Corporate Due Diligence

Transcription

1 Corporate Due Diligence Prepared for: Legal Education Society of Alberta For Presentation In: Edmonton, Alberta March 11, 2009 Calgary, Alberta March 16, 2009 For Presentation by: Kathleen M. Cowick Macleod Dixon LLP Calgary, Alberta

2 TABLE OF CONTENTS I. INTRODUCTION Purpose of Memorandum No one Size Fits All What to review Be Cautious with check lists/templates Form of Report - How Much Detail Materiality Obtaining Assistance Where Specialised Knowledge Is Required... 3 II. DUE DILIGENCE IN PROSPECTUS TRANSACTIONS Purpose of Legal Due Diligence in Prospectus Transactions... 4 (a) Accuracy, Completeness and the Due Diligence Defence... 4 (b) Opinion Due Diligence... 5 (c) Fulfilling Certain Professional Responsibilities Reviews of Corporate Records... 7 (a) Purpose of Reviewing Corporate Records... 7 (b) Subsidiaries... 7 (c) Period of Review... 7 (d) Applicable Laws... 7 (e) Specific Matters to Review:... 8 (i) Certificate of Incorporation... 8 (ii) Articles of incorporation... 8 (iii) Amendments to Articles of Incorporation... 8 (iv) Extra provincial registrations... 9 (v) By Laws... 9 (vi) Minutes and Resolutions of Directors Meetings and Committees... 9 (vii) Issued Share Capital (viii) Shareholders Minutes and/or Resolutions (ix) Share Register (x) Shareholder or Voting Agreements (xi) Annual Returns (f) Deficiencies in Corporate Records Document Reviews (a) Purpose of Document Reviews (b) Documents to Review (c) Detail of Record (d) Representations and Warranties (e) Examples of Material Clauses (f) Closing Books (g) Specific Types of Agreements (i) Credit Agreements (ii) Employment or Consulting Agreements (iii) Stock Option Plans (iv) Insurance Policies (v) Leases ii

3 TABLE OF CONTENTS (vi) Legal Proceedings Searches III. DUE DILIGENCE IN ACQUISITION TRANSACTIONS Purpose of Legal Due Diligence in Acquisition Transactions Reviews Of Corporate Records (a) Purpose of Reviewing Corporate Records (i) Asset Acquisitions (ii) Share Acquisitions (b) What Corporations to Review and For What Period (c) Applicable Laws (d) Specific Matters to Review (i) Certificate of Incorporation (ii) Articles of Incorporation (iii) Amendments to Articles of Incorporation (iv) Extra provincial registrations (v) By Laws (vi) Minutes and Resolutions of Directors Meetings and Committees (vii) Issued Share Capital Review (viii) Shareholders Minutes and/or Resolutions (ix) Share Register (x) Shareholder or Voting Agreements (xi) Annual Returns (xii) Banking Resolutions (e) Deficiencies in Corporate Records Document Reviews (a) Purpose of Document Reviews (i) Asset Acquisitions (ii) Share Acquisitions (b) Documents to Review (c) Detail of Record (d) Representations and Warranties (e) Examples of Material Clauses (f) Closing Books (g) Specific Types of Agreements (i) Credit Agreements (ii) Employment or Consulting Agreements (iii) Benefit Plans (iv) Insurance Policies (v) Leases (vi) Legal Proceedings Searches iii

4 1. Purpose of Memorandum CORPORATE DUE DILIGENCE I. INTRODUCTION This memorandum has been prepared to provide general guidance on how to approach and conduct legal due diligence in a corporate and securities context. This memorandum contains a discussion of the reasons for due diligence reviews, what to review, the nature of the reviews to be conducted, some specific matters to look for and the form of report to be prepared. The actual due diligence to be conducted must be determined on a transaction by transaction basis and this memorandum and supporting materials should accordingly not be considered as containing rules that must be complied with rather they should be used as a starting point for determining how you might approach and conduct a due diligence review. Individual lawyers and clients may have different views of what should be done and it is important to discuss what is expected in terms of the review with the assigning lawyer or client. This memorandum consists of an introductory portion containing comments applicable to due diligence reviews generally, followed by separate discussions of due diligence in prospectus transactions and due diligence in acquisition transactions. 2. No one Size Fits All There is a broad variety of securities transactions in which legal due diligence is required ranging from prospectus offerings, to merger transactions, to simple acquisitions of shares or assets. There is no "one size fits all" due diligence requirement for these various types of transactions, as the reasons for conducting due diligence varies significantly in respect of such transactions and, in addition, the actual review conducted will vary according to the nature of the business of the company is question. For example, the minute book review undertaken may vary depending upon whether the review is being conducted in order to provide information required to give an opinion, as compared to being done to support a due diligence defence in a securities offering or in connection with the purchase of shares or assets of the company. Therefore, when requested to conduct a due diligence review, the first thing to do is obtain a basic understanding of what the underlying transaction is, who we are acting for and why the due diligence is being conducted. It is also advisable to ask the assigning lawyer if they or the client want you to look for specific issues or items. Armed with that information you will be in a better position to understand what is required and expected of you. It is important to get these detailed instructions prior to commencing the review so that the reviews are conducted in a thorough and organised manner that avoids having to go back and redo the work a second time. 3. What to review It is necessary to get direction from the lawyer or client as to what should be reviewed. In many cases a due diligence request list will be prepared by the senior lawyer on the file and provided to

5 the other party requesting that they provide us with an extensive list of documents and information. When this is done, the response provided by the other party will provide you with an outline of the material to be reviewed. Ideally the other party's counsel will provide a written response indicating the documentation on the list that is applicable and will be made available. Typically someone at the other party will be assigned to assisting you in providing the requested information. Prior to commencement of the due diligence review it is helpful to meet with your counterpart and go through the due diligence request list to confirm what materials on the list are applicable and to discuss where and when the material will be provided. As regards those items that are not applicable, a note should be made on the list and, where possible, the other party should confirm that advice in writing if this confirmation has not been obtained from counsel to the other party. Many corporations will not conduct all of its operations in one corporation but will often carry on aspects of its business through subsidiaries. It is necessary to get guidance as to whether the corporate records/agreements of all such subsidiaries should be reviewed or whether only those that are "material" should be reviewed. The determination of which subsidiaries are material should be made by the senior lawyer on the file. If in the course of the review, you are not getting the co-operation of the other party or if you have the impression that the other party is not being forthcoming, you should immediately bring this to the attention of the senior lawyer on the file. 4. Be Cautious with check lists/templates Attached to this memo are some check-lists/templates. As with all precedents, these should be approached with a considerable degree of caution. Check lists/templates should not be blindly followed but considered as a starting point and examined for their suitability and, where appropriate, discussed with the senior lawyer on the file. The attached checklists/templates are generic in nature and, accordingly, thought must be given to whether all of the items are appropriate to the transaction in question and in particular whether other matters should be reviewed or noted having regard to the nature of the business of the subject corporation. 5. Form of Report - How Much Detail A written due diligence report will generally be presented to the lawyer in charge. Ideally this will be in a format that will enable the lawyer to incorporate the report or portions of the report into the due diligence report to the client, if one is being prepared for the client. You should ask the assigning lawyer if he or she has a preference as to the format of the report. One particularly difficult matter to come to grips with in conducting a legal due diligence review is the detail required or appropriate in your notes and the report. In this regard you should avoid repeating everything in the agreement or minutes but rather should have a succinct synopsis of the material aspects of the agreement or the minutes. The goal is to provide enough information so that it is clear for example what the nature of the agreement is and the material provisions of the agreement so that the senior lawyer can determine if that corresponds with his or her understanding of the agreement or of the description in the prospectus and whether additional -2-