due diligence - roping the wind for dust particles
Post on 22-Nov-2014
1.067 Views
Preview:
DESCRIPTION
TRANSCRIPT
1
Due DiligenceRoping the Wind for Dust Particles
Presented by: Brian AbrahamSeptember 28, 2011
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 tryto 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
3
CREATING A DUE DILIGENCE FRAMEWORK
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’property or interest?
• Will the client’s acquisition of target business help them achieve their end objectives?
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
5
Why due diligence?
• Time, cost, and transaction constraints are important to consider
• Due diligence expectations and processes should be set out in writing for both counsel and client and should be re‐assessed as new information is learned and evaluated throughout the process
• Regularly scheduled meetings for updating purposes
• The creation of a due diligence framework, frequent status reporting and a simple easy to update format can help make the process go more smoothly
6
Legal Due Diligence ChecklistBasic Corporate Documents
Searches
Property Records
Securities Regulation and Issuances
Shareholder Information
Material Contracts
Underlying Contracts
Financial Information
7
Legal Due Diligence Checklist
Employee Compensation/Benefits Plans
Patent, Trademark and Copyright Matters
Proprietary Information
Tangible Property
Litigation and Audits
Environmental
Management
Local Customs and Practices
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.
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.
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
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.
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.
13
Legal Due Diligence Checklist
Shareholder Information• Records setting for all issuances or grants of stock, options and
warrants by the Company.
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.
15
Legal Due Diligence Checklist
• Material Contracts• Partnership, lease, option or joint venture agreements.• Any other material contracts outstanding.
16
Legal Due Diligence Checklist
Financial Information• All management letters or special reports by auditors and any
responses thereto.
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.
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).
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.
20
Legal Due Diligence Checklist
Employee Compensation/Benefits Plans- employment agreements or severance agreements with officers or key personnel.
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.
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).
23
Legal Due Diligence Checklist
Litigation and Audits• Active litigation files, including letters asserting claims, complaints,
answers, etc.
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.
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.
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).
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.
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.
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.
30
Legal Due Diligence Checklist
Local Customs and Practices• Critical on foreign transactions.• Unwritten laws.• Community consultation.• Aboriginal claims.
31
Legal Due Diligence Checklist
Where does Legal Due Diligence get their information?1
• Site visits• Data room visits• Commissioning specialist reports• Collection of public information
32
How does a business deal focus and guide the due diligence process?
How is the Transaction structured?
Objectives:• staged due diligence• threshold issues
What should you look at to assess risks?
Value drivers
33
How does a business deal focus and guide the due diligence process?All the members of due diligence team need a basic understanding of the particular transaction structure, risks, value drivers, and objectives.• Plan regular due diligence team meetings, need to know basis• Team
• Management
• Engineering, geology, metallurgy
• Accounting
• Legal
• Environmental
• Country experts
• Tax advice
• Political risk
34
Transaction Structure
Is it an Asset purchase, a share purchase or a transaction with mixed elements?• This information helps to determine scope and extent of due diligenceWhat type of business is the “target” involved in?• This information helps assess risk
Key elements of the business
35
Transaction Structure
Assets/liabilities
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
37
Key Due Diligence Points
Preliminary review of certain issues
Threshold review to identify key issues
Auction process can drive access and economics of due diligence
Thorough due diligence review
38
Identification and Assessment of Key RisksNeed background to business being acquired
Public disclosure – securities filings on SEDAR/stock exchange
Websites
Media search
Financial statements
39
Identification and Assessment of Key RisksNotes to financial statements – contingencies/commitments/subsequent events
Management’s discussion and analysis – trends, uncertainties, liquidity
Risk factor disclosure in public documents
Assessment of risks – identify key risks
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
41
Business & Legal Due Diligence Done in ParallelCoordination
Constant reassessment of findings in light of other findings – consistency of results, red flags, re‐interpretationImportance of a legal issue depends on business issues• Loan covenants more important where company in default?
42
Business & Legal Due Diligence Done in Parallel
Regular communication and sharing of results/findings
Work sharing – intranet/portals
War rooms
Issue‐based due diligence rather than functional• e.g. sales agreement team rather than legal/business/financial teams
Contract review can be confirmed against the due diligence searches that have been performed
Agreements can relate to one another e.g. areas of interest, overlapping royalties
43
What is not covered by due diligence?
Due diligence impacts the ability to negotiate transaction terms
Representations and warranties are a risk allocation mechanism
Due diligence allows risk assessment and impacts "requirement" for representations and warranties• Areas of non‐risk
44
What is not covered by due diligence?
Due diligence can be a substitute for representations and warranties• Competitive bid/auction situations• Allows assessment of need for representations and warranties• Representations and warranties can be important in the assessment of
non‐financial risk of a transaction• As Is Where Is deals
Effective due diligence can help get the deal
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
46
Mining Considerations (continued)
Fraudulent activities
Tenure system
Agreement requirements
Foreign entities, operations
Political risk
Country risk
Aboriginal matters
Local customs and practices, cultural matters
47
Mining Considerations (continued)
Who do you talk too
Confidentiality
Technical questions
Site visits
Detailed checklists
Due diligence questionnaire
Data rooms
48
Mining Considerations (continued)
Due diligence request listcorporate structurearticles, by‐lawsindebtednessproperty interestsmineral projects
ownership
contracts
company rights
access
infrastructure
rights of mineral owner and third parties
third party consents
49
Mining Considerations (continued)
Due diligence request list (con’t)employment mattersenvironmental matterslitigationrelated party transactionsintellectual propertyassets and businessgovernment reportsinsurancemiscellaneous
Brian E. AbrahamBrian.abraham@fmc‐law.com
+1 604 443 7134
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.
top related