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2nd YEAR MMS (FINANCE) PROF :- PROF.

TMC VARADARAJAN
SUBJECT :- MERGERS, ACQUISITIONS & CORPORATE RESTRUCTURING

PROJECT :- DOCTRINE OF DUE DILIGENCE

Group Members : NOOR GHARE JITENDRA TATKARE VINAY LAD DANISH TAYYAB DABIR RIZWAN KHAN

ROLL NO 26

25

DUE DILIGENCE

INTRODUCTION OF DUE DILIGENCE


The term "due diligence" first came into common use as a result of the United States' Securities Act of 1933. "Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for acquisition.

TYPES OF DUE DILIGENCE


1. FINANCIAL DUE DILIGENCE : Financial due diligence involves critically examining the target legal companys historical, current and prospective operating results as disclosed from the following sources: Audited financial statements, Unaudited financial information , Financial information with stock exchanges and regulators regulation, Tax returns, Cash flow statements etc. 2. LEGAL DUE DILIGENCE : Legal due diligence involves the practices of addressing certain fundamental legal issues which includes good compliance practices as per the Companies Act, SEBE Act, Income Tax Act and other corporate legislations. Analysis of legal due diligence process could be undertaken from the following sources. Memorandum of Association, Articles of Association, Target companys prospectus, Documents filed with Registrar of Companies including registration of charge, Title deeds of properties, Tax return and compliance certificate,Environmental law compliance, Lending agreement, covenants and borrowing powers, Compliance with any special industry legislations , Labour agreement, compensation etc.

3. OPERATIONAL DUE DILIGENCE Operational due diligence includes investigating the targets intellectual property, its production, its sales and marketing efforts, its human resources and the other operational issues. Meaningful generalization of operational due diligence practices are difficult to make as it varies from target to target. Operational due diligence practices can be undertaken by analyzing the information from the following sources: Newspaper and magazine reporting about the target company, Available information with trade associations chambers and regulatory bodies, Company journals, brochures and websites, Market reports, Interviewing the employees, ex-employer etc.

DUE DILIGENCE CHECKLIST FOR MERGER & ACQUISITION :


Due diligence checklist assists in covering all business components to ensure that a proper investigation is performed in order to prevent any delays or complications for the involved parties.

Agreements with Customers and Clients . Product and Operating Expenses .

Tax Information and History .

HOW TO CONDUCT DUE DILIGENCE PRIOR TO A MERGER :


Create a chart detailing the structure of the other company that is a party to the merger. Include any subsidiary businesses the company owns and indicate how they are related to the merger. Compile a list of permits or licenses required by the other business to operate. Regarding permits, due diligence can save your company from time delays caused by reapplying for permits after the merger.

Request access to all of the other company's business and financial records from the past 3 years. Hire a forensic accountant to review these records and give you an analysis of the state of the business prior to deal negotiations.
Conduct a review existing labor and supply contracts the other business has with third parties. Decide whether or not you would like to continue these contracts after the merger, and then ask your attorney to review the contracts to see if this is possible. Request copies of any and all litigation the company has been a party to in the last 5 years. Ask your attorney to review these documents to see if you will be exposed to liability arising from conduct that occurred prior to the merger.

Compile a list of the other party's real estate and personal (corporate) property holdings. Hire a title company to research the titles of all real estate holdings to ensure that ownership can pass to you cleanly after the merger.

Request a complete list of the other company's intellectual property holdings. Intellectual property holdings include patents, copyrights and trademarks. The value of each piece of intellectual property can be a major factor when negotiating the costs of the merger.
Ask for copies of the other company's federal, state and local tax returns for the past 5 fiscal years. Submit these forms to your forensic accountant so that she can provide you with a report on the state of the company's tax liabilities. Request copies of any and all liens, easements, encumbrances or other barriers to the full and unrestricted use of any accounts or property to be handed over after the merger.

DUE DILIGENCE AUDIT PROCEDURES :


Rationale and Subject Matter
Preparation Evaluation and Interpretation

CONCLUSION
Due diligence refers to the detailed investigation process by an investor or his associate to assess the strengths and weaknesses of a proposed acquisition by enquiring all the relevant aspects of the past, present and the predictable future prospects of the company to be acquired. The investigation process includes financial, operational and legal due diligence. Hence, by going for proper due diligence, the buyer can assess the target company and accordingly decide whether to go for the deal or not.

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