Role of Due Diligence
Due diligence involves investigation of affairs of the business and to confirm all the material facts, the risk and the opportunities in order to reduce post-transaction risks to as low as possible. Even though deal breakers can be eradicated it would still be better than a complete failure that happened in the case of Ranbaxy or in the case of Kotak- ING Vysya.
Role of Legal Due Diligence
In the case of legal due diligence, before the commencement, a prearranged checklist is made by the target company which provides information and documents which is available in its knowledge and all of this is then very well verified by a due diligence team. Memorandum of understanding is also made between the transacting parties for disclosure and establishment of timelines. Before finalization, all the financial dues represent warranties, liabilities and other third-party claims are all invested into so that no loss or minimum losses suffered this is the whole objective of the legal due diligence.
The legal Due Diligence has to also to check whether the IP rights are maintained by the company and had to check whether they in cases of trademark, how many trademarks have company taken and how many are still pending and are there any trademark in foreing company and and how many trademark are facing legal issues.
As a due diligence legal associate, one has to look at the conditions-precedent and the condition-subsequent while drafting the agreement on the basis of due diligence findings. Clauses of warranties and indemnification are also added so that in any cases of future liabilities the liability of the company is reduced and minimum losses are suffered.
The Legal Department has to ensure many things like they have to check environment dues, like the target company has taken every necessary environment clearances and and for what issues does the government have objected to the target company.
Negotiation of Deals
When a deal is to be negotiated and finalized there has to be fulfillment of all the objectives of the due diligence so that a proper estimation can be drawn out of what are the problems that need to be sorted. When these problems are found out they can be mitigated and minimized by the other company. However, if none of this is done the acquiring company will suffer huge losses which is why it is extremely important that a proper due diligence is done where problems are identified and then a structured plan is formed by the members of the company to mitigate those identified problems.
In the case of Kotak- ING Vysya,
There was a deal wherein they did not call the deal as acquisition but as merger to protect themselves from takeover code regulations and to get exempt from tax, now all these decisions are taken on the basis of a report of Due Diligence.
Also when HP acquired Autonomy they rushed into the Due Diligence step and thus lost $5 billion.
So Due Diligence is an important step in any merger deal and it is the main step after pre deal decisions that involves planning, choosing target company, then choosing the audience.
In the case of the Ranbaxy-Sankyo,
Japan's third largest pharmaceutical company Daiichi Sankyo wanted to take over Ranbaxy laboratories in order to operate its business in more countries which ultimately reached 56 countries within a little span of time. However, in 2008 Ranbaxy received FDA warning letters because of violations in its practicing plants in Paonta Sahib and Dewas. Later due to this, even the US banned the manufacturing and selling of drugs by Ranbaxy.
All of this was because of the failure of doing due diligence properly. Daiichi had to pay $500 million to resolve the lawsuit, which is why we can see how due diligence is extremely important in mergers and in acquisitions as well.
Also read- What is Due Diligence? What are the types of due diligence?
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