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This brief is written by Preeti Pallavi Jena from Kiit Law School.


Ramnauj Mukherji is an alumnus of the National University of Judicial Sciences, Kolkata. He is the CEO of LawSikho and co-founder of iPleaders. His previous work experience includes being part of the Private Equity and M&A Team at Trilegal, Mumbai.

Since you were unable to attend this amazing session by Ramnauj Mukherjee on “Red flag issues in legal due diligence”, we thought we will bring to you the excerpts of the webinar so that you are not at a complete loss. 

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Read ahead, we hope you find it insightful and will be able to join us for the upcoming webinars. 

What is due diligence?

Before investing into a company or buying a company you have to check that they have got the licence in place and that they have done compliances. This is termed as due diligence.

What are the different steps involved in due diligence?

  1. Understanding the transaction and deal structure (acquisition, buying a company).
  2. Setting parameters for due diligence. 
  3. Information requisition.
  4. Document review.
  5. Drafting of due diligence report.
  6. finalisation of report in consultation with all parties.
  7. Highlighting outcomes with clients.
  8. Assessment of due diligence report.

Who pays for due diligence? Who hires the lawyers?

In cases of big transactions, usually the buyers buying or investors will be paying for the lawyer and will be hiring a lawyer also. But in case of small transactions or deals, the company will be asked to pay the due diligence.

What are the different types of due diligence?

  1. Financial due diligence
  2. Legal due diligence
  3. Technology due diligence
  4. Reverse due diligence
  5. Business due diligence

What is a reverse due diligence?

This is done by the sellers themselves for their own companies. Sellers do due diligence for their own company because it helps them to know what can go wrong, they can prepare themselves accordingly and for a smooth transaction process.

At what stage of a transaction is due diligence ordered?

After signing the term sheet. This is the initial binding. Then we can proceed to due diligence. Then investors can put money or invest money in it.

When would investors backout from a deal after a due diligence?

If you find that there is a fraud in this company, the books are not genuine, whatever numbers they were showing are not real ones. You realize that their most important source of revenue is compromised because there is an IP violation or infringement for which they have received a notice and litigation is going on, or they have violated the conditions of their licence. Then, there is a risk to invest in this company. And this clearly indicates a red flag issue. Hence, one must not invest here. The investor may backout after this due diligence.

What do investors want to know from the due diligence exercise?

They want to know if there is any chance that their investment or their buying of the company is a waste or a benefit for them. They want to know the full picture of the company that they are buying and there should not be any hidden costs. They want to know everything about the companies like the liabilities and if everything is fine then there is no issue. But if there is some problem then it needs to be recognized before the money has been paid out.

What will you be expected to do during legal due diligence?

  1. Prepare an information requisition list ( done by junior associates).
  2. Research about the rules, recent controversy, business is well or not in that industry, what are the trends of the industry etc.( research is critical during due diligence).
  3. You need to know about the different kinds of laws, regulations while doing due diligence.
    Example: Labour law, acts, laws, new laws, the amendments ones, previous laws etc.
  4. Review document. (check if they are properly signed by the both parties or not, each contract is stamped properly, check whether it is registered or not, if not registered then check if it needs to be registered)
  5. Look for the red flags.


What are red flags?

Red flags are the serious violations and breaches which will impact the business, which will reduce the valuation or may warn the investors to back out of the deal.
Example: 90% of the business comes from the government contracts and then, when you go and check the contracts, it shows that the contracts are not valid.

Condition precedents:

Only when you do the things, then only you will invest money in this company or buy the shares of the company or acquire the company.

Condition subsequent:

We are investing for now on the condition that within this much reasonable period of time, you will sort out all these issues and pay for the extra costs.

What are the different sections of a due diligence report and what do you look for in each section?

  1. Corporate section: Whether the registration is proper, is it properly valid or not.
  2. Finance: Does it have charges on it, does it have finance agreement, facility etc, the financial information needs to be disclosed.
  3. Licences: All the licenses will be listed.
  4. Statutory compliances.
  5. Tax: Tax related disputes arose.
  6. Disputes and litigations.
  7. Intellectual property in order.
  8. Contracts that have enter into.
  9. Real estates.
  10. Labour & employment.
  11. There can be other sections too depending on the business like insurance etc.

How to write a due diligence report?

  1. Know how to format everything.
  2. Highlight the main points.
  3. Make graphs, charts.
  4. Make it attractive and beautiful and worth it.

What would you be expected to do as a junior associate during a due diligence?

You need to do all the work that has been assigned to you by the senior associates and hand it over to the senior. If he is satisfied your job is done. You can make your seniors’ job easier and he can leave home early. That can make them happy and you may get awards for that.

What are senior associates expected to do during a due diligence?

They are responsible for the outcomes. They might cross check after the junior associates completes his work and hands it over to him. They help their seniors which means the principal and partners’ lives become easier.

What do interns do during a due diligence exercise?

As a good intern, you should be able to do the same work that the junior associates do. Do research work on case laws, read laws, sections etc, you should be able to draft too. This gives you an opportunity to be hired by them in their company.

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