WHAT SHOULD YOU CHECK WHEN BUYING OR MERGING THE COMPANIES?

INTRODUCTION

Buying or merging companies is something that cannot take place without a comprehensive due diligence process when done by a buyer (the acquiring company). This ensures that the company has been bought or merged without any fault while also complying with the concerns revolving around the true legal, financial, and operational position of the targeted company and protects them from hidden liabilities, inflated valuation, or regulatory non-compliance.

LEGAL DUE DILIGENCE

The first and foremost step that is taken into due consideration is following the process of due diligence, which involves, in its intricacies, ‘whether the targeted company’s structure, assets, and activities are in compliance with the law of the land.

This includes

I. Certification of Incorporation, Memorandum & Articles of Association.

II. Current shareholding pattern and capital structure.

III. Details of Subsidiaries, joint Ventures, or Groups of companies

IV. Board Meeting in minutes, shareholder resolutions, and annual returns; etc.

It is imperative to confirm that the company has complied with all statutory filings and that there are ongoing proceedings for striking off or liquidation proceedings. The due diligence team, which has been hired on behalf of the company, must also take into consideration the above requisites, which have been specified serially. So that each and every detail of the targeted company can be well accessed before getting involved in buying or merging the said companies.

REGULATORY & STATUTORY COMPLIANCE

Another step that comes in the way of due diligence examination is confirming whether the targeted company is compliant with all the relevant laws & sectoral regulations. This includes adherence to the Companies Act, 2013, labor law, environmental laws, and, as the case may be, regulations of SEBI, RBI, IRDAI, or other regulatory authorities. The buyer must also ensure that all the licenses, approvals, and permits required for business operations are validated and renewed on timely statutory requirements. Any show-cause notices, penalties, or pending regulatory actions must be disclosed before or at the time of buying or merging and must be evaluated for their financial and reputational impact.

CONTRACTS AND COMMERCIAL ARRANGEMENTS

Before buying or merging with a company that is targeted, it is also an essential prerequisite under the process of due diligence to look after that. In what and how many material contracts & commercial agreements, including supplier agreements, customer contracts, franchise or distribution arrangements, lease deeds & loan documents, each agreement should be analyzed, and what liabilities & rights the targeted company is entitled to under such contracts and to what extent the execution of the company has so far been facilitated.

LITIGATION & DISPUTE STATUS

It is crucial to examine whether the company is involved in ongoing or threatened litigation, arbitration, or regulatory proceedings.’ The due diligence report should classify cases such as civil, criminal, tax-related, or regulatory and assess their potential financial exposure. Additionally, any past judgments, injunctions, or decrees that could assess the companies' assets, reputation, or management must be reviewed carefully. This helps the acquirer assess their legal risk exposure and decide whether indemnities or warranties are necessary in the acquisition agreement.

INTELLECTUAL PROPERTY RIGHTS

Intellectual property often constitutes a significant portion of a company’s value, especially in tech-driven or consumer-facing sectors. The person intending to buy the company shall also examine and verify all trademarks, copyrights, patents, & designs that are duly registered and owned by the company and not licensed from third parties. The due diligence process must also crucially examine licensing agreements, IP agreements, deeds & pending infringement claims also, ensuring that the company’s ownership and freedom to use its IP assets post-acquisition is critical to avoid legal disputes or loss of business identity.

FINANCIAL STABILITY AND TAX STATUS QUO

It's imperative to examine that the targeted company's financial statement must also reflect the company's true and fair view of its business. This also involved analyzing audited financial statements for the last three to five years, along with balance sheets, profit & loss accounts, and cash flow statements. Attention must also be placed upon debt levels, contingent liabilities, working capital, and revenue recognition policies. On the tax side, compliance with income tax, GST, TDS, and transfer pricing regulations must also be verified. The buyer must also review any pending tax assessments, exemptions, and refunds to assess future liabilities.

COMPLIANCE WITH EMPLOYMENT & LABOUR LAWS

An essential component while conducting the process of due diligence also involves reviewing the company’s employee-related policies & statutory compliances. This includes employment contracts, details of key managerial personnel, & records of compliance with PF, ESI, gratuity & bonus laws. The buyer must check for any industrial disputes, claims of wrongful termination, or pending complaints under labor laws. If the acquisition also involves the transfer of employees, it must be ensured that their service continuity & benefits are preserved as per the law.

ASSETS AND PROPERTIES ON THE NAME OF TARGETED COMPANIES

A wise acquirer always duly ensures the very fact that the company's assets and financial properties are legally owned and free from any form of financial or legal obstacles. This also includes verifying title deeds, land records, building permissions, lease agreements, and encumbrance certificates. If assets are pledged as security for acquiring loans, that must be disclosed and settled before acquisition. One must also confirm the physical condition of machinery, equipment, and infrastructure to avoid future repair costs or disputes over ownership.

COMPREHENSION OF CULTURAL & OPERATIONAL COMPATIBILITY

Beyond the paperwork, a cautious business owner shall also examine and consider the cultural and operational integration between the buyer company and targeted company. Most of the companies, even after successfully merging the companies, fail due to the very fact that they fail to examine the question, which is “Whether the company I’m integrating with is compatible in terms of management styles, work cultures, & long-term visions?” Mergers often fail not because of bad numbers, but because the teams of both companies fail to integrate. Therefore, conducting integration planning and change management assessment is equally important before signing the final deal.

CONCLUSION

Before merging or acquiring a targeted company, one must certainly go through the procedure of due diligence, in which the following components must be crucially comprehended and examined, which have been laid down in detail in the above subtopics, formulating as a whole the procedure of due diligence.