Secretarial & Legal Due Diligence Process – Complete Guide

Due diligence basically involves the verification, investigation and audit of an entity or a potential deal or investment opportunity to verify and confirm all the relevant facts. It ensures that the organization undertaking due diligence knows all the details and gets confirmation about the genuineness of the other entity before proceeding with the same. 

When it comes to compliance with laws, Secretarial and Legal due diligence ensures that the entity abides by all the laws and regulations. Let us obtain a deeper understanding of legal and secretarial due diligence and their scope.

Legal Due Diligence – Meaning and Scope 

Legal due diligence is usually performed during merger and acquisition transactions. It involves checking the legal affairs of the company. The acquiring company conducts an extensive examination of the legal affairs of the company in order to determine whether there is any legal risk involved in acquiring the company.

Legal complications can arise due to multiple reasons including operations, expansions, taxation etc. Thus, the following is the scope of legal due diligence:

• Intellectual properties including patents, copyrights and trademarks. Here, an examination of all the legal implications and licensing of intellectual property is being done.
• A thorough understanding of the legal structure of the company and the scope of its activities is obtained. This is done through an examination of the Memorandum of Association and Articles of Association.
• The commercial contracts entered into by the company are analyzed to identify the risks involved in these contracts.
• Employee contracts are examined to determine the company’s liabilities towards its employees and whether there is any ongoing dispute or litigation.
• Taxation is an important aspect while undertaking due diligence for merger and acquisition transactions. It is important to determine whether the target company is being involved in any tax litigations or whether are there any possibilities of future tax liabilities and demands being initiated against the target company.
• Determining whether the target company is fulfilling all its regulatory obligations.
• Whether the company is complying with environmental laws or not? The environmental practices adopted by the company are examined to help determine whether it can attract any future environmental liabilities.

Secretarial Due Diligence – Meaning and Scope

The Companies Act, 2013 is the principal law governing and regulating companies in India. Further, when it comes to listed companies, funds and associations dealing in securities and funds involving public money, the Securities and Exchange Board of India (SEBI) acts as a watchdog. SEBI has put in place multiple laws and regulations and the concerned companies shall abide by the same. Secretarial due diligence helps in determining whether the company is complying with such laws or not. 

Following is the scope of secretarial due diligence:

• It involves checking the applicability of various laws as per the industry in which the company is operating. These laws can include labour laws, company laws, SEBI laws or other regulatory laws.
• Overviewing the charter documents of the company.
• Determining whether the company has ensured compliance with all the regulatory filings under various laws.
• Review of share allotment filings and review of the minutes of the meetings.
• Determining the legal actions and penal proceedings initiated against the company due to non-compliance with the regulations applicable to the company 

In a Nutshell

Secretarial and Legal due diligence is one of the most important stages in any merger or acquisition transaction. The acquiring company needs to be sure that they are not inviting any unnecessary legal complications by acquiring or merging with the other company. Apart from legal due diligence and secretarial due diligence, companies also prefer conducting financial due diligence, commercial due diligence, IT due diligence, environmental due diligence etc. In case you need any assistance in relation to the due diligence exercise, feel free to contact the ASC Group.

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