Basic Due Diligence Review

BASIC DUE DILIGENCE REVIEW (Short Form)

DESCRIPTION  COMMENTS

 

A.  General Information

    1. Articles of incorporation, amendments and by laws. 
    2. Minutes of Meetings – Board of Directors, Committees, Shareholders 
    3. Reports (exclude financial statements) provided to shareholders. 
    4. Business plans

B.  Financial Information

    1. Financial statements of the Company (subsidiaries?) 
    2. Budgets  
    3. List of suppliers. 
    4. List of customers

C.  Tax Issues

    1. Federal and provincial income tax returns. 
    2. Past Federal and provincial audits.
    3. Sales and GST tax returns. 

D.  Debt and Share Capital

    1. Authorized and issued shares, rights to acquire shares, i.e. options, convertible debt/shares 
    2. Financing history for shares and debt 
    3. Shareholders’ agreements 
    4. Outstanding liabilities for money borrowed; capital leases?

E.  Assets

    1. List of land owned or leased  with (a) location and brief description and (b) mortgages 
    2. List of important personal property owned or leased, and mortgages. 
    3. Copies of deed(s), lease(s) and mortgage(s).

F.  Insurance

    1. Summary of existing insurance policies, i.e. premiums, coverage, deductibles, exclusions, etc. 
    2. Copies of insurance policies. 
    3. List of insurance claims with details.

G.  Products/Marketing

    • 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  

    1. List of patents, trademarks, copyrights, service marks owned or licensed. 
    2. Copies of license agreements.
    3. List of  trade secrets, etc. 
    4. Copies of all technology sharing, use and disclosure agreements. 
    5. Confidentiality and non disclosure agreements:  employees and others 
    6. List all internet domain names owned by the company. 
    7. Obtain and list the licenses of software used by the company. 
    8. List the uses that a company makes of its intellectual property.

I.  Agreements

    1. Agreements, any amendments and related correspondence/emails 
    2. Debt, security, guarantee  
    3. Distributors, retailers or marketing representatives for you. 
    4. Supply or purchase contracts for your products.
    5. Contracts for your purchase of services and equipment.
    6. Sales contracts or service agreements with customers.
    7. Partnership, joint venture or other similar contracts or arrangements. 
    8. Non compete, 1st right of refusal on assets. 
    9. License agreements 
    10. Mortgages and related documents. 
    11. Other important agreements. 
    12. 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

    1. Pending or threatened litigation with details and copies of proceedings.

K.  Approvals/Permits/Grants

    1. Government approval(s) needed/obtained for your products, with copies of present approvals.

L.  Employees

    1. Chart showing duties and reporting responsibilities.  
    2. Record of employees with details, i.e. name, starting date, duties, compensation. 
    3. Written employee contracts; summary of terms of oral agreements 
    4. Agreements with consultants.      
    5. Stock option/purchase details, bonus, profit sharing. 
    6. Bonus, sales commission agreements. 
    7. Copies of benefit plans.

M.  Environmental

    1. Hazardous materials of the Company and details, i.e. what, where, how. 
    2. Environmental liabilities you are aware of now. 
    3. Governmental reports, permits re hazardous waste, Government notices re:  environmental issues/violations/proceedings. 
    4. Environmental reports or audits. 
    5. Environmental claims against you. 
    6. Insurance coverage, for environmental issues. 

Re: Shareholders’ Agreement Checklist

1. PARTIES

  • Corporation a party?
  • If unanimous shareholder agreement, add directors?

2. SHARES

  • Obligation for further shares?
  • Options for additional shares?
  • Obligations for purchase or redemption of shares by corporation?
  • Restrictions on issuing additional shares?

3. FINANCING

  • 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?
  • Valuation:
    • formula?
    • Book value?
    • Earnings method?
    • Appraisal?
    • Shareholders periodic fixing value?
  • Payment
    • instalments and security?

6. RELATED PARTIES

  • No non-arm’s length transactions with related parties except at fair value?

7. NON-COMPETITION

  • Agreement not to compete or use trade secrets?

Author:

Doug Shanks

Real Estate Law Contacts:

Doug Shanks
Thunder Bay, Lawyer
Phone: 807.625.7133
Email: cheadles%23com|shanksj

Ken Ritson
Thunder Bay, Lawyer
Phone: 807.625.6620
Email: cheadles%23com|ritson