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Sample Legal Due Diligence Checklist for Business Transfer

 

This is a sample due diligence checklist for a business transfer transaction, provided for reference purposes. The contents of the checklist may have variations depending on the nature of the transaction and the business of the target company. This checklist may be used for indicative guidance, but will require suitable modifications before use in a specific transaction.

 

 
 
 
 
 
 
 
 
 
________________________________________________________________________
 
 
LEGAL DUE DILIGENCE CHECKLIST
 
_______________________________________________________________________
 
 
 
 
 
 
[Insert date]
 
 
 
 
 
 
 
 
 
 
 
 
PRELIMINARY LEGAL DUE DILIGENCE CHECK-LIST
 
The following documents and information are requested from [—] (the “Company”) in connection with the potential acquisition of its [—] division (the “Target Business”) by [—]  (by itself or through any of its group companies) (the “Acquirer” and such acquisition, the “Proposed Transaction”).
 
Unless expressly specified otherwise, all documents and information requested below is in respect of the Target Business of the Company. Any reference to the Company should be deemed to include references to the Target Business of the Company and to each of the Company’s direct and indirect subsidiaries engaged in the Target Business.
 
Please note that:
 
  1. This list is not meant to be exhaustive and additional information and documents may be requested during and following the legal due diligence of the documents initially supplied by the Company.
  2. This list does not include request for information/documents to determine and evaluate the applicability of the provisions of the Competition Act, 2002 for the Proposed Transaction and a checklist in respect of the same will be circulated separately.
  3. All documentation and information provided pursuant to this due diligence checklist will need to be updated during the course of the due diligence process and should be dated as of [insert date].
  4. The documents provided in response to this due diligence checklist must either be original copies or certified true copies duly signed by an authorized representative of the Company. We clarify that the Acquirer will assume that the documents provided for due diligence are true, complete and valid documents. 
  5. In case documents to be provided are confidential in nature, we would request the Company to seek appropriate approval from third parties, if deemed necessary.
  6. It is further clarified that circulation of this due diligence checklist in no way constitutes a valid binding offer in respect of the Proposed Transaction.
  1. CORPORATE BOOKS AND RECORDS
 
  1. Certificate of Incorporation and Certificate of Commencement of business of the Company and all amendments thereto and particulars of the incorporation and documents related to commencement of business by the Company.
  2. The memorandum and articles of association of the Company, including all amendments till date.
  3. Minutes of meetings of the board of directors of the Company and any committees thereof, and the general body of shareholders over the past Five (5) years especially those pertaining to the Target Business.
  4. Details of any branch, agency, place of business or any permanent establishment in and/or outside India with respect to the Target Business, including address, brief description of business and details of the management personnel involved.
  5. Register of Contracts, Register of Investments, Register of Guarantees, Register of Charges and Mortgages and other records statutorily required to be maintained by the Company relating to the Target Business.
  6. Any document, undertaking or agreement by the promoters or management of the Company or commercial understandings with respect to restriction on disposal of substantial assets of the Company belonging or involving or relating to the Target Business.
  7. Corporate management organization chart of the Company including titles, functions and responsibilities.
  8. Copies of the audited financial statements and annual reports of the Company for the previous [3] financial years.
 
  1. GOVERNMENTAL REGULATIONS AND FILINGS
 
  1. Any report, notice or correspondence relating to any violation or infringement by the Company of any Indian or foreign laws including labor laws and environmental laws.
  2. Copies of all governmental permits, licenses, leases, authorizations, registrations, consents etc., periodic filings, of the Company obtained, granted or applied for in relation to the Target Business and correspondences relating thereto.
  3. Applications made for waiver or alteration of terms of any governmental approval, consent or license pertaining to the Target Business.
  4. Details of all reports or compliance information required by the relevant governmental authority and details of any inspections made and any alleged violations assessed concerning the licenses etc. mentioned above pertaining to the Target Business.
  5. Copy of the applications to the Government of India for recognition, renewal of recognition of in-house R&D units.
  6. List of and information relating to all laws affecting the operations of the Target Business.
  7. Any reports, notices or correspondence to the Company regarding foreign payments or compliance with any other country’s governmental regulations or currency requirements pertaining to the Target Business.
  8. Any agreements executed or MoU by the Company on the one hand and with the Indian Government on the other hand, whether at the central, state or municipal/local level in relation to the Target Business.
  9. Copies of the approvals from the Secretariat for Industrial Assistance/Foreign Investment Promotion Board (“SIA/FIPB”) and the Reserve Bank of India (“RBI”) required by the Company, if any.
  10.  Details of any current, pending or threatened investigation or proceeding against the Company in respect of Target Business by any regulatory or supervisory body or authority or any circumstance, event, act or omission that might give rise to any such investigation or proceeding.
  11. Description of how the Company ensures compliance with anti-bribery/ anti-corruption laws and the Company’s code of conduct.  
  12. Detailed list of any concessions, benefits availed from the government in relation or that may arise out of the Target Business.
  13. List of statutory, corporate and other consents, approvals and/or authorizations required to dispose of substantial assets relating to the Target Business.
 
  1. DEBT AND LOAN DOCUMENTS
 
  1. Details of the lenders, debtors and creditors and age of debts of the Company and amount outstanding to or from each of such lenders, debtors or creditors.
  2. Communications regarding defaults, potential defaults or waivers of defaults under the various debt instruments / financing facilities, if any.
  3. A schedule of all outstanding foreign currency and rupee borrowings, lines of credit, overdraft facilities and other sources of credit of the Company including equipment supply credit, and the terms and basis of any security taken pertaining to the Target Business.
  4. All documents and agreements (and any agreements in draft form which are being negotiated), including guarantees, evidencing outstanding borrowings, whether secured or unsecured, loan and credit agreements, government grants, leaseback arrangements, installment purchase agreements, promissory notes and other documents evidencing indebtedness by the Company or shareholders including those pertaining to the Target Business. 
  5. Details of security, pledge, hypothecation, liens or encumbrances created in favor of any party with respect to indebtedness incurred by the Company especially in connection with the Target Business. Copies of Form 8 filed with the Registrar of Companies in respect of any security created involving the Target Business. Copies of Form 17 here such charges have been satisfied along with Nil Due Certificates issued by the Banks/Lenders.
  6. Details of loans from any Director or shareholder of the Company to the Company or from the Company to any Director or shareholder. Also provide details of inter-corporate loans involving the Target Business, if any.
  7. Confirmation that no notice of an event of default or otherwise, requiring repayment has been served, and that the Company is not in breach of any document or agreement evidencing indebtedness including documents or agreements in respect of any debt, charge, debenture, guarantee or indemnity which may relate to the Target Business.
  8. Copies of all mortgage deeds, hypothecation agreements or any other document evidencing creation of any kind of security over any asset or property of the Company in respect of Target Business.
  9. Copies of any hedging arrangements or other arrangements involving derivatives entered into by the Company pertaining to the Target Business.
  10. Details of any bills discounting or assignment of receivables relating to the Target Business, together with the agreements/documents pertaining to such arrangements.
  11. List of payments arising from the Target Business (both receivables and trade payables) and payment arrangements with such creditors or debtors of the Company.
 
  1. BUSINESS AND MATERIAL AGREEMENTS
  1. All joint venture/collaboration, partnership, technical assistance, trademark or other licensing agreements to which the Company that relate to the Target Business.
  2. Copies of all agreements, contracts or other commitments (whether intended to be legally enforceable or not) of the Company involving the products and services of the Target Business, including:
  • top 10 suppliers/ vendors, and agreements governing procurement of products/services from them;
  • top 10 customers and agreements governing supply of products/services to them;
  • top 10 distributors and agreements governing supply of products/services to them;
  • selling/ retailing / marketing its products, copies of standard terms and conditions for the same, if any, and arrangements with the Indian Government (both Central and State);
  • technical collaboration / transfer agreements,  technical assistance agreements, trademark licenses etc;
  • agreements with any storage facilities, carriers, shippers;
  • collaboration or profit sharing agreements;
  • list of all agreements with “change of control” or similar provisions that could be implicated by the contemplated transaction;
  • commission, brokerage, agency or similar contracts;
  • franchise agreements;
  • outsourcing agreements;
  • other agreements, including indemnity agreements related to acquisitions, restructurings, reorganizations and dispositions of businesses and material assets, of the Company;
  • non-competition agreements, agreements that limit the ability to engage in any business or limit the geographic scope of any operations,
  • agreements or which grant any material exclusivity rights, releases of intellectual property claims, etc.
  • equipment leasing; 
  • operating and maintenance; and
  • advertising contracts involving the products and services of the Target Business.
  1. Any agreement entered into by the Company or its shareholders relating to restrictions on competition affecting the Target Business.
  2. A schedule of purchase orders, leases and contracts for and warranties pertaining to the products and services rendered/procured by the Company in respect of the Target Business.
  3. All other agreements to which the Company is a party pertaining to the Target Business, including government contracts, customer contracts, supplier contracts, license agreements and confidentiality agreements and documents (e.g. corporate guarantees).
  4. Details of all relationships and copies of any agreements, contracts or other commitments (whether intended to be legally enforceable or not, whether reduced into a writing or not) with all related parties, including its shareholders and employees, and information on related party transactions.
  5. A schedule containing the details of contracts and agreements to which the Company is a party which are non-assignable or non-terminable or which can be unilaterally terminated by the other party to the contract/agreement in case of change of control over the Target Business or which can be terminated only upon notice of Thirty (30) days or more.
  6. Details of any long term contract, or contracts which are or are likely to be of an unprofitable or loss making nature and of any contracts containing obligations or restrictions of an unprofitable or loss making nature and of any contracts containing obligations or restrictions of an exceptional or unusual nature, in each case relating to the Target Business.
  7. Details of corporate transactions with shareholders or affiliates of the Company including transfer pricing arrangements and inter-company charging procedures in each case pertaining to the Target Business.
  8. Copies of agreements if any, to provide goods or services below cost (other than promotional arrangements entered into in the ordinary course of business) arising out of Target Business.
  9. A schedule containing the status of contracts and details, if any of all default(s) (if any) under any contract or arrangement pertaining to the Target Business.
  10. Details of arrangement in respect of assets of the Target Business with the customers of the Company.
  11. Details of any contract, heads of agreement, arrangement or understanding with any other person which:
  • is not within the ordinary course of Target Business;
  • is not on arm’s length;
  • is material to the Target Business of the Company;
  • involves the supply of goods or services to or by the Company the aggregate sales value of which will represent in excess of 5 per cent of the turnover of the Target Business expected by the Company for the current financial year; and
  • requires payment of any sum to or by the Company in respect of Target Business in any currency other than Indian Rupees.
  1. In respect of Target Business, a list and description of any material contract, agreement, understanding or transaction that is not evidenced by writing.
  2. Agreement in respect of Target Business to which the Company is a party, including government contracts, customer contracts, license agreements and confidentiality agreements and documents (e.g. corporate guarantees) imposing contingent liabilities on the Company.
  3. Copies of any agreements relating to the Company giving any party the rights to renegotiate or require a reduction in prices of any products, components or services or the repayment of any amount previously paid (i.e. volume discounts, customer rebates) towards a product, component or service.
 
  1. ACQUISITIONS AND DISPOSITIONS
 
  1. All purchase agreements, merger petitions filed with the court and other documents of the Company relating to any mergers, consolidations, reorganizations, acquisitions or dispositions of, or investments in businesses or assets, including those proposed for the future, in each case, relating to the Target Business.
  2. All disposition agreements (including letters of intent) to which the Company is a party, including any agreement restricting the sale or transfer of the Target Business of the Company.
 
  1. REAL PROPERTY (i.e., immovable property)
 
  1. Copies of sale deeds, title documents, encumbrance certificates, planning permissions or leases of personal or real property to which the Company is a party, either as owner/lessor or lessee and a schedule thereof showing locations of properties, whether properties are owned or leased, and the annual rental payments and expiration dates of leases and those pertaining to the Target Business.
  2. A schedule of all pledges, mortgages or other instruments granting a security interest in any real property of the Company and a schedule of all liens or encumbrances existing or created on any real or personal property of the Company. Information on creation of mortgage by deposit of title deeds, if any, involving the real property proposed to be leased for the Target Business.
  3. List of all units owned and/or operated by the Company for Target Business, owned by any affiliates of the Company or its promoters from whom the Company sources any products/services or units which though not owned by the Company are operated by the Company and details of the arrangements pursuant to which the Company is operating such units for the Target Business.
  4. Details of any restrictive covenants or provisions, or legislation, rules or regulations, or orders, charges, restrictions, agreements, conditions or other matters which precludes the use of any of the properties of the Company for the purpose of Target Business, confirmation that all restrictions, conditions and covenants have been observed and performed and each such user is the permitted user under the provisions of any relevant planning legislation.
  5. Details of compliance of specific building obligations in relation to the land owned by the Company in respect of the Target Business.
  6. Details of compliance with local laws and lease agreements in relation to approval of sites, maps and building regulations and guidelines involving the real properties in respect of the Target Business.
  7. Any valuation of the real or personal property interests of the Company and any title and appraisal reports of the same involving the real properties pertaining to the Target Business.
  8. All site surveys relating to any real or personal property in which the Company has an interest and pertaining to the Target Business. 
  9. Copies of receipts indicating payment of lease rentals in case property is leasehold relating to the Target Business.
  10. Details of environmental law compliances at the real property of the Company pertaining to the Target Business.
  11. Details of all permits/licenses and approvals involving the real properties in respect of the Target Business.
  12. Copies of any search report or other title report in respect of owned/leased premises used for the Target Business.
  13. Copies of site plan and sanctioned plans by municipal/industrial bodies in respect of Target Business.
  14. Applicability of urban land ceiling Act to any of the properties used in respect of Target Business.
 
  1. GENERAL PROPERTY
 
  1. Register of all assets (identifying which assets are owned and which are leased), including all plant and machinery, inventory and work-in-progress along with stand alone values which form an integral part of the Target Business.
  2. Schedule indicating all the assets of the Company and division of those assets among various business divisions of the Company (i.e., list of assets shared by the Target Business and other divisions of the Company including labor and movable and immovable assets).
  3. Details of actual title over the assets (other than real property) forming a part of the Target Business along with receipts and warranty and service obligations from the vendor of such assets.
  4. Details of any service or replacement of parts arrangements in respect of the Target Business.
  5. Details of any Memorandum of Understanding or agreement to sell in respect of any of the assets involving the Target Business.
  6. In relation to moveable assets of the Company for Target Business details and copies in relation:
  1. Owned Assets
  • List of the Assets
  • Agreements - sale deeds, conveyance deeds, hypothecation deeds, etc. relating to the assets including asset share agreements.
  • Charge holders, name and type of charges.
  • Deferred payment scheme (including hire purchase), if any.
 
  1. Leased Assets
  • List of Leased Assets.
  • Lease Agreements, out standings/ charges
  • Purchase options.
  • Repair, tax and insurance obligations.
  1. Details of material equipments owned or used or possessed by the Company in respect of Target Business and confirmation as to whether or not any of these will require to be replaced within the next [1 (one) year]. If so, at what cost, and whether any provision has been made for this in Company’s accounts.
 
  1. LITIGATION DOCUMENTATION
 
  1. List and description (including a copy of each judgment, decree, order of court or regulatory agency and settlement of any kind) of all past, current, pending or threatened material litigation, dispute, arbitration, administrative or official or regulatory investigations or other proceedings in relation to the Target Business of the Company, its affiliates, key personnel, subsidiaries, or any related party (in connection with the affairs of the Target Business of the Company) or by which the operations or assets of the Target Business of the Company may be affected or to which the Company is a party, including but not limited to: (a) Civil suits; (b) Taxation claims; (c) Economic offences; (d) Labour laws; (e) Consumer complaints; (f) Criminal actions against directors or former directors of the Company; (g) infringement of intellectual property rights; and (h) Arbitration disputes. The above description should include amounts involved, current status of such cases / dispute and potential liability of claims pursuant to such litigation / dispute.
  2. All letters from or on behalf of the Company or the Company’s or to the independent auditors regarding legal proceedings in which the Company is or may be involved pertaining to the Target Business.
  3. All consent decrees, compromises, judgments, other decrees or orders, decisions or orders of any arbitral tribunals, settlement agreements and other agreements to which the Company is a party to or bound under, in each case relating to the Target Business.
  4. Details of any facts or circumstances known to the Company or its shareholders which might in future lead to any claims, litigation, dispute or arbitration proceedings in case of the Proposed Transaction.
  5. Details of all legal/winding up/show cause notices received by the Company.
 
  1. EMPLOYMENT AND RELATED MATTERS      
 
  1. A list of all the employees involved and managing the Target Business and forms of contracts of employment including a typical contract of employment for each grade of employee working in the Target Business along with a responsibility chart for each of the employee and salary and legal labor entitlements, including provident fund, termination package and retirement benefits. Further provide a detailed report of the usage of common pool of employees by the Company for its other divisions and businesses and the Target Business.
  2. Any contract-labor agreements pursuant to which the Company contracts with a third party for the supply of labor and a list of all contract workers and their conditions of service in the Target Business.      
  3. List of all the recognized and unrecognized trade unions or labor associations/ organizations of the Company’s employees or contract workers, and the details of the key office bearers of the Target Business. 
  4. Copies of employment contracts (or details of the terms of employment if no written contract) of all directors and senior management (i.e., any persons reporting directly to the Managing Director and/or all persons of and above the rank of general manager and details of their job description), including any consultancy agreements and arrangements for the payment of fees to board members who are not employees of the Company who are involved in the operations of the Target Business.
  5. Copies of the standard terms of employment for each grade of employee or contract worker, staff handbooks, health and safety rules, disciplinary procedures and business conduct guidelines (if any), including details regarding annual working days and hours, overtime rates, holiday entitlement, salary review date and sick pay as applicable to the Target Business.
  6. Details of any redundancy, retrenchment or lay-off, policy or arrangements applied by the Company and predicted cost of any planned redundancy involving the Target Business.
  7. Documents providing for any bonus, retirement, profit sharing, incentive compensation, welfare, pension employee stock options and other employee benefit plans or agreements of the Company. Details of bonus payments and registers required to be maintained pursuant to the Payment of Bonus Act. Details of compliance with Payment of Gratuity Act or other Gratuity Fund Scheme and any other Employee Welfare Schemes in existence involving the Target Business.
  8. Details of any litigation or industrial dispute in process or threatened concerning any employee benefit plan implemented or administered by the Company with respect to employees engaged in the Target Business.
  9. Full particulars of any provident fund, pension plan, pension arrangement, or proposed pension scheme, covenant or life assurance schemes of the Target Business. Details on compliance of the Provident Fund and Miscellaneous Provisions Act, maintaining of the registers prescribed there under and details of contributions and employees covered there under. Details of any other Provident Fund scheme or Trust and transferability of the same involving the Target Business.
  10. License under Factories Act and Registers required to be maintained regarding details of working hours, leave, safety, etc. as required under the Factories Act or any other labor welfare legislations involving the Target Business. Other labor licenses and permissions, including under the Contract Labor Act 1970.
  11. The standard disciplinary/grievance procedures that are in force, and any disciplinary actions or proceedings that are pending.
  12. Summary of the occupational health and safety history of the Company for the previous [3 years].
 
  1. CONTINGENT LIABILITIES
 
  1. Details of any violation of any law, order, ruling or regulation (that might lead to a judgment, decision, ruling or finding adversely affecting the Company and might potentially affect the Target Business.
  2. Details of any breach or default under the terms of any agreement or license to which the Company is a party and may affect the Target Business.
  3. Details of provisions made in the latest audited and unaudited balance sheets for contingent liabilities or explanations provided in the notes to accounts.
  4. Copies of internal reports recording the off balance sheet contingent liabilities.
 
  1. INSURANCE
 
  1. Details of any insurance available to the employees of the Company including medical insurance, health insurance and life insurance involving the employees working in the Target Business. Registration under Employee State Insurance Act; details of contributions and employees covered there under and who are employees in the Target Business.
  2. A schedule containing details of the insurance policies in favour of the Company relating to the Target Business and any employees assigned to the Target Business. Confirm whether such policies are transferable.
  3. A list of all insurance policies relating to the business, assets, or properties of the Company pertaining to Target Business and copies of such policies. This list should identify, among other things, the following for each policy:
  • insurance company;
  • policy number;
  • property or risk covered;
  • term of coverage;
  • extent of coverage;
  • annual premium; and
  • amount of premiums that are prepaid or are unpaid from prior years.
  1. A schedule of all claims made since incorporation with respect to the insurance policies described above.   
 
  1. INTELLECTUAL PROPERTY
 
  1. Details of and copies of documents relating to any patent, trade or service mark, brand name or registered design, or any copyright, know-how or other intellectual property of which the Company is the owner, licensee or user, in each case pertaining to the Target Business.
  2. List of all the intellectual property used in the Target Business for its operations and the royalty payment or other restrictions pertaining to use of such IP, including with respect to transferability to third parties.
  3. Details of any arrangements that exist to ensure that any intellectual property rights relating to the Target Business deriving from work done by outside parties or employees accrue for the benefit of the Company.
  4. Details of any work-in-progress or research and development that is currently being undertaken by the Company for Target Business in respect of new products or technology to be supplied to or used by them and payments that have been made, or are to be made, in connection therewith.
  5. Details of any infringement or alleged infringement by third parties of any intellectual property rights of the Company involving the Target Business.
  6. Details of any intellectual property rights owned by third parties the use or exploitation of which is necessary or desirable for the Target Business.       
  7. Details of any circumstances where the benefit, or the right of use, of any of the above intellectual property rights, licenses or agreements may be lost or affected adversely (including on a change of control) in case of the consummation of the Proposed Transaction.
  8. A list of all technology, automobile or other industry standards or protocols related to the Target Business of the Company.
 
  1. ENVIRONMENTAL MATTERS
 
  1. All licenses, permissions, authorizations and consents from environmental authorities obtained in order to carry on the Target Business and any outstanding applications in respect of the same whether in India or abroad.
  2. Details of any breach (or potential breach) of any law, code, rule, regulation, order, notice, directive, license, authorization, consent, approval concerning health, safety or pollution or protection of the environment by the Target Business, whether in India or abroad.
  3. Details of handling and treatment of any emissions, pollutants, contaminants, hazardous, flammable or toxic substances, materials or waste used in or produced by the Target Business.
  4. Details of any environmental audit and inspection reports (whether performed by the Company or by third parties) made, and documentation for any alleged violations assessed, at any time in the past.
  5. Details of any spill, leakage, deposit, emission, discharge or release of any such substance, material or waste into the air, water, sewerage system or soil which may have occurred at any time at any of the properties owned or occupied by the Target Business (even prior to their ownership or occupation, if known).
  6. Details of any complaint by any private person, association, non-governmental authority and any governmental authority, received regarding noise, smells, emissions or other environmental matters involving the Target Business.
 
  1. FINANCIAL ASSISTANCE
 
  1. Details of (together with copies of any relevant documentation) any grant, subsidy or financial assistance from any governmental or statutory or other body, person, or company and/or the effect (if any) of a change of shareholding or control on any such grant, subsidy or assistance and the continuation thereof.
  1. INDUSTRY SPECIFIC CONSENTS AND APPROVALS
 
  1. Copies of all consents and authorizations from any regulatory authority held by the Company in respect of the Target Business.
  2. NIC Codes along with a brief description of the business of the Company and the Target Business.
 
  1. BUSINESS AND OPERATIONS DESCRIPTIONS
 
  1. All marketing and other descriptive brochures regarding the Company and its products especially those involving the Target Business especially those providing warranty claims.
  2. Copies of any of the Company’s strategic business and marketing plans that involves the Target Business.
  3. Description of the research and development efforts relating to the Target Business since incorporation of the Company.
 
  1. MISCELLANEOUS
 
  1. Please confirm, by providing a certificate from the Company’s secretary and auditors that the Company is in good standing and that no receiver, receiver and manager or administrative receiver has been or is likely to be appointed in respect of any part of the undertaking or property of the Company and that no resolution has been passed or proposed and that no petition has been presented for the winding-up of the Company or for the making of any administration order which may impact the operations of the Target Business upon completion of the Proposed Transaction.
  2. A schedule containing the details of all powers of attorney granted by the Company in respect of the Target Business.
  3. Any other documents or information which are significant with respect to the business of the Company or which should be considered and reviewed regarding the business, assets and financial condition of the Company especially those pertaining to the Target Business.
  4. List of assets and liabilities relating to the sale of Target Business and forming part of the Proposed Transaction.
  5. List of products designed or developed or in the process of designing or developing for the Target Business and, that will form a part of the Proposed Transaction, including, a schedule containing the details of warranty periods, warranty expenses etc pertaining to such products.
  6. ISO Certification in respect of Target Business.
 
*****
 
The material can be download from here.
 




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