This article enlists the key takeaways from an erudite webinar on “A Primer on Due Diligence” conducted by Manupatra where Mr. Deepak Gupta explained the nuances of conducting a due diligence exercise in a very comprehensive way. He is a practising business lawyer with over 37 years of corporate experience in manufacturing, services, finance and banking, and consulting. His strength is in pro-actively identifying and synthesising complex issues, conceptualising and implementing innovative, cost-effective and durable solutions and adding value.
Due Diligence (DD) is an exercise undertaken by Corporate Entities before entering into major transactions such as mergers and acquisitions, issuing new stock or other securities, project finance, etc., to minimize risk and liabilities and maximize their assets. Critical to the shaping of a business transaction, a due diligence exercise may be conducted by the:
- Buyer Side
- Seller Side
- Independent compliance checks by an organization
STEP 1: Understanding the Business Transaction
- The key to understanding a business transaction for a due diligence exercise is to look at it from a business perspective first and then a legal perspective.
- Hhelps formulate the steps, nature, and scope of the due diligence exercise.
- Provides the size and scale for conducting the due diligence exercise as well as the jurisdictions within the decided scope.
Step 2: Using a Checklist
- A checklist is a detailed document listing down all aspects of due diligence to be covered.
- Ensures that continuous written records are maintained, and whenever a document/issue mentioned in the checklist is covered, the same can be ticked off.
- Recorded notes and observations are used in the Report Drafting and Presentation of the due diligence Exercise.
Step 3: Data Room & Communication
Data Room is a virtual room set up by the counter-party for access to sensitive information that the due diligence team can access through a server.
- Access to the Data Room is limited and restricted since the data is sensitive.
- Access is to be provided on a need-to-know basis only.
- Data rooms are equipped with tracking and back tracing software, therefore it’s important to be diligent and use the documents judiciously.
- Stringent Non-Disclosure & Confidentiality Agreements need to be signed and access rights need to be honoured.
- Imperative to keep track of trigger emails so that any previously accessed information should be revisited and re-analysed.
Step 4: Record Keeping: During and Post Due Diligence
- There should be an agreement about the period of record preservation post the due diligence exercise has been completed.
- The DD team is under no obligation to update the information/due diligence report unless it is explicitly clear with the client.
- Ensuring security and confidentiality of these records is paramount. It is also wise to preserve the contacts of the members of the Team to facilitate any post DD communication.
- Records should be systematically preserved to enable retrieval as and when required.
Step 5: Report Drafting and Presentation
- Every due diligence report should have the executive summary followed by the main issues.
- Observations precise and decision-oriented.
- Harmonize findings with other parallel teams performing due diligence on the same business transaction.
- To be accompanied by course-correction measures for potential issues to help the client in decision making.
- Key issues to be included in the due diligence report:
- pre-transaction & post transaction remediation along with the need for transaction restructuring if necessary
- Negotiation points and commercial override on the basis of the outcome of the due diligence exercise;
- Potential deal-breakers;
- Impact on the valuation of the business transaction; and additional responsibilities and costs.