Legal Due Diligence: Integrating the Legal and Business Parts of the Process

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This presentation gives an overall look at the due diligence process. It examines the key details of the process and why it is critical for any transactions as well as covers topics including: how a business deal guides the process, the transaction structure, and identifying risks.

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Legal Due Diligence: Integrating the Legal and Business Parts of the Process

  1. 1. Legal Due Diligence: Integrating the Legal and Business Parts of the ProcessMarch 2011Presented by:  Brian Abraham 1
  2. 2. Overview1. What is legal due diligence?2. How does a business deal focus and guide the due diligence  process?3. The importance  of legal due diligence being coordinated with  business due diligence.4. How legal due diligence provides essential information to the  business transaction. 2
  3. 3. What is due diligence?What is legal • Due diligence is an important step toward the due diligence? acquisition of a business – assets, shares, and/or How a does abusiness deal mixed elementsfocus and guidethe due diligence • It is a process by which clients, lawyers and other process? advisors try to learn as much as possible about a Legal duediligence target business before committing funds to buy it 1coordinated withbusiness due • Legal due diligence is just one element of due diligence diligence processLegal duediligenceinforming thebusinesstransaction 3
  4. 4. Why due diligence?What is legal • Lawyer’s role in due diligence is to ensure due diligence? achievement of client objectivesHow a does abusiness deal • Why does the client want to acquire the ‘target’focus and guidethe due diligence business? process? • Will the client’s acquisition of target business help Legal duediligence them achieve their end objectives?2coordinated withbusiness duediligenceLegal duediligenceinforming thebusinesstransaction 4
  5. 5. Different purposes for due diligenceWhat is legal • some due diligence is “target” focused, this type of due diligence? investigation attempts to address the risks and or How a does abusiness deal issues regarding what is being acquiredfocus and guidethe due diligence – e.g. existence of loan agreementprocess? • transactional due diligence addresses the risks and Legal duediligence or issues concerned with getting the deal donecoordinated withbusiness duediligence – e.g. loan agreement requires consent of bank  for transactionLegal duediligenceinforming thebusinesstransaction 5
  6. 6. Why due diligence?What is legal • According to the Due Diligence Deskbook, legal due diligence? due diligence consists of:How a does abusiness dealfocus and guide 1. Document reviewthe due diligenceprocess? 2. Regulatory approvalLegal due 3. Statutory searchesdiligencecoordinated withbusiness due 4. Other steps dictated by transaction diligence circumstances3Legal duediligenceinforming thebusinesstransaction 6
  7. 7. Why due diligence?What is legal • Time, cost, and transaction constraints are due diligence? important to considerHow a does abusiness deal • due diligence expectations and processes should focus and guidethe due diligence be set out in writing for both counsel and client process? and should be re‐assessed as new information is Legal duediligence learned and evaluated throughout the processcoordinated withbusiness due • The creation of a due diligence framework, diligence frequent status reporting and a simple easy to Legal duediligence update format can help make the process go informing thebusiness more smoothly4transaction 7
  8. 8. Legal due diligence checklistWhat is legal Basic Corporate Documentsdue diligence? SearchesHow a does abusiness deal Securities Regulation and Issuancesfocus and guide Shareholder Informationthe due diligenceprocess? Material Contracts Legal due Financial Information diligencecoordinated with Employee Compensation/Benefits Plans business duediligence Patent, Trademark and Copyright MattersLegal due Tangible Propertydiligence Litigation and Auditsinforming thebusiness Environmentaltransaction Management 8
  9. 9. Legal due diligence checklist • Material ContractsWhat is legaldue diligence? – Bank line of credit agreements, including any amendments,  renewal letters, notices, waivers, correspondences, etc.How a does abusiness deal – Other material agreements evidencing outstanding loans to or focus and guide guarantees by the Company, including correspondences.the due diligence – Material contracts with suppliers, manufacturers or customers.  process? Please indicate which suppliers are sole source.Legal due – Agreements for loans to and any other agreements (including diligence consulting and employment contracts) with officers, directors coordinated withbusiness due or employees, whether or not now outstanding.diligence – Schedule of all insurance policies in force covering property of the Company and any other insurance policies such as "key Legal duediligence person" policies, director indemnification policies or product informing the liability policies.businesstransaction – Partnership or joint venture agreements. – Any other material contracts outstanding. 9
  10. 10. Legal due diligence checklist • Tangible PropertyWhat is legaldue diligence? – List of real and material personal property owned by the  Company.How a does abusiness deal – Documents of title, mortgages, deeds of trust and focus and guide security agreements pertaining to the properties listed the due diligenceprocess? in (a) above.Legal due – List of any security interests in personal property.diligence – Documentation of significant acquisitions or dispositions coordinated withbusiness due of assets.diligenceLegal duediligenceinforming thebusinesstransaction 10
  11. 11. Legal due diligence checklistWhat is legal • Where does Legal Due Diligence get their due diligence? information?1How a does abusiness deal – Site visitsfocus and guidethe due diligence – Written questionnairesprocess? – Data room visitsLegal duediligence – Disclosure lettercoordinated withbusiness due – Certificates of titlediligence – Commissioning specialist reportsLegal duediligence – Collection of public informationinforming thebusiness 1Rankine, Denzil.  “Chapter 5‐transaction Investigating the Target”, Acquisition  Essentials: A step‐by‐step guide to smarter deals, E‐Book Accessible through  the Carleton University Library website: Harlow, Prentice Hall, 2005, p.110 11
  12. 12. How does a business deal focus and guide the due  diligence process?What is legaldue diligence? • All the members of due diligence team need a How a does a basic understanding of the particular business dealfocus and guide transaction structure, risks, value drivers, and the due diligenceprocess? objectives.Legal due – Plan a due diligence team meetingdiligencecoordinated withbusiness duediligenceLegal duediligenceinforming thebusinesstransaction 12
  13. 13. Transaction structure • Is it an Asset purchase, a share purchase or a What is legaldue diligence? transaction with mixed elements?How a does a – This information helps to determine scope and extent of business deal due diligencefocus and guidethe due diligence • What type of business is the “target” involved in?process? – This information helps assess riskLegal duediligence • Key elements of the businesscoordinated withbusiness due • Assets/liabilitiesdiligence • Pre‐closing transactions/conditionsLegal duediligence – Transactional due diligenceinforming thebusiness • Transaction structuretransaction – Transactional due diligence 13
  14. 14. Key due diligence points • Due diligence is a responsive multi‐stage processWhat is legaldue diligence? • This investigation must be as thorough as possible How a does a to accurately assess the ‘‘target’’ acquisition or business dealfocus and guide transaction within the particular timeframe, cost, the due diligenceprocess? and client constraintsLegal due • Due diligence is a value driven process because it diligencecoordinated with serves to further inform both the acquirer and the business duediligence “target” of the appropriate “target’’ value Legal due • Comprehensive due diligence exposes unexpected diligenceinforming the or unknown liabilities before the deal is closed and businesstransaction offers an opportunity for both sides to re‐assess the  preliminary agreement terms 14
  15. 15. Identification and assessment of key risks • Need background to business being acquiredWhat is legaldue diligence? • Public disclosure – securities filings on How a does a SEDAR/stock exchangebusiness dealfocus and guidethe due diligence • Websitesprocess? • Media searchLegal duediligence • Financial statementscoordinated withbusiness duediligenceLegal duediligenceinforming thebusinesstransaction 15
  16. 16. Identification and assessment of key risks • Notes to financial statements –What is legaldue diligence? contingencies/commitments/subsequent eventsHow a does a • Management’s discussion and analysis – trends, business dealfocus and guide uncertainties, liquiditythe due diligenceprocess? • Risk factor disclosure in public documentsLegal duediligence • Assessment of risks – identify key riskscoordinated withbusiness duediligenceLegal duediligenceinforming thebusinesstransaction 16
  17. 17. Business & legal due diligence done in parallelWhat is legal • Coordinationdue diligence? • Constant reassessment of findings in light How a does abusiness dealfocus and guide of other findings – consistency of results, the due diligenceprocess? red flags, re‐interpretationLegal duediligencecoordinated withbusiness duediligenceLegal duediligenceinforming thebusinesstransaction 17
  18. 18. Business & legal due diligence done in parallel • Importance of a legal issue depends on business What is legaldue diligence? issuesHow a does a – Loan covenants more important where company in business deal default?focus and guidethe due diligence • Regular communication and sharing of process? results/findingsLegal duediligence • Work sharing – intranet/portalscoordinated withbusiness due • War roomsdiligenceLegal due • Issue‐based due diligence rather than functionaldiligence – e.g. sales agreement team rather than informing thebusiness legal/business/financial teamstransaction 18
  19. 19. Questions and Answers Brian E. Abraham Brian.abraham@fmc‐law.com +1 604 443 7134 LinkedIn
  20. 20. The preceding presentation contains examples of the kinds of issues companies dealing with due diligence could face.If you are faced with one of these issues, please retain  professional assistance as each situation is unique.

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