The world of due diligence is designed to be predictable and stable – but change is inevitable. This presentation reviews the changes facing modern due diligence and provides strategies to best manage these updates. CT’s expert consultant will specifically discuss changes in Delaware corporate law, due diligence recordings, case law, and cyber due diligence. Learn About: Changes and updates to statutory law Cybersecurity / due diligence UCC-3 Issues General Motors case and terminations

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CTWolters Kluwer
The “New Look”
of Due Diligence
Presented by:
Dan Lias, Esq.

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Today’s Agenda
• UCC and Corp Law Updates
• Cybersecurity / Blockchain
• UCC 3 Issues
• GM Case Fallout
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UCC and Corp Law Updates
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Law Updates
• State level changes
• Delaware
• Delaware Cases
• UCC Cases
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UCC – Changes in the States – Illinois
• Illinois has created a New State Tax Lien Registry at the Illinois
Department of Revenue.
• The registry went into effect on January 1st, 2018.
• State Tax Liens are now filed at the state level and will NO LONGER BE
FILED AT THE COUNTY LEVEL.
• Releases of active State Tax Liens will only be filed at the IL Department
of Revenue effective immediately and will NO LONGER BE FILED AT THE
COUNTY LEVEL.
• Previously filed state tax liens at the county recorders’ offices filed
through 12/29/17 will remain effective and searchable at these county
recorder offices.
– Department of Revenue has tried to capture previously filed state tax liens,
thus adding them to the new registry. These liens should be available at
that level going forward.
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And Another Change
• Going To Dixie:
• Mississippi-Effective January 1, 2018 all state tax liens are to be filed
with/on the new state level database—no longer at the county.
• The state did give themselves some lead time to try to get older liens
moved from the their old locations to the new database
• Even with this lead-time it is still good practice to search both the county
and new state level database for now.
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More Changes in the States – Georgia
In 2017 GA passed-State Tax Modernization Act
Key point of law—January 1, 2018 created state wide registry for state tax
liens-managed by Dept of Revenue.
HOLD THE PHONE—New law passed February 20, 2018 Effective IMMEDIATELY
1) State-wide effectiveness rescinded
2) Back to previous method—file tax lien in county of taxpayer
3) Property liens filed in county where property is located not taxpayer
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Big News in Delaware – HB 175
• Increased franchise tax from $180,000 to $200,00 effective January 1,
2017 for “non large filers”
• The maximum tax is further increased to $250,000 for certain “large
corporate filers”—Corps that have a class or series of stock on national
securities exchanges and meet various other requirements-also starts on
January 1, 2017 so retroactive.
• For calculation of tax-authorized stock shares value were increased from
$75 to $85 on corporations with greater than 10,000 shares. Same rate
hike for assumed par value capital method.
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Corp – We Have CASES – Delaware Galore
• Bridev One, LLC v. Regency Centers, LP, C.A. N14C-07-115, decided 2/9/18. The Delaware Superior Court ruled that both the
Superior and Chancery Courts have the power to issue charging orders.
• Delaware – Personal Jurisdiction
EBP Lifestyle Brands Holdings, Inc. v. Boulbain, C.A. No. 2017-0269 (decided 8/4/17). The Delaware Chancery Court held that a
California resident was not transacting business in Delaware, for the purposes of the long arm statute, by entering into a
stockholders’ agreement with a Delaware corporation or by being an executive in companies whose products reached
Delaware. The failure to demonstrate sufficient minimum contacts mandated the conclusion that exercising personal
jurisdiction over the defendant would violate due process.
• Delaware – Judicial Dissolution of LLC
GR US Licensing, LP v. Seibel (In re GR Burgr, LLC), C.A. No. 12825, decided 8/23/17. The Delaware Chancery Court granted a
petition to dissolve a Delaware LLC under Sec. 18-802 where the LLC had two 50% owners whose relationship was “acrimonious
at best”, where decisions had to be unanimous, and where the LLC agreement did not provide a way to break deadlocks. The
court stated that it was “difficult to imagine how (the LLC) could be any more dysfunctional or deadlocked”.
• Delaware - Bylaw Amendment
Frechter v. Zier, C.A. No. 12038 (Del. Ch. 1/29/17). The Delaware Chancery Court ruled that a board of directors could not
amend the bylaws to provide that directors could only be removed by a two-thirds stockholder vote. Sec. 141 of the
corporation law provides that directors may be removed by a majority vote. Therefore the proposed bylaw was inconsistent
with the law.
• Delaware – Ratification of Defective Acts
Nguyen v. View, Inc., C.A. No. 11138 (Del. Ch. 6/6/17). The Delaware Chancery Court ruled that Sec. 204 could not be used to
validate actions taken by a corporation in pursuing a round of preferred stock financing that was declared void because the
majority stockholder revoked his consent to the financing transaction. This was not a failure of authorization. It was an express
rejection of a corporate proposal in a situation where that authorization was required. Failures of authorization can be ratified
pursuant to Sec. 204. Rejections of authorization cannot.
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A “Big Case” from Delaware
DFC Global v. Muirfield (April 2017) Appraisal Case
• Facts: DFC Global (publicly traded) was being acquired by private equity
company—
• Sales process was robust and competitive over 2 year period
• However market was uncertain due to new regulatory issues.
• Chancellery Court determined value by looking at three things:
1) Merger price
2) Value by DFC Global
3) A comparable valuation of similar companies
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DFC Global (cont.)
• Matter was appealed to Delaware Supreme Court:
• Issue—What is proper standard for valuation of arm’s length transaction?
1) Strong reliance on deal price in arm’s length deal with robust sales.
2) Reliance does not equate however to express presumption
3) Put pressure on Court of Chancery to expressly determine the reliability
of the applicable valuation methodologies—in other words-you better
be able to back up how you came up with that number if different than
the deal price!
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UCC Case One
United States Securities and Exchange Commission v. ISC, Inc.
2017 Dist. Court, WD Wisconsin
• UCC filing in Wisconsin, a state that does NOT use standard search logic
• Secured Party, Double Bubble, Ltd. filed a UCC to secure credit it was providing
to ISC, Inc.
• The filing of secured party was ISC, Inc . The variation between the names was
the space between the “c” and the “.”
• Battle between 9-503 and “noise words” like Inc.
• 9-503 prevails—Under Wisconsin’s search logic this filing was not found—thus
“Seriously Misleading”
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UCC Case Two
Fishback Nursery, Inc. v. PNC Bank, NA
USDC Northern District of Texas
• Dispute between two creditors. Three separate filings in three jurisdictions.
• Fishback Nursery filed ag liens/UCCs with the name BNF Operations, LLC abn
Zalenka Farms
• Correct name of debtor on charter documents was BNF Operations LLC
• Again, issue of “Seriously Misleading” under 9-506 was center stage
• Argument of Fishback Nursery? You could find the name using “Google Search”.
It finally happened.
Thankfully, Google is NOT the standard but that state’s particular search logic.
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Why Are These Cases Powerful?
• Both of these cases are Groundhog Day examples—they have happened
before.
• In Receivables Purchasing Co., Inc. v. R & R Directional Drilling, L.L.C.
– Another “space” case when someone filed Net Work instead of Network—
deemed Seriously Misleading by statute
• In Re EDM Corp
– Another DBA filing-- EDM Corporation d/b/a EDM Equipment
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Cybersecurity/Blockchain
The Nexus of Law and Due Diligence Is Changing
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Cyber-Technology
1. 2018 - 80% of largest law firms have experience a “malicious breach”
2. 2016 According to LogicForce-10,000 intrusion attempts per day across top 200
firms-ex-one “swarm” of 100,000 attacks netted 4 million in stolen info
3. 2018—breaches---1/3 of law firms with 10-99 attorneys reported ‘material’
breaches
4. 2017—22%percent of law firms experienced a cyberattack or data breach up from
14 percent a year ago.
5. Dark Overlord(not a Sith) hacked into law firms having sensitive 9/11 data and is
“blackmailing” for bitcoin
6. 6. 2018-48 percent of firms had at least one “cyber audit” by client last year
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Cybersecurity / Due Diligence
Why law firms?
1) You have information,
2) You have money,
3) Lax security compared to others
How done?
1) Spear phishing—fraud that targets specific firms/information
2) New Malware-Reveton—locks screen with fake FBI warning-pay fee
(average malware costs to firms in 2018: $141 per record or average $5M per attack)
3) Change wiring instructions—Louisiana State Bar sent out warning to real estate
attorneys about “change in bank instructions” at estate closings—money is lost
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Cybersecurity / Due Diligence
Real Life Consequences
1) DLA malware attack --was just tip of iceberg
2) Moses Affonso Ryan—10 attorney firm-malware shut down entire firm—sued
insurance company for over 700K in loss billable hours—attorneys could not bill
time-locked out.
3) Johnson Bell-Illinois/Indiana firm—sued in class action by clients—while there
was no “known breach” were still sued for not cyber technology that met
industry standards
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Cybersecurity / Due Diligence
So What Are Firms Doing?
• According to National Law Review you guys are:
1) Doing Inventory and Risk Assessment
2) Evaluating your systems
3) Using basic security tools—simple can be the best sometimes
4) Evaluating your own vendors security---lets talk about this a bit!
5) Considering security standards (2017 25% firms had no such known standards)
6) Developing policies and training for when it happens
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Blockchain – The New Frontier
Definition
Blockchain is a continuously growing list of records, called blocks, which are
linked and secured using cryptography. Each block typically contains
a cryptographic hash of the previous block, a timestamp and transaction
data. By design, a blockchain is inherently resistant to modification of the
data. It is "an open, distributed ledger that can record transactions between
two parties efficiently and in a verifiable and permanent way". For use as a
distributed ledger, a blockchain is typically managed by a peer-to-
peer network collectively adhering to a protocol for inter-node
communication and validating new blocks.
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Blockchain (cont.)
• Currently: State of Delaware and Arizona have adopted blockchain
legislation
• Blockchain legislation introduced in: NV, WY, TN, TX and IL
• In addition 49 other forms of blockchain legislation is pending
• Are these laws consistent across the jurisdictions? Of course not
• This year 22 European countries signed a Blockchain partnership
• Quote: “In the future all public services will use blockchain technology. It
is a great opportunity……to rethink their information systems to promote
user trust and protection of person data.”
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Advantages of Blockchain
1) Decentralized: harder to extract data—would need to take over 51% of
system for example to hack.
2) Transparent: Everyone can see everything.
3) Secure: Each user has his/her own key to verify identity. The block
encryption in the chain makes it much tougher for hackers to disrupt than
traditional setups.
4) Process integrity. Each transaction is recorded and time-stamped,
creating an immutable transaction trail that is transparent, unalterable
and permanent.
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Chain Chain Chain (cont.)
Not all is Puppy-dogs and Unicorns
1) Interface issues with other systems
2) Security concerns persist as the technology is linked with Bitcoin
3) Most banks/companies are not interested in “open source” for identity
purposes.
4) Lack of regulation at the present. Who is responsible for maintaining the
chain?, Who admits people onto the chain—that kind of jazz.
5) Not enough investment yet—though that might be changing.
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UCC 3 Issues
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Most Common Types of UCC 3’s
• A termination records and gives public notice that the secured party no longer
has a secured interest in the collateral listed in a filed financing statement. A
termination is usually filed prior to a lien's five (5) year lapse period. However,
a termination does not actually lapse the filing; the actual lapse of the filing
occurs independent of any termination filing.
• A continuation filing extends the maturity date of a filed financing statement
for five (5) years unless a shorter time period is specified by the secured party.
A continuation statement can only be submitted during the six (6) month
period prior to the maturity date of the financing statement.
• An assignment is done when a secured party needs to assign or transfer all or a
portion of its rights to the collateral listed in a UCC1 financing statement. By
assigning the collateral to a different secured party you are "amending" that
filing.
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Other Amendments Include…
• Deleting, adding or changing a debtor
• Deleting, adding or changing a secured party
• Deleting, adding, restating or assigning collateral
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UCC 3’s Basics
• Strongly recommended-one change per form
• Pay attention to secured parties for terminations
• UCC 1 not properly amended along the way
• Who can file? 9-509
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Secured Party Name Mismatch
• Section 9-509(d) provides that a “person” may file a continuation if authorized
by the secured party of record. It does not actually require the SP of record to
file it, hence the reason the form requires an authorizing party (and not the
name of the SP of record).
• The filing office is not authorized to reject a continuation statement that is
remitted by a party other than the SP of record (per 9-516). Thus, the filing
office met its statutory obligation by filing the continuation statement.
• The filing office does not have the authority to reject continuations. 9-516
only allows a filing office to reject continuation filings that occur outside of the
six-month window.
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Can a Debtor Authorize an Amendment?
• Scenario: The amendment in question will restate a prior collateral
description. The debtor is listed as the authorizing party on the
amendment, However, the secured party (security trustee) is the Hong
Kong and Shanghai Banking Corporation Limited (HSBC) and they would
prefer if they were listed as the authorizing party for the amendment.
Firm is looking for strong reasons that they can use to deny HSBC’s
request.
• DEBTOR normally CAN NOT authorize a change. One place Debtor can
authorize an amendment is the filing of a termination statement when SP
fails to terminate. There is no authority granted to the debtor under any
other circumstance.
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Missing Exhibits
• Question: I filed a UCC and attached Exhibit A as the collateral
description. However, there was an Exhibit B (legal description) that was
missed. How to fix? Do I file a UCC amendment that restates the covered
collateral and attach the Exhibit A, including Exhibit B? Or do I list in Item 8 -
“Collateral Change” as “ADD collateral” and insert the legal description that
was missing?
• Restatement is the best option. Adding collateral clearly indicates the
collateral was not part of the original secured collateral. If you restate, at
least an argument could be made that the collateral description is consistent.
• Another thought..If the collateral box on the original UCC gave an indication
of collateral, then there might not be a need to do anything. The Exhibits
would only be needed if requested by another interested party.
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Terminations with Multiple Parties
• If a UCC has multiple debtors (3) and the secured party terminates, is it effective
for all 3 debtors?
• Yes. When the authorized SP files a termination statement, they are terminating
their interest in all collateral covered by the FS regardless of number of debtors.
• How about Multiple Secured Parties?
• 9-509(e), which makes it clear that each secured party of record is entitled to
authorize and file (effective) amendments, and (most important) 9-510(b), which
provide “A record authorized by one secured party of record does not affect the
financing statement with respect to another secured party of record.”
• Note that this does not mean that each SP of record needs to file a termination
or continuation. If authorized by the other SPs of record, one of them can file on
behalf of all by listing all SPs of record as authorizing parties. Of course, such
authorization might need to be proven.
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The Terminated-Non Lapsed UCC Recording Issue
• An “Active Record” is defined in the Model Administrative Rules (100.1) as “a UCC record that
has been stored in the UCC information management system and indexed in, but not yet
removed from, the Searchable Indexes”. Thus, any record that is within the lapse plus one
timeframe is considered to be an “Active Record”.
• A9 places two duties upon the filing office. First, it must index each financing statement by
debtor name (9-519C). Further, the filing office must “communicate or otherwise make
available in a record” any financing statement that designates a particular debtor, has not
lapsed (or is within the one year period contemplated by 9-522), the date and time of filing,
and “the information provided in each financing statement” (9-523C).
• Various court decisions and official comment 2 of 9-502 provide that the SP is obligated to
review copies of each financing statement to uncover the details of the transaction and to
follow-up on the details provided in the financing statement.
• 9-509 and 9-510 further provide that it is necessary to determine if authority exists to file any
given record (9-509 Off. Cmt. 2: The question of authorization is one for the court, not the
filing office). We all know that the filing office is obligated to accept and index any record that
complies with 9-502 and 9-516.
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GM Case Fallout

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Current Trend – Document Review
General Motors Bankruptcy Case
• Goes to court on multiple grounds including “excusable neglect” and “lack of
authority” to terminate.
• Delaware Supreme Court rejects theory and in doing so EXPANDS APPARENT
AUTHORITY
• This expansion has let to many firms reviewing their due diligence policies---could
this happen to us?
• The law firms responses have been varied so far—the known examples so far can be
seen in: 1. Due diligence review boards, 2. Non deal partner review of due
diligence, 3. Due diligence certification for attorneys/paralegals at firm level. 4.
Authority document requirements (paralegal empowerment)
• All of these are intended to add extra attention to the UCC filings
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Current Trend – Document Review
• The review has not been limited to law firms.
• Financial Institutions have also reviewed many of their standards.
• Their reviews have been varied with many adjustments to internal policies
• Two key observations- Financial Institutions have reduced the number of
outside counsel they use. Thought is it is easier to control smaller stable and
impose bank procedures.
• In addition to this and increased emphasis as to “who can do what” or in
other words—what do the authority documents say. Increasing limits to
number of people being able to act on due diligence.
• Financial Institutions as always have attempted to have law firms shoulder
more due diligence responsibilities but so far law firms have rejected this.
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Current Trends – Fallout
• It’s not just GM and the Financial Institutions that felt the effects of the case.
• Ripples of this decision impacted all law firm clients that may have a UCC
portfolio (regardless of size)
• Insurance providers –yup malpractice– reviewed case and began looking at
law firm risk including UCC monitoring for non financial institutions.
• Response has been law firms needing to divest of this activity and needing to
find third party for clients like hedge funds, railroads, property managers,
etc.
• Risk for law firm client is lack of UCC knowledge and concerns of missed
filings and other related errors
• If you hear the words “UCC/Debtor Monitoring” it most likely is connected
to this activity.
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Summary
• UCC and Corp Law Updates
• Cybersecurity / Due Diligence
• UCC 3 Issues
• GM Termination/Fallout
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CTWolters Kluwer
Thank You For Attending!
The “New Look” of Due Diligence
Presented By
Dan Lias, Esq.