In this presentation, FMC's Brian Abraham, Q.C., outlines the entire legal due diligence process including: the lawyers role vs. that of the company, the purpose of due diligence, as well as a step-by-step checklist of the process. Also addressed is how the transaction structure affects the due diligence process and identification and assessment of key risks.
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Due Diligence - Roping the Wind for Dust Particles
1. Due Diligence
Roping the Wind for Dust Particles
Presented by: Brian Abraham
September 28, 2011
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2. What is due diligence?
• Due diligence is an important step toward the acquisition of a
business – assets, property interests, shares, and/or mixed
elements
• It is a process by which clients, lawyers and other advisors try
to learn as much as possible about a target business or
property before committing funds to enter into an option;
joint venture lease
• Legal due diligence is just one element of due diligence
process
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3. Why due diligence?
• Lawyer’s role in due diligence is to ensure
achievement of client objectives
• Why does the client want to acquire the ‘target’
CREATING A DUE DILIGENCE FRAMEWORK
property or interest?
• Will the client’s acquisition of target business help
them achieve their end objectives?
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4. Different purposes for due diligence
• Some due diligence is “target” focused, this type of
investigation attempts to address the risks and or issues
regarding what is being acquired
– e.g. existence of underlying agreements,
i.e. royalties
• Transactional due diligence addresses the risks and or issues
concerned with getting the deal done
– e.g. loan agreement requires consent of third parties for
transaction, original owner
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8. Legal Due Diligence Checklist
Basic Corporate Documents
• Bylaws, including all amendments.
• Articles of Incorporation, including all amendments.
• Minutes of all meetings of directors, committees of directors and
shareholders, including copies of any written notices (if given) or
waivers thereof and any written consent to action without a meeting
within the past five years.
• List of all provinces, states and countries where property is owned or
leased or where employees are located, indicating in which provinces,
states and countries the Company is qualified to do business.
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9. Legal Due Diligence Checklist
Basic Corporate Documents
• Copies of any voting trust, shareholder or other similar agreement
covering any portion of the Company’s shares.
• Copies of all agreements relating to repurchases, redemptions,
exchanges, conversions or similar transactions.
• Copies of all agreements containing registration rights or assigning
such rights.
• Copies of all agreements containing pre‐emptive rights or assigning
such rights.
• All quarterly and annual reports, proxy materials and any other
communications to the Company’s shareholders within the past five
years.
• List of all subsidiaries.
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10. Legal Due Diligence Checklist
Searches
• Applicable registries/names/jurisdictions
• Local advice is critical – even in Canada!
• Mining Recorder or equivalent
• Land Offices e.g. BLM, County
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11. Legal Due Diligence Checklist
Securities Regulation and Issuances
• All securities filings within the past five years.
• Agreements relating to sales of securities by the Company including
any private placement memoranda or other offering circulars within
the past five years.
• Stock option or purchase plans and forms of option or purchase
agreements which have been or may be used.
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12. Legal Due Diligence Checklist
Securities Regulation and Issuances
• All securities permits, registrations, notices of exemption and consents
for issuance or transfer of Company’s securities and evidence of
qualification or exemption under other applicable securities laws.
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14. Legal Due Diligence Checklist
• Material Contracts
• Property agreements, areas of interest, consents, royalties, clawback
rights, right to market product
• Confidentiality agreements
• Strategic alliance agreements
• Bank line of credit agreements, including any amendments, renewal
letters, notices, waivers, correspondences, etc.
• Other material agreements evidencing outstanding loans to or
guarantees by the Company, including correspondences.
• Material contracts with suppliers, manufacturers or customers. Please
indicate which suppliers are sole source.
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17. Legal Due Diligence Checklist
Financial Information
• SEDAR, EDGAR, quarterly, MD &A, AIF’s, Annual Reports, News
Releases
• All audited and unaudited financial statements of the Company,
including balance sheets, income statements and statements of
changes in financial position.
• All letters from accountants of the Company regarding the Company’s
control systems, methods of accounting, etc.
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18. Legal Due Diligence Checklist
Financial Information
• Recent analyses of the Company or its industries prepared by
investment bankers. engineers, management consultants, accountants
or others, including marketing studies, credit reports and other types
of reports, financial or otherwise. Company projections for future
periods.
• Company projections for future periods.
• Any special reports by auditors (e.g., as to control procedures).
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19. Legal Due Diligence Checklist
Financial Information
• List of all fixed assets of the Company and its Subsidiaries together
with depreciation schedule if available.
• Bank letters or agreements regarding lines of credit.
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21. Legal Due Diligence Checklist
Patent, Trademark and Copyright Matters
• List of all foreign and domestic patents and patent licenses held by the
Company.
• Copies of all material agreements for licensing of Company technology
to third parties.
• Copies of all material agreements for licensing of technology from
third parties.
• Proprietary data.
• Any pending patents or trademarks.
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22. Legal Due Diligence Checklist
Tangible Property
• List of real and material personal property owned by the Company.
• Claims, concessions, permits, licences, leases (examine terms and
conditions).
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24. Legal Due Diligence Checklist
Litigation and Audits
• Any material litigation settlement documents.
• Any decrees, orders or judgements of courts or governmental
agencies.
• Information regarding any material litigation to which the Company is
a party or in which it may become involved.
• Property expenditures, write‐offs particularly with the advent if IFRS.
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25. Legal Due Diligence Checklist
Environmental
• Schedule of all instances in the past in which the Company has
corrected unsafe working conditions.
• Schedule of all permits, certificates, registrations or approvals
obtained from any governmental body responsible for environmental
or health regulation.
• Any notices of violation or requests for information that have been
received or threatened at any time for alleged failure of any facility to
comply with applicable environmental laws, permits, certificates,
registrations or approval.
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26. Legal Due Diligence Checklist
Environmental
• Schedule of any environmental problems, conditions or issues known
to the Company concerning the Company’s business or any known
violations or potential violations of applicable environmental laws.
• Schedule of any discharges or releases of Hazardous Materials into the
environment by the Company.
• Schedule of the location, size and contents of any underground or
aboveground storage tanks or PCB transformers owned or used by the
Company.
• Description of all hazardous wastes that are disposed of on and off site
by the Company and a description of the procedures for disposal of
such wastes (including a list of all disposal sites and transporters).
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27. Legal Due Diligence Checklist
Environmental
• Description and status statement of all completed, pending or
threatened regulatory, judicial or administrative actions relating to the
Company.
• Description and status statement of any investigation, remediation,
removal or monitoring actions relating to any of the Company’s
facilities.
• Environmental assessments, reports or audits performed by the
Company or any other party relating to any of the Company’s facilities
or operations.
• Schedule of Hazardous Materials management plans, emergency
response plans, inventory reports, and other environmental reports,
policies and notices required by environmental law to be filed by the
Company with any governmental body.
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28. Legal Due Diligence Checklist
Management
• Founders agreements, management employment agreements,
indemnification agreements, and "golden parachute" agreements, if
any.
• Schedule of all compensation paid in the most recent fiscal year to
officers, directors and key employees showing separately salary,
bonuses and non‐cash compensation (e.g. use of cars, property, etc.).
• Bonus plans, option agreements, retirement plans, pension plans,
deferred compensation plans, profit sharing and management
incentive agreements.
• Agreements for loans to and any other agreements (including
consulting and employment contracts) with officers or directors,
whether or not now outstanding.
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29. Legal Due Diligence Checklist
Management
• Organizational chart.
• Extensive, broad scope.
• Starting point for planning legal investigation.
• Cost limitations.
• Effective use of time available.
• Legal investigation needs to be focused.
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36. Key Due Diligence Points
Due diligence is a responsive multi‐stage process
This investigation must be as thorough as possible to accurately assess the
‘‘target’’ acquisition or transaction within the particular timeframe, cost,
and client constraints
Due diligence is a value driven process because it serves to further inform
both the acquirer and the “target” of the appropriate “target’’ value
Comprehensive due diligence exposes unexpected or unknown liabilities
before the deal is closed and offers an opportunity for both sides to re‐
assess the preliminary agreement terms
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40. Types of Due Diligence – Functional Types
Legal due diligence
Financial due diligence
Accounting due diligence
Operational due diligence
Technical due diligence
Environmental due diligence
Tax due diligence
Regulatory due diligence
Legal element to all types of due diligence
Country risk
Political risk
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45. Mining Considerations
Confidentiality agreements
Proprietary data
Professional obligations to disclose
Overlapping agreements
Technical matters need experts
Access to key people
Material undisclosed information
Cultural differences
Areas of Interest
Strategic Alliances
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48. Mining Considerations (continued)
Due diligence request list
corporate structure
articles, by‐laws
indebtedness
property interests
mineral projects
ownership
contracts
company rights
access
infrastructure
rights of mineral owner and third parties
third party consents
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