Lawsikho Blog

In this first of two articles, you will learn how to conduct thorough due diligence for private company acquisitions. This article examines Corporate Structure and Operations, covering the target company’s constitutional framework, ownership structure, material contracts, and employment relationships. These practical insights will equip lawyers with the methodology to analyse internal company structure and key operational relationships, enabling comprehensive assessment and advice to clients during acquisition transactions.

Introduction

I went to a traditional law school and graduated, learning traditional subjects like IPC, CrPC, and Labour laws. Most of my internships were in litigation chambers, and eventually, I did take up a litigation practice. 

A lot of my friends from national law schools were working with law firms in corporate teams, and the idea of it was daunting to me. Terms like mergers and acquisitions were alien to me, and I had no idea about what the actual work even entailed.

So, I became a happy traditional litigator, earning 30-50k a month, living in a comfortable cocoon of what seemed easy to grasp. But somewhere in my head, I did wish that I could someday understand what it all meant to be a kickass corporate lawyer. 

Enter, new flatmate– an M&A lawyer. Fancy. 

This was immediately after COVID-19, so he worked in a hybrid setup, often working from home. He was always involved in high-profile deals. The amount? Hundreds and thousands of crores. His bonus? In lakhs. The firm even sponsored his Euro trips. 

So, one day, I just asked him how it really works. All of it. 

He sighed and explained how he could not teach me all of it at once, but he could teach me small skills that I could build upon gradually. The first thing he mentioned to me was Corporate Due Diligence. 

It took me a couple of weeks before I eventually got a good grip on it. Luckily, within a month, I got an opportunity to work with a real estate law firm as an independent consultant. My role there was to assist the team in conducting due diligence exercises.

My experience with that law firm gave me deep insights into how a due diligence exercise is conducted. 

Today, through this article, I am going to teach you all that you need to know about due diligence. There are other articles on this blog that will help you learn other concepts about corporate law. You can bookmark them for later reading. 

This article is going to be a long one, so I suggest that you grab a cup of coffee and get comfortable. I will focus on a specific type of due diligence, wherein a private company plans to acquire another one. 

So, the most important question: 

What is due diligence in a company acquisition? 

I want you to think about a situation where you decide to buy a second-hand smartphone from a friend. Would it not be obvious for you to check if the screen and battery are working fine and that there are no lags while running apps? 

You would also want to check that your friend has the invoice to ensure that he legally bought the smartphone and is not selling a stolen phone.

That is essentially what due diligence is, but for companies, it happens on a much larger and complex scale.  

Think about it from a business perspective — why does a businessman decide to buy/acquire a company? 

There are primarily two reasons: –

• Growth; and 
• Reduce competition 

Once the board of directors of a business collectively decides “Yes, we want to acquire a company”. It needs to hire a team of experts from different fields, which shall include financial and legal experts to advise on the feasibility of the acquisition. 

The work of a lawyer, AKA you, would be to examine whether the target company is legally sound or not. 

Trust me, I have seen what happens when people skip proper due diligence, and it is NOT pretty. Here is a complete list of M&A transactions that failed due to inadequate due diligence.

What are the benefits of legal due diligence?

If you have read the article carefully this far, you will probably agree that legal due diligence is basically about spotting potential red flags and making sure that the company actually ‘is as good as it looks’ on paper. 

Besides the obvious stuff, here are some other reasons why due diligence really matters:

Risk identification 

Remember that smartphone example I gave above? 

Just like you would check for any hidden issues before handing over your cash. 

The buyer of a target company also needs a team of experts to dig around and find all the hidden landmines before they decide to enter into a transaction.

In my experience, I have seen companies hiding all sorts of problems like dodgy financial reports, ongoing tax fights, or breaking regulations left and right.

Legal compliance check

This one is no no-brainer. 

The buyer company needs legal experts to tell them whether the target company they are eyeing to acquire is actually following the laws or not. And yep, the best way to figure that out is through legal due diligence.

Price assessment

The first thing my flatmate told me about due diligence was that it helps buyers decide the right price to pay for the target company. 

He told me that ‘more often than not, due diligence helps the buyer company to unearth inflated revenue, profits, or underreported liabilities.’ 

Once they find this stuff, the buyer goes back to the target company and says, “Hey, this company is not worth what you’re asking – let’s talk numbers again.”

I remember him telling me about this one case where they found a target company looking at a potential tax liability of ₹1 Crore in the future. 

The buyer immediately knocked that exact amount off their offer price. Smart move!

Business verification: 

And finally, due diligence helps the buyer check if all those fancy business claims made by the target company are actually legit or not.

Let me share something that happened on one of my deals. 

So we were working with this client who was super excited about buying this company because they claimed to have these amazing exclusive contracts with some really big-name clients.  

Our client found these claims to be very attractive.  

After reviewing the renewal and expiry clauses in those contracts, we discovered they were set to expire in just three months, with no automatic renewal. 

Additionally, there was a clause stating that a change in the target company’s management could lead to the termination of those contracts. 

This meant that all those ‘valuable’ contracts would have been essentially worthless to the buyer. 

Without proper due diligence, our client could have easily overpaid, thinking they were acquiring these great contracts, only to find out they were about to expire.

Due diligence process

The due diligence process can be broadly divided into three stages:

Pre-due diligence

In this stage, the buyer and the target company usually execute either of the two documents, namely: 

1. A Letter of Intent (LOI); and 
2. A Non-Disclosure Agreement (NDA) 

The purpose behind executing these documents is to establish preliminary terms such as the proposed purchase price, exclusivity period, confidentiality obligations, and the framework for the due diligence process. 

The execution of this document is very important for the target company. 

Think about this logically. What if the buyer company decides not to purchase the target company after due diligence? 

The target company would lose all its confidential and sensitive information, which could be later misused by the acquirer company. Therefore, the target company needs to execute pre-due diligence documents to ensure that:

• The target company’s confidential information is protected. 
• Its confidential and sensitive information will not be misused by the acquirer if the deal does not go through.

Here is a sample NDA cum LOI document for your reference.

Due diligence

Suppose you are the lawyer for the acquiring company. 

The first thing you would be doing is the preparation of a requisition checklist of documents. Once prepared, you have to share the checklist with the target company beforehand. 

Let me inform you that there are chances that you might also be asked to conduct a physical inspection of the target company’s assets, movable and immovable properties, inter alia.

After receiving all the material information from the target company, the due diligence team sits together and connects all the dots to create an overall picture of the target company.

This picture of the target company is presented in a report called Due Diligence Report. 

Post-due diligence

The Due Diligence report serves as the basis for an acquirer company to decide whether to proceed with the acquisition of the target company or not. Sometimes, the acquirer company agrees to proceed with the acquisition on the condition that the inconsistencies found in the target company be rectified, including legal lapses, if any.

Step-by-step guide to conducting due diligence using a checklist

To make it simpler, I will use an example of a business acquisition transaction.

The transaction involves a real estate company named Urban Heights Ltd.

Urban Heights is a dominant player in the high-rise real estate market and wants to expand into different market segments. They learned that the suburban housing market was on the rise. As a result, Urban Heights is eager to enter this market and cement its dominance in both luxury and affordable housing.

Instead of starting a new company from scratch, Urban Heights’ business strategist advised top management to acquire an existing player that complements their business.

Urban Heights decided to acquire Skyline Developers Pvt. Ltd., a mid-sized real estate firm known for developing affordable townships.

Urban Heights approached Skyline’s management. The top executives from both companies met, and Urban Heights offered a lucrative price to buy out Skyline Developers.

After a brief initial discussion, the parties agreed to proceed with the acquisition. However, Urban Heights insisted on conducting a due diligence check on Skyline Developers to ensure the target company was as good as it appeared.

Your task now is to conduct the due diligence exercise using the following instructions and checklist.

A comprehensive due diligence for this acquisition requires examining several critical areas, such as:

• corporate and constitutional documents, 
• equity and ownership structure, 
• material contracts and agreements, 
• employment and labor matters,
• environmental law compliance, 
• licenses and regulatory approvals, 
• land title and property documents, 
• litigation and legal proceedings, 
• taxation and statutory dues, and 
• intellectual property.

In this first part, we will focus on the Corporate Structure and Commercial Operations of Skyline Developers, covering: – 

• corporate and constitutional documents, 
• equity and ownership structure, 
• material contracts and agreements, and 
• employment and labor matters. 

Part 2 will focus on compliance with regulations, asset validation, and potential legal and financial risks, including: – 

• land title and property documents, 
• environmental law compliance,
• licenses and regulatory approvals,
• litigation and legal proceedings, 
• taxation and statutory dues, and
• intellectual property.

Let’s begin by examining Skyline’s foundational corporate documents.

Corporate and constitutional documents

When I have to look at a target company like Skyline, the first thing I always do is dig into their foundational documents. 

You’d be surprised how many deals I have seen fall apart because nobody bothered to check if the Articles even allowed for the transaction! 

Make sure you verify their corporate status under the Companies Act, 2013. 

Here is a quick table of documents to examine, including potential red flags and possible solutions:

Documents to Examine	Potential Red Flags	Possible Solutions
Memorandum & Articles of Association (MoA & AoA)	• The Objects clause of Skyline doesn’t cover real estate development • Restrictions on share transfers • Special approvals required for change in control • Special rights/pre-emption clauses/lock-in provisions• Amendments not properly filed with RoC	• Amend the objects clause before closing under section 13 of the Companies Act, 2013 • Obtain necessary approvals through special resolution under sections 102, 110, and 117 of the Companies Act, 2013• Negotiate with holders of special rights • File form MGT-14 with the Registrar of Companies for amendments • Include specific indemnities in the Share Purchase Agreement (SPA) for historical non-compliance
Certificate of Incorporation & Corporate Registrations	• Missing Certificate of Incorporation• Change of name certificates are not available • Registered office changes not properly documented	• Request a complete set of certificates • File necessary forms with RoC like MGT-7, MGT-14, and SH-7 to regularize changes under relevant sections of the Companies Act, 2013 • Pay compounding fees for late filings as per applicable sections • Include special indemnity in SPA
Statutory Registers	• Register of Members does not match current shareholding • Register of Directors/KMP not updated • Allotment/transfer entries inconsistent with the shareholding pattern • Missing or incomplete registers	• Update registers before closing as required under section 88 of the Companies Act, 2013 • Reconcile discrepancies in shareholding • Consider postponing closing until the registers are updated • Obtain special indemnity for any consequences
Minutes & Resolutions	• Missing minutes for key meetings • The board has not authorised the share purchase transaction • Required shareholder approvals were not obtained • Improper governance processes for major decisions	• Hold proper board/shareholder meetings as per sections 173 and 174 of the Companies Act, 2013 • Obtain ratification for past decisions through proper resolutions • Make closing conditional on proper approvals • Implement proper governance processes
Group Structure & Subsidiaries	• Undisclosed subsidiaries or JVs • Hidden liabilities or cross-guarantees • Minority stakes that limit control • Complex ownership structures	• Expand due diligence to include all entities • Request release of cross-guarantees under relevant contract provisions • Buy out minority stakeholders • Simplify structure before closing • Carve out problematic entities
Authorizations for Transaction	• AoA or shareholders’ agreements prohibit share sale • Missing consents (tag-along/drag-along rights) • Lack of approval from lending institutions • Sellers lack the authority to sell shares	• Amend AoA/shareholders’ agreements under appropriate provisions of the Companies Act, 2013 • Obtain required consent before closing • Get NOC from lending institutions • Ensure proper board resolutions from sellers • Structure as asset purchase if share sale too complex

Equity and ownership structure

This is where things often get messy, especially with family-run businesses like Skyline. 

I remember working on the Horizon Towers deal where we discovered that 12% of the shares supposedly owned by the seller were actually held in an undocumented trust for his nephew. 

Always examine the Register of Members meticulously and cross-reference with statutory filings. Do not just take their word for it – I physically verify share certificates when possible.

Check for pledges or charges – RoC filings sometimes reveal surprises. 

In the Westview acquisition, we found shares had been pledged as collateral for a personal loan the promoter had taken, which he had “forgotten” to mention. Also, pay special attention to any Right of First Refusal (RoFR) or lock-in clauses – they can derail a deal at the eleventh hour.

Here is a quick table of documents to examine, including potential red flags and possible solutions:

Documents to Examine	Potential Red Flags	Possible Solutions
Share Capital Details	• Discrepancy between authorized, issued, and paid-up capital • Undisclosed preference shares or convertible instruments • Partially paid shares still outstanding • Numbers do not match with RoC filings	• Request reconciliation of capital structure before proceeding • Ensure all shares are fully paid before closing under section 50 of the Companies Act, 2013 • File corrective forms with RoC (SH-4 for share transfers under section 56) to address discrepancies • Consider adjusting the purchase price if the capital structure differs from what was represented
Shareholding Pattern (Cap Table)	• Sellers do not collectively own the promised percentage • Undisclosed minority shareholders • Recent changes in shareholding not properly documented • Inconsistency between the cap table and official records	• Ensure all shareholders are part of the transaction • Develop a strategy for dealing with minority shareholders • Update records to accurately reflect current ownership • Consider escrow for a portion of the purchase price until ownership is fully verified
Share Certificates/Demat Statements	• Missing or damaged share certificates • Irregularities in certificate issuance • Inconsistency between physical certificates and register • Demat holdings do not match company records	• Issue duplicate certificates following the legal process under section 46 of the Companies Act, 2013 • Conduct thorough verification of all certificates • Reconcile records before proceeding • Consider direct confirmation from the depository participant
Encumbrances on Shares	• Shares pledged to lenders or third parties • Undisclosed liens or charges on shares • Incomplete or missing Charge filings with RoC • Disputed ownership claims	• Obtain release letters from pledgees before closing • Secure No-Objection Certificates from lenders • Make share transfer conditional on removal of all encumbrances • Set aside a portion of the purchase price in escrow to resolve disputes
Historical Issuances or Transfers	• Improper procedure followed for past share transfers • Missing board resolutions for share issuances • Stamp duty not paid on previous transfers • Pre-emptive rights of existing shareholders violated	• Ratify previous transfers through proper resolutions under section 56 of the Companies Act, 2013 • Pay any outstanding stamp duty with applicable penalties as per the State Stamp Act • Obtain retrospective waivers from affected shareholders • Include specific indemnity in the purchase agreement for historical non-compliance
Rights and Convertible Instruments	• Outstanding convertible debentures or warrants • Unexercised stock options or Employee Stock Options (ESOPs) • Preferential rights that survive change in control • Rights that could dilute ownership post-acquisition	• Buy out or settle all convertible instruments before closing • Accelerate vesting of ESOPs and address before closing • Negotiate termination of special rights • Adjust purchase price to account for potential dilution
RoC Compliance	• Annual returns not filed or incomplete • Missing PAS-3 forms for allotments • SH-7 forms not filed for capital alterations • Charge forms for charges not properly recorded	• File all pending returns before closing • Pay compounding fees for late filings under sections 403 and other applicable provisions • Establish a compliance timeline as a closing condition • Include specific indemnity for any penalties from historical non-compliance

Material contracts and agreements

This is tedious but essential work.

I remember that in the Silver Springs acquisition, we discovered a joint development agreement that gave a landowner 30% of revenue with a guaranteed minimum return- a liability that had not been properly accounted for.

Review everything from JDAs to customer booking agreements.

I always map out the change-of-control provisions with a special matrix to show clients which consents they will need before closing.

Pay attention to terms in financing documents, too – I have seen cases where lenders had the right to accelerate loans upon a change in management.

Also, look closely at any guarantees or indemnities the company has issued- these can be ticking time bombs.

Documents to Examine	Potential Red Flags	Possible Solutions
Real Estate Project Agreements	• JDAs with restrictive change of control clauses• Revenue sharing obligations not fulfilled • Development timeline breaches in agreements • Partner consent is required for the transfer of ownership • Onerous exit penalties or liquidated damages	• Obtain partner consent pre-closing • Cure breaches of JDA obligations • Renegotiate problematic terms if possible under sections 62 and 63 of the Indian Contract Act, 1872 • Create escrow for outstanding obligations • Structure deal to honor original partnerships • Consider a carve-out of problematic JDAs
Agreements for Land Acquisition	• Incomplete payment schedule for land purchases • Specific performance risk from land sellers • Unusual price escalation clauses • Title transfer conditions not yet fulfilled • Unclear acquisition terms leading to disputes	• Complete pending land payments pre-closing • Obtain extension for payment schedules • Secure no-objection from land sellers • Create escrow for future land payments • Resolve ambiguities in acquisition terms under the Transfer of Property Act, 1882 • Exclude problematic land parcels from the deal
Customer Sales Agreements	• Unusual guarantees or commitments to buyers • Penalty clauses exceeding RERA requirements • Delivery timelines impossible to meet • Amenities promised but not delivered • Price escalation clauses challenged by buyers	• Review sample agreements for onerous terms • Assess the financial impact of delay penalties under sections 73 and 74 of the Indian Contract Act, 1872 • Create a plan for promised but undelivered amenities • Negotiate with customer associations if RERA complaints are unresolved, offering refund timelines or compensations • Create a reserve for customer commitments • Develop post-acquisition customer management plan
Major Supplier & Contractor Contracts	• Termination penalties for key contracts • Change of control requiring contractor consent • Long-term contracts with unfavorable terms • Exclusivity arrangements limiting flexibility • Related party contracts at above-market rates	• Review termination provisions and costs under sections 73 and 74 of the Indian Contract Act, 1872 • Obtain contractor consents where needed under sections 37 and 62 of the Indian Contract Act for assignment • Identify contracts requiring renegotiation • Create a phase-out plan for problematic vendors • For related party contracts, ensure arm’s length pricing under section 188 of the Companies Act, 2013, and get them ratified by the board • Budget for contract termination costs
Loan and Financing Agreements	• Change of control triggers loan acceleration • Cross-default provisions with other group companies • Covenants restricting business operations • Security over critical assets • Non-fund facilities (bank guarantees) with ongoing obligations	• Obtain lender consent for change in ownership • Negotiate waiver of problematic covenants • Plan for refinancing restrictive loans • Secure the release of guarantees where possible • Create a strategy for loan portfolio management • Structure-specific indemnity for hidden loan terms
Leases and Rentals	• Long-term leases with unfavorable terms • Office/facilities leases with lock-in periods • Commercial property leases with below-market rent • Lease termination requiring significant penalties • Maintenance obligations exceeding market norms	• Review all lease agreements for unusual terms • Assess the cost of early termination if needed • Develop a strategy for below-market leases • Plan for office consolidation post-acquisition • Create reserve for lease-related liabilities • Consider the assignment of beneficial leases under the Transfer of Property Act
Guarantees and Indemnities	• Corporate guarantees to group companies • Performance guarantees for infrastructure development • Financial guarantees to suppliers or contractors • Open-ended indemnities in past transactions • Guarantees to authorities for project approvals	• Quantify all contingent liabilities • Obtain release of guarantees where possible • Replace corporate guarantees with limited support • Create reserve for likely guarantee invocations • Establish post-closing guarantee management • Structure-specific indemnity for guarantees under relevant contract provisions
Insurance Contracts	• Inadequate coverage for project risks • Claims pending or denied by insurers • Gaps in coverage for key assets • Insurance covenants in loan agreements not met • Unusual exclusions limiting effective coverage	• Conduct insurance gap analysis • Address reasons for claim denials • Upgrade coverage to meet industry standards • Ensure compliance with loan agreement requirements • Create post-closing insurance optimisation plan • Purchase additional coverage where needed

Employment & labor matters

Trust me, labor disputes can add significant unexpected costs. Verify that PF, Employee State Insurance Corporation, and gratuity contributions are current, along with construction workers’ welfare compliance and cess payments.

In the Heritage Homes case, worker misclassification led to major disputes post-acquisition.

Documents to Examine	Potential Red Flags	Possible Solutions
Employee List & Contracts	• Employment contracts missing for key personnel • Unusual termination benefits for executives • Change of control clauses triggering payments • Inconsistent employment terms across similar roles • Verbal employment arrangements without documentation	• Obtain/create documentation for all employees • Identify key talent retention requirements • Assess the financial impact of change-triggered payments • Standardise employment terms where appropriate • Create post-acquisition retention strategy • Budget for key employee retention incentives
Payroll Compliance	• Unpaid or deferred salaries • Minimum wage violations for certain categories • PF/ESI contributions not made or delayed under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, and the Employees’ State Insurance Act, 1948 • Improper employee classification (contractor vs. employee) • Undocumented cash component of compensation	• Clear all salary arrears before closing • Adjust wages to meet statutory minimums • Pay outstanding PF/ESI with applicable interest under the relevant Acts • Correct employee classification issues • Create proper compensation documentation • Verify PF, ESIC, and gratuity contributions • Structure specific indemnity for past violations
Gratuity and Leave Encashment	• Unfunded gratuity liability under the Payment of Gratuity Act, 1972 • Incorrect calculation of gratuity entitlements • Unpaid gratuity to former employees • Leave encashment liability not accounted for • Non-compliance with Payment of Gratuity Act	• Quantify total gratuity and leave liability • Purchase gratuity insurance policy • Pay outstanding gratuity to former employees as required by the Payment of Gratuity Act, 1972 • Create proper accrual for leave encashment • Calculate employment liabilities based on unpaid gratuity, PF, ESIC, and any ongoing disputes • Include specific indemnity for past non-compliance
Labor Law Registrations	• Missing Shops & Establishments registration • No registration under BOCW Act for construction • Contract Labour Act license not obtained • Professional Tax registration missing in applicable states • State-specific labor law registrations absent	• Obtain all missing registrations immediately • Pay penalties for operating without registration • Create a compliance checklist by location • Implement a registration renewal tracking system • Engage labor law consultant for compliance • Structure indemnity for historical non-compliance
Industrial Disputes & Unions	• Active labor unions with pending demands • History of strikes or labor unrest • Cases filed under Industrial Disputes Act, 1947 • Complaints to labor commissioners • Non-compliance with layoff/retrenchment regulations	• Assess status of all labor disputes• Develop strategy for union relationships • Settle meritorious labor complaints • Ensure compliance with applicable regulations under the Industrial Disputes Act, 1947 • Create labor relations management plan • Budget for potential settlement costs

Closing thoughts for Part 1

In this first part of our due diligence series, I have covered the foundational elements focused on Corporate Structure and Operations

These areas form the bedrock of any thorough due diligence exercise.

For young lawyers looking to break into corporate practice, mastering these critical aspects is a fantastic starting point. Be methodical, structured, and once you grasp these fundamentals, you can build on them systematically.

My advice is simple: be thorough, be skeptical, and document everything. Don’t take management representations at face value—verify independently whenever possible.

Coming next: Regulatory compliance, asset verification and risk assessment (Part 2)

In Part 2, I willl shift our focus to regulatory compliance, asset verification, and risk assessment, exploring areas that often harbor the most significant hidden liabilities:

• Environmental Compliance
• Licenses & Regulatory Approvals
• Land Title & Property Documents 
• Intellectual Property
• Litigation & Legal Proceedings
• Taxation & Statutory Dues

While Part 1 focused on understanding what the company is and how it operates, Part 2 will address external regulatory requirements and specific risk areas that could derail an acquisition or significantly impact its value.

Remember, in the world of M&A, the devil truly is in the details. Even the most promising corporate structure can be undermined by regulatory non-compliance or hidden liabilities.

See you in Part 2, where I will complete our comprehensive guide to legal due diligence!