Legal Due Diligence for Acquiring Legal Due Diligence for Acquiring Business Business in India – Do’s & Don'ts of in India – Do’s & Don'ts of

Formulating an MoUFormulating an MoU

1 August 2008,1 August 2008,PHD chambers of Commerce & IndustryPHD chambers of Commerce & Industry, New Delhi, New Delhi

Karnika SethKarnika Seth Managing PartnerManaging PartnerSETH ASSOCIATESSETH ASSOCIATES

ADVOCATES AND LEGAL CONSULTANTS ADVOCATES AND LEGAL CONSULTANTS

Copyright reserved © Seth Associates 2008.Copyright reserved © Seth Associates 2008.

What is ‘due diligence’ ?What is ‘due diligence’ ?

Due diligence is the process whereby an Due diligence is the process whereby an investing party investigates, analyses, and investing party investigates, analyses, and evaluates an intended major investment, evaluates an intended major investment, transaction, takeover, or business partnership transaction, takeover, or business partnership prior to committing capital to it. Due diligence prior to committing capital to it. Due diligence can be termed as a risk aversion strategy aimed can be termed as a risk aversion strategy aimed at checking if the information about the at checking if the information about the investment that is available is correct and investment that is available is correct and complete.complete.

There are several forms of due diligence – There are several forms of due diligence – business due diligence, technical due diligence, business due diligence, technical due diligence, financial due diligence, intellectual property due financial due diligence, intellectual property due diligence and legal due diligence. This diligence and legal due diligence. This presentation discusses only aspects relating to presentation discusses only aspects relating to legal due diligence.legal due diligence.

““Due diligence” definedDue diligence” defined The term “due diligence” as The term “due diligence” as

relevant in this context is relevant in this context is defined in the Merriam defined in the Merriam Webster’s Dictionary of Law Webster’s Dictionary of Law as:as:

The process of investigation The process of investigation carried on by a disinterested carried on by a disinterested third party (such as a law firm third party (such as a law firm or an accounting firm) on or an accounting firm) on behalf of a party behalf of a party contemplating a business contemplating a business transaction (as a corporate transaction (as a corporate acquisition or merger, a loan acquisition or merger, a loan of finances, or especially of finances, or especially purchase of securities) for the purchase of securities) for the purpose of providing purpose of providing information with which to information with which to evaluate the advantages and evaluate the advantages and risksrisks i involvednvolved..

Essential aspects of due Essential aspects of due diligencediligence

Due diligence is understood by the legal, Due diligence is understood by the legal, financial and business communities to mean financial and business communities to mean the disclosure and assimilation of public and the disclosure and assimilation of public and proprietary information related to the assets proprietary information related to the assets and liabilities of the business being purchased. and liabilities of the business being purchased. This information includes financial, human This information includes financial, human resources, tax, environmental and legal resources, tax, environmental and legal matters.matters.

Due diligence would include full understanding Due diligence would include full understanding all of the obligations of the target company: all of the obligations of the target company: debts, rights and obligations, pending and debts, rights and obligations, pending and potential lawsuits, leases, warranties, all high potential lawsuits, leases, warranties, all high and impact laden contracts – both inter-and impact laden contracts – both inter-corporate and intra-corporate.corporate and intra-corporate.

Meaning of legal due diligenceMeaning of legal due diligence

Definite agreements & closing

LDD

MOU

In a given business In a given business transaction, a law firm or transaction, a law firm or legal counsel generally legal counsel generally assists in four phases before assists in four phases before the completion of the the completion of the intended transaction.intended transaction.

The preliminary The preliminary negotiations, which negotiations, which culminate mostly in the culminate mostly in the execution of a letter of execution of a letter of intent or a memorandum of intent or a memorandum of understanding.understanding.

The legal due diligence The legal due diligence (‘(‘LDDLDD’).’).

The negotiation and signing The negotiation and signing of the definitive or final of the definitive or final transactional document.transactional document.

The closing. The closing.

Legal Due Diligence Legal Due Diligence ProcessProcess There is no definitive form There is no definitive form

of a legal due diligence. of a legal due diligence. The investigative aspects The investigative aspects as well as form of the LDD as well as form of the LDD process varies depending process varies depending upon the scope of work upon the scope of work dictated by the client, the dictated by the client, the focus, special areas of focus, special areas of weakness, the type of weakness, the type of business, et al. However, business, et al. However, the basic philosophy of a the basic philosophy of a LDD is common to most LDD is common to most processes followed in a processes followed in a LDD.LDD.

The LDD follows a certain The LDD follows a certain life cycle. The LDD covers life cycle. The LDD covers two aspects – intra-two aspects – intra-corporate transactions corporate transactions and inter-corporate and inter-corporate transactions. transactions.

The various chronological The various chronological stages of the LDD are:stages of the LDD are:

A memorandum of A memorandum of understanding between the understanding between the transacting parties for transacting parties for disclosuredisclosure

Establishment of time-linesEstablishment of time-lines Commencement with pre-Commencement with pre-

arranged check-list(s) where arranged check-list(s) where the target company provides the target company provides information and documents to information and documents to the best of its ability and the best of its ability and knowledge.knowledge.

Interview with the relevant Interview with the relevant personnel of the target personnel of the target companycompany

The legal due diligence processThe legal due diligence process

Independent checks with Independent checks with the statutory and the statutory and regulatory authorities, regulatory authorities, libraries, corporate libraries, corporate documents, banks and documents, banks and third parties that do third parties that do business with the target business with the target companycompany

Transactional and Transactional and corporate documentation, corporate documentation, financial statements, tax, financial statements, tax, litigation, environment litigation, environment and safety issues, HR and and safety issues, HR and propertyproperty

Collation with financial Collation with financial due diligence for due diligence for confirmation of confirmation of representations, representations, warranties and liabilitieswarranties and liabilities

Investigation of issues that Investigation of issues that would materially impact would materially impact the business transactionthe business transaction

Analysis by the law firm of Analysis by the law firm of the foregoing the foregoing

Drawing of the draft or Drawing of the draft or preliminary reportpreliminary report

Discussions with the Discussions with the acquirer on findings and acquirer on findings and discoveriesdiscoveries

Finalisation of the LDD Finalisation of the LDD Report (‘Report (‘LDDRLDDR’)’)

Analysis and StrategyAnalysis and Strategy

Additional information from Additional information from reportsreports

ReportsReports 1. Copies of any studies, appraisals, reports, analyses or memoranda 1. Copies of any studies, appraisals, reports, analyses or memoranda

within the last three years relating to the Company (i.e., competition, within the last three years relating to the Company (i.e., competition, products, pricing, technological developments, software developments, products, pricing, technological developments, software developments, etc.). etc.).

2. Current descriptions of the Company that may have been prepared 2. Current descriptions of the Company that may have been prepared for any purpose, including any brochures used in soliciting or for any purpose, including any brochures used in soliciting or advertising. advertising.

3. Descriptions of any customer quality awards, plant 3. Descriptions of any customer quality awards, plant qualification/certification distinctions, ISO certifications or other awards qualification/certification distinctions, ISO certifications or other awards or certificates viewed by the Company as significant or reflective of or certificates viewed by the Company as significant or reflective of superior performance.superior performance.

4. Copies of any analyst or other market reports concerning the 4. Copies of any analyst or other market reports concerning the Company known to have been issued within the last three years.Company known to have been issued within the last three years.

5. Copies of any studies prepared by the Company regarding the 5. Copies of any studies prepared by the Company regarding the Company's insurance currently in effect and self-insurance program (if Company's insurance currently in effect and self-insurance program (if any), together with information on the claim and loss experience any), together with information on the claim and loss experience thereunder.thereunder.

6. Any of the following documents filed by the Company or affiliates of 6. Any of the following documents filed by the Company or affiliates of the Company and which contain information concerning the Company: the Company and which contain information concerning the Company: annual reportsannual reports

Objectives of legal due Objectives of legal due

diligencediligence Identify the correct value of a business transaction Identify the correct value of a business transaction Verifying the size of known liabilitiesVerifying the size of known liabilities Checking any unforeseen liabilitiesChecking any unforeseen liabilities Understand the financial and accounting position of the target Understand the financial and accounting position of the target

companycompany Intellectual property rights of target company need to be identified, Intellectual property rights of target company need to be identified,

ownership needs verification, and validity has to be established. ownership needs verification, and validity has to be established. Ownership of domain name is to be checkedOwnership of domain name is to be checked to check the person from whom shares are to be bought is the to check the person from whom shares are to be bought is the

rightful owner of sharesrightful owner of shares Inspecting documents relating to allotment and issue and transfer of Inspecting documents relating to allotment and issue and transfer of

shares, the approval of transfers at board meetings and registration shares, the approval of transfers at board meetings and registration of various transfer documents.of various transfer documents.

Former shareholders have returned certificates and new Former shareholders have returned certificates and new shareholders have valid certificates.shareholders have valid certificates.

Verifying shares that are to be sold are not subject to any charges Verifying shares that are to be sold are not subject to any charges or encumbrances.or encumbrances.

Objectives of legal due Objectives of legal due diligencediligence

Verify title to any freehold or lease Verify title to any freehold or lease hold property of target company hold property of target company and any other major assetsand any other major assets

Whether there are charges or any Whether there are charges or any other encumbrances over property other encumbrances over property or assetsor assets

Check if consents and releases are Check if consents and releases are required required

Any licence, permission ,regulatory Any licence, permission ,regulatory approval is required to lawfully approval is required to lawfully conduct business of target conduct business of target companycompany

Disclosure letter can be a source of Disclosure letter can be a source of information , word with other information , word with other advisers such as financial advisersadvisers such as financial advisers

Public information –general public Public information –general public records, internet due diligence, records, internet due diligence, search of land registry , registry of search of land registry , registry of trademarks , designs, patents, trademarks , designs, patents, Registry records of ROC, etcRegistry records of ROC, etc

Objectives of legal due Objectives of legal due diligencediligence

Check List of any export, import or Check List of any export, import or customs permits or authorizations, customs permits or authorizations, certificates, registrations, concessions, certificates, registrations, concessions, exemptions, etc., that are required in exemptions, etc., that are required in order for the Company to conduct its order for the Company to conduct its business and copies of all approvals, business and copies of all approvals, etc. granted to the Company that are etc. granted to the Company that are currently in effect or pending renewal.currently in effect or pending renewal.

Check any correspondence with or Check any correspondence with or complaints from third parties relating complaints from third parties relating to the marketing, sales or promotion to the marketing, sales or promotion practices of the Company.practices of the Company.

How legal due diligence may How legal due diligence may help?help?

Compliance with local lawsCompliance with local laws Securities or other regulatory violations or Securities or other regulatory violations or

disciplinary actions disciplinary actions Extensive litigation and/or bankruptcies – Extensive litigation and/or bankruptcies –

assessment of feasibility of pursuing assessment of feasibility of pursuing litigationlitigation

Financial statementsFinancial statements Unpaid tax liens and/or judgementsUnpaid tax liens and/or judgements Past business failures and related debt Past business failures and related debt Fraudulent or exaggerated credentials Fraudulent or exaggerated credentials Misrepresentations or character issuesMisrepresentations or character issues Discoveries and disclosuresDiscoveries and disclosures

Importance of legal due Importance of legal due diligencediligence

Assets – real and intellectual property, brand Assets – real and intellectual property, brand valuevalue

Reputation and goodwillReputation and goodwill Cross-border issues – double taxation, foreign Cross-border issues – double taxation, foreign

exchange fluctuation, sovereign risk, investment exchange fluctuation, sovereign risk, investment climate, cultural impact on HRclimate, cultural impact on HR

Cultural Due DiligenceCultural Due Diligence:: An important aspect of An important aspect of LDDs in cross-border transactions is cross-LDDs in cross-border transactions is cross-cultural study, which is not typically covered, cultural study, which is not typically covered, especially in India. The compatibility and especially in India. The compatibility and adaptability of corporate cultures and ethics adaptability of corporate cultures and ethics between the acquirer and the target company between the acquirer and the target company must be analysed. must be analysed.

Legal risk Legal risk managementmanagement some aspects enabling effective legal some aspects enabling effective legal

risk management arising out of the risk management arising out of the LDD are:LDD are:– Information procured from target Information procured from target

company’s personnelcompany’s personnel– Representations and warranties – also Representations and warranties – also

covering conditions precedent and covering conditions precedent and conditions subsequentconditions subsequent

– A merge of financial analysis of target A merge of financial analysis of target company with legal risk analysiscompany with legal risk analysis

LDD and legal documentationLDD and legal documentation

One of the most important One of the most important aspects in the LDD is the aspects in the LDD is the transactional documentation transactional documentation under inter-corporate under inter-corporate transactions, in other words, transactions, in other words, contracts.contracts.

Contract value and impact – Contract value and impact – lock-in periods and other lock-in periods and other restrictive clausesrestrictive clauses

Statutory and regulatory Statutory and regulatory compliances and consentscompliances and consents

Restrictions of any formRestrictions of any form Non-compete, non-solicitation Non-compete, non-solicitation

and confidentialityand confidentiality Intellectual propertyIntellectual property Human resourceHuman resource The cut off date and closure The cut off date and closure

datedate

Environmental legal due diligenceEnvironmental legal due diligence

A list of facilities or other properties currently or formerly owned, leased, or A list of facilities or other properties currently or formerly owned, leased, or operated by the Company and its predecessors, if any.operated by the Company and its predecessors, if any.

Reports of environmental audits or site assessments in the possession of the Reports of environmental audits or site assessments in the possession of the Company, including any Phase I or Phase II assessments or asbestos surveys, Company, including any Phase I or Phase II assessments or asbestos surveys, relating to any such facilities or properties.relating to any such facilities or properties.

Copies of any inspection reports prepared by any governmental agency or Copies of any inspection reports prepared by any governmental agency or insurance carrier in connection with environmental or workplace safety and insurance carrier in connection with environmental or workplace safety and health regulations relating to any such facilities or properties.health regulations relating to any such facilities or properties.

Copies of all environmental and workplace safety and health notices of Copies of all environmental and workplace safety and health notices of violations, complaints, consent decrees, and other documents indicating violations, complaints, consent decrees, and other documents indicating noncompliance with environmental or workplace safety and health laws or noncompliance with environmental or workplace safety and health laws or regulations, received by the Company from local, state, or federal regulations, received by the Company from local, state, or federal governmental authorities. If available, include documentation indicating how governmental authorities. If available, include documentation indicating how such situations were resolved.such situations were resolved.

Copies of any private party complaints, claims, lawsuits or other documents Copies of any private party complaints, claims, lawsuits or other documents relating to potential environmental liability of the Company to private parties.relating to potential environmental liability of the Company to private parties.

Listing of underground storage tanks currently or previously present at the Listing of underground storage tanks currently or previously present at the properties and facilities listed in response to Item 1 above, copies of permits, properties and facilities listed in response to Item 1 above, copies of permits, licenses or registrations relating to such tanks, and documentation of licenses or registrations relating to such tanks, and documentation of underground storage tank removals and any associated remediation work.underground storage tank removals and any associated remediation work.

Patent due diligencePatent due diligence

List of Indian and foreign List of Indian and foreign patents, including, for each patents, including, for each patent: patent: a. countrya. countryb. grant numberb. grant numberc. grant datec. grant dated. expiration dated. expiration datee. publication numbere. publication numberf. publication datef. publication dateg. inventorsg. inventorsh. titleh. titlei. number and date of Indian i. number and date of Indian patent to which the foreign patent to which the foreign patent is a counterpartpatent is a counterpartj. dates on which annuities j. dates on which annuities were paid, identity of parties were paid, identity of parties paying annuitiespaying annuitiesk. name and address of foreign k. name and address of foreign agent responsible for agent responsible for maintenance of the patent.maintenance of the patent.

Patent due diligencePatent due diligence

2. List of foreign patent applications, including for each application:2. List of foreign patent applications, including for each application:a. national patent office in which pendinga. national patent office in which pendingb. filing date in that officeb. filing date in that officec. priority datec. priority dated. application numberd. application numbere. number of European Patent Office application or Patent e. number of European Patent Office application or Patent Cooperation Treaty application giving rise to the application Cooperation Treaty application giving rise to the application inventorsinventorsf. title f. title Patent Rights As Between the Company and Its EmployeesPatent Rights As Between the Company and Its Employees

1. List of agreements between the Company and any of its 1. List of agreements between the Company and any of its employees conveying patent rights to the Company.employees conveying patent rights to the Company.

2. Invention development memoranda (which recites details about 2. Invention development memoranda (which recites details about patentable inventory for review by the Company's patent lawyer patentable inventory for review by the Company's patent lawyer and which could tell about areas the Company has chosen not to and which could tell about areas the Company has chosen not to patent).patent).

3. The Company's written policy on patenting inventions, if any.3. The Company's written policy on patenting inventions, if any. 4. List of key employees/inventors and employment and other 4. List of key employees/inventors and employment and other

agreements with same.agreements with same.

Trademark due Trademark due diligencediligence Company's FilesCompany's Files 1. Review of trademark/service mark/domain name files:1. Review of trademark/service mark/domain name files:

a. Indian and foreign registration, application and a. Indian and foreign registration, application and assignment files, including prosecution historiesassignment files, including prosecution historiesb. Licenses and Registered User Agreements and license b. Licenses and Registered User Agreements and license files, including quality control filesfiles, including quality control filesc. Rejected applicationsc. Rejected applicationsd. Protest letters (sent and received)d. Protest letters (sent and received)e. Litigation files (e.g., past infringements, disputes, e. Litigation files (e.g., past infringements, disputes, demands or language in court orders may impact future demands or language in court orders may impact future litigation)litigation)f. Settlement agreements, administrative or judicial f. Settlement agreements, administrative or judicial decisions affecting ownership or validity of the marks decisions affecting ownership or validity of the marks (e.g., may restrict expansion of mark geographically or to (e.g., may restrict expansion of mark geographically or to other goods)other goods)g. Trademark search report files on current marksg. Trademark search report files on current marksh. Concurrent use agreements.h. Concurrent use agreements.

Trademark due diligenceTrademark due diligence

2. Computer printout of trademark record maintenance of 2. Computer printout of trademark record maintenance of the Company, including maintenance and status report on the Company, including maintenance and status report on all registrations, pending applications, licenses Registered all registrations, pending applications, licenses Registered User Agreements, assignments, etc.User Agreements, assignments, etc.

3. Advertising, brochures, packaging and other materials 3. Advertising, brochures, packaging and other materials which may disclose, inter alia:which may disclose, inter alia:a. Style and secondary marks that are protectable or which a. Style and secondary marks that are protectable or which may infringe third party usesmay infringe third party usesb. Slogans that are protectable or which may infringe third b. Slogans that are protectable or which may infringe third party usesparty usesc. Misuse of marks (e.g., use as generic terms; misuse of ® c. Misuse of marks (e.g., use as generic terms; misuse of ® or failure to use ®)or failure to use ®)d. Protectable or infringing trade dress.d. Protectable or infringing trade dress.

4. Sample products4. Sample productsa. For proper trademark markingsa. For proper trademark markingsb. To consider possible protection of configuration.b. To consider possible protection of configuration.

5. List of trade/domain name registrations5. List of trade/domain name registrations

Copyright due diligenceCopyright due diligence

Registrations and OwnershipRegistrations and Ownership 1. List of all Indian Copyright Registrations owned by the Company 1. List of all Indian Copyright Registrations owned by the Company

for relevant subject matter, including:for relevant subject matter, including:a. Registration Numbera. Registration Numberb. Registration Dateb. Registration Datec. Title as listed in Registrationc. Title as listed in Registrationd. Publication Dated. Publication Datee. Creation Datee. Creation Datef. Author (if anonymous work, list each employee who prepared any f. Author (if anonymous work, list each employee who prepared any portion of the work)portion of the work)g. Subject matter coveredg. Subject matter coveredh. Description of deposit filed in support of the registrationh. Description of deposit filed in support of the registrationi. Name and current address of each person who participated in i. Name and current address of each person who participated in creation of the subject matter from whom a written assignment has creation of the subject matter from whom a written assignment has been obtainedbeen obtainedj. Name and current address of each person who participated in j. Name and current address of each person who participated in creation of the subject matter from whom a written assignment has creation of the subject matter from whom a written assignment has not been obtainednot been obtainedk. Identification of circumstances which would support the subject k. Identification of circumstances which would support the subject matter, or any particle thereof, being considered a work made for matter, or any particle thereof, being considered a work made for hire. hire.

Copyright due Copyright due diligencediligence Copyright registrations and files listed above for each registration.Copyright registrations and files listed above for each registration. 3. List of all relevant non-Registered works (which are nevertheless protected via 3. List of all relevant non-Registered works (which are nevertheless protected via

copyright) which have ever been offered for license, use or sale by the Company, copyright) which have ever been offered for license, use or sale by the Company, including:including:a. Name and version of worka. Name and version of workb. Release dateb. Release datec. List of previous versions and their release datesc. List of previous versions and their release datesd. Creation Dated. Creation Datee. Name and current address of each person who participated in creation of the work from e. Name and current address of each person who participated in creation of the work from whom a written assignment has been obtained.whom a written assignment has been obtained.f. Name and current address of each person who participated in creation of the work from f. Name and current address of each person who participated in creation of the work from whom a written assignment has not been obtained. whom a written assignment has not been obtained.

LicensesLicenses 1. For each work owned or used by the Company, a list of all underlying licenses which 1. For each work owned or used by the Company, a list of all underlying licenses which

convey rights in copyright to the Company, including:convey rights in copyright to the Company, including:a. name and address of licensora. name and address of licensorb. dateb. datec. work licensedc. work licensed

2. For each work owned by the Company, a list of licenses conveying rights in copyright to 2. For each work owned by the Company, a list of licenses conveying rights in copyright to a third party, including: a third party, including: a. name and address of licenseea. name and address of licenseeb. dateb. datec. work licensedc. work licensed

3. Each license listed in items numbered 1 and 2 above.3. Each license listed in items numbered 1 and 2 above.

IP -legal due diligenceIP -legal due diligence

Infringement ClaimsInfringement Claims 1. Demand letters that the Company has sent 1. Demand letters that the Company has sent

regarding third party infringement of the regarding third party infringement of the Company's trademarks, patent rights or copyrights.Company's trademarks, patent rights or copyrights.

2. Demand letters that the Company has received 2. Demand letters that the Company has received regarding infringement of third party rights or regarding infringement of third party rights or copyrights. copyrights.

3. Files for any litigation that has occurred 3. Files for any litigation that has occurred involving the trademarks, patent rights and involving the trademarks, patent rights and copyrights.copyrights.

4. Consent orders regarding infringement litigation.4. Consent orders regarding infringement litigation. 5. List of all patent clearance searches that have 5. List of all patent clearance searches that have

been conducted relating to the technology.been conducted relating to the technology.

Meaning of Meaning of ‘Acquisition’‘Acquisition’

An acquisition may be defined as an act of An acquisition may be defined as an act of acquiringacquiring effective control by one effective control by one company over assets or management of company over assets or management of another company through purchase of another company through purchase of shares without any combination of shares without any combination of companies. Thus, in an acquisition two or companies. Thus, in an acquisition two or more companies may remain more companies may remain independent, separate legal entities, but independent, separate legal entities, but there may be a change in control of the there may be a change in control of the companies companies

Acquisition vs Acquisition vs TakeoverTakeover When an acquisition is 'forced' or 'unwilling', it is called a When an acquisition is 'forced' or 'unwilling', it is called a

takeover. In an unwilling acquisition, the management of takeover. In an unwilling acquisition, the management of 'target' company would oppose a move of being taken over. 'target' company would oppose a move of being taken over. But, when managements of But, when managements of acquiringacquiring and target and target companies mutually and willingly agree for the takeover, it companies mutually and willingly agree for the takeover, it is called acquisition or friendly takeover. is called acquisition or friendly takeover.

TakeoverTakeover-A person or group of persons ( acquirer ) -A person or group of persons ( acquirer ) acquiring shares or acquiring voting rights or both of a acquiring shares or acquiring voting rights or both of a company ( target company) from its shareholders, either company ( target company) from its shareholders, either through private negotiations with shareholders or through through private negotiations with shareholders or through public offer in the open market with the object of gaining public offer in the open market with the object of gaining control over its managementcontrol over its management

While in While in the Companies Act (Section 372)the Companies Act (Section 372), a company's , a company's investment in the shares of another company in excess of investment in the shares of another company in excess of 10 percent of the subscribed capital can result in takeovers. 10 percent of the subscribed capital can result in takeovers. An acquisition or takeover does not necessarily entail full An acquisition or takeover does not necessarily entail full legal control. legal control.

Laws governing acquisition of a Laws governing acquisition of a

companycompany An acquisition of shares of a listed target An acquisition of shares of a listed target

company is governed interalia, by company is governed interalia, by Companies Act , by SEBI, and Takeover Companies Act , by SEBI, and Takeover codecode

For acquisition of shares of unlisted or For acquisition of shares of unlisted or private company , the governing law is private company , the governing law is contained in Section 108 of the contained in Section 108 of the Companies Act, 1956 –transfer of shares Companies Act, 1956 –transfer of shares takes place on mutual agreement of takes place on mutual agreement of parties.parties.

Laws governing acquisition of a Laws governing acquisition of a companycompany

If acquisition results in a combination , then If acquisition results in a combination , then provisions of Competition Act 2002 are also provisions of Competition Act 2002 are also applicable and approval of CCI is required. ,if applicable and approval of CCI is required. ,if acquisition requires inflow or outflow of money acquisition requires inflow or outflow of money to ore from India FEMA is also, RBI permission to ore from India FEMA is also, RBI permission may be required. may be required.

Listing agreement- Section40 A and 40 B- Listing agreement- Section40 A and 40 B- Disclosure for particulars by shareholder to the Disclosure for particulars by shareholder to the

target company once threshold limit 5% is target company once threshold limit 5% is crossed and mandatory public offer for crossed and mandatory public offer for acquisition of minimum percentage when acquisition of minimum percentage when threshold limit of ten percent was crossed.-SEBI threshold limit of ten percent was crossed.-SEBI Regulations 1994 Regulations 1994

Takeover code-automatic /specific exemptions Takeover code-automatic /specific exemptions

Negotiation between parties Negotiation between parties and drafting an MOU for and drafting an MOU for

acquisitionacquisition Set up a foundational understanding-Set up a foundational understanding-

binding/non-bindingbinding/non-binding Representations and warranties-Representations and warranties-

ownership of assets-tangible and non ownership of assets-tangible and non tangible-IP assets included tangible-IP assets included

Financial status of the company –Financial status of the company –liabilities/debts-both accrued/continentliabilities/debts-both accrued/continent

Regulatory approvals for conduct of Regulatory approvals for conduct of business by target company to be in business by target company to be in placeplace

staff/employees retainedstaff/employees retained

Negotiation between parties Negotiation between parties and drafting an MOU for and drafting an MOU for acquisitionacquisition Undertaking to sell agreed percentage of shares Undertaking to sell agreed percentage of shares

–free and clear of encumbrances –free and clear of encumbrances Amount of consideration Amount of consideration Director is to continue to be part of management Director is to continue to be part of management

of target company –lockin minimum term, of target company –lockin minimum term, salary,etcsalary,etc

First right to purchase remaining sharesFirst right to purchase remaining shares Steps to be taken after execution of this Steps to be taken after execution of this

agreement agreement Costs for drafting formal agreementsCosts for drafting formal agreements Non compete clause-territory ,time, activityNon compete clause-territory ,time, activity Confidential and proprietary rights-in perpetuityConfidential and proprietary rights-in perpetuity Non solicitationNon solicitation

Negotiation between parties Negotiation between parties and drafting an MOU for and drafting an MOU for acquisitionacquisition Incase of breach of provisions- reserve right to Incase of breach of provisions- reserve right to

equitable remedies-specific performance or injunctive equitable remedies-specific performance or injunctive reliefrelief

Severability clauseSeverability clause Assignment clauseAssignment clause Shareholder approvals and other corporate approvalsShareholder approvals and other corporate approvals Agreement binding subject to bonafide due diligence Agreement binding subject to bonafide due diligence

by both parties by both parties Amendments Amendments WaiverWaiver Supersedes previous understanding with target Supersedes previous understanding with target

companycompany Best efforts clause Best efforts clause

Negotiation between parties Negotiation between parties and drafting an MOU for and drafting an MOU for acquisitionacquisition Governing law of agreementGoverning law of agreement Forum for dispute resolutionForum for dispute resolution Construction and interpretation Construction and interpretation HeadingsHeadings Service of Notices-mode of service, address for service.Service of Notices-mode of service, address for service. Signature by authorized representatives and witnessesSignature by authorized representatives and witnesses Schedules to MOU- Schedules to MOU- IP rights and assetsIP rights and assets Verified financial documents of the company certified by Verified financial documents of the company certified by

auditorsauditors Liabilities of the companyLiabilities of the company Staff ParticularsStaff Particulars Transitional services by directorsTransitional services by directors Financial and other limits of authority of director Financial and other limits of authority of director

( transitional services) ( transitional services)

Thank You!Thank You!

SETH ASSOCIATESSETH ASSOCIATES ADVOCATES AND LEGAL CONSULTANTSADVOCATES AND LEGAL CONSULTANTSNew Delhi Law OfficeNew Delhi Law Office:: C-1/16, Daryaganj, New Delhi-110002, C-1/16, Daryaganj, New Delhi-110002, IndiaIndiaTel:+91 (11) 65352272, +91 Tel:+91 (11) 65352272, +91 98681191379868119137Corporate Law OfficeCorporate Law Office: : B-10, Sector 40, NOIDA-201301, N.C.R B-10, Sector 40, NOIDA-201301, N.C.R ,India,IndiaTel: +91 (120) 4352846, +91 Tel: +91 (120) 4352846, +91 98101557669810155766Fax: +91 (120) 4331304Fax: +91 (120) 4331304E-mail: E-mail: mail@sethassociates.com