DUE DILIGENCE AN OVERVIEW

Transcription

1 Purpose of my address DUE DILIGENCE AN OVERVIEW n Experience is not what happens to a man, it is what a man does with what happens to him Aldous Huxley CS J SUNDHARESAN practising company secretary Bengaluru My Mission statement n I do not want to do Data Dumping by exhibiting my knowledge without understanding the capability of the audience to receive information. I am here to articulate ideas, share experience and try to address issues in a clear, crisp and concise manner so that there is two way communication for a better understanding. n Why a DD - purpose INTRODUCTION n When a DD scenario n What is a DD rules n How to do a DD - process n What is the outcome - issues n What next - post DD ABOUT DUE DILIGENCE n Dictionary meaning Due is sufficient and Diligence is persistent effort or work n It is SCIENCE, ART & COMMERCE n Use Scientific methods to detect n Art of expressing reports n Commerce in billing effectively n It is not just n Checking the facts n Reciting them n Its about: n Evaluation What is Due Diligence? n Interpretation n Communication n Requires business plan skills n Deal agreed in principle n work encompasses review of historic statements / forecasts / tax n report includes views / observations / opinions 1

2 What is Due Diligence? not an audit! Due Diligence Audit Transaction support Why needed Shareholders/ a/c users Prior to transaction Timing Annual, closing etc Business plan Robust structure The acquisition process Financing Management team TS Post-acquisition actions Comfort only, not audit Research & Investigation Opinion given Process True and fair Interim & final Search Target Due diligence Negotiations Completion Integration Institute guidelines Vary with concern Governing rules Materiality Companies Acts Effect on profitability TS Desk top Approach Value Risk Warranties Indemnities Disclosures Audit Settlement Pressurised Controlled access Atmosphere Working Environment Controlled Full access Target selection Heads of agreement indicative bid Key Issues TS Sales & purchase agreement Post acquisition review Making due diligence effective Financial assessment Tax review direct / indirect Commercial assessment of markets, management, operations, IT, potential synergies, pensions etc. Pricing Issues Strategic Fit Strategy target identification and evaluation Improvement opportunities Integrated financial and commercial due diligence Due Diligence Deliverables Key Postacquisition actions Capex needs Management Merchant Bankers Lawyers and other advisors Funding issues Warranty and contract issues n Initiated by n Potential Investors n Management n JV Partners n Regulators Why a DD Deal Negotiation and completion Post-acquisition plans purpose n Assessment of risks n Management of risks n Title search n Existing and potential liabilities n Valuation of business n Transaction n The real cost of risk Benefits n Determine with precision the risk as that can be assumed n Risks during negotiation n Understanding fundamentals of the target 2

3 PROCESS INVOLVED n Determination of scope n Drafting detailed checklists for each item n Access to records & information n Compilation of draft reports n Management discussions & reviews n Final report & sign off TYPES n Compliance certificate n Secretarial audit n Legal Compliance n Annual compliance review n Quarterly statutory compliance reporting n Health check audit n CEO / CFO certification under clause 49 n All this is corporate compliance n Corporate n In house n External Who will need a DD n Acquisitions n Mergers n restructuring corporate n Secretarial audit n Legal Health check n Clause 49 reporting In house external.. n Investment bankers n For acquisition n Mergers n Strategic investments n Merchant bankers n IPO n Investors/ venture capital funds/ n Limited review report 3

4 n Finance & Accounting n Tax n Legal n Corporate law n HR n Environment n Technical Types of DD Finance & Accounting n Booking of expenses n Hidden expenses n The depreciation n Capitalisation issues Tax n Status of tax assessments n Pending notice and demands n Adherence to tax policy n Identifying potential tax liability n Tax issues with regard to agreements n Double taxation n Withholding tax n Immovable properties n IPRs n Litigations n Status of insurance n Environment issues Legal n Registration with statutory authorities n On going compliance labour laws Corporate law n Inter-se promoters agreement n Articles of Association n Contracts with directors n Loans granted, investments n Borrowings n Related party n Joint venture agreement n Foreign exchange laws HR n Employee related compliance n Environment issues n Litigations 4

5 Process.. n Information Memoranda n Term Sheet to be entered into n DD checklist standard n Data room n NDA n Diligence n Reporting n Shareholders agreement SCOPE n Scope determined based on requirement n Normally a 3 year diligence n Normal scope would include n Companies Act n Tax laws n Business related laws n Other issues n Preliminary search n MCA/ google/ RoC n Minutes Board / General n MoA/ AoA n A/c s n RoC filings n Statutory registers n RBI filings n Central Govt. applications n Sundry Debtors List n Sundry Creditors List Documents Discussions.. n Discussions with other team members (your own) n Discussion with team members (finance Tax) n Discussion with finance mediators n Discussion with top management team n Discussion with investors Length of diligence n Substitute extensive warranties for DD process n Speedy DD ensures minimum disruption to ongoing business and lower out of pocket n Buyer to quickly ascertain whether acquisition is of any interest or not n DD report n Limited review report n Executive summary n Full Report Reporting.. 5

6 Deal closure n Deal breakers any criminal proceeding or known liabilities n Deal diluters diminish the value of company n Deal cautioners rectifiable but be cautious n Deal makers clean report Closure n Shareholders agreement n Standard add tag along and drag along rights n Include representations and warranties n Condition precedents that have an impact on the deal n Escrow account ISSUES FOR CONSIDERATION n Companies Act n Interse promoters agreements n Provisions of Articles of Association n Contracts with Directors n Transactions with related parties & impact n Loans granted, investments made, guarantees given n Borrowings by the Company & security offered ISSUES FOR CONSIDERATION n Business related legislations n Applicability of such legislations n Registration with statutory authorities & necessary approvals n Specific registers to be maintained / returns to be filed n Risks involved in event of non compliance ISSUES FOR CONSIDERATION n Other Issues n Immovable properties n IPRs n Employee related issues n Litigations pending n Joint Venture Agreements n Business Agreements & their impact n Status of insurance n Foreign Exchange laws n Environmental Issues Weakness - external n Quality of data supplied n Non availability of data n Hidden tax liabilities n Industry specific legislations n Assessing the target n Status n Years in existence n Type of company global or small single company n Public or private n Length of diligence 6

7 n Quality of checklist n Time constraints n Trained staff Weakness - internal PRACTICAL DIFFICULTIES n Non availability of information n Reliance on information given by Company n Industry specific legislations n Hidden tax liabilities n New & emerging legislations n Composition of board n Maintenance of register n Loans n HR n Payments and filings n Contract labour n Agreements n Liabilities n Obligations n Restrictions Red flags Scope for professionals n adequately equipped to handle intricacies of due diligence n Extensive knowledge of all commercial laws n Additional requirements n Accounting n Industry specialisation n Knowledge of new legislations To conclude n Potential for undertaking legal due diligence n An opportunity to develop additional skills n compliance certificate an extension n Remunerative with limited risks To conclude n I know what I have given you. I do not know what you have received Antonio Porschia 7

8 My vision statement n To share my knowledge and experience to as many learners and after each interaction learn to unlearn and relearn which in itself is a continuous process. THANK YOU ALL n For a patient listening.. n J SUNDHARESAN n Write to me sundharesan@jsundharesan.com n Speak to me on