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Legal Audit Power Point

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Legal Audit Checklist

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Legal Audit Power Point

  1. 1. Legal Audit Checklist Presented by Daniel J. Alexander II Graves & Alexander LLP Attorneys and Counselors at Law 195 South “C” Street, Suite 250 Tustin, California 92870-3652 Telephone: (714) 730-4040 Facsimile: (714) 730-4044 © Daniel J. Alexander II, A Professional Corporation
  2. 2. Legal Audit Checklist <ul><li>Companies face a bewildering array of law and regulations that impact various areas of operations. A properly conducted legal audit is a way for management to frame, prioritize and anticipate the most important issues and minimize costly surprises which distract management focus. </li></ul><ul><li>The Legal Audit Checklist is not a legal audit; it is a checklist of key areas of inquiry to complete with a qualified attorney retained to perform a legal audit. Analogous to a physical exam, the purpose of the legal audit is to understand your current condition, identify any problems, and enable you take appropriate actions to correct or arrest the worsening of current problems and to avoid/prevent future problems. </li></ul>
  3. 3. Legal Audit Checklist <ul><li>CAUTION: DO NOT BEGIN INVESTIGATION AND/OR DOCUMENTATION OF ITEMS LISTED IN THIS LEGAL AUDIT CHECKLIST PRIOR TO CONSULTING WITH A QUALIFIED ATTORNEY. OTHERWISE YOUR COMPANY MAY LOSE PROTECTIONS OTHERWISE AFFORDED BY THE ATTORNEY – CLIENT PRIVELEGE WITH RESPECT TO ANY LEGAL LIABILITIES, WHICH ARE DISCOVERED OR WHICH LATER ARISE . </li></ul>
  4. 4. Legal Audit Checklist <ul><li>Organizational Records </li></ul><ul><li>Articles of Incorporation and Amendments. </li></ul><ul><ul><li>Verify that these documents continue to be consistent with applicable law. </li></ul></ul><ul><ul><li>Determine if they impose and restrictions or limitations on any significant transactions being contemplated by management (e.g., special shareholder votes, super-majority provisions, restrictions on sale of stock or assets, etc.) </li></ul></ul><ul><li>Bylaws and Amendments </li></ul><ul><ul><li>Review for sufficiency and determine if there are any unusual provisions (e.g., notice provisions or expanded powers of officers) and verify compliance. </li></ul></ul><ul><li>Shareholders and Directors Proceedings </li></ul><ul><ul><li>Determine if all outstanding shares are: authorized, paid for, non-assessable and issued in accordance with any pre-emptive rights or other restrictions imposed by shareholders or directors. </li></ul></ul><ul><ul><li>Determine if there are any outstanding warrants, options, convertible or other securities. </li></ul></ul><ul><ul><li>Determine if any restrictions on transferability. </li></ul></ul><ul><li>Determine if share issuances were in conformance with applicable securities laws. </li></ul>
  5. 5. Legal Audit Checklist Organizational Records Continued <ul><li>Stock Ledger </li></ul><ul><ul><li>Determine number of outstanding shares and whether it is the same number authorized by shareholders/directors, and whether issuances conform with applicable laws and regulations. </li></ul></ul><ul><li>Foreign Qualification; Good Standing and Tax Status </li></ul><ul><ul><li>Determine states in which company does business and whether it has qualified as a foreign corporation in those jurisdictions. </li></ul></ul><ul><ul><li>Determine if company is in good standing in state of domicile and all jurisdictions where it is qualified to do business. </li></ul></ul><ul><ul><li>Determine if company is delinquent on taxes in state of domicile or in jurisdictions where it is qualified to do business. </li></ul></ul><ul><li>Subsidiaries </li></ul><ul><ul><li>Identify subsidiaries and collect information in Items above. </li></ul></ul>
  6. 6. Legal Audit Checklist <ul><li>Financial Matters </li></ul><ul><ul><li>Debt Instruments </li></ul></ul><ul><ul><ul><li>Identify all debt instruments and list on a separate schedule to show the amount of payments, due dates and maturity. </li></ul></ul></ul><ul><ul><ul><li>Review and evaluate likely consequences, if any, of affirmative and negative covenants in the debt instruments. </li></ul></ul></ul><ul><ul><li>Security Interests </li></ul></ul><ul><ul><ul><li>Identify security interests in all company property and list on a separate schedule. Conduct UCC and tax lien search in all states where company has property or operations. </li></ul></ul></ul><ul><ul><li>Investments by Company </li></ul></ul><ul><ul><ul><li>Identify all company --investments and list on a separate schedule. </li></ul></ul></ul>
  7. 7. Legal Audit Checklist Financial Matters Continued <ul><ul><li>Company’s Sales of Securities – Equity and/or Debt Investments in Company </li></ul></ul><ul><ul><ul><li>Identify all company offerings, and dates and terms thereof, and list on a separate schedule. </li></ul></ul></ul><ul><ul><ul><li>Review written and other disclosures made to investors, representations made by investors, and state/federal filings in connection with each of the company’s offerings, and determine: </li></ul></ul></ul><ul><ul><ul><ul><li>Compliance with applicable federal and state securities regulations; and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>For any prior non-compliance, the extent of company’s exposure to private actions by investors for rescission and/or damages, and/or to government sanctions. </li></ul></ul></ul></ul><ul><ul><li>Company’s Listed Securities </li></ul></ul><ul><ul><ul><li>Identify class(es) of Company securities registered under the Securities Act of 1934. </li></ul></ul></ul><ul><ul><ul><li>Verify compliances with quarterly, annual and material event reporting forms (Forms 10-Q/10-QSB, 10-K/10-KSB and 8-K). </li></ul></ul></ul><ul><ul><ul><li>For any prior non-Compliance, the extent of company’s expenses to private actions and/or to government sanctions. </li></ul></ul></ul><ul><ul><ul><li>Filing Forms 3, 4, 5, 13D and 13G. </li></ul></ul></ul>
  8. 8. Legal Audit Checklist <ul><li>Properties </li></ul><ul><ul><li>Real Property </li></ul></ul><ul><ul><ul><li>Each parcel of real property owned or leased by company should be described in reasonable detail on separate schedules: </li></ul></ul></ul><ul><ul><ul><ul><li>Deeds and leases – review to determine adequacy and the existence of commercially significant restrictive provisions (e.g., prohibitions on assignment, subordination etc.). </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Encumbrances, including mortgages, liens, rights of way, restrictions, reversions, and the like on any real property owned by company – review to determine commercial significance to property and to company. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Title reports, abstracts, opinions and insurance – identify on a separate schedule the form and extent of required additional insurance and/or contractual provisions. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Applicable zoning and other local ordinances – review to determine compliance. </li></ul></ul></ul></ul><ul><ul><li>Equipment and Other Personal Property </li></ul></ul><ul><ul><ul><li>Leases – identify and list on a separate schedule; review generally with special attention to termination and assignment provisions and the existence of chattel mortgages, conditional sales contracts, etc. </li></ul></ul></ul>
  9. 9. Legal Audit Checklist <ul><li>Litigation </li></ul><ul><ul><li>Pending and threatened litigation – identify on a separate schedule, review with trial counsel and assess risks (in consultation with trial counsel) with respect to all material or potentially material litigation to which the company is a party </li></ul></ul><ul><li>Environmental Matters </li></ul><ul><ul><li>Analyze overall company compliance with respect to all applicable environmental ordinances and regulations. </li></ul></ul>
  10. 10. Legal Audit Checklist <ul><li>Business Practices </li></ul><ul><ul><li>Sales and Distribution Procedures – review sale and distribution procedures to determine legal adequacy (e.g., per Robinson-Patman Act and Sherman Act, applicable state statutes, etc.) </li></ul></ul><ul><ul><li>Product Safety – review insurance and procedures for product liability claims; review design issues for compliance with federal and state product liability laws. </li></ul></ul><ul><ul><li>Standard Form Purchase Orders and Sales Orders – review to determine their adequacy for both prior transactions and for continued use. </li></ul></ul><ul><ul><li>Advertising and Sales Practices – review representations and claims to assure compliance with applicable federal and state consumer protection laws and false or misleading advertising laws. </li></ul></ul><ul><ul><li>Sales Representatives/Agents– prepare a separate schedule of sales representatives and/or agents, by locations, and the standard or other form of contract to determine acceptability for prior transactions and for continued or future use. </li></ul></ul><ul><ul><li>Product Warranty Procedures – review all company warranties and disclaimers as to enforceability and duration, together with a review of company’s procedures with respect to any product warranty claim. </li></ul></ul><ul><ul><li>Significant Contracts – review all material contracts for the sale of products or the purchase of materials or capital goods to determine implications for prior sales or purchases and continued and future sales or purchases. </li></ul></ul>
  11. 11. Legal Audit Checklist <ul><li>Licenses, Permits, Regulations </li></ul><ul><ul><li>Prepare a separate schedule of all material federal, state and local regulations affecting company. </li></ul></ul><ul><ul><li>Prepare a separate schedule of all licenses and permits that company possesses in connection with the operation of its business and/or the ownership of its property to determine whether any licenses or permits have expired. </li></ul></ul>
  12. 12. Legal Audit Checklist <ul><li>Employee Matters </li></ul><ul><ul><li>Employment </li></ul></ul><ul><ul><ul><li>Describe any “at will” employment policy in place. </li></ul></ul></ul><ul><ul><li>With a qualified attorney’s assistance, evaluate the company’s employment process as to the following: </li></ul></ul><ul><ul><ul><li>Does the company’s standard employment application ask any illegal questions? </li></ul></ul></ul><ul><ul><ul><li>Have the company interviewers been trained as to what they can and cannot legally ask prospective employees? </li></ul></ul></ul><ul><ul><ul><li>Is there a procedure in place to assure that all job offers are in writing and the standard form for each such offer is properly drafted? Signed copies on file? </li></ul></ul></ul><ul><ul><li>Equal Employment Opportunities </li></ul></ul><ul><ul><ul><li>Summarize company’s equal employment opportunity practices and, with qualified attorney’s assistance evaluate level of compliance under applicable federal and state regulations. </li></ul></ul></ul>
  13. 13. Legal Audit Checklist Employment Matters Continued <ul><li>Occupational Safety and Health Matters; Workers Compensation </li></ul><ul><ul><li>With a qualified attorney’s assistance, evaluate company’s compliance with working condition requirements pursuant to applicable federal, state and local regulations. </li></ul></ul><ul><ul><li>Review California Workers Compensation exposure and insurance coverage. </li></ul></ul><ul><li>Sexual Harassment Matters </li></ul><ul><ul><li>Summarize company’s sexual harassment policy and, with qualified attorney’s assistance evaluate level of compliance under applicable federal, state and local regulations. </li></ul></ul><ul><li>Benefit Plans </li></ul><ul><ul><li>Describe in reasonable detail all of company’s benefit plans (e.g., defined benefit, defined contribution, insurance coverages, tuition sharing, etc.) on a separate schedule. </li></ul></ul><ul><ul><li>Assemble and review copies of the benefit plans, trusts, Forms 5500 and determination letters to verify compliance with applicable ERISA regulations. </li></ul></ul>
  14. 14. Legal Audit Checklist <ul><li>Management </li></ul><ul><ul><li>Employment Contracts </li></ul></ul><ul><ul><ul><li>Identify all management contracts and list on a separate schedule. Review for unusual and significant provisions (e.g., golden parachutes, deferred compensation, severance provisions, etc.) </li></ul></ul></ul><ul><ul><li>Consulting Contracts </li></ul></ul><ul><ul><ul><li>Identify all consulting contracts and list on a separate schedule. Review for unusual and significant provisions (e.g., exclusivity, penalties on termination, etc.). </li></ul></ul></ul><ul><ul><li>Employee and/or Related Party Transactions </li></ul></ul><ul><ul><ul><li>Identify all such arrangements and verify compliance with company’s organizational documents, debt instruments, shareholders’ agreements and financing disclosure documents. </li></ul></ul></ul>
  15. 15. Legal Audit Checklist <ul><li>Intellectual Property </li></ul><ul><ul><li>Intellectual Property </li></ul></ul><ul><ul><ul><li>Identify and list on a separate schedule all of company’s patents, patent applications, trademarks, tradenames, service marks, copyrights, etc. (whether registered or unregistered). Include a description of the patent or other mark, the date file, expiration date, the jurisdiction filed in and other relevant information. </li></ul></ul></ul><ul><ul><li>Licenses </li></ul></ul><ul><ul><ul><li>Identify and list on a separate schedule, all licenses of intellectual property to the company, as well as licenses of intellectual property by the company. Review as to their legal adequacy, termination, assignability and other material terms. </li></ul></ul></ul>
  16. 16. Legal Audit Checklist <ul><li>Web Site - Note: Operating a web site takes most enterprises beyond their core business into an entirely new business – “publishing”. As such, they are faced with a whole new set of issues. </li></ul><ul><ul><li>Content Review </li></ul></ul><ul><ul><ul><li>Original Content. Identify and review for accuracy, fair advertising practices, intellectual property rights and securities regulatory issues. </li></ul></ul></ul><ul><ul><ul><li>Licensed Content. Identify and review license to ensure that company has the necessary rights to distribute, alter, republish or otherwise use the licensed content. Also, review representations and warranties by the licensor of the content, and any appropriate rights by company to indemnification by the licensor. </li></ul></ul></ul><ul><ul><ul><li>Third Party Content. If company’s web site includes chat, message boards, e-commerce and e-mail, then much of content will be created by users of the web site, and not by the company. This makes it impractical for company to review or edit much of the third party content. Verify: </li></ul></ul></ul><ul><ul><ul><ul><li>Company’s policy and procedure for handling complaints and appropriate disclaimers and indemnifications and, in some circumstances, removing a post and/or providing information about the author. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Company’s registration with US Copyright Office and company’s policy and procedure for reporting possible copyright infringement (under the 1998 Digital Millennium Copyright Act). </li></ul></ul></ul></ul><ul><ul><li>Linking and Framing. </li></ul></ul><ul><ul><ul><li>To avoid liability for contributory infringement or vicarious liability, view linking policies and procedures to verify that company is not knowingly linking to other web sites that containing copyright infringing material. </li></ul></ul></ul><ul><ul><ul><li>To avoid trademark infringement or unfair competition for framing another web site on company’s web site, review framing policies and procedures to verify that company is not deriving ad revenues based on others’ content without their permission. </li></ul></ul></ul>
  17. 17. Legal Audit Checklist Website Continued <ul><ul><li>Content Liability Issues </li></ul></ul><ul><ul><ul><li>Copyright & Trademark. Review third-party content, and the corresponding license agreements, to ensure that company has acquired the appropriate rights for use on company’s web site. These rights must cover graphics, images and logos, as well as, text. </li></ul></ul></ul><ul><ul><ul><li>Defamation. Company may incur liability for defamatory statements that originate with company. These statements should be reviewed by counsel prior to publication . </li></ul></ul></ul><ul><ul><ul><li>Invasion of Privacy. Original content may give rise to privacy tort for (i) public disclosure of private facts, (ii) statements which place a subject in a false and defamatory light, and (iii) the commercial use of another’s image or likeness without their permission. These statements should be reviewed by counsel prior to publication. </li></ul></ul></ul><ul><ul><ul><li>User Privacy. Review web site’s collection of user information (from registration page, as well as from “cookie” technology collections), how it is used and to whom it is disclosed to ensure compliance with applicable federal privacy statutes, FTC regulations and the web site’s privacy policy. (NB: The Online Child Privacy Protection Act may require certain online service providers to obtain verifiable parental consent before collecting or disclosing any personally identifiable information about children under age 13.) </li></ul></ul></ul><ul><ul><ul><li>Advertising and Promotions. Review web site’s guidelines for accepting advertising, particularly banner ads which hyperlink to the advertiser’s web site, to ensure: </li></ul></ul></ul><ul><ul><ul><ul><li>Adherence to: state and federal fair advertising laws, particularly with regard to minors. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Inclusion of appropriate indemnifications, representations and warranties. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Compliance with applicable sweepstake and contest laws. </li></ul></ul></ul></ul><ul><ul><ul><li>Sales. Review online contracts and company’s account procedures for creating and maintaining records of transactions. </li></ul></ul></ul><ul><ul><ul><li>Regulatory Compliance. If company is publicly traded or in a regulated industry (e.g., banking, real estate, utilities, pharmaceuticals, alcoholic beverages, etc.), review SEC compliance and/or applicable industry regulations. </li></ul></ul></ul>
  18. 18. Legal Audit Checklist Website Continued <ul><ul><li>User Liability Issues </li></ul></ul><ul><ul><ul><li>Review form of online User Agreement to assess contractual relationship between company and user. User Agreement should cover the issue of privacy and security of personal information. </li></ul></ul></ul><ul><ul><ul><li>Review company policies for disclosing user information and, in particular, policies for responding to subpoenas for user information, in light of the terms of the User Agreement, the federal Electronics Communications Privacy Act and applicable state law. </li></ul></ul></ul><ul><ul><ul><li>Review company’s privacy policy as to notifying users about the types of information collected by the web site, how such information is used, and to whom it is disclosed, and whether or not users have reasonable access to their personal information and the ability to update or remove such data as appropriate. </li></ul></ul></ul>
  19. 19. Legal Audit Checklist <ul><li>Other Material Agreements </li></ul><ul><ul><li>Describe and list on a separate schedule in reasonable detail any other material agreements not mentioned elsewhere herein (e.g., raw materials, supplier agreements, customer orders, computer/MIS services, guarantees, etc.). Review the material terms of the underlying documents (e.g., assignability, enforceability, breaches/defaults, expiration, escalation clauses, etc.). </li></ul></ul>
  20. 20. Legal Audit Checklist <ul><li>For more information regarding a legal audit for your company or any other business legal needs, please contact Daniel J. Alexander II, Esq. at </li></ul><ul><ul><li>(714) 730-4040 ext. 2 or </li></ul></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li>© Daniel J. Alexander II, A Professional Corporation </li></ul></ul>

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