Legal Due Diligence in M&A Transactions

Introduction

In the evolving arena of Indian business consolidation, mergers and acquisitions (M&A) have emerged not just as corporate strategies but as calculated legal manoeuvres. Often behind the scenes, legal due diligence (LDD) plays a foundational role in safeguarding transactions from legal pitfalls. Its value lies in uncovering liabilities, compliance gaps, and contractual weaknesses—essentially, stress-testing the legal viability of a deal. This article explores how LDD operates within India’s regulatory fabric, its practical relevance, challenges encountered, and the road ahead.

Background or Legal Framework

Legal due diligence is essentially a pre-transaction audit that examines whether the target company complies with applicable laws, maintains clear ownership of its assets, and faces any ongoing legal exposures. Unlike financial audits, it’s designed to spot legal risks that may hinder or affect the commercial intent of an acquisition.

While no single Indian statute governs LDD, the process draws authority and relevance from several enactments:

• Companies Act, 2013 – governance, resolutions, and disclosure requirements

• Income Tax Act, 1961 – tax liabilities, benefits, and pending assessments

• Indian Contract Act, 1872 – contractual obligations and enforceability

• SEBI Takeover Regulations, 2011 – for listed entities’ control and disclosure

• FEMA, 1999 – cross-border investments and foreign ownership compliance

• Sector-specific norms – labour, environment, and industry-specific licenses

  
  

Depending on whether the transaction is structured as an asset sale, share acquisition, or business transfer, the legal focus and compliance checklist vary significantly.

What Legal Due Diligence Covers

 LDD covers a sweeping range of areas:

• Charter documents, resolutions, and regulatory filings

• Legal validity of licenses and operational permits

• History and status of litigation or regulatory inquiries

• Ownership and status of physical and intellectual assets

• Review of all binding contracts and business obligations

• Employment structure and statutory benefits compliance

For buyers, this isn’t just about ticking boxes—it’s about determining whether the deal exposes them to unknown future liabilities.

Illustration Through Case Law

The Supreme Court in Siva Industries & Holdings Ltd. v. Union of India emphasized that commercial deals must rest on transparency and full disclosure, especially during insolvency or restructuring processes. The case underscored why comprehensive diligence is essential—not just for valuation, but for legitimacy.

Global Trends and Indian Transition

Compared to developed economies, India’s diligence practice is relatively document-heavy and manual. Globally, buyers leverage Virtual Data Rooms (VDRs) and AI-based tools to sift through large volumes of contracts and disclosures efficiently. In India, leading law firms are slowly integrating these practices into high-value or cross-border deals.

Strategic Impact on Deal Structure

The findings from legal due diligence often determine:

• Whether to proceed with a share vs. asset deal

• The scope of representations, warranties, and indemnities

• Whether certain conditions precedent must be met

• How the purchase price might be adjusted based on legal risk

Thus, LDD not only informs the legal feasibility but also drives financial negotiation.

Challenges or Gaps

1. Opaque Documentation

   Especially in closely-held or promoter-driven companies, legal records are either outdated, incomplete, or selectively disclosed.

   
   

2. Compressed Timelines

   Due diligence is often given a back seat in fast-moving acquisitions, increasing the risk of oversights.

   
   

3. Regulatory Overlap

    The multiplicity of statutes—company law, taxation, foreign exchange, sectoral policies—creates a maze of compliance points.

   
   

4. Lack of Standardisation

   Indian regulators have yet to define baseline due diligence parameters, leaving scope for inconsistent legal vetting.

   
   

Suggestions or Way Forward\

1. Guided Protocols from Regulators

   Issuance of LDD templates or sector-specific compliance modules by SEBI or MCA could bring consistency.

   
   

2. Wider Adoption of Legal Tech

   Promoting automated red-flag tools, centralized compliance trackers, and VDRs can significantly reduce the human burden and improve accuracy.

   
   

3. Voluntary Legal Audits

   Companies preparing for acquisition should consider internal legal audits well in advance to mitigate risks during negotiations.

   
   

4. Practical Legal Training

   Law firms and law schools must offer deeper exposure to transaction-based LDD through internships, simulations, and live client work.

   
   

Conclusion

Legal due diligence is the quiet engine behind every well-executed M&A transaction. While financial data may drive valuation, it is the legal skeleton that ensures the transaction won’t collapse under regulatory scrutiny or unforeseen liabilities. As Indian markets mature and attract foreign capital, refining the LDD process will be key to building investor confidence and corporate transparency.

References

1. Nishith Desai Assocs., Legal Due Diligence in M&A Transactions in India, (2022), https://www.nishithdesai.com.

2. Companies Act, No. 18 of 2013, § 129, India Code (2013).

3. Income-tax Act, No. 43 of 1961, § 139, India Code (1961).

4. Indian Contract Act, No. 9 of 1872, § 2(h), India Code (1872).

5. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Gazette of India, Extraordinary, Part III, Sec. 4.

6. Foreign Exchange Management Act, No. 42 of 1999, § 6, India Code (1999).

7. Cyril Amarchand Mangaldas, M&A Transaction Handbook, 112–122 (2023).

8. Siva Indus. & Holdings Ltd. v. Union of India, (2021) 10 SCC 731.

9. KPMG India, Virtual Data Rooms in Indian M&A Deals, M&A Advisory Report (2021).

AZB & Partners, Drafting Warranties and Indemnities in Indian M&A, IndiaCorpLaw Blog (2023).

DISCLAIMER- This article has been submitted by Abhinash Mahapatra, a trainee under the LLL Legal Training Program. The views and opinions expressed in this piece are solely those of the author.