How Companies Conduct Legal Due Diligence for Business Projects in India?
Whether it is a greenfield (new) project in India, an M&A
or the establishment of a joint venture, due diligence on the target (land) or
the acquired or joint venture is indispensable.
Considering that when the Indian party makes disclosures to
Chinese investors, it is inevitable that there is an information tendency.
Taking the Chinese companies (buyers) to acquire the shares of Indian companies
(sellers) as an example, Indian companies often share information and
information that is beneficial to them. Information is disclosed to potential
buyers, and unfavorable information is not disclosed or less disclosed to
buyers. This is true of the so-called "Wang Po sells melons, sells and
boasts". Under the common law, there is a legal principle called
"Caveat Emptor", which means that buyers need to be careful. That is,
as a buyer, the buyer is legally presumed to be a "Sophisticated
Buyer" and has the ability to identify various Information, at the same
time, judge the risk and make a decision whether to proceed with the project.
Therefore, it is very important to conduct due diligence and obtain relevant
information.
The purpose of due diligence is to evaluate and quantify
risks. Through the qualitative risk, we can ascertain whether the project can
be launched, and the quantitative risk can solve the problem of increase or
decrease in the consideration in the transaction.
In addition to the risk
elimination function, the results of due diligence can also be used in the next
negotiation with the Indian side, as a very important negotiation weight to
help Chinese investors achieve business goals such as reducing costs.
As mentioned in the beginning, generally when conducting
joint venture projects, the sequence of due diligence, commercial negotiation,
and drafting of joint venture agreement is the most ideal state to conduct due
diligence first, and then conduct business after finding out the situation. The
negotiation is at the same time as the drafting of the joint venture agreement.
However, considering that there are various differences in the actual
situation, it is often the case that these tasks are carried out at the same
time or overlap.
In practice, the author has also encountered the completion of
commercial negotiations and the drafting of the joint venture agreement. When some people just started the due diligence case. Without the help of due diligence, some
potential risk information of the counterparty company will not be known, the
risk of joint venture projects will increase, and there is no information found
in the due diligence as a support for the negotiation, and it may pay more in
the negotiation, the price.
In a project before, a Chinese state-owned
company plans to establish a joint venture with an Indian company in India. The
two parties have been negotiating for a long time and have reached a consensus
on the main commercial terms.
The company will invest in cash and hold
51% of the shares, and the Indian company will use land use rights and part of
the cash to invest in the remaining shares. The two parties have set a time for
the chairman of the two parties to sign a joint venture agreement in India and
announce it to the public.
The corresponding arrangements such as visas,
schedules, air tickets, and media have been completed. The cost of temporary
cancellation is too great.
However, at this time, foreign investors did not
conduct company due diligence and land due diligence on the Indian company.
Regarding this case, the author's opinion is that because the two parties have
made corresponding arrangements and it is not convenient to cancel, but there
is no due diligence to avoid some risks of future joint ventures.
The final
plan is that you can declare in the joint venture agreement , The
results of the company due diligence and the land due diligence made in the
later period shall be the necessary conditions for the joint venture agreement
to take effect. This is, that the joint venture agreement is simply signed but not
effective, and it will take effect after the problems found in the due
diligence are fully resolved. Through this arrangement, the previous conflicts
were subtly resolved.
Generally speaking, company due diligence reports mainly
include the following aspects:
Due diligence on company-related matters in the past
three years
- Serial number
- Required information/documents
- Note
Corporate information and important documents
1. Company organization chart and business introduction
2. Business license, proof of business start and related
documents
3. Copy of the company's memorandum
4. A copy of the company's articles of association
5. Change of name or business objectives after the establishment
of the company, as well as supporting company resolutions and filing records
Director
6. List of directors and detailed information after the
establishment of the company
7. Record the appointment information and appointment documents
of directors with the Companies Registry
8. Director Information Disclosure Form
9. If a director resigns or suspends his position, the relevant
declaration materials for his resignation or suspension
10. Employment Agreement/Service Agreement
Equity information
11. Shareholder information from the date of company
establishment to the date of due diligence
12. If the shareholder is a non-resident shareholder, the
relevant Reserve Bank of India (India Central Bank) filing and declaration
information and the central bank permit (if any) are required
13. If there is an equity transfer, provide relevant documents
for the equity transfer
14. Share certificate issued since the date of company
establishment
15. Warrant/bond holder (if any) and their details
Minutes/Resolutions
16. Minutes of Board Meetings, Minutes of Board Committees
17. Minutes of the shareholders meeting since the establishment
of the company
18. Specific information on the resolutions obtained at the
meeting in the form of Postal Ballot
Companies Registry Forms and Statutory Register
19. All statutory registers maintained by the company
20. Forms and vouchers filed by the company to the Companies
Registry
Company Capital
21. Information sheet about the company’s legal capital, issued
share capital and paid-in capital, etc.
22. Company’s equity issuance and transfer status
23. Share restriction transfer agreement (if any)
Company's foreign investment
25. Details of the company's foreign investment and filing and
reporting with relevant authorities
Employee
26. The company's current total number of employees and
information table (employee category and number)
27. Standardized terms for each type of employee employment
agreement
28. List of key management and technical personnel and their
terms of service and employment agreement
Intellectual property
29. Information about trademarks that the company has registered
or applied for or is in use
30. Design related information that the company has registered or
applied for or is using
31. Information about trade names used by the company
32. The company permits others to use the company’s patents,
trademarks, trade names, copyrights, know-how, confidential information,
formulas, etc.
33. Other intellectual property rights or rights owned or being
used by the company
34. Concession agreements, agency agreements, distribution
agreements, research and development agreements, etc. signed by the company
35. Inventions that are used by the company, have not yet applied
for a patent, or have not yet been approved
36. Information about the company's ongoing litigation or
opposition procedures related to intellectual property rights, and the matters
that have been settled in the foregoing procedures
Company property
37. Company-owned, leased, and occupied real estate information
38. Relevant land deeds, leases or license documents of real
estate owned or owned by the company
39. Important documents and information related to the real
estate owned and occupied by the company, such as development planning
information, notices from local authorities, notices of demolition, owners'
disputes, etc.
40. Whether the company has violated planning, environmental
protection, pollution control, central or local laws and regulations related to
safety and health production standards, if any, relevant information needs to
be included
41. Does the company have subletting, subletting and related
agreements (if any)
42. Recent real estate value assessment (if any)
Financing and Lending
43. List and information of outstanding bank loans and liquid
funds obtained from other financial institutions, signed loan agreements, and
relevant supporting materials from banks and other financial institutions
44. List of information issued by the company or issued by the
directors and shareholders of the company on the company assets as the subject
matter of mortgage, charge, and guarantee
45. Information about loan or guarantee agreements signed between
the company and other companies
46. As of the date of receipt of the due diligence checklist, the
company's outstanding loan information from banks and non-bank institutions
47. For information on equity assets of other companies (except
for company subsidiaries), the company needs to list relevant information such
as investment quota, investment nature, business relationship with the invested
company, specific transactions, etc.
Insurance
48. A detailed list and copies of important insurance policies,
including the type of insurance, the amount of insurance subject matter, and
insurance premiums
49. A copy of the insurance policy of key person insurance purchased by the company
50. Information on the extent and scope of compensation for
directors and senior management’s liability insurance
51. Scope and description of employee compensation
52. Product liability compensation scope and description
Government Permit
53. Information or arrangements of relevant government licenses
and permits that have been obtained or are applying for
54. Important correspondence, declarations and other information
related to the central or local state government agencies
55. Lists and information of licenses, licenses, government
consents, etc. that have expired, been revoked, cannot be updated, or may have
the above consequences
56. For information on correspondence with the government and
relevant authorities due to violations or non-compliance of the above licenses,
permits, government consents, registration matters, etc.
57. Detailed information about government inspections or
investigations
Litigation
58. A summary of pending or potential litigation, disputes, arbitration
matters at all levels of the central, state, and local levels, as well as
relevant government accountability, investor claims and other related
information, including:
(i) Statement of dispute
(ii) Potential loss or compensation amount
(iii) Information on the relevant agreements or arrangements in
response to the letter and lawyer’s letter affecting the dispute
59. Documents and materials related to litigation settlement
60. Information on lawsuits or disputes arising from guarantees
61. Information on laws, arbitration awards, and judgments made
by governments, arbitration institutions, courts, etc.
62. Information that may affect potential transactions such as
pending litigation, arbitration, etc. involving company subsidiaries, company
directors, etc.
63. Information on pending or potential litigation directed at
the company’s shareholders that will have a significant impact on the intended
transaction
64. The company’s public exposure information in the
aforementioned litigation and arbitration cases
Competitor
65. Is there any information that has been investigated by
relevant government agencies related to the anti-monopoly law, the anti-unfair
transaction law, and the monopoly and restricted transactions prohibited in the
company law?
66. Information on oral or written agreements, arrangements, etc.
between the company and one or more competitors
Accounting and tax
67. Copy information of the company's annual report, company
accounting books, audit reports, etc.
68. A copy of the company's balance sheet
69. Copy of company income tax statement
70. Information on tax deductions, exemptions and special
arrangements obtained by the company from relevant tax authorities
71. Information on tax incentives, tax holidays, etc. obtained
by the company from tax authorities
72. Unresolved or potential legal issues affecting the
transaction between the company and the tax authority
73. The company's existing tax reports, pending claims, etc.
74. Information on possible tax burdens due to deferred taxes
75. Information on circular transactions or ongoing matters that
may affect future tax burdens
Agreement
76. List and copies of major contracts signed by the company so
far
Trade related Matters
77. List of major trade matters carried out by the company so far
78. Orders signed or executed in the name of the company, bidding
79. List of the company's main customers in India or overseas
Miscellaneous
80. Other documents or information related to the company or its
affiliated companies that need to be disclosed in consideration of the intended
transaction
81. Other important documents and information related to existing
shareholders that may affect the expected transaction
The mall is like a battlefield. There is a famous saying in
the business community that "choosing a counterparty is choosing trading
risks." Although there is an old saying that "wealth and
wealth are sought in insurance", the most rational business person still
hopes to minimize risks as much as possible.
Therefore, due diligence came into
being, which is responsible for discovering risks, resolving risks, revising
prices, and assisting in negotiations and decision-making.
However, after
conducting due diligence, it does not mean that the transaction can rest easy,
because due diligence has the following limitations, which will be amplified to
a certain extent in the case of overseas transactions:
1. Limitations of the scope of due diligence
The author gave
a list of due diligence above. In most real business transactions, it is
impossible for the surveyed party to provide all the above information to the
surveying party because it is impossible for any seller to allow the buyer to
Due diligence is conducted in the form of "copying home", not to
mention that the seller is worried that the buyer is only using the transaction
as an excuse.
After obtaining all the information, it may cause information
leakage and other potential risks. Therefore, even if the seller has all the
above information, the seller It may not be easy to tell. Either the seller did
have some information lost due to various reasons, so it could not be provided
to the buyer.
Regarding this limitation, investors can use limited information
to restore the full picture of the transaction as much as possible with the
help of their own team and external consultants. Of course, this requires
investors to have very strong business insight.
As long as the risks found do
not belong to the "Deal breaker" risk that can veto the entire
investment project with one vote, other risks can be protected through legal
and financial arrangements. Of course, different investors have considerable
differences in the definition and acceptance of risk. This requires specific
case analysis.
2. The urgency of due diligence
Generally speaking, the
trading time is limited, and the longer the time is, the greater the
possibility of "excessive branches" or other risks. Therefore, it is
very important for investors to complete the due diligence efficiently and
obtain the most valuable information.
3. The inclination of the information disclosure party
For
the party who is obliged to disclose information in due diligence, there are
various motives to prompt them to provide some tendentious documents.
Therefore, it needs to attract investors' attention. However, for many asset
and license investigations, if there is something, there is something, and if
there is not, there is nothing, either black or white. Of course, whether such
information is true and effective still needs to be checked by professionals
such as lawyers and accountants.
Conclusion
In addition to the risks mentioned above, after the due
diligence is done, there will generally be a time lag before the transaction is
settled. Investors also need to pay close attention to the dynamic changes in
risk during this period.
After all, due diligence reflects a certain cut-off
point and previous risk dynamics. This also requires investors to calculate the
time, such as through a detailed schedule to achieve the efficient connection
of various parts, not to spend a lot of money to do the full adjustment, but
the delay in the middle is longer, resulting in long nights and dreams.
[1] Please note that the items listed in this template of the
due diligence list are not exhaustive, and there are possibilities for
additions, deletions and changes for different items. This is only used as an
example in this book.
[2] Chinese investors can decide whether the scope of due
diligence data should be provided in the past three, five years or other time
according to the actual situation of the project.
[3] Key Person Insurance Key Man Insurance or Key Person
Insurance generally refers to the insurance purchased by the company for those
holders of significant technology or intellectual property rights that are of
great significance to the company’s development. Importantly, the risk of this
kind of insurance confrontation is the loss to the company caused by the sudden
death, incapacity, etc. of these people. Generally, it is a fixed amount of
compensation, not compensation for the death or incapacity of such people.
Expected or possible economic benefits.
[4] "Tax Holidays" refers to tax holidays, which
refer to the tax holiday provided by the government to enterprises.
[5] Of course, there will be a relevant confidentiality
agreement signed before due diligence, and the buyer will also use this to urge
the seller to disclose as much as possible. However, once the buyer receives
the sensitive information and abuses it, although the buyer can invoke some
compensation clauses or dispute settlement clauses in the confidentiality
agreement to protect their own interests, no one wants to invest time and money
in a "remedy" way To protect their rights.