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1. Legal Due Diligence: Integrating the Legal
and Business Parts of the Process
March 2011
Presented by: Brian Abraham
1

2. Overview
1. 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. 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 a
business deal mixed elements
focus and guide
the due diligence • It is a process by which clients, lawyers and other
process?
advisors try to learn as much as possible about a
Legal due
diligence
target business before committing funds to buy it 1
coordinated with
business due • Legal due diligence is just one element of due
diligence
diligence process
Legal due
diligence
informing the
business
transaction
3

4. Why due diligence?
What is legal • Lawyer’s role in due diligence is to ensure
due diligence?
achievement of client objectives
How a does a
business deal • Why does the client want to acquire the ‘target’
focus and guide
the due diligence business?
process?
• Will the client’s acquisition of target business help
Legal due
diligence them achieve their end objectives?2
coordinated with
business due
diligence
Legal due
diligence
informing the
business
transaction
4

5. Different purposes for due diligence
What is legal • some due diligence is “target” focused, this type of
due diligence?
investigation attempts to address the risks and or
How a does a
business deal issues regarding what is being acquired
focus and guide
the due diligence – e.g. existence of loan agreement
process?
• transactional due diligence addresses the risks and
Legal due
diligence or issues concerned with getting the deal done
coordinated with
business due
diligence
– e.g. loan agreement requires consent of bank
for transaction
Legal due
diligence
informing the
business
transaction
5

6. Why due diligence?
What is legal • According to the Due Diligence Deskbook, legal
due diligence?
due diligence consists of:
How a does a
business deal
focus and guide
1. Document review
the due diligence
process? 2. Regulatory approval
Legal due 3. Statutory searches
diligence
coordinated with
business due
4. Other steps dictated by transaction
diligence circumstances3
Legal due
diligence
informing the
business
transaction
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7. Why due diligence?
What is legal • Time, cost, and transaction constraints are
due diligence?
important to consider
How a does a
business deal • due diligence expectations and processes should
focus and guide
the due diligence be set out in writing for both counsel and client
process?
and should be re‐assessed as new information is
Legal due
diligence
learned and evaluated throughout the process
coordinated with
business due • The creation of a due diligence framework,
diligence
frequent status reporting and a simple easy to
Legal due
diligence
update format can help make the process go
informing the
business
more smoothly4
transaction
7

8. Legal due diligence checklist
What is legal Basic Corporate Documents
due diligence?
Searches
How a does a
business deal
Securities Regulation and Issuances
focus and guide Shareholder Information
the due diligence
process? Material Contracts
Legal due Financial Information
diligence
coordinated with Employee Compensation/Benefits Plans
business due
diligence Patent, Trademark and Copyright Matters
Legal due
Tangible Property
diligence Litigation and Audits
informing the
business Environmental
transaction
Management
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9. Legal due diligence checklist
• Material Contracts
What is legal
due diligence? – Bank line of credit agreements, including any amendments,
renewal letters, notices, waivers, correspondences, etc.
How a does a
business 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 with
business 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 due
diligence person" policies, director indemnification policies or product
informing the liability policies.
business
transaction
– Partnership or joint venture agreements.
– Any other material contracts outstanding.
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10. Legal due diligence checklist
• Tangible Property
What is legal
due diligence? – List of real and material personal property owned by the
Company.
How a does a
business deal – Documents of title, mortgages, deeds of trust and
focus and guide security agreements pertaining to the properties listed
the due diligence
process? in (a) above.
Legal due
– List of any security interests in personal property.
diligence – Documentation of significant acquisitions or dispositions
coordinated with
business due
of assets.
diligence
Legal due
diligence
informing the
business
transaction
10

11. Legal due diligence checklist
What is legal
• Where does Legal Due Diligence get their
due diligence?
information?1
How a does a
business deal – Site visits
focus and guide
the due diligence – Written questionnaires
process?
– Data room visits
Legal due
diligence – Disclosure letter
coordinated with
business due – Certificates of title
diligence
– Commissioning specialist reports
Legal due
diligence – Collection of public information
informing the
business 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. How does a business deal focus and guide the due
diligence process?
What is legal
due diligence? • All the members of due diligence team need a
How a does a basic understanding of the particular
business deal
focus and guide transaction structure, risks, value drivers, and
the due diligence
process? objectives.
Legal due – Plan a due diligence team meeting
diligence
coordinated with
business due
diligence
Legal due
diligence
informing the
business
transaction
12

13. Transaction structure
• Is it an Asset purchase, a share purchase or a
What is legal
due diligence? transaction with mixed elements?
How a does a
– This information helps to determine scope and extent of
business deal due diligence
focus and guide
the due diligence • What type of business is the “target” involved in?
process?
– This information helps assess risk
Legal due
diligence • Key elements of the business
coordinated with
business due • Assets/liabilities
diligence
• Pre‐closing transactions/conditions
Legal due
diligence – Transactional due diligence
informing the
business • Transaction structure
transaction
– Transactional due diligence
13

14. Key due diligence points
• Due diligence is a responsive multi‐stage process
What is legal
due diligence?
• This investigation must be as thorough as possible
How a does a to accurately assess the ‘‘target’’ acquisition or
business deal
focus and guide transaction within the particular timeframe, cost,
the due diligence
process? and client constraints
Legal due • Due diligence is a value driven process because it
diligence
coordinated with serves to further inform both the acquirer and the
business due
diligence “target” of the appropriate “target’’ value
Legal due • Comprehensive due diligence exposes unexpected
diligence
informing the or unknown liabilities before the deal is closed and
business
transaction offers an opportunity for both sides to re‐assess the
preliminary agreement terms
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15. Identification and assessment of key risks
• Need background to business being acquired
What is legal
due diligence? • Public disclosure – securities filings on
How a does a SEDAR/stock exchange
business deal
focus and guide
the due diligence
• Websites
process?
• Media search
Legal due
diligence • Financial statements
coordinated with
business due
diligence
Legal due
diligence
informing the
business
transaction
15

16. Identification and assessment of key risks
• Notes to financial statements –
What is legal
due diligence? contingencies/commitments/subsequent events
How a does a • Management’s discussion and analysis – trends,
business deal
focus and guide uncertainties, liquidity
the due diligence
process? • Risk factor disclosure in public documents
Legal due
diligence
• Assessment of risks – identify key risks
coordinated with
business due
diligence
Legal due
diligence
informing the
business
transaction
16

17. Business & legal due diligence done in parallel
What is legal
• Coordination
due diligence?
• Constant reassessment of findings in light
How a does a
business deal
focus and guide
of other findings – consistency of results,
the due diligence
process?
red flags, re‐interpretation
Legal due
diligence
coordinated with
business due
diligence
Legal due
diligence
informing the
business
transaction
17

18. Business & legal due diligence done in parallel
• Importance of a legal issue depends on business
What is legal
due diligence? issues
How a does a
– Loan covenants more important where company in
business deal default?
focus and guide
the due diligence • Regular communication and sharing of
process?
results/findings
Legal due
diligence • Work sharing – intranet/portals
coordinated with
business due • War rooms
diligence
Legal due
• Issue‐based due diligence rather than functional
diligence – e.g. sales agreement team rather than
informing the
business
legal/business/financial teams
transaction
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19. Questions and Answers
Brian E. Abraham
Brian.abraham@fmc‐law.com
+1 604 443 7134
LinkedIn

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.