Abha Kashyap
Abha Kashyap

With a market mostly driven by hard-to-acquire intangible assets, like intellectual capital and brand equity, experts warn that acquiring companies with pending legal cases can be detrimental for the business

New Delhi: With more start-ups attracting big corporate houses and even business giants selling off their money-spinning enterprises to expand the market and increase proficiency, experts warn investors to also review the legal health of the companies before taking over.  

Abha Kashyap, Photo Credit: www.kpalegal.com

Usually, before an acquisition or merger, the company is assessed on the basis of debts and liabilities, financial statements, the market value of the company and its future plans. Experts suggest that while a financially stable and promising venture is always good for the investment, at the same time it is also important that investors confirm that the company they are going to collaborate with, has a clear legal record.

In today’s market, the major share of the business comes from the intangible assets of the companies, like proprietary technology and brand equity, which are incredibly hard to acquire and even more challenging to maintain in the long run. Obviously, getting associated with a name, which later turns out to be involved in legal issues, can seriously affect the brand image and its value. It is like buying a venture with high market value but eventually losing business due to legal matters it brings along.

However, despite many cases coming to the fore where big businesses were acquired on incredibly high cost but they eventually proved to be a huge loss for the investors because of the legal cases they were involved in, the idea of assessing legal health of the company hasn’t yet established. This is also because it is not easy for the investors to check the cases that are pending on the name of a company, directors and/or founders in all the courts of India. in fact, some district courts in India do not even have appropriately updated databases.

Commenting on the matter, Abha Kashyap, Managing Partner of Kashyap Partners and Associates says, “Taking the contracts and compliances into account can be simple but as for the cases, there needs to be a single database for investors to check seamlessly but that is not the case in India. Therefore, to have an accurate legal health report of the company, it is advisable for the investors to engage experts. This might cost them in the beginning, as inspecting cases by going through website of every district court, high court and then the supreme court, and sometimes even tribunals, is a huge task, but considering its importance in today’s market, it is still a good deal for them,” suggests Ms Kashyap.

And is there anything start-ups can do to avoid getting into legal issues?

Ms Kashyap says that start-ups can actually do a lot to avoid getting into legal matters, she says, “I always insist that the companies, especially the start-ups, should seek expert advice while contriving the legal structure of the company right from the beginning. This not only gets them covered for most of the legal issues in future but goes a long way in building a brand-image and equity. Such reputation eventually pays very well in case the intent is to sell off the business or merge with big brands.”

It’s like creating a system with the help of lawyers or law firms, wherein businesses are equipped with strong legal frameworks which enable better compliance, at the same investors are backed by a meticulous review of the legal health of the companies they are going to invest in.

“Getting expert’s help on legal matters ensures a win-win situation for everybody. For investors, having law experts on-board help them thoroughly go through the legal health of the company before taking it over, and for the start-ups, and even for the big business houses, it provides them with a robust legal framework that ensures maximum compliance,” adds Ms Kashyap.