Chapter 48 - § 48.5 • DUE DILIGENCE; DRAFTING TIPS

• Jurisdiction: Colorado

§ 48.5 • DUE DILIGENCE; DRAFTING TIPS

No matter how well legal documents are drafted, there is no substitute for thorough due diligence. Acquirers, as well as seller shareholders who anticipate receiving acquirer stock as consideration, have much to gain by being aware of what they are about to own. Understanding the business and "kicking the tires" is the surest way to bring problems to the surface, which, in turn, reduces the possibility for costly post-closing disputes.

§ 48.5.1—Due Diligence Checklist

Counsel should begin the legal due diligence process with a comprehensive checklist tailored to the transaction. In mergers and stock deals, it is especially important to perform diligence on the company's books and records, with special attention to corporate resolutions, authorizations, and equity issuances. This provides assurance that the seller has observed necessary formalities and that its actions are, and will be, duly authorized. Additionally, it allows the acquirer to understand the capital structure of the entity and to whom outstanding ownership interests belong.

§ 48.5.2—Potential Problem Areas

Legal due diligence should be undertaken in every major area of the seller's business to uncover circumstances that could give rise to material problems for the acquirer in the future. Possible issues could arise in any of the following areas:

• Leases;
• Threatened and pending litigation;
• Employee agreements, pensions, and benefits;
• Financial accounting, including accounts receivable and payable;
• Indebtedness, lines of credit, and loans;
• Title to assets;
• Taxes;
• Relationships with major customers and suppliers;
• Intellectual property;
• Compliance with laws;
• Insurance;
• Related party transactions;
• Competitive issues; and
• Data privacy and security compliance.

Documents in these subject matter areas likely will contain confidential and proprietary information. For this reason, prior to opening the books, the disclosing party should obtain written assurances from the reviewing party regarding confidential information obtained in due diligence. The reviewing party should specify that confidential information will not be disclosed to third parties (unless required by law) or used to harm the competitive interests of the disclosing party should the transaction fail. Although beyond the scope of this chapter, confidentiality and non-disclosure agreements are an important component of any business sale or combination.

§ 48.5.3—Review of...