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CS Professional · Corporate Restructuring, Valuation and Insolvency · Planning and Strategy

Ananya Pharma Ltd is evaluating a merger with Bhavani Labs Ltd. The due diligence team finds that Bhavani's two largest customers, contributing 60% of revenue, have contracts with a clause allowing termination on change of control. What is the most appropriate use of this finding in the transaction?

The finding should be treated as a key risk and addressed through counterparty consents, a price adjustment or a condition precedent to closing. Since the contracts generate most revenue and can be terminated on change of control, ignoring them would overstate the value of the target.

  1. AIgnore it, since customer contracts are not part of due diligence
  2. BTreat it as a key risk and seek consents, a price adjustment or a closing conditionCorrect
  3. CProceed only after reducing the share exchange ratio to zero
  4. DDefer disclosure until after the scheme is sanctioned

Explanation

A change-of-control termination right on contracts forming 60% of revenue threatens the value being paid for. The acquirer should handle it through third-party consent as a condition precedent, price renegotiation or protective warranties. Ignoring or hiding it defeats the purpose of diligence.

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