Due Diligence in M&A: A Buyer's Legal Checklist

Introduction

Mergers and acquisitions represent some of the most significant transactions a business can undertake. Whether you're acquiring a competitor, expanding into new markets, or consolidating operations, the due diligence process is your first line of defense against costly surprises.

At RevLaw, we've guided numerous acquirers through the complexities of M&A transactions in India. This guide outlines the essential legal checkpoints every buyer must address.

Corporate Structure and Governance

The first step in any acquisition is understanding what you're actually buying. This requires a deep dive into:

Constitutional Documents: Review the target's Memorandum of Association, Articles of Association, and any shareholders' agreements. Look for restrictions on share transfers, pre-emption rights, and any special rights attached to particular share classes.

Board Composition and Decisions: Examine board minutes from the past five years. Identify any contentious decisions, related-party transactions, or governance irregularities that could signal deeper problems.

Statutory Registers: Verify the register of members, directors, and charges. Cross-reference these with ROC filings to ensure consistency.

Contractual Obligations

Contracts form the backbone of any business. Your due diligence must cover:

Material Contracts: Identify all contracts exceeding 5% of annual revenue. Review change of control provisions that could trigger termination or renegotiation rights upon acquisition.

Customer Concentration: Assess revenue dependency. If more than 20% of revenue comes from a single customer, this represents significant risk that should be reflected in valuation.

Supplier Agreements: Review key supplier terms, exclusivity arrangements, and minimum purchase commitments that will bind the combined entity.

Employment and Labor Matters

People issues can derail even the most promising acquisition:

Key Employee Agreements: Identify senior management contracts, non-compete clauses, and retention bonuses. Consider which employees are critical to post-acquisition success.

Outstanding Disputes: Review any pending labor litigation, union negotiations, or workmen's compensation claims.

POSH Compliance: Verify that the target has proper Internal Complaints Committees, has conducted required training, and has no pending sexual harassment complaints.

Intellectual Property

In knowledge-based businesses, IP often represents the core value:

Ownership Verification: Confirm that all trademarks, patents, and copyrights are properly registered in the company's name—not in founders' personal names.

Licensing Arrangements: Review both inbound and outbound IP licenses. Identify any restrictions that could affect post-acquisition operations.

Trade Secrets: Assess the adequacy of confidentiality agreements with employees and contractors.

Litigation and Regulatory Matters

Pending Litigation: Obtain a comprehensive list of all pending cases, including status, potential liability, and litigation strategy.

Regulatory Compliance: Verify compliance with sector-specific regulations, environmental laws, and data protection requirements.

Tax Assessments: Review any ongoing tax assessments or disputes with revenue authorities. Obtain representations on tax compliance for closed years.

Conclusion

Thorough due diligence is not about finding reasons to walk away—it's about understanding what you're acquiring and pricing risk appropriately. The findings should inform your negotiation strategy, warranty provisions, and post-closing integration plan.

Our corporate team regularly advises acquirers on transactions ranging from startup acquisitions to multi-hundred crore deals. Each transaction is unique, but the fundamentals of good due diligence remain constant.

For guidance on your next acquisition, contact our Corporate Advisory team.