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Due diligence requirements What due diligence is necessary for buyers?
The nature and scope of due diligence varies depending on:
- the nature and form of the transaction;
- the identity of the target; and
- the industry in which the target operates.
However, due diligence should include legal, financial, tax and environmental due diligence for buyers. The legal due diligence process includes a review of:
- the corporate details and company structure;
- material contracts;
- employment agreements, labour disputes, labour law registrations and compliance with labour laws;
- environment law registrations, compliance with environment laws and notices issued by environment regulators;
- litigation by or against the company, including legal notices and show cause notices;
- IP (trademark, patent or copyright) registrations, IP licensing and assignment agreements;
- insurance policies;
- registrations, consents and licences obtained by the company;
- owned and leased real property, including agreements concerning the property; and
- financing and security agreements concerning the company’s indebtedness.
Information What information is available to buyers?
The information available to buyers varies based on whether the target is publicly traded. If the target is not publicly traded, the information is limited to statutory corporate filings that must be made by the company with the registrar of companies (which are accessible at ww.mca.gov.in on payment of a fee). These include annual reports and financial statements, incorporation documents and filings concerning directors, encumbrances and certain types of shareholder resolution.
If the target is publicly traded, in addition to the information stated above, supplemental information is available on the Securities and Exchange Board of India (SEBI) website and the websites of the stock exchange where the shares of the target are listed. The law mandates that publicly traded companies disclose specified information to the public through stock exchanges (where their shares are listed). This includes information concerning:
- shareholding patterns (including director holdings);
- board and shareholder meetings;
- material agreements;
- arrangements and acquisitions;
- changes to capital structure;
- insolvency; and
- key decisions taken by the company.
The company’s website will also contain more extensive information.
Trademark, copyright and patent registration information is also publicly available on government websites (eg, www.ipindia.nic.in). Information regarding litigations and regulatory proceedings may also be available online, but given the lack of indexing, maintenance and search capability of such records, this is not conclusive or definitive.
Other sources of information include news reports, information disclosed by the company on its website and industry reports.
What information can and cannot be disclosed when dealing with a public company?
Under the SEBI (Prohibition of Insider Trading) Regulation 2015, a publicly traded company or persons specified as ‘insiders’ are prohibited from communicating unpublished price sensitive information (UPSI) regarding the company to outsiders. An outsider is also prohibited from soliciting such UPSI from an insider. Once an outsider gains access to UPSI, he or she is treated as an ‘insider’ and is thus prohibited from trading in the company’s securities while in possession of the UPSI. Accordingly, while public companies disclose information on stock exchanges, a potential acquirer should be careful in asking a listed target for – and the listed target should be wary of supplying – further information that is not publicly available and which on becoming available is likely to affect materially the price of the securities.
However, certain carve-outs are available which allow information to be communicated to potential acquirers in the pursuance of a potential transaction, provided that:
- the target’s board is of the opinion that such a transaction is in the company’s best interests;
- the potential acquirer has executed a confidentiality or non-disclosure agreement; and
- cleansing disclosures are made at least two days before the proposed transaction is enacted (in the event that the transaction does not trigger an open offer requirement under the SEBI Substantial Acquisition of Shares and Takeovers Regulations 2011 (the Takeover Code)).
The potential target or acquirer should also consider the desirability of making cleansing disclosures in the event that the transaction is aborted.