DUE DILIGENCE

HEART OF A PRIVATE EQUITY TRANSACTION DUE DILIGENCE: WHAT WHY WHO WHEN

9WHAT 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 9 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 9 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.

9 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

9Understand the checklist

9Getting the data room ready

9Report the findings/ take corrective actions

9Incorporate 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 FACT 9 Need for due diligence can 9 DUE DILIGENCE IS A TOOL be eliminated by Warranties TO or Indemnity Protection • Evaluate the valuation of 9 Only investors need to the Target Company conduct due diligence • Structure the deal • Effectively manage Issues and Risks 9 Due diligence is all about • compliance and legal Assist in creating a Road Map for future liabilities review

7 EFFECTIVE DUE DILIGENCE

9Clearly establishes objectives

9Effectively provides for issues and risk management

9Suggests post deal improvements

8 India Vs. West

9 Fact finding mission Vs Risk allocation exercise

9 No set pattern or ‘formula’

9 No implied representations and warranties

9 Difficulty/Delays in enforcing warranties and indemnities

9 CRITICAL AREAS TO LOOK FOR IN DUE DILIGENCE 9 Capitalisation of the Company 9 Related Party Transactions 9 Business Contracts • Vendor Contracts • Customer Contracts • OEM Contracts 9 Ownership of IPR (if IPR is critical to the business of the Company) • Patents, Trademarks, Copyrights 9 Approvals and Licenses 9 Loan Agreements/ Line of Credit 10 AT THE CORE…

ISSUES CONDITIONS PRECEDENT

DUE RISK WARRANTIES DILIGENCE

INDEMNITIES & LIABILITY PRICE RETENTION

11 EXAMPLE OF CONDITIONS PRECEDENT • FINDINGS OF DUE • CONDITIONS PRECEDENT DILIGENCE 9 The Company has entered into a 9 There will be a condition loan agreement with a bank precedent as per which the which requires the Company to Company will be required to take take prior approval from the bank approval from the bank for the regarding any change in control proposed investment. and management of the company. 9 The Company does not have 9 There will be condition enough authorised share capital precedent requiring the Company to issue shares/ debentures to to increase its authorised share the Investor. capital before the investment.

12 EXAMPLE OF WARRANTY

• FINDINGS OF DUE • WARRANTY DILIGENCE 9 The application for registration of 9 A warranty shall be taken from trademark of the Company is the Company that it owns all the pending. intellectual property belonging to the Company and it does not infringe the rights of any third party.

9 The Company represents that it 9 A warranty shall be taken from does not have any pending the Company regarding absence litigation however the of any litigation and indemnity to representation is not absolute as the Investor in case any loss is it is not possible to find out if any incurred on account of any litigation is pending in the trial litigation. courts. 13 EXAMPLE OF RELATED PARTY TRANSACTIONS • FINDINGS OF DUE • REMEDIAL ACTION DILIGENCE 9 Daughter of one of the directors 9 There will be condition precedent is employed as executive requiring the Company to assistant and she is drawing much terminate the employment more than her prescribe salary by agreement of the related party. way of additional perks.

9 The company has entered into a 9 It will have to be verified that the rent agreement for one of its rent for the warehouse is on arms warehouse with the relative of length basis. the director.

14 ROLE OF LAWYERS AND COMPANY SECRETARIES 9 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) 9 POST DEAL • Monitor conditions subsequent • Do necessary filings with the Reserve Bank of India and other regulatory authorities

15 LIMITING FACTORS

9 Dependent on information shared by the Target Company

9 Pressure to conclude transactions

9 Competition in the PE world

9 Time and Cost

9 Transactions based on good faith

9 Viewed as an obtrusive and time taking exercise 16 QUESTIONS

17 THANK YOU

Contact: GAURAV DANI [email protected]

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