Legal Due Diligence Checklist: NewCo Company

        Venture capitalists will use their legal department to conduct legal due diligence on any proposed company. Our venture capital firm attorneys will issue a due diligence checklist to the NewCo Company, requesting different types of information concerning the company.

Due Diligence Checklist

1. “Corporate Documents of the Company and Subsidiaries

1. Articles of Incorporation and all amendments thereto.
2. By laws and all amendments thereto.
3. List of states and jurisdictions in which qualified to do business and in which the Company has offices, holds property or conducts business.
4. Most recently obtained good standing certificates for all states and jurisdictions where the Company is qualified to do business” (Due Diligence Checklist, 2005).

2. “Material Contracts and Agreements

5. Lists of banks or other lenders with whom Company has a financial relationship (briefly describe nature of relationship - lines of credit, equipment less or, etc.).
6. Credit agreements, debt instruments, security agreements, mortgages, financial or performance guaranties, indemnifications, liens, equipment leases or other agreements evidencing outstanding loans to which the Company is a party or was a party within the past two years.
7. All material correspondence with lenders during the last three years, including all compliance reports submitted by the Company or its accountants.
8. List of all major clients and their locations.
9. Any other material contracts” (Due Diligence Checklist, 2005).

3. “Litigation

10. Copies of any pleadings or correspondence for pending or prior lawsuits involving the Company or the Founders.
11. Summary of disputes with suppliers, competitors, or customers.
12. Correspondence with auditor or accountant regarding threatened or pending litigation, assessment or claims.
13. Settlement documentation” (Due Diligence Checklist, 2005).

4. “Employees and Related Parties

14. A management organizational chart and biographical information.
15. Summary of any labor disputes.
16. Correspondence, memoranda or notes concerning pending or threatened labor stoppage.
17. List of negotiations with any group seeking to become the bargaining unit for any employees.
18. All employment and consulting agreements, loan agreements and documents relating to other transactions with officers, directors, key employees and related parties.
19. Schedule of all compensation paid to officers, directors and key employees for most recent fiscal year showing separately salary, bonuses and non-cash compensation (i.e. use of cars, property, etc.).
20. Summary of employee benefits and copies of any pension, profit sharing, deferred compensation and retirement plans.
21. Summary of management incentive or bonus plans not included in (7) above, as well as other non-cash forms of compensation.
22. Confidentiality agreements with employees.
23. Description of all related party transactions, which have occurred during the last three years (and any currently proposed transaction) and all agreements relating thereto” (Due Diligence Checklist, 2005).

5. “Financial Information

24. Audited financial statements since inception (unaudited if audited financials are available).
25. Quarterly income statements for the last two years and the current year (to date).
26. Financial or operating budgets or projections.
27. Business plan and other documents describing the current and/or expected business of the Company including all material marketing studies, consulting studies or reports prepared by the Company.
28. A description of all changes in accounting methods or principles during the last three fiscal years.
29. Any documents relating to material write-downs or write-offs other than in the ordinary course.
30. Revenue, gross margin and average selling price by product or service.
31. Management letters or special reports by auditors and any responses thereto for the last three fiscal years.
32. Letters of counsel to the Company delivered to auditors for the last three fiscal years.
33. Aging schedules for accounts receivable for the last two years.
34. Description of all contingent liabilities.
35. List of real and material personal property owned by the Company.
36. Documents of title, mortgages, deeds of trust and security agreements pertaining to the properties listed” (Due Diligence Checklist, 2005).

Although the above due diligence checklist appears complicated and erroneous in its content, it is necessary to obtain such information in order for an investment firm to make an informed decision on a company in disguise. Taking the above factors into consideration will account for a small percentage for predicting the success of the proposed company (Business Angels Network, 1999). The onus is to avoid dealing with companies that have demonstrated ethically, socially or environmentally irresponsible organizations in the past. The venture capital firm will use the due diligence checklist before an official commitment is made, to provide a safeguard against a company with past criminal activity, a company induced with corruptive practices, a company with damaged reputation (socially and financially), and a company with breaches of legislation.

In essence, due diligence will predict the future of the company once the deal has closed between the proposed company and the venture capital firm. An investigative firm such as ours will do a thorough job to avoid any future surprises from the acquisition, thereby approving a company that presents opportunities for synergies, innovative research and development and dispersions to a wider array of the market. Becoming familiar with a company’s history is a key component of making a constructive and secure decision that will be tailored to the needs of NewCo and our firm.

 

References

Business Angels Network: Business Angels Network launches a due diligence         check list. (1999, June). M2 Presswire. Retrieved on May 22, 2005, from         InfoTrack OneFile database.

Due Diligence Checklist. (2005). All Business. Retrieved May 22, 2005, from