUCTION
Due diligence is a process of research and analysis that is initiated before an acquisition, investment, business partnership or bank loan, to determine the value of the subject of the due diligence or whether there are any other issues involved. Such findings are then summarized in a report which is known as a due diligence report.
Due diligence is a process of:
According to the Cambridge Dictionary, Due diligence means: “The detailed examination of a company and its financial records, business transactions, done before becoming involved in a business arrangement with it”. The concept of due diligence enshrined in German law refers to the exercise of reasonable care in the course of business. A due diligence check involves careful investigation of the economic, legal, fiscal and financial circumstances of a business or individual. This covers aspects such as sales figures, shareholder structure and possible links with forms of economic crime such as corruption and tax evasion. Due diligence is necessary to perform risk and compliance checks and protect themselves. Assessment involves risk and compliance checks, conducting investigations, and reviewing and auditing data about a particular subject. Due diligence helps the buyer make a more informed decision when it comes to purchasing any property/product and know exactly what they are buying before investing their money into it. When it comes to buying any product/property, it is the responsibility of the acquirer (buyer) to perform due diligence related to the sale agreement. It is the responsibility of the seller to provide all the necessary documents required by the buyer to perform the due diligence.
II.
WHY DO WE NEED DUE DILIGENCE?
Finding skeletons in the closet before the deal is better than finding them later “is a relatable aspect when it comes to due diligence. The information collected during this process is crucial for decision-making and hence needs to be reported. The due diligence report helps one understand how the company plans to generate additional earnings (monetary as well as non-monetary).
It serves as a ready reckoner for understanding the state of affairs at the time of purchase/sale, etc. The ultimate purpose is to get a clear picture of how the business will perform in future.
Due diligence helps acquire valuable information about the business you plan to acquire and unravel any potential fact that can impact your decision to buy the product.
It affects decisions like whether you should invest or not, which venture partner to choose and what should be disclosed in an offer document.
It can play a major role in defining the price of the business and learning when it may become an overbearing investment for you.
Considering ‘Knowledge is Power’ in our world today due diligence helps make sure no vital details miss your eye and you have all the information needed for the deal. It gives you the upper hand define the risks associated with the entire deal.
It is also a good idea to assess your target company, and prospects before signing a sales contract to avoid issues in future.
III.
WHO CARRIES OUR DUE DILIGENCE?
Due diligence is carried out by equity research firms, individual investors, fund managers, risk and compliance analysts, firms and broker-dealers. Individual investors can also conduct their own assessments. Broker-dealers can conduct an assessment of a security before selling it.
IV.
WHAT ARE THE DOCUMENTS REQUIRED FOR CONDUCTING DUE DILIGENCE?
V.
TYPES OF DUE DILIGENCE
If a prospective acquirer of any corporation has contacted someone, irrespective of whether the offer is arranged as an asset sale, an equity transaction, or a takeover, one would expect the acquiring firm to want to do a thorough “due diligence examination” of the assets and activities of the organization. 4
There are mainly three types of Due diligence:
Business Due Diligence: Operational/business due diligence is generally done by the investor or seller prior to the sale of a firm or acquisition of a business. It is the duty of the purchaser of the firm or shares to supply the record and details required for doing due diligence on the firm to the purchaser. Due diligence allows the consumer to make an educated investment judgement and to mitigate the risk involved with an agreement to purchase a company. Before beginning a company's due diligence, all parties normally enter into a non-disclosure arrangement so confidential monetary, technical and regulatory details will be revealed to the purchaser during the due diligence process. This includes looking at the stakeholders involved in the deal, market and opportunities and investment efficiency. Various documents are assessed during a due diligence check. These documents pertain to the technical nature of the company:
Legal Due Diligence: legal due diligence is scrutiny of all, or specific parts, of the legal affairs of the target company depending upon the purpose of legal due diligence which may be mergers, acquisitions or any major investment decision, with a view of uncovering any legal risks and provide the buyer with an extensive insight into the company’s legal matters. It also improves the buyer's bargaining position and ensures that necessary precautions are taken in relation to the transaction proposed.
Legal due diligence is a precautionary operation through which one can know the strengths and weaknesses of the company through the maximum possible information available. This process reduces future problems and ensures safety.
SCOPE OF LEGAL DUE DILIGENCE: The following are various important aspects covered as the scope of Legal Due Diligence-
The need of legal Due diligence may occur in the following occasions
Financial Due Diligence: One of the most important types of due diligence is the financial due diligence that seeks to check whether the financials showcased in the confidentiality information memorandum are accurate or not. Financial DD aims to provide a thorough understanding of all the company’s financials, including, but not restricted to, audited financial statement for the last three years, recents unaudited financial statements with comparable statements of the last year, the company’s projections, and the the basis of such projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc. The financial due diligence process also involves analysis of major customer accounts, fixed and variable cost analysis, analysis of profit margins, and examination of internal control procedures. Financial DD additionally examines the company’s order book and sales pipeline in order to create better (more accurate) projections.
IMPORTANCE OF FINANCIAL DUE DILIGENCE
One can put financial DD as the number one priority in the due diligence process. There are many reasons why this particular due diligence is very important; some of them are –
Financial due diligence helps to answer the following questions –
When done correctly, financial due diligence provides valuable information and insights to come to a fair purchase price for the target company.
Financial DD also identifies the issues that the buyer and target company must address to ensure a smooth and transparent merger/acquisition.
VI.
CHALLENGES IN CONDUCTING DUE DILIGENCE
The four biggest due diligence challenges are-
VII.
DUE DILIGENCE: CONCEPT AND ITS EXISTENCE UNDER INDIAN LAW
ACCORDING TO Black’s Law Dictionary (Eighth Edition), “diligence” means a continuing attempt to attain something, consideration; caution; and the concern and care needed by an individual in a given situation. ‘Due diligence’ means thorough research; it means such diligence as might be practised by a responsible man in the management of his own relations.
Due diligence derives its essence from the Latin maxim of ‘caveat emptor’ which means ‘buyer beware’. This implies that this is the responsibility of the company initiating the buying process to be maximum aware of future transactions and take steps to prevent any possible legal liabilities. It is the duty of both or all the companies involved in the transaction to disclose facts and obligations to one another and constitute a smooth due diligence process.
Due diligence has been a very dynamic and complex mechanism that needs very special expertise on which the most sensitive business operations are focused. As defined earlier, due diligence requires a whole lot of analysis of a company’s affairs and wellness. As such there is no legislation or case laws concerning due diligence in India. The principle of notice is closely connected with the jurisprudence of due diligence. It could be real, positive, or imputed to a document.
Transfer of Property Act states that when one already knows the fact or when, except for intentional refraining from an inspection or investigation they should have made, or gross incompetence, they may have known it an individual is said to have notice of the fact. Thus, the law imposes an obligation to ascertain whether or not the evidence provided is valid and presumes that any reasonable individual can determine whether there is a clear title to certain property before engaging in some sort of assets, or whether some risk or liability is attached to it or if it will show in some manner that is not a reasonable choice.
Today when one entity buys or sells another entity for its properties, the entire canvas is very broad in the case of large businesses and multinational conglomerates; a lot of individuals, a lot of papers, a sum of investment is involved and the necessity for due diligence emerges here. Under the SEBI (Mutual Fund) Regulations 1996 and foreign sales of shares by Indian firms but US or foreign depository receipts, Compulsory requirements have been adopted for the operation of due diligence. A clear level of treatment is inherent in due diligence. There is generally no positive contractual requirement on the part of the seller to practice due diligence mostly in the Indian sense, nor is there any criminal responsibility for failure to implement due diligence.
Conformity with the Industrial Dispute Act, 1947 , the Payment of Bonus Act, 1965 , the Payment of Wages Act 1936 , the payment of Gratuity Act 1972 , the Employees Provident Fund and miscellaneous Provisions Act 1952 , the Employees State Insurance Act 1948 , any workplace dispute or arbitration, as with any employment settlement, award, decision or order; recognize union movement; dismissals, lay-off including voluntary retirement initiatives; and equity rights for workers, share incentives, benefit sharing or other reward schemes; saving, pensions, PF, unemployment insurance and gratuity strategies; also fall under the ambit od due diligence.
Due to the possibility of a combination of a variety of sectors in the Indian market, due diligence must be carried on in different departments of a prospective company. This basically includes legal due diligence, financial due diligence, assessment of intellectual property, investigation of ending lawsuits, research and development, capital and labour, corporate social responsibility ventures and last but not least, corporate structure, and governance.
The Ministry of Corporate Affairs has laid down certain guidelines when it comes to inter-company transactions, and due diligence proves to be a fundamental key to the smooth processing of these contracts. Due diligence helps companies gain reliable data about other companies that they wish to do business with decreasing the possibility of getting involved in a detrimental transaction.
Indian companies give tremendous significance to legal due diligence in order to comply with the statutory guidelines laid down by MCA, FEMA, and the SEBI. Due diligence has also been considered to be an aspect of Civil Litigation, Competition Law, Property Law, M&A, JV, and tax law. The Indian globalization flow considers due diligence as an important aspect of the ease of doing business. Multiple compliance requirements and their implementation is verified through due diligence check.
VIII.
CONCLUSION
Due diligence constitutes a critical component of corporate transactions per se and the determinative basis of steps taken subsequent thereto for the execution of such transactions.
Due diligence most importantly allows the Acquirer to determine whether the proposed approach regarding the transaction fits within the original strategic objectives of the Acquirer.
Due diligence presents the seller with accurate and full background details on the agreed agreement in the light of an asset sale and also seeks to uncover future liabilities and inconsistencies thereby allowing the purchaser to make an educated decision. Based on the area/scope of exposure, multiple types of due diligence exist, such as monetary due diligence, statutory due diligence, business due diligence and employer contribution due diligence.
The potential of the due diligence is not just about to only define the future of an organization, but also about individuals, and the function that we perform in the future. Innovation also has the ability to dramatically change the due diligence process, and the ideal example of an advanced technology that aims to fundamentally change corporate ventures is Artificial Intelligence(AI).
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