Contents
Table of Contents
CHAPTER 1
Introduction to Due Diligence
§ 1.01 Due Diligence: The Key to Successful Business Transactions
§ 1.02 Key Terms and Concepts
§ 1.03 Benefits of the Due Diligence Investigation
[1] Full Disclosure
[2] Transaction Evaluation
[3] Limitation of Professional Liability
§ 1.04 Requirements of an Effective Due Diligence Process
[1] A General Frame of Reference: The Proposed NASD Standards
[2] Establishing Accountability: the Responsible Attorney
[3] Establishing Accountability: the Diligence Attorney
[4] Scope and Budget
[5] Documenting the Due Diligence Investigation
§ 1.05 Guidelines: Due Diligence Investigation
[1] General Guidelines for All Transactions
[2] Checklist Items for Corporate Finance Transactions
[3] Investor/Principal Questionnaire
CHAPTER 2
Statutory, Case Law and Common Sense Origins of Due Diligence
§ 2.01 Introduction
§ 2.02 The Due Diligence Defense Under Section 11 of the Securities Act
[1] Overview of Section 11
[2] Due Diligence Defense Not Available to Securities Issuer
[3] Experts and Others Entitled to Due Diligence Defense
[4] Prudent Person Standard
[5] Summary of Principal Defenses Under Section 11
§ 2.03 What Constitutes “Reasonable Investigation” in a Due Diligence Defense
[1] Brief Overview of Escott v. BarChris Construction Corporation
[2] Limited Due Diligence by Defendants
[3] General Responsibilities of Underwriters
[4] Responsibilities of Underwriters for Their Attorneys' Actions
[5] Higher Standard of Conduct Required of Attorneys Who Sit on Issuer's Board of Directors
[6] Responsibilities of In-House Counsel
[7] Some Important “Take Aways”
§ 2.04 Avoiding Liability: Underwriters
[1] Important Components of Adequate Underwriter Due Diligence
[2] Expertised and Non-Expertised Portions of the Registration Statement
[3] SEC Views Regarding Underwriter Due Diligence
§ 2.05 Due Diligence Defenses by Various Parties Under Section 11
[1] Experts
[2] Underwriters
[3] Inside Directors and Attorney-Directors
[4] Outside Directors, Trustees and Attorneys
[5] Underwriters' Obligations
[6] Evolving Standards in the Wake of Corporate Fraud
§ 2.06 The Importance of Due Diligence in Defending Derivative Claims Against Attorneys, Accountants and Others
[1] Overview of the Legal Basis for Derivative Claims
[2] Section 12(a)(2)
[3] Section 10(b), Rule 10b-5, and Section 17(a)
§ 2.07 Guidance from Administrative Proceedings
§ 2.08 Causes of Action Under Common Law and Commercial Statutes
§ 2.09 Special Situations: Due Diligence Involving Internal Controls over Financial Reporting
[1] What Is “Internal Control over Financial Reporting?”
[2] Timing and Implementation of the Internal Control Report
[3] Items that Must Be Included in the Internal Control Report
[4] Guidelines for Financial Control Evaluation and Reporting
[5] Internal Control Compliance Checklist
CHAPTER 3
The Multidisciplinary Due Diligence Team
§ 3.01 Overview
[1] Key Components of a Successful Due Diligence Team
[2] Potential Areas of Investigation and Diligence Team Requirements
§ 3.02 Selecting the Right Risk Evaluation Due Diligence Specialists
[1] Overview
[2] Form: Risk Evaluation Due Diligence Specialist—Request for Proposal
[3] Form: Risk Evaluation Due Diligence Specialist Confidentiality Agreement
§ 3.03 Insuring Effective Communication Among the Multi-Disciplinary Team
[1] Overview
[2] Initial Diligence Team Meeting
[3] Form: Diligence Team Initial Staffing Memorandum
CHAPTER 4
Scope of Review and Data Room
§ 4.01 Process, Procedures, Budget and Timeline
§ 4.02 Establishing a Forms-Driven Process
[1] Overview
[2] Form: Time and Responsibility Schedule—Initial Public Offering of Securities
[3] Form: Summary Time and Responsibility Schedule—Tender Offer
§ 4.03 Getting the Most from Inexperienced Members of the Diligence Team
[1] Overview
[2] Guidelines: Questions and Answers to Assist Those New to the Diligence Process
§ 4.04 General Diligence Request Forms
[1] Form: Preliminary Due Diligence Information Request List for General Business Transaction
[2] Form: Summary Due Diligence Checklist for Review Purposes—General Business Transaction
[3] Form: Prioritized Financial and Accounting Due Diligence Checklist
§ 4.05 Form: Due Diligence Document Request List for Medical Facility Acquisition
§ 4.06 Form: Short Form/Due Diligence Request List for Partnership Target Company
§ 4.07 Form: Request for Due Diligence Documents from a Technology Company
§ 4.08 Checklist: M&A Due Diligence
§ 4.09 The Data Room
[1] Overview
[2] Visiting a Physical Data Room
[3] Form: Data Room Index
CHAPTER 5
Memoranda and Legal Opinions
§ 5.01 Overview
[1] The Importance of the Data Trail
[2] First-Tier Product: Notes, Checklists and Guidelines
[3] Second-Tier Product: Periodic Diligence Memoranda and Attorney Specialist Memoranda
[4] Third-Tier Product: the Diligence Compendium
[5] Fourth-Tier Product: Client-Oriented Materials
§ 5.02 The Importance of Client-Oriented Executive Summaries
[1] Overview
[2] Content Focus
[3] Caveats
§ 5.03 Form: Attorney Specialist Memoranda
§ 5.04 Form: Preliminary Diligence Memorandum
§ 5.04A Form: Bankruptcy Restructuring Memorandum
§ 5.05 Form: Summary of Preliminary Data Room Review
§ 5.06 Form: Short-Form Executive Summary Due Diligence Findings
§ 5.07 Form: Executive Summary of Final Legal Due Diligence Findings
§ 5.08 Form: Bullet Point Executive Summary
§ 5.09 Form: Diligence Compendium
§ 5.10 Legal Opinion Memorandum
[1] Overview
[2] Form: Legal Opinion Checklist
[3] Form: Opinion Memorandum
[4] Form: Legal Opinion Backup
§ 5.10A Form: How to Protect Confidential Information During a Due Diligence Review
§ 5.10B Legal Considerations in Creating Electronic Recordings of Conversations
[1] Introduction
[2] Applicable Laws for Non-Attorneys
[3] American Bar Association Guidelines for Attorney Conduct
[4] State Law and Ethical Standards
[5] Possible Punishment for Attorney Misconduct
§ 5.11 Form: Consolidated Facilities Visit Report
CHAPTER 6
Company Interviews and Director/Officer/Shareholder/Investor Questionnaires
§ 6.01 Company Interviews
[1] Overview
[2] Form: Interview Record
§ 6.02 Director/Officer/Shareholder/Investor Questionnaires
[1] Overview
[2] Form: Director and Officer Checklist
[3] Form: Questionnaire for Directors, Officers and Certain Other Individuals: Public Offering
[3A] Form: Questionnaire for Directors and Officers: Annual Proxy Statement
[4] Form: Non-Employee Director Checklist
[5] Form: Questionnaire for Non-Employee Directors
[6] Form: 5% Shareholder Checklist
[7] Form: Comprehensive Questionnaire for Shareholders (Including Officers and Directors) Holding at Least 5%
[8] Form: Comprehensive Selling Stockholder Questionnaire
[9] Form: Short Form Questionnaire for Directors and Officers
[10] Form: Investor Suitability Questionnaire
§ 6.03 Form: “Director Favorable” Director Indemnification Agreement
CHAPTER 7
Company Records Review
§ 7.01 Overview of Importance and Character of Company Records Review
[1] Introduction
[2] Objectives
[3] Company Records Examiner
§ 7.02 Review of the Other Governing Documents
§ 7.03 Review of Minute Books, Resolutions, and Equity Interest Transactions
§ 7.04 A Multifaceted Approach
§ 7.05 Form: Company Data Summary
§ 7.06 Form: Partnership Data Summary
§ 7.07 Form: Limited Liability Company Data Summary
§ 7.08 Checklist: Company Records Checklist
§ 7.08 A Checklist: Director's Meeting, Compliance with Requirements
§ 7.09 Form: Corporate/Partnership/LLC Meeting Analysis
§ 7.10 Form: Litigation Workform
§ 7.11 Form: Acquisition/Divestiture/Merger Agreement Summary
§ 7.12 Form: License/Permit Workform
§ 7.13 Form: Miscellaneous Agreement Workform
§ 7.14 Form: Hart-Scott-Rodino Questionnaire
§ 7.15 Form: Short-Form Checklist and Guidelines for Basic Corporate Entity Overview
§ 7.16 Document Retention and Destruction
§ 7.17 Form: Records Retention Policy
§ 7.18 Checklist: Purchasing a Broadcast Station
§ 7.19 “Sell-Side” Due Diligence
§ 7.20 Conducting Due Diligence for Franchisees
§ 7.21 Checklist: Due Diligence for Acquiring Ongoing Operations (Asset or Stock)
§ 7.22 Review Letters of Intent as Part of Due Diligence
[1] Goal of the Letter of Intent
[2] What is a Binding Proxision?
[3] What Should a LOL Include?
§ 7.23 Review Guidelines and Checklist: Review of Financial Statements and Financial Information
[1] Overview
[2] Guidelines and Checklist
§ 7.24 Diligence Review of Company Ethics Policies and Practices
[1] Overview
[2] Form: General Code of Executive Ethics for All Corporate Executives and Members of the Board of Directors and Committees
§ 7.25 Diligence Review of Company Officer and Director Screening Policies and Practices
[1] Overview
[2] Form: Memorandum Regarding Potential Board Member Nomination
[3] Checklist: Evaluation of Potential Board Nominees
[4] Form: General Questionnaire for Potential Nominees to Boards of Directors
CHAPTER 8
Environmental Due Diligence
§ 8.01 Overview of Environmental Due Diligence
[1] Purpose and Scope of Environmental Due Diligence
[2] Environmental Due Diligence: Who Needs It?
[3] The Regulatory Framework
[4] The Importance of Adequate Environmental Due Diligence
§ 8.02 Guidelines for Effective Environmental Due Diligence Methodology
[1] Overview
[2] The Document Review and Associated Inquiries
[3] The Environmental Audit
§ 8.03 Form: Environmental Matters: Information Request List
§ 8.04 Form: Environmental Matters Questionnaire
§ 8.05 Form: Environmental Workform
§ 8.06 Form: Phase I Environmental Assessment Checklist
CHAPTER 9
Real Property and Personal Property Due Diligence Review
§ 9.01 Fundamentals of Real Property and Personal Property Due Diligence
[1] Overview: The Bundle of Rights and Responsibilities
[2] Basic Scope of Review
[3] Building Blocks of Real Property Due Diligence
[4] Surveys, Title Review, and Title Insurance
[5] A Potential Pitfall: the Visual Artist's Rights Act
§ 9.02 How to Conduct an Effective Real Property and Personal Property Due Diligence Investigation
[1] Initial Steps
[2] The Role of Local Counsel
[3] Effective Use and Limitations of Appraisal
§ 9.03 Form: Owner Real Property Information Workform (Fee Interest)
§ 9.04 Form: Leased Real Property Information Workform
§ 9.05 Form: Ensuring a Comprehensive and Effective Real Property Due Diligence Process
§ 9.06 Form: Real Property Mortgage Information Workform
§ 9.07 Form: Real Estate Investment Trust (REIT) Due Diligence
§ 9.08 Form: Leased Personal Property Information Workform
CHAPTER 10
Debt Instrument Review
§ 10.01 Overview
[1] Types of Indebtedness
[2] Typical Debt Instrument Provisions
§ 10.02 Identifying and Understanding Debt Instruments
§ 10.03 Form: Basic Debt Instrument Information Workform (for Borrowed Funds)
§ 10.04 Form: Debt Information Workform (Industrial Development Bond)
§ 10.05 Form: Debt Instrument Information Workform (Customer or Vendor Credit Agreements)
CHAPTER 11
Employee Due Diligence
§ 11.01 Employee Due Diligence Review
[1] Overview
[2] Disruption of Employee Morale and Productivity
[3] Special Considerations in Business Combinations
§ 11.02 Benefit Plan and Labor Agreements Review
[1] Overview
[2] Actuaries and Other Experts
[3] 401(k) and Other Defined Contribution Plans
§ 11.03 The Regulatory Framework for Employee Benefit Plans
§ 11.04 Employee Stock Ownership Plan (ESOP) Due Diligence
[1] ESOP Primer
[2] Areas of Concern
[3] Form: Employee Plan/ESOP Due Diligence Supplemental Checklist
§ 11.05 Form: Employee Benefit Plan Document Checklist
§ 11.06 Form: Benefit Consultant's Checklist
§ 11.07 Form: Management Questionnaire
§ 11.08 Form: Employee Benefit Plan Workform
§ 11.09 Form: Employment Agreement Workform
§ 11.10 Form: Labor and Employee Relations Workform
§ 11.11 Americans with Disabilities Act Due Diligence
[1] Overview
[2] Definition of “Disability”
[3] Prohibition and Discrimination
[4] Not All Employers Are Subject to the ADA
[5] Qualified Individuals
[6] Employer's Duty to Provide Reasonable Accomodations
[7] Exceptions for Undue Hardship on the Employer
[8] Substance Abuse and Testing
§ 11.12 Form: ADA Due Diligence Workform
CHAPTER 11A
Immigration Due Diligence
§ 11A.01 Overview of Due Diligence Related to Immigration
§ 11A.02 Foreign Worker Status and Regulation
[1] Temporary Nonimmigrant Employees
[2] Immigrant Employees Seeking Permanent Residency
§ 11A.03 Potential Employer Compliance and Liability Under the Immigration Reform and Control Act
[1] Form I-9
[2] Anti-Discrimination and Document Fraud and Misuse Provisions
[3] Employer Failure to Comply with IRCA Requirements
§11A.04 Due Diligence Methodology and Approach
[1] Inquiries Related to Nonimmigrant and Immigrant Employees
[2] Investigating Employer Compliance Under IRCA
§11A.05 Form: Immigration Due Diligence Guidelines
§11A.06 Form: Immigrant Employee Worksheet and Checklist
§11A.07 Form: I-9 Audit Guidelines
CHAPTER 12
Due Diligence Investigations in International Transactions
§ 12.01 Overview of Due Diligence Investigations in International Transactions
[1] Unique Issues in International Transactions
[2] Expanded Teams and Process
§ 12.02 The Expanded Due Diligence Team for International Transactions
§ 12.03 International Due Diligence Methodology
[1] The Fundamentals Remain the Same
[2] Preliminary Steps
§ 12.04 Selected Regulatory Issues
[1] United States Department of Commerce Bureau of Economic Analysis Filings
[2] Overview of European Union Merger Notifications
[3] Foreign Corrupt Practices Act Overview
[4] Export/Import Restrictions
§ 12.05 Form: Sample Agenda for Initial International Due Diligence Team Meeting
§ 12.06 Form: Sample Guidelines for Foreign Counsel Members of the Diligence Team
§ 12.07 Form: Checklist for Dispute Avoidance in Foreign Transactions
§ 12.08 Form: Initial Due Diligence Memorandum for Foreign Transactions
§ 12.09 Form: Interim Due Diligence Report for International Transactions
CHAPTER 13
Intellectual Property Due Diligence
§ 13.01 Intellectual Property Diligence
§ 13.02 Building Blocks of Effective IPR Due Diligence
[1] Identifying Relevant IPR
[2] Defining the Scope of Review Based on the IPR Inventory
[3] IPR Ownership Analysis
[4] Perfecting Interest
[5] Legal Title to IPR
§ 13.03 Understanding the Various Types of IPR
[1] Patents and Patent Claims
[2] Trade Secrets
[3] Copyrights
[4] Trademarks
[5] Other Areas
§ 13.04 Defining the Scope and Objectives of the IPR Investigation
[1] Understanding the Transactional Context
[2] Nature of the Business and the Industry
§ 13.05 Effective IPR Due Diligence: What to Review
[1] Overview
[2] IPR Diligence Activities Checklist
§ 13.06 Checklist and Guidelines: IPR Due Diligence
[1] Preliminary Questions
[2] Guidelines: Team Logistics
[3] Guidelines: Patent-Related Due Diligence
[4] Guidelines: Trademark Due Diligence
[5] Guidelines: Copyright Due Diligence
[6] Guidelines: Trade Secrets Due Diligence
[7] Guidelines: Miscellaneous IPR Due Diligence Areas
§ 13.07 Form: Technology Facilities Due Diligence Questionnaire
§ 13.08 Checklist: Software License Due Diligence
§ 13.09 Instructions for Software License Due Diligence Checklist
CHAPTER 14
Risk Management Practices Due Diligence
§ 14.01 Introduction
§ 14.02 Understanding Risks and Available Management Alternatives
[1] Traditional Insurance
[2] Evolving Insurance Products
§ 14.03 Form: Risk Management Due Diligence Request List
§ 14.04 Form: Work Sheet: Insurance Policies
§ 14.05 Form: Summary Risk Management Due Diligence Memorandum
§ 14.06 Form: Work Sheet: Risk Evaluation Matrix
§ 14.07 Form: Work Sheet: Directors and Officers Policy
§ 14.08 Form: Assessment of Risk Exposure for Director and Officer Liability
§ 14.09 Form: Director and Officer Liability Insurance Policy Analysis
§ 14.10 Form: Checklist: Insurance Company Due Diligence
CHAPTER 15
Due Diligence Considerations in Light of Heightened National Security
§ 15.01 Overview
§ 15.02 Compliance with International Trade Regulations
[1] Regulatory Framework
[2] Potential Successor Liability
[3] Due Diligence Methodology and Approach
§15.03 Transactions Involving Foreign Investors
[1] Introduction
[2] The Exon-Florio Amendment
[3] Security Clearance Considerations for Transactions Involving Government Contractors
§ 15.05 Form: Export Compliance Due Diligence Inquiries
§ 15.06 Form: Outline of Considerations for Transactions Involving Foreign Investors