BASIC DUE DILIGENCE REVIEW (Short Form)
A. General Information
- Articles of incorporation, amendments and by laws.
- Minutes of Meetings – Board of Directors, Committees, Shareholders
- Reports (exclude financial statements) provided to shareholders.
- Business plans
B. Financial Information
- Financial statements of the Company (subsidiaries?)
- List of suppliers.
- List of customers
C. Tax Issues
- Federal and provincial income tax returns.
- Past Federal and provincial audits.
- Sales and GST tax returns.
D. Debt and Share Capital
- Authorized and issued shares, rights to acquire shares, i.e. options, convertible debt/shares
- Financing history for shares and debt
- Shareholders’ agreements
- Outstanding liabilities for money borrowed; capital leases?
- List of land owned or leased with (a) location and brief description and (b) mortgages
- List of important personal property owned or leased, and mortgages.
- Copies of deed(s), lease(s) and mortgage(s).
- Summary of existing insurance policies, i.e. premiums, coverage, deductibles, exclusions, etc.
- Copies of insurance policies.
- List of insurance claims with details.
- List of distributors for your product.
- Market reviews, marketing plans and materials.
- Details of competitors and their products.
- Details re: warranties on your products.
H. Intellectual Property
- List of patents, trademarks, copyrights, service marks owned or licensed.
- Copies of license agreements.
- List of trade secrets, etc.
- Copies of all technology sharing, use and disclosure agreements.
- Confidentiality and non disclosure agreements: employees and others
- List all internet domain names owned by the company.
- Obtain and list the licenses of software used by the company.
- List the uses that a company makes of its intellectual property.
- Agreements, any amendments and related correspondence/emails
- Debt, security, guarantee
- Distributors, retailers or marketing representatives for you.
- Supply or purchase contracts for your products.
- Contracts for your purchase of services and equipment.
- Sales contracts or service agreements with customers.
- Partnership, joint venture or other similar contracts or arrangements.
- Non compete, 1st right of refusal on assets.
- License agreements
- Mortgages and related documents.
- Other important agreements.
- Agreement approvals. List when a consent or approval is needed to complete a sale, purchase or financing the transaction or that will be subject to change or acceleration as a result of the transaction.
J. Law Suits
- Pending or threatened litigation with details and copies of proceedings.
- Government approval(s) needed/obtained for your products, with copies of present approvals.
- Chart showing duties and reporting responsibilities.
- Record of employees with details, i.e. name, starting date, duties, compensation.
- Written employee contracts; summary of terms of oral agreements
- Agreements with consultants.
- Stock option/purchase details, bonus, profit sharing.
- Bonus, sales commission agreements.
- Copies of benefit plans.
- Hazardous materials of the Company and details, i.e. what, where, how.
- Environmental liabilities you are aware of now.
- Governmental reports, permits re hazardous waste, Government notices re: environmental issues/violations/proceedings.
- Environmental reports or audits.
- Environmental claims against you.
- Insurance coverage, for environmental issues.
Re: Shareholders’ Agreement Checklist
- Corporation a party?
- If unanimous shareholder agreement, add directors?
- Obligation for further shares?
- Options for additional shares?
- Obligations for purchase or redemption of shares by corporation?
- Restrictions on issuing additional shares?
- Initial capital contribution? Additional contributions?
- Financing – methods(s) of financing and corporation’s activities?
- Loans: interest payable? Terms of repayment of shareholders’ loans?
- Forced shareholder loans to the corporation? Penalties for failure to make loans?
- Personal guarantees required? Failure to provide?
- Security for shareholder loans?
4. MANAGEMENT OF OPERATIONS
- Board of directors – number, appointment, removal, who, time involved
- Officers and employees - salary? Terms of employment? Employment agreement? Shares sold when employment ends?
- Banking – bank? Signing officers? Limitations on borrowing?
- Meetings of Directors and Shareholders – who can call meetings; notice, quorum and voting at meetings, whether specified nominees must be present to form a quorum; names of shareholders and number of each class held, who can call meetings, notice, quorum and voting at meetings; whether specified shareholders must be present to form a quorum?
- Financial – accountants or auditors? Financial year-end? Annual budget? Shareholders must approve budget? Accounting records and inspection?
- Fundamental changes – 100% approval? Majority? Directors? Shareholders? Declaration of dividends? Issuance of further shares? Material change in business; major contracts, contracts out of the ordinary course of business, contracts with shareholder, compensation to employees?
- Dividends – in excess of the working capital?
- “Key-Person Insurance” – funding? Tax issues?
5. TRANSFER OF SHARES
- Unanimous approval needed? Majority? Directors? Shareholders?
- Right of first refusal?
- Shotgun buy-sell?
- Debt repaid on transfer of shares?
- All shares must be offered?
- Purchase by other shareholders:
- Death of shareholder – purchase price (formula), funding (insurance) payment,outstanding loans paid off.
- Bankruptcy of a shareholder?
- Disability of a shareholder?
- Shareholder ceasing to be an employee?
- Allowed transfers:
- to other shareholders?
- on death?
- to related persons?
- Book value?
- Earnings method?
- Shareholders periodic fixing value?
- instalments and security?
6. RELATED PARTIES
- No non-arm’s length transactions with related parties except at fair value?
- Agreement not to compete or use trade secrets?
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