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CS Professional · Corporate Restructuring, Valuation and Insolvency · Process of M&A Transactions

Nila Motors Ltd is acquiring Ganga Auto Ltd. Due diligence shows a pending product-liability suit where the likely loss is Rs 8 crore but the amount is uncertain and no provision exists in Ganga's books. Which approach best protects Nila?

Nila should negotiate a price reduction, a specific indemnity or an escrow holdback for the Rs 8 crore contingent liability. This allocates the risk to the sellers. Ignoring the suit or cancelling automatically are not appropriate responses to an identified, quantifiable exposure.

  1. AIgnore it because the suit is not yet decided
  2. BNegotiate a price reduction, a specific indemnity or an escrow holdback covering the contingent liabilityCorrect
  3. CRely solely on the target's auditor's report without further action
  4. DCancel the deal automatically as litigation always bars acquisition

Explanation

An unprovided contingent liability affects value. The buyer typically adjusts price, takes a specific indemnity from sellers, or retains part of the consideration in escrow until the suit is resolved. Ignoring it shifts the loss to the buyer, and litigation does not automatically bar an acquisition.

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