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Due Diligence Review Of Corporate History And Legal Status
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Due Diligence Review Of Corporate History And Legal Status

During a merger or acquisition by one company of another, the acquiring company needs to a comprehensive and detailed analysis of the corporation to be acquired before it completes the acquisition. This process is called due diligence review.

We have previously discussed a general overview of due diligence review and the financial portion of it. In this article, we will focus on analysis of the corporate records and the legal position of the company to be acquired.

Analysis of Corporate Records and History

In order to obtain an accurate picture of what you are buying, you must scrutinize corporate records and history. For example, you need to review the corporate minute book, articles of incorporation, and any stock option plans. If there are shareholders, you need to obtain documents relating to the share structure and shareholder agreements.

Following is a list of what else you need to analyze in your due diligence review:

1. Verify that the company is properly registered and its filings are up to date in every jurisdiction in which it operates.

2. Study whether annual reports have been given to shareholders and whether they have been filed at the appropriate state and federal authorities.

3. Evaluate whether the target company’s minute book is complete.

4. Determine if all annual meetings were held and if all minutes and resolutions were passed.

5. Carefully review if the target company’s by-laws comply with its charter.

6. Analyze the qualifications for corporate officers and what power they have.

7. It is important to clarify how officers and directors are elected and removed. What will happen to the existing officers and directors if the corporation changes ownership?

8. If the company issued shares, the following issues must be analyzed:

 What classes have been authorized?

 Have all shares been validly issued?

 Are there restrictions on transfers of shares? And whether transfers to date have been completed properly?

9. Determine if there are any bonus, retirement, or profit sharing plans in effect.

10. Evaluate if any agreements (oral or written) exist with employees, directors, officers, etc. If yes, clarify the obligations and time commitments for all agreements.

Legal Status of the Company Being Acquired

It is crucial to know that the target company is in full compliance with all state and federal laws and regulations. Furthermore, you must determine if there are any active legal actions involving the company.

Following are steps of how to conduct your due diligence review of the corporation’s legal status:

1. Obtain for review all permits, licenses, environmental reports, court filings and all documents from every legal action involving the company.

2. Determine whether the target company is properly licensed (under the correct business name) in every jurisdiction in which it operates.

3. Examine the corporation’s history with complying with state and federal environmental issues. It is particularly important to detail the past five years.

4. Analyze whether the company is involved in any current legal actions and their value.

5. Review if any governmental or law enforcement agency filed a criminal, administrative or disciplinary action against the company to be acquired. The status of any action must be clarified.

6. Examine if the company has every filed for bankruptcy and what was the outcome.

7. Not to be overlooked is the requirement to determine if there are any ordinances prohibiting the transfer of the target company.

Certainly, this is not an exhaustive list of how to do due diligence review of a company’s corporate records and legal status. The intention is to provide guideline of how a legal document review might proceed when completing such a due diligence review.

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