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Due Diligence in Business Transactions

Gary M. Lawrence

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“All but the most seasoned acquisition professional will find some topics addressed in this book that he or she has never considered. This volume of material the author addresses is truly staggering.”
The M&A Tax Report

This valuable deskbook presents a complete overview of the due diligence process and gives attorneys, legal assistants and allied professionals the tools they need to conduct more thorough and efficient due diligence investigations.

Due Diligence in Business Transactions book and CD provides detailed guidance on: who makes up the due diligence team and what roles these various experts play; how to limit your risk of liability for inadequate or incomplete due diligence; what the courts say about “adequate due diligence” under the federal securities laws; creating a “data trail” to document the investigation; techniques that can help you uncover more and better information; the special requirements of international and intellectual property due diligence; and how the due diligence investigation process varies for different types of companies. Chapters analyze due diligence on environmental issues, real property and personal property, debt instruments, employee benefits, insurance and liability coverage, international issues, and intellectual property, as well as due diligence considerations in light of heightened national security. The book features over 100 forms and checklists that can also be found on the accompanying CD-ROM.

Due Diligence in Business Transactions includes in-depth coverage of the case law and statutes governing due diligence and shows you what to do—and what to watch out for—every step of the way.

Book #00629; looseleaf, two volumes, 1,388 pages and one CD-ROM; published in 1994, updated as need; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-066-1

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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 1388
  • ISBN: 978-1-58852-066-1
  • Pub#/SKU#: 629
  • Volume(s): 2
  • CDs: 1

Author Image
  • Gary M. Lawrence
Gary M. Lawrence, J.D. is one of the country’s leading due diligence, investment and transactional scholars. He is a member of the adjunct faculty of the Dedman School of Law at Southern Methodist University where he teaches Due Diligence Studies to JD, MBA and LLM candidates. He is also executive director of the Center for Advanced Due Diligence Studies (www.CADDS-EDU.org), and has served as an expert witness in some of the country’s most significant investment, due diligence and fraud related lawsuits.  Previously, Professor Lawrence was a senior partner with a major international law firm where he chaired the global technology, media and telecommunications transactions practice and was a member of the firm’s global management committee.

Also by Gary M. Lawrence:
Representing High-Tech Companies

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 Overview: General Guidelines for a Due Diligence Investigation
[1] 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 Overview and Definition of Due Diligence
§ 2.02 Reasonable Investigation Defense Under Section 11 of the Securities Act
[1] Overview of Section 11
[2] No Due Diligence Defense for 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
[1] What Constitutes Reasonable Investigation
[2] Limited Due Diligence by BarChris Defendants
[3] Underwriter Defendants in BarChris
[4] Underwriters Counsel in BarChris
[5] Higher Standard for Insider Attorneys Under BarChris
[6] In-House Counsel Under BarChris
[7] BarChris Conclusions
§ 2.04 Avoiding Liability: Underwriters
[1] Verification of Management Statements
[2] The Importance of Context
[3] The Relevance of Cumulative Due Diligence by Underwriters
[4] Expertised and Non-Expertised Materials
[5] Expertised Materials and Reasonable Reliance
[6] Allocation of Responsibility Among Members of the Underwriting Syndicate
[7] The SEC's Rule 176 and the Aircraft Carrier Release
[8] Document the Due Diligence Process
§ 2.05 Selected Party-Specific Case Law Involving the Due Diligence Defense
[1] Experts and Attorneys
[2] Underwriters
[3] Inside Directors and Attorney-Directors
[4] Special Situations: Outside Directors, Trustees and Attorneys
[5] Underwriters’ Obligations
§ 2.06 Primary and Derivative Liability-Based Claims Against Non-Issuer Defendants
[1] Legal Basis for Derivative Claims
[2] Types of Derivative Claims
[3] Special Considerations Regarding Attorneys
§ 2.07 Due Diligence Issues in SEC Administrative Proceedings
§ 2.08 Common Law and Commercial Statutes
§ 2.09 Special Situations: Internal Controls over Financial Reporting
[1] Definition of Internal Control over Financial Reporting
[2] Timing and Implementation of the Internal Control Report
[3] Contents of the Internal Control Report
[4] Guidelines for Financial Control Evaluation and Reporting
[5] Internal Control Diligence 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 Specialized Right Risk Evaluation
[1] Overview
[2] Form: Risk Evaluation Specialist—Request for Proposal
[3] Form: Risk Evaluation Specialist Confidentiality Letter 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
The Data Trail: Memoranda, Legal Opinions and Other Written Records

§ 5.01 Overview
[1] The Importance of the Data Trail
[2] Four Tiers of the Data Trail
§ 5.02 Client-Oriented Memoranda
[1] Overview
[2] What Client-Oriented Memoranda Should Contain
[3] Risks Associated with Summary Memoranda and Improper Staffing
§ 5.03 Form: Specialist Memoranda
[1] Sample Antitrust and Noncompetition Specialist Memorandum
[2] Sample Environmental Specialist Memorandum
§ 5.04 Form: Sample Preliminary Diligence Memorandum
§ 5.05 Form: Due Diligence Memorandum: Bankruptcy Restructuring
§ 5.06 Form: Internal Diligence Team Summary of Scope and Findings of Preliminary Data Room Review
§ 5.07 Form: Due Diligence Report—Manufacturing Facility Site Visit
§ 5.08 Checklist: Legal Due Diligence Overview and Training Tool
§ 5.09 Form: Executive Summary of Preliminary Legal Due Diligence Findings (Short Form)
§ 5.10 Form: Executive Summary of Final Legal Due Diligence Findings
§ 5.11 Checklist: Outline for Use in Preparation of Client-Oriented Executive Summary
§ 5.12 Form: The Final Written Record of the Diligence Effort—The Diligence Compendium
§ 5.13 The Importance of Legal Opinions in the Due Diligence Process
[1] Why Legal Opinions Matter
[2] Checklist: Legal Opinion Delivered in Connection with Business Transaction
[3] Form: Support Memorandum for Proposed Legal Opinion in Business Transaction
[4] Form: Support Memorandum for Proposed “Model Opinion”-Based Legal Opinion in Business Transaction
§ 5.14 Form: Seller Side Diligence Team Memorandum Regarding Confidential Information
[1] The Importance of Protecting Confidential Information
[2] Form: Confidentiality and Non-Disclosure Letter Agreement
§ 5.15 Legal Considerations in Creating Electronic Recordings of Conversations in the Course of Due Diligence
[1] Introduction
[2] Non-Attorney Actor Considerations
[3] Additional Considerations for Attorney Actors
[4] State Law and Ethical Standards
[5] Possible Punishment for Attorney Misconduct

CHAPTER 6
Company Interviews and Director/ Officer/Shareholder/Investor Questionnaires

§ 6.01 Company Interviews
[1] Overview
[2] Form: Interview Record
§ 6.02 Executive Officer, Director, Significant Employee and Security Holder Questionnaires
§ 6.03 Form: Basic Director and Officer Checklist for Use by Diligence Team
§ 6.04 Form: Public Offering of Securities Questionnaire—Directors, Executive Officers and Certain Beneficial Owners of Securities
§ 6.05 Form: Proxy Statement and Annual Report: Questionnaire for Directors and Officers
§ 6.06 Form: Checklist for Non-Employee Directors
§ 6.07 Form: Public Offering of Securities: Questionnaire for Non-Employee Directors
§ 6.08 Form: Beneficial Shareholder Checklist
§ 6.09 Form: Public Offering of Securities: Comprehensive Questionnaire for 5% and Greater Equity Holders
§ 6.10 Form: Public Offering of Equity Securities: Selling Equity Holder Questionnaire
§ 6.11 Form: Miscellaneous Filings and Transactions: Short Form Questionnaire for Directors, Officers and Equity Holders
§ 6.12 Form: Private Placement of Securities: Investor Suitability Questionnaire
§ 6.13 Form: “Director Favorable” Director Indemnification Agreement

CHAPTER 7
Essential Records Review

§ 7.01 Overview of Essential Records Review
[1] Introduction
[2] Primary Goals
[3] Staffing
§ 7.02 Governing Documents Review
§ 7.03 Organizational Books, Resolutions and Equity Issuances
§ 7.04 The Importance of a Comprehensive Approach
§ 7.05 Form: Organizational Records Summary
§ 7.06 Form: Partnership Records Review
§ 7.07 Form: Limited Liability Company Review
§ 7.08 Checklist: Company Resolution Review
§ 7.09 Checklist: Governing Body Meeting
§ 7.10 Form: Short-Form Entity Meeting Analysis
§ 7.11 Form: Litigation Analysis Worksheet
§ 7.12 Form: Short-Form Transaction Agreement Review
§ 7.13 Form: Short-Form License/Permit Review
§ 7.14 Form: Material Agreement Workform
§ 7.15 Form: Anti-Competition Questionnaire
§ 7.16 Form: Checklist and Guidelines for Organizational Records and Entity Review
§ 7.17 Assessing Document Retention Practices
[1] What Documents Should Be Kept? [2] Formal Document Retention Policies
§ 7.18 Form: Document Retention Policy
§ 7.19 Checklist: Regulated Industry: Broadcast and Wireless
§ 7.20  A Word About “Sell-Side” Due Diligence
§ 7.21 Special Concerns Related to Franchised Businesses
§ 7.22 Checklist: Short-Form Diligence Checklist
§ 7.23  Role of the Letter of Intent in Due Diligence
[1] Purpose of the Letter of Intent
[2] Binding and Non-Binding Provisions
[3] Typical LOI Provisions
§ 7.24 Checklist: Review of Financial Information
§ 7.25 The Role of Ethics Policies and Practices in Due Diligence
[1] Overview
[2] Form: General Code of Executive Ethics
§ 7.26 Special Diligence Issues: Sarbanes-Oxley Act Section 206
[1] Overview
[2] Form: Board Member Nomination Criteria and Protocols
[3] Checklist: Evaluation of Potential Board Member Nominees

CHAPTER 8
Basic Environmental and Sustainability Due Diligence

§ 8.01 Basic Environmental Due Diligence
[1] Overview
[2] Importance of Basic Environmental Due Diligence
[3] Basic Environmental Regulation
[4] Risks
§ 8.02 Environmental Sustainability and Green Initiatives Due Diligence
§ 8.03 Environmental Due Diligence Process and Methodology
[1] Overview
[2] The Data Review and Associated Inquiries
[3] The Environmental Audit
§ 8.04 Checklist: Basic Environmental Due Diligence
§ 8.05 Form: Basic Environmental Questionnaire
§ 8.06 Form: Diligence Team Member Environmental Workform
§ 8.07 Form: Short-Form Environmental Survey Checklist
§ 8.08 Greenhouse Gas Emissions Due Diligence
§ 8.09 Checklist: Short-Form Sustainability Checklist
§ 8.10 Form: Internal Environmental Impact Questionnaire
§ 8.11 Form: California Environmental Quality Act Checklist
§ 8.12 Checklist: Energy Star Program
§ 8.13 Form: Environmental Sustainability Checklist for EU Region
§ 8.14 Form: Sample Government Regulations Regarding Sustainable Development

CHAPTER 9
Real and Personal Property Due Diligence Review

§ 9.01 Fundamental Concepts
[1] Overview
[2] Scope of Review
[3] Essential Building Blocks
[4] Real Property Surveys, Title Review, and Title Insurance
[5] Example of Regulatory Complications: The Visual Artists Rights Act
§ 9.02 Public Real Estate Project Due Diligence Under Federal, State and Local Regulations
[1] Overview
[2] Relevant Due-Diligence Based Definitions
[3] Statutory and Regulatory Framework
[4] Due Diligence Implications of Public Projects Involving Federal Compliance Procedures
[5] The Preliminary Project Evaluation
[6] The Environmental Impact Statement
§ 9.03 Special Considerations in Real and Personal Property Due Diligence
[1] Preliminary Matters
[2] Role of Local Counsel
[3] Use and Limitations of Appraisal
§ 9.04 Form:Fee Interest Real Property Workform
§ 9.05 Form:Leasehold Interest Workform
§ 9.06 Form: Ensuring a Comprehensive and Effective Real Property Due Diligence Process
§ 9.07 Form:Mortgage and Encumbrance Workform
§ 9.08 Form:Real Estate Investment Trust (REIT) Checklist
§ 9.09 Form:Leased Personal Property Checklist
§ 9.10 Guidelines: Due Diligence Guidelines for Public Real Property Transactions: FAA Order 1050.19B

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
Foreign Worker Status Due Diligence
Chapter Contents

§ 11A.01 Introduction
§ 11A.02 Overview of Selected Foreign Worker Visas
[1] Temporary Workers
[2] Workers Seeking Permanent Residency
§ 11A.03 Employer Compliance and Liability Issues
[1] Form I-9
[2] Fraud and Other Issues
[3] Employer Failure to Comply with Immigration Reform Act Requirements
§ 11A.04 Foreign Worker Due Diligence Guidelines
[1] Worker-Focused Diligence
[2] Employer-Focused Diligence
§ 11A.05 Form: Foreign Worker Due Diligence Guidelines
§ 11A.06 Form: Foreign Worker 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 Involving National Security Regulations

§ 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] Overview
[2] The Exon-Florio Amendment
[3] Security Clearance Considerations for Transactions Involving Government Contractors
§ 15.04 Form: Import Compliance and Records Review Due Diligence
§ 15.05 Form: Export Compliance Questionnaire
§ 15.06 Checklist: Transactions Involving Foreign Investors

Index