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Learning to draft a termination clause? Start with the events of termination.

Drafting_for_Business_Deepa_Mookerjee.jpgAfter our discussions on condition precedent clauses, restrictions placed on transfer of shares, and the meaning of ‘call’ and ‘put’ options, let us now turn our attention to the termination clause, one of the last clauses we usually see in a shareholders agreement but no less significant. It is in fact a vital clause that contains the mechanism by which an agreement can be terminated and the shareholders can exit the company.

A termination clause typically contains two main elements: (1) the events of termination; and (2) the consequences of such an event occurring. In this post, let us look closely at some common events of termination:

– Material default by one party: Take the case of A Limited and K Limited, two parties to a shareholder agreement. K Limited commits a material default and is unable to cure that default within a specified period of time. A Limited should then have the right to terminate the agreement.

While drafting this clause, clearly define the term ‘material default’. This ensures that the agreement cannot be terminated for minor ingressions and that only serious defaults will trigger the clause. Also, it reduces the scope for parties to dispute whether a ‘material default’ has in fact occurred.

Next, the defaulting party should always be provided a specified time period (known as the ‘cure period’) to rectify the situation, and only the non-defaulting party should be given the right to terminate the agreement. Specify that to invoke this clause, the non-defaulting party must always send a written notice to the defaulting party.

– Deadlock: A deadlock typically occurs when parties are unable to agree on a vital issue necessary for running the business of the company. While drafting, always define a ‘deadlock situation’. An example could be a company’s inability to hold a board meeting on three consecutive times for want of quorum.

For example, if K Limited would like the company to take a loan and A Limited disagrees and whenever K Limited tries to organise a board meeting to discuss this issue, the directors representing A Limited do not show up and so since no proper quorum is constituted for a board meeting, it can be considered a ‘deadlock situation’.

Often, the occurrence of a deadlock situation can act as a termination event. Parties may feel that it is impossible to run the business in such a situation and they would rather terminate the agreement. Discuss with your clients whether they would like a deadlock to be a termination event or whether they would prefer to resolve the situation through other means (such as arbitration).

Further, if a deadlock situation is considered an event of termination, always specify a mechanism by which one party can send a written notice to the other party specifying that this is a deadlock and it would like to terminate the agreement.

– Insolvency of the company – A Limited and K Limited are shareholders in One Limited, a corporation that is bankrupt and going through insolvency proceedings. Obviously the shareholders will then wish to terminate the agreement since it is not possible to continue running the business. While drafting this clause, it is best to specify that the agreement will terminate automatically on the occurrence of this event. This will eliminate procedural steps such as a notice being sent by one party to another.

– Cancellation of the license required to carry on business: The shareholders agreement concerns a banking company. A bank requires a license from the Reserve Bank of India to carry on business. If this license is cancelled, the bank ceases to function. Therefore, cancellation of the license (in a regulated entity) should be drafted as an automatic termination event.

– Change in law (resulting in the business of the company becoming illegal): Currently, the law permits private entities to operate airlines (subject to the necessary approvals). Assume that over a period of time, the government changes the law and nationalises all airlines. This means that private entities can no longer operate airlines. Consequently, any shareholders agreement to operate a particular airline must automatically terminate.

There is one important distinction among termination events that comes to mind when we study these clauses – some do not result in automatic termination and require parties to send written notices to each other (for instance, in case of material default or deadlock situations) and in other cases, there is an automatic termination (in case of a change in law, insolvency, or cancellation of a license). Always keep this distinction in mind while drafting. Ask your clients whether they are comfortable with certain events leading to automatic termination. After all, the thumb rule while drafting is always to reflect the interests of your client.

Finally, remember that a termination clause usually comes into play when the parties are disputing or have an issue they cannot resolve. In such a scenario, it is necessary that the termination clause is clearly drafted and sets out in a very precise manner, the events of termination and their consequences. If the clause is open-ended or vague, it is unlikely the parties will be able to follow the clause since they will end up arguing over the very intent of the clause itself. As a lawyer, your role is to try to amicably resolve the dispute or at the very least provide the most efficient way to exit from a situation that cannot be resolved!

With this, we come to the end of this post. In my next post I will write about the consequences of termination.

Deepa Mookerjee is part of the faculty on myLaw.net.

Written by myLaw

Learn to draft a share purchase (or subscription) agreement for a private equity transaction

PrivateEquityLawyer_AngiraSinghviOnce due diligence has been conducted on the target of a private equity investment and the investor, satisfied with the outcome of due diligence, is ready to invest, the stage is set for drafting the documents needed to complete the transaction. Drafts of these documents are usually prepared while the due diligence proceeds simultaneously.

The key documents

The documents that are fundamental to a private equity investment are (1) the share purchase agreement (“SPA”) or the share subscription agreement (“SSA”) depending on how the investor acquires shares in the target; (2) the shareholders’ agreement (“SHA”); and (3) the disclosure schedule. Since a private equity investor invests in the company for a fixed amount of time rather than in the assets owned by the company, asset transfers are quite rare.

An SPA provides for the transfer of shares to the investor. It is executed when the shareholders of the target company agree to transfer their shares to the investor. Under such an agreement, the investor purchases shares that are already in existence. An SSA on the other hand, provides for a new issue of shares. Such an agreement is preferred when parties decide that instead of the current shareholders transferring their shares to the new investor, the company would issue new shares to the investor. The investor subscribes to these new shares and hence the name, “share subscription agreement”.

An SHA provides for the rights and obligations of the parties inter se, that is, in relation to each other. It includes provisions for the manner in which the target company will be governed and run after the closing. Common items covered in an SHA are the appointment of directors, the conduct of board and shareholders’ meetings, shareholding, the raising of finance, and the transfer of shares.

A disclosure schedule sets out the documents and information that the target has provided or given access to the investor during the due diligence process or at any time before the execution of documents.

Let us now discuss these documents in greater detail. I will cover SPAs and SSAs in this article and SHAs and disclosure schedules in the next one.

As we have seen, an SPA or an SSA (as the case may be) provides the framework for the investor to become a shareholder in the target company. Let us now see some of the major issues that this document will cover.

Transfer or issue of shares

The agreement will state whether the shares are being issued or transferred to the investor. It will also set out the price at which the shares are being issued or transferred, the mode of transfer or issue, and the manner in which the consideration is transferred. While the transfer is stipulated in the agreement, it actually takes place during the board meeting that is conducted at the time of closing the deal. I will discuss the details of how this should be conducted in a later article on closing.

While drafting this clause, it is also useful to keep in mind certain specific aspects that may affect a transfer.

Documents in escrow: The parties may, for example, only want the transfer to take effect from a later date. Until that date, they may want the executed documents to be deposited in an escrow account. While drafting such conditions, you should be able to identify any procedural and secretarial issues such as those in relation to the validity of resolutions for a particular period or the validity of share transfer certificates. An escrow arrangement for instance, will not work unless those documents are valid for the entire period of escrow.

Sale to a foreign party: Similarly, a sale to a foreign party must adhere to the pricing norms contained in the FDI Policy.

Encumbrances: In the case of a transfer of securities, lawyers advising on the transaction should ensure that the transfer is free from all encumbrances. For example, the shares may be pledged to third parties against loans and advances or there may be a charge on the assets of the company. Due diligence should be thorough so that any such possibilities can be crossed out. Further, documentation should mention that all transfers are without any encumbrance. Charges can be searched on the Ministry of Corporate Affairs’ website and a lawyer can draft the ‘transfer’ clause accordingly.

– Authorised share capital: In case of a new issue of shares, a lawyer should also ensure that the company will continue to comply with the ceiling of authorised share capital after such issue. Under law, a company cannot raise more capital than the authorised share capital provided in its memorandum of association. In case the capital after the raise is likely to exceed this amount, the memorandum should be amended to reflect that.

– Nature of security: In case the issue involves a party resident outside India and the automatic route is intended for the investment, a lawyer advising on the transaction should also ensure that the nature of security is such that it is a plain vanilla equity or that is compulsorily convertible into equity and advise the client accordingly.

Conditions precedent to closing the transaction

On completing the due diligence, lawyers advising the investor will be able to identify some key items that the target entity should fulfil before closing the transaction. For instance, the target company may not have complied with some laws.

Some common conditions precedent include:

(1) that target entity should obtain some prescribed licenses;

(2) that it should issue appointment letters to its employees in a prescribed format;

(3) that it should complete the statutory books and pending filings;

(4) that it should obtain necessary corporate approvals and resolutions for entry into the transaction; and

(5) that it should obtain a valuation of shares.

The SPA or the SSA will contain these conditions. A condition precedent has to be fulfilled by the seller after the agreement is executed but prior to closing the transaction. The buyer usually has the option to provide an extension of this period or even to cancel any such compliance as a condition precedent if it is not fundamental to the investment. Common examples of such conditions are the obtaining or renewal of ancillary licenses, such as, the license to operate a lift. However, fundamental conditions such as the license to operate the business or any corporate approvals necessary to undertake the transaction, cannot be dispensed with.

The SSA or SPA will also provide a date by when each of the conditions precedent should be complied with. This is usually called the “long stop” date. The agreement will stipulate that unless the conditions are complied with by that date, the agreement, despite execution, will terminate and there will not be any closing of the agreement.

Closing

The “closing” is the point at which the transaction is completed. Shares are transferred, money is paid, the board undergoes changes, and the necessary corporate actions are undertaken to formally make the investor a part of the target entity. Closing is usually undertaken 30 to 60 days after the execution of transaction documents. During this time, the target entity fulfils the stipulated conditions precedent or seeks from the investor, a waiver from fulfilling them.

On the closing date, a board meeting is organised. The main actions undertaken at such meetings include the issue or transfer of shares (as the case may be); the appointment of directors nominated by the investor; and the approval of the amended form of the target’s articles of association and then placing them before the shareholders for final approval. We will discuss the need for such appointments and amendments in a later post on SHAs. The process of closing will also be discussed in detail in subsequent posts.

Following the board meeting, a shareholders’ meeting is also organised. Some matters that are passed by the board, such as an amendment to the company’s articles of association, require shareholders’ meeting for final approval.

Once the closing has been successfully completed, an investor formally becomes a part of the target company. All these aspects are stipulated in the SPA or the SSA usually after the clause on conditions precedent. This clause provides the time and date of closing and also lists out the actions that will be undertaken on the closing date. Since there are numerous actions to be completed, usually, it is provided that upon one last action being completed, all closing items will be deemed to have been completed. This clause also provides the manner in which consideration will flow from the buyer to the seller unless a separate clause on consideration is provided for. There are several ways in which a transfer of shares may take place. For example, it may be in dematerialised form or through the endorsement of share certificates. Consideration may be paid through cash, cheque, or wire transfer. All these aspects are provided for in the clause providing for transfer or issue of shares. Where the investor is a foreign entity, Form FC-GPR in the case of an issue of shares or Form FC-TRS in case of a transfer of shares, need to be filed with the Reserve Bank of India. After all these actions are completed, share certificates are finally issued to the buyer and then the closing is deemed to have been undertaken.

This clause has a large bearing on the completeness of a transaction from a procedural point of view. All items should be carefully listed and completed in accordance with company law and the applicable secretarial standards.

Representations and warranties backed by indemnity

You will remember from studying the law of contracts and sale of goods that representations and warranties are usually made by a seller to a buyer regarding the product that is up for sale. To understand this clause in the SSA or the SPA, you can consider the target company as a ‘product’ that is being sold by its current shareholders. Extensive representations and warranties are made to ensure there will not be any liabilities or adverse consequences for the investor.

They include representations and warranties about the authority and capacity of the parties in entering into the transaction; corporate matters, filings, resolutions and approvals; licenses and approvals for the transaction and business; business of the company; taxation, accounts and records; borrowings; intellectual property; related party transactions; assets; and litigation.

As lawyer advising the investor, you should ensure that your list of representations and warranties should be extensive and cover every aspect in relation to the target company. A lawyer advising the target company will attempt to narrow down the list. For example, if the target company has already provided the investor with some information during the due diligence, you may refrain from providing any representation or warranty on that very aspect as the investor is expected to know the correct state of affairs. Also, if the investor has clearly come to know of any shortfall in the company’s affairs, you may not want to provide a representation or warranty to that item.

These representations and warranties are backed by indemnity. While agreeing to indemnify the investor, the company and its current shareholders promise to save the investor from any loss caused to the investor for any breach, falsity, or shortfall of the representations and warranties. It is important to draft the clause on indemnity carefully to ensure that liability is predictable. A company will want to cap its liability as much as possible while an investor will want to do the opposite.

This brings our discussion on drafting SPAs and SSAs to a close. I will discuss SHAs and disclosure letters in my next post.

Angira Singhvi is a principal associate with Khaitan Sud and Partners and handles general corporate, joint ventures and private equity investments.

Written by myLaw

All you need to know about drafting put and call option clauses

Drafting_for_Business_Deepa_Mookerjee.jpg

“Call options” and “put options” are used frequently in shareholders agreements. As you know very well by now, a shareholders agreement specifies the rights and obligations of shareholders and sets out the manner in which the company will be governed. We have already seen some vital clauses used in these agreements such as condition precedent clauses and restrictions placed on the transfer of shares. Let us now look at “call” and “put” options.

Simply, a call option is a right but not an obligation to purchase shares at a specified price, on the happening of a specified event. If A and B are two investors in a joint venture company, A may have a call option over twenty-six per cent of the shares held by B, which he can exercise once the limit on foreign direct investment (“FDI”) is raised. This means that once the FDI cap is raised, A has a right to purchase twenty-six per cent of the shares held by B. If A exercises this right, B cannot decline to sell the shares to A.

A put option on the other hand, is a right but not an obligation to sell shares upon the occurrence of a specified event at a specified price. If A has a put option over twenty-six per cent of his own shares in the company that he can exercise once the company is insolvent, it means that if the company declares insolvency, A can sell his shares to B. Once A exercises his put option, B cannot decline to purchase A’s shares.

Junior lawyers should understand these mechanisms well because they can be used in a shareholders agreement in various scenarios. To think that call and put options are only useful in an FDI limit scenario or an insolvency situation (as discussed above), would be incorrect. Let us first go through some scenarios to understand how they may be useful.

Versatile options

Assume that there are two shareholders in a joint venture company – A and B. You are representing ‘A’. A comes to you with a simple question – what if B commits a material default of the provisions of the shareholders agreement and is unable to cure the defect or default? What are the options available to A?

PutAndCallOptions_ShareholderAgreementsYou can tell A that he can either ask for a mechanism by which he can sell his shares and exit the company (a put option) or a mechanism by which he can insist that B exits (a call option), when the material default occurs. The latter mechanism means he can continue in the company and ask B to exit. If you know these mechanisms well, you can give your client two options – either continue in the company and buy the other party’s shares (by exercising the call option) or sell his shares and exit the company (by exercising the put option).

Take another scenario. Suppose your client would like to continue as a shareholder in the company only if the company generates a certain amount of revenue after a specified period (say five years). If not, your client would like to exit. If you know what a put option is, you can simply suggest that your client include a put option over his own shares.

These two mechanisms can therefore be used throughout shareholders agreements to address different scenarios and the various needs of your client. There are some points that you should keep in mind while drafting them.

1. Be precise about whether your client has a right to sell shares or is under an obligation to purchase shares. Use words such as ‘right’ and ‘obligation’ wisely to ensure that the burden is being placed on the correct party.

2. Specify the amount or percentage of shares that are subject to the call or put option. At the time of enforcement, there should be no confusion on the amount of shares that can be sold or bought.

3. Remember, contractual arrangements can work in many permutations and combinations. For instance, if you are drafting a put option clause, it is not necessary that the shares always need to be sold to the other parties in the shareholder agreement. You can also have a right to sell your shares to a third party of your choice. Similarly, it is up to the parties to decide whether the option should apply to a part of the shares or all the shares that a party holds. As a lawyer, you should advise your client about the most appropriate form of the clause depending upon his or her intentions.

4. As always, the letter of the law plays an important role. For instance, the Reserve Bank of India has made it clear that a non-resident investor should not be guaranteed any assured exit price at the time of making an investment. The exit price must be a fair price calculated according to the prescribed guidelines and at the time of exit. Keep this in mind when you draft a put option for a foreign investor and always know the correct legal position before drafting.

5. Always flesh out the manner in which the clause will work. For instance, if your client has a call option on the shares held by the other party, you should specify the manner in which your client should send a notice to the other party indicating his or her intention to exercise the call option (known as a call option notice), the time period within which the other side must respond (the call option period), the price at which shares will be sold (the call option price), and the maximum time period within which the sale must take place. Specifying these details makes it simpler to execute the sale and implement the clause effectively.

Remember these basic points while drafting. Make sure that you are always clear about what a clause is intended to achieve. Take the time to understand the needs of your client and draft accordingly.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

We hope you enjoyed this article. You might want to check out our course on Advanced Commercial Contracts

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Written by myLaw

Lock ins, ROFRs, tag alongs, drag alongs – understand the four types of transfer restrictions

Drafting_for_Business_Deepa_Mookerjee.jpgShareholders agreements, we all know, list the rights and obligations of the shareholders in a company and contain clauses that are vital for any M&A transaction. We have already discussed one such clause, the conditions precedent clause. Let us now study another set of clauses – commonly grouped under the term, ‘transfer restrictions’.

Consider the case of a foreign investor who intends to purchase 26 per cent of the shares of a company and has all the know-how and expertise to run the business. This investor’s participation is critical to the business and its Indian partner in the business would prefer that it does not exit the company. Even the foreign investor, mindful of its faith in the Indian partner, would not want the Indian partner to exit the company. The shareholders agreement therefore, would contain clauses that restrict the foreign investor and the Indian partner from transferring their shares to a third party.  A ‘transfer restriction’, simply put, restricts shareholders from transferring their shares in the company.

All doubts about the legality of transfer restrictions under the Companies Act, 1956 has been cleared by the proviso to Section 58(2) in the Companies Act, 2013. It clearly states that “any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract”.

While there is no formal clarification from the Ministry of Corporate Affairs regarding this insertion, it appears that that this provision is an attempt to codify the principles laid down in the judgment of the Bombay High Court in the case of Messer Holdings Limited v. Shyam Madanmohan Ruia and Others, [2010] 104 SCL 293 (Bom). The Court held that it is open to shareholders to enter into consensual agreements in relation to the specific shares held by them, provided such agreements are not in conflict with the articles of association of the company, the Companies Act, 1956, and its rules. Such agreements can be enforced like any other agreement and does not impede the free transferability of shares.

The Companies Act, 2013 has also recognised the position that a share is the property of the shareholder. The shareholder is free to transfer his or her property, provided that it is not in conflict with the articles of the company and other provisions of company law.

Let us now focus on a few common transfer restrictions.

Lock-in period

By a specifying a period during which a party is prohibited from transferring or selling its shares in the company, a shareholder is ‘locked in’ to the company. This restriction can apply to one, some, or all the shareholders of in the company.

There is no specified time period applicable to all transactions. Parties determine the time period for the lock-in depending on commercial considerations such as the nature of the business. Sometimes, the time period may differ among shareholders.

The Indian party in our earlier example may feel that five years is sufficient time to absorb all the foreign investor’s know how and then run the business independently. In such a case, the Indian party would probably be content with a lock-in period of five years applicable to the foreign investor.

Right of first refusal

Sometimes, a shareholder who intends to sell its shares to a third party can only do so after first offering them to the other shareholders and only if they refuse to purchase these shares. The price at which the shares are sold to the third party must be equal to or higher than the price at which they were offered to the other shareholders. This gives the other shareholders in the company a right of first refusal, that is, a right to purchase shares which helps consolidate their own shareholding in the company and also prevent the entry of an undesirable purchaser.

Tag along right

A right is some times granted to a minority shareholder to require the majority shareholder to sell its shares along with those of the majority shareholder, to the same third party. This gives a minority shareholder, the right to exit the company if it does not want to continue in the company with a new majority shareholder.

Drag along right

While a tag along right is granted to a minority shareholder, a drag along right is typically granted to a majority shareholder. A majority shareholder will have the right, while selling its own shares, to require the minority shareholder to sell its shares as well. The majority shareholder can thus drag the minority shareholder along while making a sale.

This right is important from the perspective of a new investor. Consider the case of an investor who is about to purchase 95 per cent of the shares of a company from one party in which another party holds the remaining five per cent shares. Since a new investor would prefer to own all the shares and take full control of the company, the majority shareholder would prefer to exercise a drag along right and force the minority shareholder to sell its five per cent to the same new investor.

The key point to remember while drafting any of these clauses is that your clients (whether a majority or minority shareholder) would like to maximise their investment while exiting the company. Therefore, determining the price at which shares are sold is critical.

Say for instance, your client has a drag along right. While drafting this clause, it may be best to lay down certain principles as to how the share price will be determined to ensure that there is no dispute at a later stage. Generally, the minority shareholder sells his or her shares at the same or higher price than that which is offered by the third party for the shares of the majority shareholder.

Always be very clear while drafting these clauses. You should choose your words and terms carefully and ensure there is no ambiguity while interpreting the nature of the restriction. Remember that these clauses are primarily contractual in nature and will always change depending upon the nature of the transaction. Never cut and paste a clause from another agreement without applying your mind to the facts of your transaction. In short, put in time and effort in understanding the transaction and only then draft a clause to suit the requirements of your client.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Written by myLaw

Three points to remember while drafting conditions precedent clauses

Drafting_for_Business_Deepa_Mookerjee.jpgA shareholders’ agreement is a contract that contains the rights and obligations of the shareholders in a company. It typically supplements either a share purchase agreement or a share subscription agreement. You can read more about them in my post on the documents that you will come across during M&A transactions.

Almost every shareholders agreement looks similar. You will see a title, a table of contents, a recital clause, an interpretation clause, and introductory clauses describing the transaction. These clauses have been discussed in detail in myLaw.net’s course on Advanced Commercial Contracts. In this post, I will explain the conditions precedent clause, which is typically seen in all shareholders agreements.

A condition precedent is usually a legal term describing a condition or event that must occur before a contract is considered in effect or any obligations are expected of either party. Here are a few examples.

A is purchasing 100% of the shares in a company whose main business is selling computers to the public. The company does not manufacture computers itself but sells the computers it receives from different distributors. From A’s perspective, the company’s relationship with its distributors is key because if the distributors don’t provide computers to the company, it will have nothing to sell. Many of the distributors’ contracts with the company require their prior approval before a 100% transfer of shares takes place. A would only want his obligation (to purchase shares and pay consideration for them) to be triggered once the company receives these approvals. The receipt of these approvals therefore, is a condition precedent that must be fulfilled by the company before the transaction is effective.

ConditionPrecedentClause

Take another example. B, a non-resident investor who has an investment in an IT company in Mumbai, wants to invest in an IT company in New Delhi. One of the terms of the transaction is that B must sell his interest in the Mumbai-based company before making the investment. So, the sale of those shares in the Mumbai-based company is a condition precedent that B must fulfill before he can invest in the Delhi-based company.

If these conditions are not fulfilled, there will be no deal. Common conditions precedent in M&A transactions include those in relation to obtaining approvals from the regulators, firing or hiring particular employees, ensuring that sufficient cash is available in the company, obtaining approvals from third parties, and ensuring that lease agreements are in place.

On whom is the obligation cast?

Let’s take a closer look at the examples above. You will see that the obligation to fulfill the condition precedent in the examples is cast on different parties. In the first example, the obligation to obtain approvals from distributors is cast on the investee company, that is, the company in which the investment is being made. In the second example, it is cast on the foreign investor. Conditions precedent can thus differ on the basis of the party on which the obligation to fulfill it, is cast. Some obligations can be cast on the investee company, some on the investor, and some jointly on the investee company and its shareholders.

For instance, C is a foreign investor who wants to invest in a company operating in a sector where the approval of the Reserve Bank of India is required for any foreign investment. Typically, the burden of obtaining this approval is cast jointly on all parties because each party’s cooperation is required for obtaining this approval.

While drafting a conditions precedent clause, you must take care to identify the party on whom the obligation to fulfill a particular condition is imposed. This is vital as each party is responsible to fulfill its own obligations in relation to the conditions precedent. While casting an obligation on the investee company, you should examine whether it is also useful to cast the obligation on its shareholders (or at least the majority shareholders) if they control the operations of the company.

The right to waive a condition precedent

Another point vital to this discussion is whether conditions precedent can be waived. Look at the first example. Assume that the investee company has only obtained approvals from fifty percent of its distributors. A, the investor, would really want the deal to go through and should be happy with approvals from these distributors if they are the major ones and would want to waive the condition that approvals must be obtained from all the distributors. Once A has waived the fulfillment of this condition, the deal can go through. The right to waive the fulfillment of a condition precedent is very important in all M&A transactions. Always include this right when you are drafting a condition precedent. The important point to keep in mind is that the person who has the right to waive the condition must be different from the person who is obliged to fulfill the condition.

In the first example, the right to waive the fulfillment of the condition in relation to obtaining consents from distributors must be with A and not the investee company. The investee company can never have the right to waive fulfillment of a condition that it is obliged to fulfill. Similarly, in the second example, the right to waive the condition in relation to withdrawal from the Mumbai-based IT company is on the investee company and not B, the investor.

Since these are all contractual rights, it is up to the parties to decide whether they would like to waive the conditions in part or in full. As a lawyer, your duty is to ask these questions from your client before you start drafting so that you can use the words that are appropriate to your client’s interests.

When should the conditions precedent be met?

Finally, always insert a date by which all the conditions precedent must be met. This is typically called the ‘long stop date’ and is important to ensure that there is no undue delay in the performance of the contract or the fulfillment of the conditions. Parties know that they must fulfill the conditions precedent by a specific date. While drafting this clause however, always include the following or similar words:

The Conditions Precedent must be satisfied by April 20, 2015 or any date as may be mutually agreed between the Parties.

The words in plain text above give the parties to a contract the right to mutually agree and extend the time for the fulfillment of the conditions. If, for example, regulatory approval — a condition precedent for a particular deal — takes longer than anticipated, the parties should have the right to extend the long stop date if they feel the need to do so. This is also important because if conditions precedent are not satisfied, the transaction is terminated, and parties must have the flexibility to prevent this.

As you start drafting conditions precedent, you will realise that there are many nuances to the manner in which you draft these conditions. For instance, you may use the words ‘use all reasonable efforts’ to dilute the obligation on a party. In such cases, that party only has to show that it has used all reasonable efforts to fulfill the condition and that will be enough (even if the condition has not been fulfilled).

Keep drafting and with practice, you will get better at drafting conditions precedent clauses.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Written by myLaw

4 essential documents that you will come across during M&A transactions

Drafting_for_Business_Deepa_Mookerjee.jpgLet us now learn to draft transactional documentation. All M&A transactions are not identical. Sometimes the drafting of definitive documentation begins before negotiations. Parties exchange the first draft of documents and then negotiate to resolve major outstanding issues. In other cases, parties begin to negotiate major issues even before the first draft is complete. They may either negotiate while the agreement is being drafted or commence drafting only after the major issues have been resolved. Irrespective of the approach, a lawyer’s job is to draft the best possible agreement to suit the clients’ needs.

Before starting to draft, it is important, especially as a junior lawyer, to understand the different documents that are typically used in various transactions. Once you are part of a corporate law firm, you will realise that the more senior lawyers will ask you to draft documents quickly and may not be able to spare the time to explain the nature of the document. You must be quick on your feet and read up as much as possible.

I will now discuss a few agreements that you will find most commonly in M&A transactions. Remember that since M&A transactions are of various types, this is not an exhaustive list.

1. Share purchase agreement

Dee Limited has two shareholders, A and B. A intends to sell its shares in Dee Limited to Karl Limited for a specified monetary consideration. This understanding between the parties will be recorded in a share purchase agreement (“SPA”), a legally binding agreement. This agreement is important as it contains all the terms and conditions relevant to the sale such as:

(a) the exact description of the sale (including the number of shares, the names of the seller and the purchaser, and the consideration for the sale);

(b) the conditions that must be satisfied before the sale takes place;

(c) the date on which the sale will be completed;

(d) the manner in which the transfer will be made;

(e) any indemnities or protections available to the parties;

(f) the representations and warranties made by either party; and

(g) the conditions upon which the agreement will terminate.

The parties to a SPA are typically the seller, the purchaser, and the company whose shares are being sold. Often shareholders who may not be selling their shares may be also be a party to the agreement if specific consents are required from them for the transfer to take place.

2. Share subscription agreement

A new investor C wishes to invest in Dee Limited, the company in the example above. However, instead of purchasing shares held by A and B, Dee Limited will issue fresh shares to C. In other words, C will subscribe to fresh shares in Dee Limited. This understanding is typically recorded in a share subscription agreement (“SSA”). A SSA is similar in nature to a SPA. The only difference is the subject matter of the agreement. A SPA is executed when there is a transfer of shares from a shareholder to an investor while a company executes a SSA in case of a fresh issue of shares.

Watson_Free coursesThe parties to a SSA are typically the new investor and the company that is issuing fresh shares. The shareholders of that company are also parties to the SSA if certain consents are required from them before the transaction can be completed.

 

3. Shareholders agreement

A shareholders’ agreement is a contract that contains the rights and obligations of the shareholders in a company. Typically, this agreement supplements a SPA or a SSA. However, a shareholders agreement is not necessary in all cases. Lets understand this better with the help of certain examples:

Assume Dee Limited is purchasing 100% of the shares of Ceka Limited. Ceka Limited’s existing shareholders are transferring all their shares to Dee Limited. After the share transfer, Dee Limited will be the sole shareholder of Ceka Limited. In this case there is no need for a shareholders agreement. This is because there will be only one shareholder after the transfer and that shareholder has full control over the company.

Look at a slightly different scenario. Assume Ceka Limited has two shareholders P and Q. P is selling all his shares to Dee Limited. After the share transfer, Dee Limited and Q will be the two shareholders in the company. In such a case, a shareholders agreement is typically entered into to regulate the relationship between the shareholders.

In other words, a shareholders agreement is usually entered into when a company has more than one shareholder. The parties to a shareholders agreement are typically the shareholders of the company and the company itself. This agreement contains the rights and obligations of each shareholder on various matters such as:

(a) the manner in which shareholders can exit the company;

(b) the procedure for transfer of shares (whether in whole or part);

(c) the manner in which to wind up the company (in case of insolvency);

(d) the manner in which to resolve a disagreement between the shareholders;

(e) the manner in which the company will operate on a day-to-day basis and the rights of each shareholder regarding such operations; and

(f) the composition of the board of directors.

The SPA (or the SSA) and the shareholders agreement are often combined into one document that contains all the details of thjoie transaction and the manner of operation of the company after a transaction has been completed.

4. Joint venture agreement

A joint venture agreement (“JVA”) is similar to a combined shareholders agreement and SPA or SSA. It is essentially an agreement that parties enter into when they wish to run the company as partners. JVAs are executed between parties who intend to set up a new joint venture company or invest in an existing company. More often than not, if the company in which the investment is being made already exists, that company is also a party to this agreement. This is done to ensure that the provisions of the agreement are binding on the company.

The provisions of JVA are similar to that of a shareholders agreement and SPA or SSA.

We have learnt about four agreements that you will typically find in an M&A transaction. Other agreements are also generally drafted in such transactions and you can learn about them in our Programme on Advanced Commercial Contracts. In my next blog post, we will discuss the contents of these agreements in greater detail.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Written by myLaw

Be cool, look sharp, take notes – these and more tips to ace your M&A negotiation

Drafting_for_Business_Deepa_Mookerjee.jpgIn my last post, I discussed some key points that you need to remember while preparing for a negotiation during an M&A transaction. Let us now discuss the things you have to bear in mind after negotiations have started.

Your demeanour

Clients and parties come with different temperaments. Some of them may seem polite while others may be a bit rude and even a little pushy. Irrespective of how the other side is behaving, you have to be equable and composed at all times. Be firm but polite. Do not get ruffled by any behaviour from the opposing side. Put your case across clearly and (if necessary) a bit forcefully but avoid foul language, impolite behaviour, and harsh words, all of which are more likely to lead to an unsuccessful conclusion.

For a negotiation to be successful, all parties must be calm, composed, and ready to find a solution or a compromise. Remember that you are the lawyer and therefore, do not have a personal stake in the subject of the negotiations. Your clients on the other hand, are financially (and possibly even personally) invested in the transaction, and so may be unable to take a balanced approach to some issues. You have to be the voice of reason.

As discussed in the last post, you need to know your client’s bottom line before the negotiation starts. However, if during the negotiation, your client is being unreasonable, either try to park the issue for a lengthier discussion later or ask your client to step out of the room to discuss the matter privately. If the discussion has stalled on a particular issue, try to move on and resolve other smaller issues before circling back to the unresolved one. Parties are likelier to feel that they have achieved something rather than return to an issue feeling like there was no resolution on any of the issues.

Your attire

While your attire may seem a slightly foolish (and even flighty) issue to even mention in this context, do not underestimate the importance of your clothes. For instance, if you came to the negotiations in your pyjamas or in wrinkled clothes that look like you just rolled out of bed, your client may feel that you are not taking the negotiation seriously. Even your opposing counsel is likely to feel that you have not taken the negotiation seriously. You need the opposing side to take you seriously and have faith in your abilities as a negotiator. Only then will they listen to you and consider your point of view. Dressing the part is important.

Always dress formally. Look smart, clean, and well put-together. Remember this is a key part of your job and you must dress in a manner that is acceptable in your office.

Take detailed notes

As a lawyer, we sometimes feel that it is not our job to take detailed notes. After all, we took notes throughout our student lives and taking notes during a negotiation might make us look like we are back in college. Having so much faith in your memory can get you into trouble because it is unlikely that you will be able to remember everything. After all, negotiations can continue for days and quite often, issues that had seemed resolved are re-visited to reach a fresh conclusion. Particularly in such situations, no matter how good your memory, you are likely to be confused if you don’t jot down those points or the conclusions that have been reached.

If you are not used to taking down notes while talking, keep a computer open in front of you and type out the conclusion concisely next to each point. Quite often, lawyers also ask for a very short break after a point has been decided to jot down the result before moving forward.

Remember that all of these points and conclusions will later be inserted in definitive documentation. Your client will rely solely on you to ensure the correct position is reflected in the documents. Having something written down – to refer to later – helps to ensure that your understanding of the results of the negotiation is correct and that you have not forgotten anything important.

Use the breakout room

The term ‘breakout room’ refers to a room outside of the room where the negotiations are being held, where parties can convene with their lawyers to discuss a particular issue. This helps break the monotony of the negotiation if there is any deadlock and gives the parties a chance to honestly review their positions with their lawyers without being overheard by the opposing side. While a negotiation process is going on, suggest a “time-out” or a visit to a breakout room if you feel that things are getting too heated, if you need to discuss an issue with your client privately, or even if you have a new idea or strategy for your client. It is always better to interrupt a gridlocked negotiation than continue to argue without any hope of a result.

Keeping these points in mind will help achieve a successful outcome to the negotiation. However, following these rules does not guarantee success. We should all remember that a negotiation depends mainly on the parties and their behaviour, which is bound to differ from one to the next. For lawyers, the best course of action is to keep these basic principles in mind and then adjust them to suit the temperaments of their clients.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Written by myLaw

Five tips to help you negotiate an M&A transaction like a boss

Drafting_for_Business_Deepa_Mookerjee.jpgThinking about negotiations, we may picture lawyers from opposite sides meeting in a conference room. Negotiations however, can take place over the phone or even through email. While most ‘big-ticket’ M&A transactions will comprise at least one meeting where the parties and lawyers are physically present to discuss all the major issues, minor issues can always be discussed through email or over a phone call. Remember, after having studied how to conduct an effective due diligence exercise and draft a comprehensive report, we are now moving ahead in the timeline of an M&A transaction. Actually, as you will see below, it often happens at the same time as the due-diligence.

Consider this scenario. Care Insurance Limited, a foreign insurance company, is investing in 26% of the equity share capital of Happy Life Insurance Limited, an Indian insurance company, and both companies have entered into a memorandum of understanding (a preliminary document about which we have already learnt), quite a few issues remain open. Care Insurance has two options. It can (a) wait to see the results of the due diligence exercise and then commence negotiations; or (b) if it is reasonably sure about its intention to invest, it can commence negotiations while the due diligence exercise is going on and then decide on any issues that may arise from the due diligence. More often that not, parties chose the second option unless they expect to see major red flags after the due diligence.

M&A negotiations can start in one of two ways — either one of the parties will circulate a first draft of the definitive documentation that can then be negotiated at a meeting or the parties will circulate a list of major negotiation points, which once decided, will then be inserted into definitive documentation. The choice of process is entirely up to the parties.

NegotiationInProgressRemember that a negotiation process is very sensitive and delicate as parties (sometimes with completely opposing positions), need to arrive at a mutually acceptable solution. Your job as a lawyer is to facilitate the closing of a deal. Here are five points you should keep in mind while preparing for a negotiation. Some of these may seem pretty obvious but after several negotiations, you will realise that even the smallest issue can make a difference.

1. Think about what to negotiate

Always sit with your clients to prepare a comprehensive list of issues that you would like to negotiate, before any meeting with the opposing counsel. Unless your clients would like to keep their position confidential till time the negotiation commences, it is best to set out their positions on these issues and circulate it to the other side. At times, the opposing counsel will also set out their responses to the issues you have circulated. The result is that before the negotiation commences, you will have a document that lists the major negotiating points and the views of both sides on each. This will help structure the discussion as the parties will be focused on the issues at hand. It will also give each side some time to consider the other party’s position before the negotiation commences, often aiding in a smoother negotiating process.

2. Be on the same page as your client

It is best to have a few meetings with your client (whether over the phone or in person) before your meeting with the opposing counsel. You should know how your client would like to see each individual issue resolved. Make sure that you have discussed possible outcomes with your clients and that you have taken them through both the best and the worst-case scenarios. Think about how the issues might relate to each other—for instance, is there some issue your client might be willing to concede in order to succeed in another aspect of the case? Finally, and importantly, make sure that you have determined—in consultation with your client—your ‘bottom line’, that is the point beyond which you cannot concede in a negotiation. If for example, Happy Life believes that Care Insurance must at least invest Rupees One Hundred crore for purchasing 26% shares in the company, then Rupees One Hundred crore is the bottom line. You cannot go below this number in your negotiations.

3. Know the transaction

APCCLP_CompanyLaw-BannerKnow the contours of the transaction and the several issues that can arise. Be aware of the law and the manner in which it relates to the transaction. This will ensure that you never agree to anything that is illegal (due to your ignorance of the law) which you will have to go back on later. For instance, you should be aware that the maximum permissible limit of foreign investment in any insurance company is 26%. Also, be aware of the manner in which the Foreign Investment Promotion Board allows a company to make this investment. Is investment allowed by way of preference shares or only equity shares? How can a foreign partner exit the company? Is there any guidance on the number of directors that can be appointed by a foreign partner? You should have answers to all these questions before you start negotiations.

4. Keep copies of all supporting documents ready

Make sure that you have enough copies of all supporting documentation (emails, preliminary documents, term sheet, reports and the like) that you might need before you enter into a negotiation. Keep additional copies in case anyone needs it. It is always best to have more copies so the negotiation does not need to be halted for something as trivial as taking printouts or photocopies. Also, make sure you have enough stationery – pens, papers, and notepads — for all participants in the negotiation.

5. Plan the conference

Make sure you have a comfortable environment for the negotiation. It should take place in a private room, such as a conference or meeting room. If possible, you can provide a smaller, private room for the other side to go to if they need to discuss anything in private during the course of the negotiation. This is typically called a break out room.

Ensure that facilities such as printers and photocopying machines are available through the duration of the conference. Finally, keep in mind that refreshments such as water, juice, lunch, and dinner should be provided to all the parties with minimal fuss so that they can be focused on the discussion rather than deal with ancillary issues.

Remember planning the meeting is as important as your conduct in negotiations. Good planning leads to an effective negotiation while incomplete planning will result in a bumpy negotiation process.

In my next post, I will discuss the manner in which you should conduct yourself at negotiations and the steps you should take to conclude your negotiation successfully.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Written by myLaw

Learn to draft a loan agreement like a pro

DeekshaSinghLoan agreements, like most commercial agreements, have a standard structure that must be moulded and adapted to suit specific transactions. In corporate lending, that is, where a bank is lending to a company, the amounts involved tend to be substantial and both the bank and the borrower will typically have legal representation. The bank’s lawyers usually draft the first version of the loan documents and the borrower’s lawyers review and negotiate the terms of the agreement on behalf of the borrower.

Remember, a loan agreement goes through many rounds of discussions and negotiation. A drafting lawyer must be prepared to rework the draft several times.

Term sheet

Before the lawyers begin drafting, the bank and the borrower enter into a term sheet that lays down the key commercial points that they have agreed upon in relation to the loan. Referred to as a financing term sheet, it is the basis for the legally binding documents that the lawyers have to draft. Generally, it covers only the more important aspects of a deal, without going into every detail covered in a binding contract. Typically, the authority or committee within a bank that reviews and approves loan proposals also considers financing term sheets.

Facility agreement

Often, a corporate loan is also called a ‘facility’ provided by the bank to the borrowing company and so, a corporate loan agreement is also known as a facility agreement.

A facility agreement between the bank and the borrower sets out the terms laid out in the term sheet in the form of a binding legal agreement. It contains the details of the loan, the manner in which the loan will operate, and the terms and conditions that have to be fulfilled by the parties to the agreement.

Each facility agreement is different and is drafted bearing in mind the nature of the facility. While there are several ways of drafting facility agreements, all of them can be divided into the following key sections—introductory, interpretation, operational, terms and conditions, and boilerplate clauses.

The introductory section

APCCLP_CompanyLaw-BannerAt the beginning of a facility agreement, the introductory section contains all the vital information that sets up the contract. This is typically the part where the drafter tells the reader what is being communicated, and what will be contained within the body of the contract.

The title, the exordium, the recitals, and the table of contents, which are items that are found at the beginning of most commercial agreements, are placed at the beginning of a facility agreement also.

The interpretation section

Every facility agreement also needs a separate section defining the special terms used in the agreement, or terms that are used in a particular way in the agreement. Typically, in facility agreements in India, definitions are provided at the beginning.

This section should be accurately drafted as it will significantly impact the way in which key clauses in the agreement operate. Many definitions are common to all facility agreements, but they can have minor variations depending on the specific transaction. It is, therefore, important for the drafter to tailor the definitions to suit the term sheet.

Most facility agreements will define terms like “Borrower”, “Obligor”, “Material Adverse Effect”, and “Event of Default”. A drafter must examine the terms of the particular loan transaction and determine how they should be defined.

In addition to a definitions section, a facility agreement can also contain a section that sets out specific rules for interpreting the agreement. These rules apply through the document.

The operational section

DraftingCreditFacilityAgreementsThis is the section of the facility agreement that deals with the operational details of the loan, that is, the amount of the loan, the term and purpose of the loan, how the loan will be drawn by the borrower, the repayment schedule, the details of payment of interest, conditions relating to prepayment of the loan, and so on. Obviously, these details are transaction-specific and the drafter will need to rely on the commercial understanding contained in the term sheet to draft the clauses in this section.

Terms and conditions

The terms and conditions section of a facility agreement is transaction-specific and contains the terms and conditions based on which the lender agrees to give a loan to the borrower. These terms and conditions differ among agreements and include both generic conditions that any lender would ask of a borrower—such as the borrower’s capacity to take the loan—as well as conditions that specifically relate to the facts and circumstances of that particular facility. An example of a specific condition is one where the borrower has to obtain the necessary environmental approvals, if the loan is for setting up a power plant.

Broadly, the provisions in this section can be categorised as representations and warranties, undertakings, events of default, and consequences of events of default. This section also includes provisions protecting the bank from changes in circumstances that could affect the loan.

Representations and warranties

The representations and warranties in a facility agreement typically focus on issues such as:

– Whether the borrower is a legally incorporated entity, carrying on business legally, and is duly authorised to take the loan and enter into the agreement;

– Whether the loan agreement and other finance documents for the transaction will be valid, admissible as evidence, duly stamped or registered, and binding on the borrower;

– Whether the borrower has committed any default in relation to the loan or has committed any default that could impact the loan;

– Whether all the information, including financial statements, that the borrower provided to the lender, are true, accurate, and in the form that the lender requires;

– Whether the rights of the lender under the loan agreement or the security documents are in any way subordinated to any other creditor of the borrower;

– Whether the borrower has any legal proceedings pending against it that could affect the borrower’s business or its ability to repay the lender; and

– Whether the assets offered to the lender as security are legally owned by the borrower, and whether they are free of any existing encumbrances.

Covenants

Covenants or undertakings are provisions in the loan agreement that relate to actions that the borrower company is required to carry out (known as affirmative covenants), or prohibited from carrying out without obtaining prior consent from the bank (known as negative covenants). These can also be financial covenants, which  set out parameters for the borrower to follow during the tenure of the loan. Typically, this section contains some specific financial definitions provided by the bank, based on which the bank intends to judge the financial performance of the borrower. The breach of these covenants can be an immediate event of default.

Events of default and consequences

InfrastructureLawThe section on events of default tends to be extensive, in order to protect the interests of the bank in the best way possible. Broadly, events of default focus on the following key points:

– Events relating to the loan agreement: Naturally, any non-payment of any amount due to the bank, any breach of, or any misrepresentation under the loan agreement will be considered an event of default by the lender. Similarly, any breach, or misrepresentation in relation to the security documents will also be included as an event of default.

– Events relating to the borrower: There will also be some other events, which affect the borrower’s ability to repay the loan that will be included as events of default. These include cross-default provisions that consider non-payment by the borrower in other loans as a default, any events in relation to the insolvency of the borrower, the cessation of business by the borrower, any illegal activity by the borrower, and so on.

Since loan agreements tend to be fairly one-sided documents, where the obligations remain primarily on the borrower, events of default are usually linked only to breaches by the borrower and not by the lender.

Deeksha Singh is part of the faculty on myLaw.net.

Written by myLaw

Learn to structure and communicate a good due diligence report

Drafting_for_Business_Deepa_Mookerjee.jpgIn my last post here, I listed out some points that are important for a due diligence exercise. Completing the investigation (or the due diligence) however is just half the job. The latter half – often more confusing – is to organise all the information you have collected in a structured manner and communicate it effectively to your client.

Before starting to draft, determine the type of due diligence report your client wants. Typically, though there is no formal classification, there are two types of due diligence reports.

A comprehensive due diligence report

You will come across this type more frequently. Many pages long, often going into hundreds of pages, it will contain all the information that you have found from your investigations about the company. It is usually divided into many chapters, each containing information about a specific part of the company.

Generally the chapters include:

Corporate information: This chapter contains details about all corporate matters related to the target company, including its date of incorporation, number of directors, provisions in the articles of association, corporate compliances, and key decisions of the board and the shareholders.

– Litigation: This chapter lays out the details of all the litigation pending against, and filed by, the target company and their impact on the transaction, if such litigation is decided against the target company.

– Material agreements: Here, all the material agreements that a company has with its suppliers, consumers, and retailers, are reviewed to understand the important terms of such agreements, and determine whether there are any particular clauses that will hinder the transaction.

– Human resources: Here, a broad overview is provided of the employee structure, the key employees, their terms of employment, and conditions of their contracts.

– Financial information or indebtedness: In this chapter, all information about loans or financial indebtedness of the company is reviewed, and key issues such as requirement of consents from lenders, and restrictions on transfer of shares or assets, are highlighted.

– Compliances: In this chapter, there is a detailed investigation into the registration and licenses required under law to carry on the business of the company. Information regarding all statutory compliances is found in this chapter.

– Property: Information about all property (movable and immovable), whether owned or leased by the company, and their terms and conditions, is reviewed and outlined in this chapter.

– Intellectual property law issues: This is important if the target company has registered trademarks, copyrights, or patents. All documents in relation to their registration, ownership, or assignment are analysed, to examine any restrictions present on such intellectual property rights.

– Environmental law issues: If the target company is a manufacturing, construction, or engineering company, acquirers ensure that the company is in compliance with all environmental statutes in India and does not violate any pollution standards that have been prescribed.

– Insurance law issues: This chapter outlines the insurance policies taken by the target company, to provide the acquirer with a general idea of the protection available to the target company.

Since such a report runs into many pages, a client often asks for a separate document listing key issues to accompany this report. The list of key issues is a three-or-four-page document (maybe more depending on the transaction) which only lists out the problem areas of the company and provides concrete suggestions on how to solve these problems. Remember that the client will always want a solution to the problems. It is not enough to only identify the problems in the company. As a lawyer it is your duty to provide a solution. Therefore, while drafting, take some time out to think clearly about the manner in which a particular problem can be solved, and then specify that.

An “exceptions only” due diligence reportAPCCLP_CompanyLaw-Banner

Here, a lawyer is only supposed to list out the problem areas or issues with the company. The due diligence report will have language to the effect that “everything is in order with the company except the following…”. This is a report where the client assumes that all the items are in order except those listed in the report. The only problems with the company or its operations are those identified in the report. In other words, while drafting, you will only list out the problems with the company that you have investigated. You will not spend your time stating facts about the company that are in order.

In a comprehensive due diligence report, you will provide the client with all the facts (whether they are in order or not). You will obviously identify problem areas specifically but provide a complete picture as well. In an “exceptions only” report, the client will assume everything is in order except those issues that you have mentioned. Reports like this are becoming common and clients often ask for such reports as they are more concise and much easier to plough through.

Obviously the manner in which you will draft will depend upon the type of report that your client asking for. However, there are some basic drafting points to keep in mind for any report. See the image below.

DraftingaDueDiligenceReport_DosAndDon'tsKeep these points in mind while drafting your report. While some of these seem very simple and obvious, browsing through it before starting to draft will always help refresh your memory and hold you in good stead in your career as a commercial lawyer.

(Deepa Mookerjee is part of the faculty on myLaw.net.)

Written by myLaw