pri Due Diligence In Reference To Taxation Due Diligence In Reference To Taxation

Due Diligence is the care that is expected from a normally prudent person to exercise in examining and evaluating the risks that affect business transactions. The process of due diligence involves reviewing a company’s documents and visiting a company’s facilities or interviewing employees. Due diligence generally falls into two overlapping categories: business and legal. Business diligence focuses on the financial situation, operations and prospects of a company and it is a cooperative process. Legal diligence can be described generally for serving three purposes:

  • Diligence helps identifies what needs to be done. For example, it is the duty of the lawyer to inform the clients what actions must be taken before the transaction is completed.
  • Lawyers need to know what must be disclosed in a transaction. Most agreements contain representations and warranties- statements in which the party represents that certain facts are true.
  • Lawyers need to identify legal issues that may affect a client’s business decisions and advice the client regarding potential resolutions to these issues.[1]

A young entrepreneur goes up the career ladder - Due diligence

 Due Diligence in commercial real estate transactions can be generally grouped into three types:

1. Searches and enquires of registries and public offices;

2. Review of relevant documents and agreements;

3. Investigations- generally by professional third party consultants such as engineers, appraisers, and surveyors.[2]

Communication with clients is very essential to productive and effective due diligence. Due diligence can be very expensive for clients, and some due diligence provides only a few benefit or reduction to the client. Communication by a lawyer with clients makes clear who is responsible for engaging third party consultant. A lawyer must specify whether the party has to review the engagement letter with the third party so that to make sure about the scope of services to be provided. That review gives a better picture of a property and any possible concerns.

The client needs to make the ultimate call .on the scope of the due diligence to be conducted by the solicitor, based upon the advice of the solicitor. Clients should be free to limit the scope of the services to be provided by their solicitors, but the solicitor must ensure that his advice and the scope of his retainer are properly documented in order to avoid liability. .[3]

The main objectives of due diligence are to manage the risks, prevents unpleasant surprises that can harm transactions, an enabler in negotiations, value protection, facilitates decision making, etc.

Scope of due diligence varies depending upon transactions

a) In a 100% acquisition of shares, joint ventures, private equity transactions, the following is the scope of coverage of due diligence exercise

i. Background and business overview of the target company

ii. Details of shareholders

iii. Agreements and contracts

iv. Corporate Governance

b) In case of an Asset/business/ undertaking acquisition

i. Asset- their title and ownership

ii. Agreements and Contracts- related to assets

iii. Intellectual Property

iv. Insurance coverage of asset

c) Specific caution in case of due diligence of a listed company

i. Confidentiality agreement

ii. Provisions to be agreed by various parties

iii. Dissemination of confidential information to the exchanges before closing the deal.

d) Fellow Chartered Accounts and Anti-Corruption issues

e) Specific and industries focused on areas of diligence

i. Telecom

ii. Information Technology

iii. Healthcare

iv. Metals & Mining

v. Insurance

Process of Pre-Diligence

  • Agree with scope and timelines of client
  • Identify major issues concerning the transaction
  • Set out process and expectations
  • Read all documents properly.
  • Identify specific issues that may be relevant to the transaction
  • Prior to the commencement of the process, make an overview of issues that would be of significance for the successful execution of the transaction.

The pre-diligence deliberative overview stage is of critical significance as it sets out the basis for setting out the scope and intensity of the due diligence process specific to the contemplated Transaction at hand.

There are two aspects of the due diligence process

1) Formal Process

> Review and analysis of the data

> Review and analysis of representative based on their interviews to get clarity of missing links

2) Informal Process

> Significant information about the target can be obtained through discussions, meetings with key persons of the Target.

Due Diligence enables to take critical decisions pertaining to said transaction. This process allows strategizing the course of action and terms of negotiations going forward.  Keeping this thing in mind, it can be concluded that it helps the reviewer to focus on what is important in the transaction and by processing the plethora of information received into something useful that will guide how the transaction may proceed. Despite the critical role of due diligence, it is not always well understood, especially by new associates, who often are the one assigned primary responsibility.[4]

[1] Due, P.(n.d.). Performance of Due Diligence in Transactions. Barristers tips, 1.

[2] (Wicijowski, Due Diligence in Commercial Real Estate Transactions, March 2004)

[3] (Wicijowski, Due Diligence in Commercial Real Estate Transactions, 2004)

[4] (Pear, A.M. (2010). Performance of Due Diligence in Transactions. Barriater Tips, 1).

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  1. Subramanian Natarajan says:

    A very eminent article educating legal and professional ones. A thorough study has been done to enlighten us. As a senior I wish them a bright future. If a writer deals with due diligence at a young age India has a bright future.

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July 2021