#3403 - Due Diligience Chart - Private Acquisitions

Due Diligence

Issue		Risk	Solution	Further Information
Key Contracts	Non-exclusivity	Competitors could use the same software or products Contract/products not worth as much Restricts scope of use	Price adjustment Enter into exclusivity agreement Deal breaker?	How do they intend to use the contract & IP rights? How key to the deal is this contract? Is an exclusivity deal a viable option? Is there an alternative supplier that could be used?
	Assignment	Applicable for an asset purchase	Need consent – condition precedent
	Termination	The contract can be terminated	Warranty that there have been no breaches and that any debts are fully paid up	Have there been any breaches or are there any potential breaches?
	Change of Control	Can terminate on written notice resulting in the loss of an important contract	Seek a waiver of change of control clause Make SPA conditional on waiver Enter into a new contract	Is there any other product that could be used? Is termination likely? Confidentiality
	Confidentiality	Breached already so could be sued or contract terminated	Sellers obtain permission to disclose details of contract, if the answer is no then re-evaluate purchase price Or indemnity for breach	Has there been any waiver of confidentiality?
Articles of Association	Pre-emption Rights	Other shareholders can prevent the Buyer from acquiring the entire share capital of the Target if they decide to exercise their pre-emption rights	Remover pre-emption rights on transfer from articles Ask sellers to obtain a written waiver of pre-emption rights from the shareholders	Have pre-emption rights been followed in the past – have there been valid transfers in the past?
	ASC	How much has been allotted? Has the cap been reached?	Ask seller to remove ASC from Articles by OR Change Articles
	Liens	If a shareholder is indebted to the company, the company has a right to retain share and shareholder will be unable to sell the share	Get a warranty that there aren’t any liens Get directors to declare liens exempt Release documents condition on completion	Investigate whether there are any liens
	Director indemnities	Company could be liable for the actions of the directors after a takeover	Warranty that there has been no breach of articles	More information about directors and whether this article has ever been activated
Employment	Golden Parachute	Might have to pay money to key managers They may be more likely to leave	Warranty that there are no more people affected other than those specified Price adjustment Earn-out on the deal	Details about clause – is it binding? How much is it? See contracts to analyse all key terms & conditions Who is entitled to the golden parachutes?
	Payments for loss of office	Company could be liable if there is an indemnity clause in the articles	Retrospective ordinary resolution for payment of loss of office (215 CA 2006) Warranty that properly authorised Warranty about who has clauses Maybe price adjustment if it runs into the millions of pounds	Was it properly authorised Check board minutes Check service contract
	Dismissal	Possible litigation (wrongful/unfair dismissal)	Warranty that correct steps were taken Indemnity if there is a claim	Were the correct steps taken? What did the employee do? Employee’s contract
IP		Litigation pending or patent thrown out	Deal breaker Price adjustment	Patent documentation Patent fees paid up
Litigation		Huge costs if claim/clause breached	Warranties Indemnity for costs of litigation Sellers put money in an escrow account	Contract Documentation breached Letter before action, letter of claim, claim form – have proceedings been issued?
Property		Lose property shortly after takeover Change of ownership restriction in lease Not contracted out of LTA 54 so might cost more money – risk that might not be able to get vacant possession or remain in property	Get new lease Landlord give 6 months’ notice to terminate under s.25 Warranty that no breaches of lease	Has landlord served a s.25 notice on tenant to evict them? Has tenant served a s.26 notice on landlord to renew lease? Have replies/objections been raised to notices? Is there a confidentiality clause in the lease? Check lease for change of ownership clause
Charges		Can assets be transferred? Permission required from 3^rd party Seller may default	Undertaking that seller will remove charge prior to completion Consent of charge holder for transfer	What type of charge?
Loans		Could be onerous agreements	Alter agreements	Check loan agreements

Factors influencing extent of due diligence:
Timing

Lock-out period

Cost
Material key contracts
- Threshold – normally those over 1% purchase price
Do sellers have limited resources?

Questions to Ask:

How far back does client want to go?
- With shares go back to the beginning
What is the threshold for material contract investigations?
- Is it finance or specific area
What do they mean by material issues?
- Everything about a contract? Or by exception only – only unusual matters
- Only contracts for suppliers for a specific area
Limits on IP?
- Can be NO limits on IP investigations from trademarks to copyrights to patents
- IP rights last for 20 years
- Have to pay renewal fees on patents – need to do intensive investigation on this
How far to investigate into foreign subsidiaries?

Ownership of shares:

Share certificates or on CREST
Register of members from Company
Board minutes to check everything has been properly allotted
Annual returns
SH01 Forms at Companies House
Articles of Association & Memorandum of Association
- Can only allot what is authorised so need to check that was authorised to allot the shares
Charges Register
- Any loan documentation evidencing the charge
Check minority shareholders
- How do you get them to agree to the sale – ‘drag along’ clauses in constitutional documentation

#3403 - Due Diligience Chart - Mergers and Acquisitions (Private Acquisitions)

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