“Legal Due Diligence in
JVS and M&As”
presented by
Picharn Sukparangsee
at the Conference on
“Legal & Financial Due Diligence Strategies for
Successful Acquisitions, JVs & Strategic Alliances”
arranged by
the Asia Business Forum
on October 28-29, 2010
at the Royal Orchid Sheraton Hotel, Bangkok
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LEGAL DUE DILIGENCE IN
JVS AND M&As
I.
LEGAL RATIONAL FOR DUE
DILIGENCE
II. SCOPE OF DUE DILIGENCE IN
DIFFERENT TYPES OF
TRANSACTIONS
III. AVOIDING PITFALLS AND
SOLUTIONS
IV. CASE STUDY
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I. LEGAL RATIONAL FOR
DUE DILIGENCE
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I.
LEGAL RATIONAL FOR DUE DILIGENCE
M&A
• amalgamation
• merger
• takeover
• acquisition of shares or assets
Joint venture
• unincorporated joint venture
• incorporated joint venture
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I.
LEGAL RATIONAL FOR DUE DILIGENCE
Legal rational for due diligence
• comply with laws and regulations
• identify and solve legal problems
• protect an interested party from any legal
liability
• due diligence as used as defence in any lawsuit
• enable a legal claim against a defaulting party
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I.
LEGAL RATIONAL FOR DUE DILIGENCE
Types of due diligence
• Financial due diligence by financial advisor
• accounting due diligence by auditor
• legal due diligence by legal advisor
• technical due diligence by technical
consultant
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I.
LEGAL RATIONAL FOR DUE DILIGENCE
Methods applied in the conduct of legal
due diligence
• management discussion and analysis
• review and summary of agreements and
documents
• representations and warranties under
agreements
• issuance of legal opinion
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I.
LEGAL RATIONAL FOR DUE DILIGENCE
Fiduciary duties of directors
• duty of care
• duty of loyalty
• duty of obedience
• duty of disclosure
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I.
LEGAL RATIONAL FOR DUE DILIGENCE
Obligations of directors under laws
• duties of care
• no conflict of interest
• no competition with the business of the company
• no sale , no purchase or doing business with the company
unless approved by the board of directors
• disclosure of interest in any contract , shareholding and
bondholding
• no loan to a director or an employee unless made under the
regulations on the welfare or any law
• comply with laws and regulations
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II. SCOPE OF DUE DILIGENCE
IN DIFFERENT TYPES OF
TRANSACTIONS
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Examples of important laws
• Civil and Commercial Code
• Public Limited Company Act
• Securities and Exchange Act
• Foreign Business Act
• Land Code
• Investment Promotion Act
• Industrial Estate Authority of Thailand Act
• Factory Act
• Building Control Act
• Act on Mortgage of Machinery
• Foreign Employment Act Immigration Act
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Examples of important laws
• Revenue Code and Double Taxation Agreements
• Customs Act
• Excise Act
• Financial Institutions Business Act
• Foreign Exchange Act
• Environmental Protection and Promotion Act
• Competition Act
• Labour Protection Act
• Act on Establishment and procedures of the tax court
• Trade Mark Act
• Copyright Act
• Patent Act
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Conduct of legal due diligence
• Affidavit, Memorandum and Articles of
Association and the list of shareholders shall be
reviewed.
• Financial statements of the target company shall
be provided.
• MOU is signed between a seller and a purchaser.
• Confidential undertaking is signed by the
purchaser.
• A kick-off meeting between a seller and its
advisors and a purchaser and its advisors.
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Conduct of legal due diligence
• Roles of local advisors and foreign advisors.
• Data room and documents
• List of requested legal due diligence documents
• Legal due diligence questions
• Interview directors and/or the management
• Site visit
• Preparation of memorandum
• A draft and a final legal due diligence report
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Legal due diligence report
Disclaimer provision
Executive summary
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II.
II. SCOPE
SCOPEOF
OFDUE
DUEDILIGENCE
DILIGENCEIN
INDIFFERENT
DIFFERENT
TYPES
TYPES OF
OF TRANSACTIONS
TRANSACTIONS
Summary of Documents
• corporate documents
• licences, concessions , permits , certificates and approval
• financing agreements
• material agreements
• land title deeds , land documents, buildings , factories ,
machinery and equipment
• insurance
• trade mark , copyright and patent
• employment
• environmental issues
• regulatory requirements
• tax disputes
• litigation and arbitration
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Corporate documents
• Affidavit
• Memorandum
• Articles of association
• List of shareholders
• Holding company, subsidiary, related company
and affiliated companies
• Notices and minutes of the meetings of the
management
Continue
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Corporate documents
• Notices and minutes of the board of directors
meetings
• Notices and minutes of the general meetings of
shareholders
• Groups of shareholders
• A branch
• A representative office
• A regional office
• Regional operating headquarters
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Corporate Issues to be focused upon
• Major shareholders
• Authorized directors
• Restriction on transfer of shares
• Important matters as approved by the board
of directors
• Important matters as approved by the
meeting of shareholders
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Licenses, permits, approval, certificates
BOI privileged certificate
• foreign shareholding
• ownership of land
• tax exemption and reduction
• exemption of importation of raw material and
finished products
• work permits for experts and technicians
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
IEAT
• government industrial estate
• private industrial estate
• Factories
• types of factory licences
• construction license
• use of building license
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Financial Agreements
• single loan agreement
• syndicated loan agreement
• underwriting agreement
• subscription agreement
• purchase agreement
• mortgage agreements
• pledge agreements
• assignment agreements
• ISDA Master Agreement
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Material agreements
• joint venture agreement
• consortium agreement
• shareholders agreement
• share sale and purchase agreement
• asset sale and purchase agreement
Issues in the Agreements
• representations and warranties
• affirmative covenants
• negative covenants
• events of default
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Materiality test
• percentage of the total assets
• percentage of the total revenues
• percentage of profits
• material adverse effect or change
Land Documents
• land title deeds
• land utilization certificate
• land possession certificate
• mortgage and other encumbrances over property
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Intellectual property
• trademark and trade service
• copyright
• patent (product patent and process patent)
• know-how
• Licensing Agreement
• Know-how Agreement
• Technical Assistance Agreement
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Human resources
• labour protection law
• labour relation law
• law on establishment and procedures of
labour courts
Environmental compliance
• environmental impact assessment report
• health impact assessment report
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Insurance
• life and non-life insurances
• product liability insurance
• professional insurance
Dispute settlement
• litigation vs arbitration
• professional expert, arbitrators , umpire, judges
Governing law
• issues on conflict of laws
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Courts
• Constitution Court
• Court of justice
• ordinary courts of justice- courts of first instance,
courts of appeal and the Supreme Court
• special courts of justice- labour courts, tax court,
intellectual property and international trade court
or IP and IT court, bankruptcy court
• administrative courts
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Court forum
• place of domicile of defendant
• place of location of property
• place of occurrence of tort
• place of committing an offence
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Tax issues
• Revenue Code
• Customs Act
• Excise Tax Act
• Signboard Tax Act
• Land and structure Tax Act
• Municipality Tax Act
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Revenue Code
• personal income tax,
• corporate income tax
• value added tax
• specific business tax
• stamp duty
Double taxation agreements
• taxation of income
• taxation of capital
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Examples of frequent opinions on laws and
regulations
• opinion on foreign shareholding
• opinion on ownership and mortgage of land and
building
• opinion on creation and enforcement of security
• opinion on investment promotion
• opinion on joint venture and consortium
• opinion on bankruptcy and liquidation
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Tax opinions
• Opinion on use of a branch, an office or a subsidiary
• opinion on share purchase
• opinion on asset purchase
• opinion on sale of goods and provision of services
• opinion on royalty and service fees
• opinion on dividend and interest
• opinion on dividend and capital gains
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II. SCOPE OF DUE DILIGENCE IN DIFFERENT
TYPES OF TRANSACTIONS
Legal Documentation
• Memorandum of understanding
• Term sheet
• sale and purchase agreement
• shareholders agreement
• joint venture agreement
• loan agreement
• security agreement
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III. AVOIDING PITFALLS AND
SOLUTIONS
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III. AVOIDING PITFALLS AND SOLUTIONS
Avoiding pitfalls
• All material documents have not been disclosed.
• Some documents have severe legal issues.
• Documents are produced periodically.
• Documents are not completely provided.
• No correct, true and accurate information has been given.
• Complicated transactions and waxed issues
• A limited period for legal due diligence
• Important issues are missing.
• An executive summary does not reflect significant issues.
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III. AVOIDING PITFALLS AND SOLUTIONS
Problems
• Licences are not renewed
• Failure to meet financial ratio such as debt to equity ration and interest
coverage ratio
• Restriction on foreign shareholding limit
• Trade secret and confidential information
• Infringement of intellectual property
• Non-compliance with laws and regulations
• Taxes are not paid or are incorrectly paid.
• floating charge
• non perfect security
• outright and conditional assignments
• Legal cases are pending and are not updated.
• Business rehabilitation or liquidation of a subsidiary
• Novation and assignment
• Legal and beneficial interest
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II.
AVOIDING PITFALLS AND SOLUTIONS
Solutions to Problems
• Detailed representations and warranties
• strict undertakings
• escrow agreement
• right of first refusal
• tag-along or drag-along provision
• indemnification
• events of default – cross default , negative pledge, material
adverse change
• termination
• Governing law
• Arbitration or ligation
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IV. CASE STUDY
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IV.
CASE STUDY
Case study
• lease of land owned by a state enterprise
• 2 sets of bank accounts- on balance sheet
bank accounts and off-balance sheet bank
account
• Related transactions
• Acquisition or disposition of assets
• Licences have not been renewed
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Thank you for your attention
SIAM CITY LAW OFFICES LIMITED
183 Rajanakarn Building, 20th Floor,
South Sathorn Road,
Bangkok 10120, Thailand
Tel: (662) 676-6668
Fax: (662) 676-6188
E-mail : picharn@siamcitylaw.com
www.siamcitylaw.com
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