DUE DILIGENCE IN REAL ESTATE: HOW TO CONDUCT AND …underwriters, investment bankers and lead...

DUE DILIGENCE IN REAL ESTATE: HOW TO CONDUCT AND USE

First Run Broadcast: February 26, 2019

1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)

This program will provide you with a real world guide to due diligence in real estate transactions

– what information you need, where to get it, and the timeframes involved – depending on the

type of transaction involved. The relationship between the duration and depth of due diligence

and the state of the market – how “hot” markets involve more risk because sellers or others are

reluctant to give lengthy diligence periods – will be discussed. The program will also discuss

using information obtained in diligence to draft specific reps and warranties. This program will

provide you with a real-world guide to planning due diligence in real estate transaction –

essential information to obtain depending on the transaction involved and how to tie that

information the transaction’s reps and warranties.

• Relationship between diligence and market conditions – willingness of sellers to

cooperate or not

• Using diligence to draft specific reps and warranties

• Service contracts, condominium HOAs, and other contracts

• Review of leases, rent rolls, and financial statements

• Title work – liens and other encumbrances

• Zoning, regulatory and tax issues

• Notices of new or special tax assessments

Speaker:

John S. Hollyfield is of counsel and a former partner in the Houston office Norton Rose

Fulbright, LLP. He has more than 40 years’ experience in real estate law practice. He formerly

served as chair of the ABA Real Property, Probate and Trust Law Section, president of the

American College of Real Estate Lawyers, and chair of the Anglo-American Real Property

Institute. He has been named a "Texas Super Lawyer" in Real Estate Law by Texas Monthly

magazine and is listed in Who’s Who in American Law. He is co-editor of Modern Banking and

Lending Forms (4th Edition), published by Warren, Gorham & Lamont. He received his B.B.A.

from the University of Texas and his LL.B. from the University of Texas School of Law.

Richard R. Goldberg is a retired partner, resident in the Philadelphia office of Ballard Spahr,

LLP, where he established an extensive real estate practice, including development, financing,

leasing, and acquisition. Earlier in his career, he served as vice president and associate general

counsel of The Rouse Company for 23 years. He is past president of the American College of

Real Estate Lawyers, past chair of the Anglo-American Real Property Institute, and past chair of

the International Council of Shopping Centers Law Conference. Mr. Goldberg is currently a

Fellow of the American College of Mortgage Attorneys and is a member of the American Law

Institute. Mr. Goldberg received his B.A. from Pennsylvania State University and his LL.B.

from the University of Maryland School of Law.

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Due Diligence in Real Estate: How to Conduct & Use Teleseminar

February 26, 2019 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

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NO REFUNDS AFTER February 19, 2019

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CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: February 26, 2019 Seminar Title: Due Diligence in Real Estate: How to Conduct & Use Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

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DUE DILIGENCE FOR PROPERTY ACQUISITION

John S. Hollyfield

Norton Rose Fulbright, LLP - Houston

(o) (713) 651-3717

[email protected]

• Scope of due diligence (how much or how little; limits; third party v. internal due

diligence; control and distribution of due diligence materials

• Length of time to conduct—this is market driven;

• Title/survey

• Rent roll; estoppel certificates

• Zoning; CC&R review; confirm no delinquency/default of CC&R obligations

• Condition of property; deferred maintenance; repair costs; code violations; costs

to cure or correct

• UCC search

• Service contracts—survival and termination

• Property income and expense analysis

• Government records review; permits; records of property repair and maintenance;

records relating to insurance claims; litigation; incident reports of criminal

activity; interviews with staff; correspondence from tenants

• Environmental inspection; other non-destructive testing; history of enviro

violations; prior use of hazardous materials at site

• Plans/specifications

• Appraisal

• Right to rely on existing 3rd party due diligence reports

• Existing management agreement; free or reduced office space rent for manager;

free or reduced rent for management/leasing personnel at apartment project

• Existing listing/brokerage and commission agreements

• Employee termination/retention; severance/vacation payments;

• Ad valorem tax history and assessed valuation; tax appeals

mailto:[email protected]

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REAL ESTATE DUE DILIGENCE

David C. Camp

Senn Visciano Canges P.C. – Denver

(o) (303) 298-1122

[email protected]

WHAT IS DUE DILIGENCE AND WHY IS IT IMPORTANT

I. Who performs due diligence?

A. Buyer, but recognize that they will be second guessed by any additional investors, and any

lenders, future tenants, etc.

B. Sellers trying to be prepared to support this purchase price.

II. Why perform due diligence?

A. To identify risks and problems that would affect your decision on whether to purchase the

property (e.g., superfund site).

B. To identify adjustments to purchase price (e.g., no term on anchor tenant).

C. To identify items that must be addressed prior to closing (e.g., deemed maintenance).

D. To be sure you understand the property well enough to make an information, rational decision.

III. What do you do with due diligence information?

A. Walk away from the deal.

B. Adjust the price.

C. Demand that something be addressed pre-closing.

D. Agree to post-closing obligation (but be sure that there will be assets in the seller or sufficient to

actually ensure compliance).

IV. Preparing for due diligence.

A. Seller side.

1. Prepare up front. The better organized and well prepared you are up front, the easier the

process goes.

2. Anticipate questions.

3. Fix obvious problems.

4. Line up tenants for estoppels (may ask to sign up front, but lenders and buyers may not

accept if too stale.

B. Buyer side.

1. Start as soon as possible to get decisions made before deadlines run out.

2. Line up inspectors and experts you trust.


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3. Prepare for cost and understand the goals. If the reality is that the existing building will

be torn down upon purchase, don’t spend too much time investing its structural integrity.

But, do spend time to ensure that you understand remediation cost for any asbestos, etc.

4. Be sure you process each piece of information and decide whether anything needs to be

addressed and what needs to be done to address it.

PROCESS

Set up a weekly meeting to ensure that due diligence is progressing.

Define what documents are missing.

Decide what actions need to be taken on matters disclosed by the due diligence.

©2016 Greenberg Traurig, LLP. Attorneys at Law. All rights reserved.

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DUE DILIGENCE IN BUSINESS TRANSACTIONS

April 5, 2016

C. Ben Huber Greenberg Traurig, LLP

1200 Seventeenth Street, Suite 2400 Denver, Colorado 80202

303-572-6586 [email protected]


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OUTLINE

I. What is Due Diligence?

II. Who Conducts Due Diligence?

III. Purpose and Impact of Due Diligence

IV. Organizing Due Diligence – Target’s Perspective

V. Organizing Due Diligence – Buyer’s Perspective

VI. Conducting Due Diligence

VII. Reviewing Due Diligence Information

VIII. Tracking Results of Due Diligence

IX. Due Diligence in Other Contexts

EXHIBIT A – Sample Due Diligence Request List

EXHIBIT B – Due Diligence Issues

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I. WHAT IS DUE DILIGENCE?

The term “due diligence” originates from the Securities Act of 1933 where it serves as a defense by directors and underwriters against liability for failure to disclose certain matters in public offerings. That is, if directors and officers can demonstrate that they conducted reasonable diligence on the issuer in preparing, reviewing and approving a registration statement, they can shield themselves from securities fraud liability. This defense is not available for the issuer.

Today, the term more commonly means the investigation of a business through researching public records, reviewing documents, interviewing people with knowledge and inspecting facilities, equipment and inventory.

The purpose and scope of due diligence changes depending on the type of deal as well as parties and industry involved. This webinar is geared towards due diligence in private M&A transactions.

II. WHO CONDUCTS DUE DILIGENCE?

Diligence of a target business (“Target”) is typically driven and conducted by the purchaser of the Target (“Buyer”).

Lenders who provide acquisition financing to Buyer and insurers who provide representation and warranty insurance will also conduct diligence but often “piggyback” on the results of Buyer’s diligence.

Targets will conduct nominal diligence of a Buyer to understand who the Buyer is and to assess the cultural fit. Sometimes a Target will conduct more extensive diligence if the consideration is to include any Buyer equity or if there are any concerns about Buyer’s genuine interest in Target or Buyer’s ability to close.

In other contexts - lenders will conduct diligence of borrowers in debt financings; issuers, underwriters, investment bankers and lead investors will conduct diligence in securities offerings; and counsel will conduct diligence of its client when giving legal opinions.

The party conducting due diligence typically outsources much of it to outside counsel, accountants and other consultants (though the extent to which they outsource will depend on their level of sophistication, culture and available in-house resources).

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III. PURPOSE AND IMPACT OF DUE DILIGENCE

Understand the business at issue – enable clear and intelligent communication among the parties involved. As counsel, this is especially important for effective communication with your client and counsel for the other side.

Identify items that influence primary business considerations underpinning transaction – namely, the purchase price or value of Target. The results of diligence may lead to concerns about earnings, customer retention, liabilities, etc., resulting in price adjustments or earn-outs.

Identify significant liabilities and risks of the business and potential impediments to closing.

o Risk Assessment. Diligence can reveal risks that need to be considered, quantified if possible and then addressed in the reps and warranties and indemnification sections of the acquisition agreement (discussed below).

o Termination. In extreme cases, diligence can uncover impediments that rise to the level of “deal breakers” causing the parties to walk away and terminate the deal. Common culprits are unfunded pension liabilities, recent loss of major revenue sources, disputes over ownership of Target or key business assets, and significant or unquantifiable environmental liabilities.

o Closing Conditions. Diligence identifies problems or issues that must be taken care of before closing. For example, corporate clean up, consents and waivers, governmental approvals, HSR clearance, assignment of leases, debt payoff, lien releases, etc.

Determine documentation, including ancillary agreements, needed to paper and close the transaction, including the best forms or precedents to use as a starting point (e.g., employment agreements, transition services agreement, license agreements, leases and estoppel certificates).

Draft transaction documents, including definitive agreement, ancillary agreements and other collateral documents.

o Representations and Warranties. Buyers obtain assurances regarding the Target and the business being purchased from it. These should not only be tailored to the type of transaction (e.g., asset versus stock sale) and the Target’s business but also to diligence findings.

o Disclosure Schedules. These go hand in hand with the reps and warranties and either identify exceptions to them or set forth information required by them.

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Diligence provides the information necessary to complete the reps and warranties and how to qualify them where appropriate.

o Covenants (Pre- and Post-Closing).

Pre-closing obligations are typically geared towards (i) pushing the deal towards closing and satisfaction of closing conditions (e.g., requiring the Target to obtain consents, make HSR filings, release liens, etc.), (ii) maintaining the status quo (e.g., continuing to operate in the ordinary course), and (iii) not taking certain actions that could jeopardize the business (e.g., incurring significant debt or making extraordinary dividends) or the deal (e.g., soliciting or talking to other potential Buyers for the business). Diligence can provide a window into certain activities that you may want to require the Target to take or prohibit the Target from taking prior to Closing.

Post-closing obligations may include certain types of transition assistance, maintaining insurance, paying employment obligations, or non-compete and non-solicitation provisions. Financial Buyers, such as private equity firms, typically need more transition assistance since they often don’t have their own existing infrastructure. Diligence will help determine where such assistance will be needed most.

o Indemnification. Negotiated remedy section for breaches of reps and warranties, covenants and other specifically identified issues discovered in diligence. The results of diligence will help inform the (i) scope of indemnification, including the survival period of reps and warranties; (ii) baskets, caps, and other limitations on indemnification; and (iii) the necessity for escrows or hold-backs, and carve-outs or special indemnities.

o Special Note regarding Fraud Claims and Sandbagging.

Buyers and sellers often argue about the extent to which sellers have disclosed everything in due diligence and, more specifically, whether Buyers have a right to bring fraud claims based on Target making material misstatements or omissions outside of the contract, really during the diligence process. Sellers want Buyers’ diligence to serve solely for evaluation purposes – kick the tires kind of stuff - and limit all claims to breach of contract actions. If buyers want protection, sellers argue, then buyers should include a representation and warranty and any breach should be run through the indemnity section (with its survival periods, caps, baskets, etc.). Buyers, on the other hand, want to expand their remedies and ensure they can not only sue for breach of contract but also

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for fraud outside of the contract. Who wins this battle usually turns on who has more leverage.

To limit Buyer’s from bringing claims outside of the contract (e.g., for problems with diligence), sellers will want to make sure the acquisition agreement contains: (i) an exclusive remedy provision (i.e., that buyer’s only claims are those available under the indemnification provision; and a (ii) a strong non-reliance provision (i.e., where Buyer represents that it is only relying on the representations and warranties in the definitive agreement and not on any other representations or warranties outside of the definitive agreement). If seller can get it, seller should also try to get a due diligence provision (i.e., that buyer has conducted all the diligence it deems necessary or appropriate) and an integration provision (that the agreement constitute the entire agreement of the parties with respect to the entire subject matter).

Conversely, to ensure that a buyer has the right to bring claims outside of the contract for fraud, buyers will not want to make sure that the acquisition agreement does not have an exclusive remedy provision (or, if it does, include a carve out for fraud). It will also want to resist a non-reliance provision. Finally, if a buyer can get it, it should seek a full disclosure or 10b-5 representation (i.e., that seller has fully disclosed all material information to buyer). This can provide additional grounds to bring a fraud claim and perhaps lead to recovery for damages without even having to show intend given its contractual nature.

Notwithstanding the foregoing, this is a murky area of the law which has been written about a lot. How all these provisions interact and the extent to which courts will permit people to contractually give up claims for fraud is still an open question.

Another area impacted by diligence is sandbagging. Sandbagging is where a buyer’s close a transaction with knowledge that one of the seller’s representations or warranties is false (e.g., from information that it discovered in diligence) and then sue the seller for breach and damages after the closing. Buyers often attempt to negotiate a provision that expressly permits them to do this but, even where they don’t, the common law in some jurisdictions, including Delaware, permits buyers to do this. Accordingly, if a seller wants to avoid being sandbagged, it should negotiate an anti-sandbagging provision that states that if the buyer discovers a breach of a representation and warranty (in diligence or otherwise) prior to closing, it can either terminate the agreement and

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“walk” or accept the breach and close (but not sue). As a practical matter, buyers often advise sellers of any breaches they find and negotiate a solution (which often involves an accommodation to buyer).

IV. ORGANIZING DUE DILIGENCE – TARGET’S PERSPECTIVE

Be organized and prepared – As soon as decision to put Target up for sale is made, commence “internal” diligence.

o Locate and organize information and documents (financial statements and back-up accounts and schedules, tax returns, minute books, key contracts, permits and licenses, human resources information and benefits, etc.)

o Understand the Target’s business, including its assets and liabilities and strengths and weaknesses. Set realistic expectations and address potential issues preemptively (e.g., have an explanation for a recent decline in sales). You may even be able to convert a problem into a potential opportunity (for the right Buyer).

o Identify and address problems that are capable of quick resolution upfront.

o Identify and be prepared to explain problems (and offer potential solutions, if applicable) that are not capable of resolution upfront.

o Messy record keeping, missing documentation or unsolved problems can create red flags for a Buyer leading to broader representations and warranties and greater indemnity obligations for Target.

o Identify any regulations that might prohibit disclosure of certain information. For example, exam reports for banks or pricing information where there are anti-trust concerns. Need to identify the issue but consult experts.

o Avoid surprises as much as possible – Surprises kill momentum, delay closing and often result in re-trading of the deal.

Non-Disclosure Agreements.

o Prior to making any disclosures to any potential Buyer, make sure there is a strong non-disclosure agreement in place.

o But . . . an NDA is just a piece of paper. If breached, it will only give rise to a lawsuit which can be expensive and hard to prove. Consider providing due diligence information in stages – disclose most sensitive information (e.g., customer lists and pricing data) as late in the process as possible when you are

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comfortable there is a deal. Or, if there are sensitive facts to be confirmed, consider limiting disclosure to Buyer’s counsel only.

Appoint a point person to manage due diligence, including populating the data room, coordinating interviews and providing responses to diligence questions. If an investment banker has been engaged, they typically fill this roll. If not, Target’s counsel will often act as the point person. Sometimes, it makes sense to have different point people for different parts of diligence.

Consider secrecy issues. What access will be given to facilities, employees and customers and when? Once access is provided, people will know the Target is being sold. This can create angst among workforce (affecting moral and possibly retention) and adversely impact other business relationships (e.g., trigger customer concerns about supply, service and pricing). Also, if the deal does not close for any reason (e.g., even one that is not Target’s fault such as Buyer’s financing falls through), it can create stigma that the Target is flawed. One option – use a cover story such as refinancing.

Be wary of strategic Buyers (typically competitors) who may just be fishing for information.

V. ORGANIZING DUE DILIGENCE – BUYER’S PERSPECTIVE

Understand the due diligence budget, scope of investigation, including your client’s goals, primary focus areas and key concerns (e.g., potential deal breakers), timing and how your findings should be communicated during the diligence process and at the end of it. These should be discussed with your client at the outset.

Determine Scope of Diligence. How much diligence should be done? Every deal is different. It depends on many factors but needs to be determined early on because the scope will influence how many people are needed, how much time is required, whether and when outside experts should be engaged and the depth of the diligence team’s review. Common factors influencing scope are:

o Deal Structure – In a stock acquisition or merger, Buyer likely will want information on the entire business of the Target, its history and the equity owners. In an asset acquisition, the Buyer may just wish to focus on the assets (and liabilities) that it is acquiring from the Target.

o Industry – The industry in which the Target operates may impact due diligence. If the Target operates in a risky industry (e.g., oil and gas, mining, chemicals), there will be more of a focus on environmental liabilities, permits and worker safety than if the Target operates in a safer industry such as professional services.

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o Business Assets – The focus and scope of diligence will be impacted by the Target’s core assets. If the Target owns a lot of real estate and facilities, examination of title, surveys, zoning, physical premises and environmental conditions will be necessary. If the Target owns a lot of intellectual property, more time will be spent reviewing ownership, validity, infringement and licensing issues related to the intellectual property.

o Competition – If the Buyer and Target are in competition, e.g., a strategic Buyer versus a financial Buyer, they may want or need to limit each other’s access to certain information such as pricing and customer lists (at least until it is fairly certain that the deal will close).

o International Business – If the Target operates or sells products or services overseas, the Buyer will want to investigate compliance with anti-bribery and corruption laws (e.g., FCPA)

o Deal Size – Clients may be inclined to conduct more diligence in larger deals where there is more money at risk.

o Target History – The longer the Target has been in existence, the more likely there may be “skeletons” to be concerned about, warranting a further look back to older operations and activities. This is especially true in stock and merger deals where Buyer will generally assume all of Target’s known and unknown liabilities by operation of law.

o Access to Target – Target may wish to restrict access to limit interference with business operations, to prevent discovery of potential sale by employees or customers or to protect sensitive information.

o Timing – The parties may wish to close the transaction in an aggressive timeframe or one of the parties may have more leverage and require a quick closing, limiting the time available to conduct diligence.

o Cost – Buyer may be sensitive to due diligence expense and limit costs. It may also wish to conduct due diligence in phases, increasing due diligence spending as the likelihood of a deal gets greater and greater.

o Goals – Does your client want you to identify high level issues that impact valuation, structure and timing? Buyer may have very limited or specific concerns that it wishes to address in diligence (e.g., title to assets and absence of liens) given its familiarity with the Target or its owners, trust in Target’s management, bargain price to be paid for Target or sensitivity to due diligences costs. Or does your client want an in-depth understanding of the Target, including detailed summaries of its operations, contracts human resources, etc., for post-closing administration and integration?

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Practice Tip – Buyers increasingly unhappy with traditional broad-based, shotgun approach to due diligence. Ask client: “What are top five reasons you would not do this deal?” and start diligence there. You may also suggest trading diligence for broader representations and warranties and increased indemnification coverage depending on leverage (sellers likely to resist). Clearly define the diligence task with client (budget, scope, key concerns, experts, deadlines, and deliverable).

Assemble the Due Diligence Team.

o Size and composition of team depends on scope and parameters of project but typically includes business, accounting and legal specialists.

o Determine what expertise is needed and allocate responsibility accordingly.

o Client typically handles business diligence in-house or with consultants such as investment bankers or industry specialists.

o Accountants and other tax professionals assist with financial review of the Target and its business (e.g., financial statements, accounting policies and tax returns).

o The legal team typically handles most other aspects of due diligence and consists of the following (on an as needed basis):

Corporate lawyers – review of organizational documents, minutes and resolutions, stock ledgers, voting agreements, shareholder agreements, commercial agreements, financing documents (debt and equity), joint venture agreements, and merger, acquisition and sale agreements, etc. They will often also conduct a high-level review of financial statements, with a special focus on the notes, if any.

Employee benefits lawyers – review of summary plan descriptions (health and wellness), Form 5500 Annual Reports, equity incentive plans, deferred compensation arrangements, parachute payments, etc.

Labor lawyers – employment agreements, review of union contracts, EEOC claims, employee handbook, etc.

Tax lawyers – review of tax correspondence and audits (but typically not tax returns) and facts that may bear on more efficient tax structuring of deal.

Real estate lawyers – review of title commitments, surveys, zoning issues, deeds, mortgages and leases.

Environmental lawyers – review of Phase Is, Phase IIs, environmental audits, investigations, and correspondence from EPA and state agencies, environmental permits and licenses, remediation or reclamation plans, etc.

Intellectual Property lawyers – review of patents and trademarks, patent and trademark applications, trademark usage guidelines, copyrights,

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invention assignment agreements, IP licenses, confidentiality agreements, etc.

Litigators – review of litigation history as well as pending and threatened lawsuits and claims for exposure.

o There may be overlap depending on competencies of lawyers working on the deal. For example, an experienced corporate lawyer may be able to handle employment agreements, real estate matters, IP licensing, etc.

o Sometimes other outside specialists are also needed (e.g., insurance brokers, HR consultants, environmental consultants, title companies, surveyors, landmen, etc.). Specialists can be more cost effective and deliver better results but pay attention to engagement letters (scope, fees, expenses, confidentiality, reliance and ability to share results, particular focus or expertise, etc.).

o Determine who needs to be on the diligence team as early as possible, whether your client has established relationships with any needed outside specialists and who will engage them (privilege issues).

o The due diligence team can consist of anywhere from 1 - 2 people to 15 or more.

o Designate point person to coordinate and manage Buyer’s due diligence efforts – typically an attorney. Create a working group list for everyone on the diligence team.

Manage the Due Diligence Process (Point Person).

o Have a “kick off” meeting among diligence team to make introductions, divvy up responsibilities, address process and any discuss key deadlines.

o Determine method for communicating with Target regarding due diligence requests and follow-up. Does Target have a point person (often third party such as investment banker or lawyer)? Or are their different point people depending on subject matter?

o Understand Target’s sensitivity to due diligence. Is there a need for a cover story? If so, develop one and ensure all diligence team members, including outside consultants, are aware of it and use it consistently.

o Stage due diligence as necessary, especially where real property and facilities involved, and set deadlines for each stage. Keep the process on track to meet deadlines, sending out reminders as appropriate.

o Obtain periodic updates and collect due diligence reports from all members of due diligence team, both legal specialists and other consultants.

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o Establish method and timing of communication with client regarding due diligence (e.g., weekly status calls) but, in any event, communicate results to client promptly, especially significant discoveries.

Practice Tip – It is critical to understand the timing of the transaction, including how long it will take to complete diligence, including third party investigations and external reports (e.g., Phase Is and IIs, surveys, title commitments, accountants review). This may be impacted by the industry or where parties are located. Some industries and some places slow down significantly at different times of the year (e.g. automotive industry in December, most of Europe in the summer, etc.) and it can be difficult to get ahold of people. The bigger the deal and the more assets involved or the more third party consultants required, the longer diligence will typically take. Diligence will often uncover a few issues that need to be resolved and a number of consents, approvals and waivers that need to be obtained at or prior to closing. It is best to figure these out early on so there is more lead time to resolve and obtain them. Be conservative and realistic – anticipate and plan for problems and delays. There never seems to be enough time to complete due diligence.

VI. CONDUCTING DUE DILIGENCE

Get the big picture first – Sit back and think about the particular business. How does Target make money and what are the major risks? Where does the money come from and where does it go? Review the Target’s website; Google the Target and executive management; conduct high level Internet research on the Target’s industry.

Management Interviews.

o Best place to start and learn about the Target business. Schedule meetings with management or department heads (finance, operations, legal, IT).

o More work up front but will save time later on. Open discussions about Target’s business and issues can streamline diligence, permitting Buyer to focus on key areas. Need to ask good questions.

o Key question – “what keeps management awake at night?”

Due Diligence Request Lists – The bulk of diligence is conducted through the use of a due diligence request list. A sample list is attached as Exhibit A.

o Comprehensive list provided to Target requesting a substantial amount of documents and information covering Target’s entire business.

o Tailor list to the Target as best you can. Don’t ask for documents or information you don’t need or are not going to review. For example, if the Target is a

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manufacturing business with no intellectual property other than off-the-shelf software, you can limit your intellectual property requests.

o Keep scope and client’s goals in mind as you prepare list and review documents and responses.

Publicly Available Information.

o UCC, Tax and Judgment Lien searches (Secretary of State and counties where real property located).

o USPTO (patent and trademark) and Library of Congress (copyright) searches.

o Litigation searches.

PACER – Federal docketing system. Local courts (state of formation, location of principal office, jurisdiction(s)

where Target does most or a significant amount of its business).

o SEC filings for public companies (e.g., financial statements, material contracts, business descriptions and analysis, risk factors, etc.). SEC filings for private companies – primarily limited to Form Ds, which may be helpful if Target has raised money through private placements of its securities.

Data Rooms.

o Online Data Rooms.

The norm today. Services provided by financial printers, investment bankers and law firms.

Some Targets will set up their own online data rooms using cloud services such as Dropbox but that raises security concerns.

Provide lots of control over process for Target.

Limit who has access and who can review what folders and documents.

Limit whether documents can only be reviewed online, printed and/or downloaded.

Automatically watermark documents with legends denoting different levels of confidentiality.

Gather intelligence – who is looking at what, how often – can indicate level of Buyer interest, especially in auctions.

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o Physical Location.

The exception today. Sometimes still used for very sensitive confidential information that

Target doesn’t want copied or disseminated (e.g., customer contracts) and large amounts of old information that is less important and would be burdensome to upload (e.g., company minute books dating back several decades).

Obtain index in advance to determine if specialists need to be brought in. Determine which documents can be copied and which cannot so you can

use your time most efficiently.

o Overnight Courier/E-mail.

Due diligence responses sometimes sent directly to Buyer or its representatives by e-mail or overnight courier.

Often easier, especially when responding to follow-up inquiries, but not best practices (loss of control and may result in different bidders receiving different information in auction).

Diligence is an iterative process – As documents and information are reviewed, follow-up questions are asked and additional documents are requested. The responses may then raise further questions and document requests.

VII. REVIEWING DUE DILIGENCE INFORMATION

Although the focus of each diligence project will change depending on the transaction and parties involved, attorneys should usually plan on reviewing the following areas.

Organization and Governance. Review of charter documents (articles/certificate of incorporation/formation, bylaws, limited liability company agreement, partnership agreement), minutes and resolutions, stockholder agreements, voting agreements, etc. Looking to (a) confirm due formation, foreign qualification, and good standing of Target, (b) understand governance structure and determine what approvals are required to authorize and consummate the transaction, (c) identify any unusual rights such as rights of first refusal, preemptive rights, poison pills, etc., and (d) generally assess the quality of record keeping and compliance with corporate formalities. It is also important to confirm the Target’s and perhaps its owners’ legal structure, ownership, and tax classification as they may provide opportunities to structure the transaction that is more tax efficient to the parties. Minutes and resolutions can also reveal significant corporate actions that may be of interest.

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Capitalization and Financing. Review of stock ledger, equity transactions and debt financing documents. Looking to understand capital structure of Target, including how it has been financed and who has what interests in Target, which may include the distribution waterfall in limited liability companies and partnerships. Also want to confirm clear ownership of Target as disputes can disrupt the deal or result in unwanted interference with Buyer’s ownership post-closing. If the Target has raised capital through the issuance of equity, any disclosure documents it used in connection with those activities can provide valuable information. You will also want to ensure that the Target complied with applicable securities laws selling securities. As for debt financing, you will want to understand the basic terms of the loans, including any security interests the lender has in the Target’s assets or equity. You will also want to know the payoff terms, including notice requirements and prepayment penalties.

Financial Statements. Review of financial statements. Although attorneys are generally not trained as accountants, it is important to understand the Target’s financials at a high level. Looking to obtain general understanding of Target’s assets and liabilities as reflected on balance sheet, including current assets and current liabilities (in anticipation of working capital adjustments), and revenues and expenses as reflected on income statement, including year over year changes. I also tend to look for unusual entries or descriptions, contingent liabilities, capital expenditures, and reserves. In addition, one should always review the notes to the financial statements, if any (unaudited financial statements often don’t have any and are not required too). These are an exceptionally good source of information about the Target.

Ownership. Review of asset lists, deeds, titles, security agreements, mortgages, liens and leases. Looking to understand mix and identity of assets, including hard assets (e.g., real property, facilities, equipment, rolling stock, inventory, raw materials, furniture, etc.) versus soft assets (accounts receivable, contract rights, intellectual property, goodwill, etc.) as well as the location of the assets. Need to understand which assets are owned versus leased and what the material lease terms are. If there are any “crown jewels,” those need to be given special attention. If an asset sale, also need to understand which assets are titled or registered in the name of the Target (e.g., real property, vehicles, patents, trademarks, copyrights), to determine what filings will need to be made to legally transfer them to the Buyer. Finally, need to understand which assets are encumbered and what will be required to obtain releases so they can be acquired unencumbered at closing.

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Customer and Supplier Relationships.

Review of customer and supplier lists, aging reports and customer and supplier agreements. Looking to understand key customer and supplier relationships, including payment terms and history. Want to confirm stability and consistency of revenues and expenses and, if there is softness or lumpiness, why (e.g., seasonal business, loss of critical customer, unexpected increase in price of raw materials, etc.). Also want to determine what customer and supplier consents may be required as a result of anti-assignment or change of control provisions in their contracts. Finally, want to determine if there are other unusual provisions which might affect transaction or operation of Target business (e.g., purchase or sale requirements, exclusivity, non-compete, or most favored nation clauses, etc.).

Labor Issues. Review of employee lists, employment agreements, employee handbooks, employee claims, collective bargaining agreements, and benefit plans. Looking to understand (a) composition of workforce (i.e., employees versus independent contractors), including general terms of employment and employment policies, (b) who has employment agreements (e.g., key employees) and what are the material terms, (c) if the transaction will trigger any accelerated bonuses or vesting of equity, (d) whether any employees are entitled to golden parachute payments or deferred compensation that might violate 290G or 409A of the IRC, respectively (e) extent of employee grievances or claims, (f) if any part of the workforce is unionized, and (g) employee benefits to determine workforce entitlements, costs and expectations. Also want to make sure Target is in compliance with all benefit plans and that benefits are fully funded. If any portion of workforce is unionized, Target may participate in a multiemployer pension plan, in which case there are almost certainly withdrawal penalties that need to be analyzed and addressed.

Related Party Transactions. Buyer should diligence Target’s relationships with its affiliates. It is not uncommon for affiliates to provide favorable terms which may not be available to the Buyer post-closing or when the agreement comes up for renewal. If these can be identified in diligence, they can be addressed (e.g., in post-closing covenants).

Special Note regarding Consents. It is important to determine the extent to which the Target’s relationships and contracts are important assets because contracts often require consent to be transferred, both in asset and stock or merger deals. In determining what consents are necessary, you need to determine which of

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the Target’s contracts contain anti-assignment provisions (for assets deals) and which contain “change of control” or transfer by “operation of law” provisions (for stock or merger deals). You can’t just rely on headings. Instead, you need to review how an “assignment” or “change of control” has been defined. Sometimes a change of control will include a transfer of assets and vice versa. In addition, some courts have found that certain types of merger transactions (e.g., a reverse triangular merger in California, for instance) constitute an assignment by operation of law and therefore are covered by an anti-assignment provision. As a result, the governing law of the Target’s contracts also may be important in determining what consents are needed. Since obtaining consents can be a contentious issue among the parties and a gaiting item for closing, it is important to determine what consents will be required early on, if they are capable of being obtained, who will obtain them (e.g., business people versus counsel), when they will be sought and at whose cost (e.g., who bears burden if counterparty demands consideration for its consent?). Practice Tip. It is helpful to prepare an Excel spreadsheet using columns to provide (i) basic identifying information for each contract such as by date, counterparty, etc., (ii) a ranking system for relative importance of the contract (e.g., by value), (iii) whether the contract has anti-assignment, change of control, or notice provisions, including the basic requirements of each, and (iv) what the governing law of the contract is. It should also be set up to be easily sortable. The spreadsheet can be used to manage the consent process and be converted into the inevitable disclosure schedule requiring this information. In anticipation of a material contracts disclosure schedule, it may also be helpful to add columns for non-competition, exclusivity, most favored nations, indemnification and guaranty provisions since buyers often require disclosure of agreements that contain such provisions. A more comprehensive list of key information and issues to look for in diligence (which generally corresponds to the sample due diligence request list) is attached as Exhibit B. VIII. TRACKING RESULTS OF DUE DILIGENCE

Keep track of what you have reviewed and what you have learned. Make good notes – using a separate notepad or folder for due diligence is advisable. It will help in preparing a diligence memo and, even you are not preparing one, it will establish a record of your review and enable you to answer the inevitable questions that arise after you have forgotten what you have done.

Client Deliverable – The type of deliverable, including its purpose, should be part of the client discussion about scope and determined ahead of time as it can impact the organizational approach to diligence and how the deliverable is drafted, especially if the deliverable is to be shared with third parties such as lenders providing acquisition financing.

o Verbal reports to client.

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o Written summary.

o Detailed memo.

Practice Tips

o Get diligence results to client in timely manner (if memo, before closing).

o Privileged and confidential (and potentially attorney work product) – generally not addressed or provided to third parties.

o Know your audience – make it easy to read and not too cryptic.

o Organize thematically (e.g., track sections of request list).

o Highlight big issues by putting them in boldface. If a detailed memo, consider including a summary of the big issues up front.

o Don’t just identify issues, resolve them or provide options for handling them (goes for verbal reports too). Also, if an issue is capable of quantification, quantify it. Clients appreciate it. If an issue is not capable of quantification, attempt to categorize it (e.g., is it an ordinary course, industry specific risk? Is the risk covered by insurance or indemnities from other parties? Has Target established reserves for the risk and, if so, what are they and how did it make the determination? Is there claims experience with similar risks? Etc.

ALWAYS INFORM THE DUE DILIGENCE TEAM AND THE CLIENT OF ANY BIG ISSUES YOU DISCOVER IMMEDIATELY. AVOID SURPRISES.

IX. DUE DILIGENCE IN OTHER TRANSACTIONS Public M&A – Similar to private M&A but most information is obtained from public filings with the SEC (material information publicly available and concerns about disclosure of material non-public information). Financing Transactions – Lenders conduct diligence on borrower primarily to assess credit risk, sufficiency of collateral of borrower, special covenants in loan documentation and steps necessary to perfect and obtain priority in collateral. Securities Offerings – Issuers (officers and directors), underwriters and investment advisers all conduct varying degrees of diligence on the issuer in preparing disclosure documents for public and private securities offerings to ensure accuracy, make any governmental review process smoother, determine pricing and, in some cases, to establish due diligence defense. In some private placements, such as a venture capital with one or two lead investors, the lead investors

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will also conduct diligence on the issuer to assess value and risks of business it is investing in (as well as to assist with drafting of the equity purchase agreement). Legal Opinions – Counsel conducts diligence on its client to establish factual back-up for legal opinions (where it cannot rely exclusively on support certificates from client). Diligence in all of these other scenarios is similar to diligence in private M&A but typically not as comprehensive.

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EXHIBIT A

SAMPLE DUE DILIGENCE REQUEST LIST

(See attached)


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LEGAL DUE DILIGENCE REQUEST

The following should serve as a checklist for information to be assembled in connection with our legal due diligence review with respect to the proposed acquisition of [____________________] and its subsidiaries (collectively, the “Company”).

This checklist covers major categories of documents and information; not all potential areas of information are covered (additional categories may be added as we become familiar with the Company) and not all categories listed are necessarily material or relevant. The categories listed refer to the Company and any subsidiaries or affiliates, if any, since inception (unless specified otherwise). Please indicate “Provided (VDR Folder)”, “To Be Provided” or “Not Applicable” under the columns provided next to each line item. If the document or information has been provided, please also indicate where it is located in the virtual data room.

In addition to the listed matters, the Company should provide any other information it believes to be material to the business of the Company or which it believes would be otherwise relevant to a prudent investor making an investment decision with respect to the Company.

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Preliminary Due Diligence Request List

Provided (VDR Folder)

To Be Provided

Not Applicable

1. General Corporate

1.1 Copy of the Company’s entire minute book.

1.2 Articles/Certificate of Incorporation of the Company as originally filed and all amendments thereto.

1.3 Bylaws of the Company as originally adopted and all amendments thereto.

1.4 Minutes of all meetings, and all written consents, of (a) the Company’s Board of Directors, (b) any committee of the Board of Directors and (c) the shareholders, since inception of the Company.

1.5 Stock ledger and copies of stock certificates issued by the Company.

1.6 Samples of any certificates representing securities, which certificates have been approved by the Board of Directors.

1.7 A list of each jurisdiction (domestic and foreign) in which the Company does business (e.g. makes sales, operates a sales office or where its employees reside) and a brief summary of the Company’s activities in each jurisdiction.

1.8 A list of each jurisdiction in which the Company is authorized or qualified to do business as a foreign corporation and a current good standing certificate from each such jurisdiction.

1.9 A list and organizational chart of any subsidiaries, affiliates, parent, or predecessor entity of the Company, specifying corporate name, state of incorporation, relationship to the Company, and the percentage ownership of voting securities.

1.10 Any shareholders’ agreements relating to any subsidiary or affiliate of the Company.

1.11 Copies of all offering memos, business summaries and other materials and information prepared for or delivered to potential purchasers of the Company or otherwise used in connection with any prior proposed sale of the Company.

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To Be Provided

Not Applicable

1.12 All agreements, memoranda and any other documents pertaining to any bankruptcy proceedings in which the Company has been involved.

2. Equity Securities Issuances

2.1 Capitalization table or other records that list the issued and outstanding securities of the Company.

2.2 A list of all shareholders, warrant holders and option holders, specifying name, address, number of shares, price paid, date of purchase/grant, name of seller (if other than the Company), exercise price, expiration date and which options/warrants are currently outstanding.

2.3 A list of all holders of other rights to acquire equity securities of the Company, specifying name, address, date of issuance, description of rights, exercise or conversion price, and any other relevant terms.

2.4 Any shareholders’ agreements, buy-sell agreements, voting trust agreements or other restrictive agreements relating to the sale or voting of shares of capital stock.

2.5 All securities offering documents for the Company since its incorporation, including private placement memoranda, prospectuses, offering circulars, registration statements, stock purchase agreements and any written proposals of any oral proposals for the acquisition of the Company’s securities.

2.6 Any forms filed by the Company with the SEC to qualify an offering of the Company’s securities for an exemption under the federal securities laws (e.g. Form Ds).

2.7 Any agreements that may restrict the ability of the Company to (a) issue or redeem its own securities, (b) assume additional indebtedness, or (c) sell, lease or transfer any of the assets or capital stock of the Company.

2.8 All permits, notices of exemption and consents from state securities regulators regarding offerings of the Company’s securities and any other evidence of qualification or exemption of securities under applicable blue sky laws.

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To Be Provided

Not Applicable

2.9 All agreements, instruments or other documents under which any person has any rights concerning issued or unissued securities, including without limitation, rights of purchase or sale, preemptive rights or rights of first refusal, registration rights, options, warrants or convertible securities.

2.10 Any agreement restricting the Company’s payment of dividends.

2.11 Any agreements and other documentation relating to repurchases, redemptions, exchanges, conversions or similar transactions with respect to the Company’s securities.

2.12 All material communications to shareholders since the Company’s incorporation, including annual and quarterly reports.

2.13 List of all verbal arrangements between the Company and its shareholders.

2.14 List of any stop transfer orders/legends.

2.15 Any agreements with investment bankers, finders and brokers with respect to any equity investment in the Company or any business combination with the Company.

2.16 All other documents relating to any equity investment in the Company or any business combination with the Company, including reports and analyses.

3. Suppliers, Distributors and Customers

3.1 All outstanding agreements with manufacturers, suppliers, service providers, distributors, and customers resulting in annual revenues or expenses in excess of $5,000, including service, consulting, license, distribution, reseller or maintenance agreements and any forms thereof.

3.2 Company-financed customer purchase agreements.

3.3 Form of standard purchase order terms.

3.4 List of the Company’s top 10 accounts payable, specifying contact names and phone numbers.

3.5 List of the Company’s top 10 accounts receivable, specifying contact names and phone numbers.

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To Be Provided

Not Applicable

3.6 List of the Company’s top 20 customers since the Company’s incorporation, specifying contact name, address, telephone number, and revenues and gross margins generated from each customer.

3.7 List of the Company’s top 20 suppliers, specifying contact name, address, telephone number, purchases from each supplier in the past year and whether they are a sole-source supplier.

3.8 Description of any significant customer relationships terminated since the Company’s incorporation.

3.9 Copies of all current and prior versions of privacy policies, agreements, training materials and manuals, including website policies, relating to the collection, use, sale, lease or transfer (including cross border transfer) of personal information of customers and others.

3.10 Any agreements with service providers and other vendors relating to the collection, use, sale, lease or transfer (including cross-border transfer) of personal information.

3.11 List of any alleged breaches of any of the Company’s privacy policies.

4. Sales and Marketing

4.1 Any sales, agency, marketing, advertising or service/product tie-in agreements.

4.2 Any agreement that limits the Company’s business activities or ability to compete in any market.

4.3 Any agreements with sales representatives and dealers.

4.4 Copies of all market research or marketing studies.

5. Real and Personal Property

5.1 List of all real property (including address, county and zip code) and material personal property owned and leased by the Company, including vehicles, machinery, equipment, furniture and fixtures.

5.2 Documents of title for the Company’s real and material personal property.

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To Be Provided

Not Applicable

5.3 All mortgages, deeds of trust, security agreements, UCC financing statements or other documents purporting to create liens, mortgages, security interests, pledges, charges or other encumbrances on any real or personal property described in item 5.1 above.

5.4 A schedule of all leases of real and material personal property to which the Company is either a lessor or lessee, specifying rental payment amounts, expiration dates and renewal options.

5.5 The leases described in item 5.4 above.

5.6 All purchase agreements relating to purchases of real and material personal property.

5.7 Title insurance policies and surveys for all real properties owned or leased by the Company.

6. Intellectual Property

6.1 List of trademarks, service marks, trade names, patents, licenses, and any other intellectual property rights owned or used by the Company (including pending applications), and all material agreements and correspondence relating thereto.

6.2 A list and copies of all patents and patent applications pending, held or being prosecuted by the Company in the United States or elsewhere, with descriptive titles, numbers and jurisdiction, and copies of all correspondence to or from examining authorities or other parties regarding such patent and patent applications.

6.3 Any prior art known by the Company or its employees which relate to patents held by the Company or to patents that are currently pending or are in the process of being prepared.

6.4 Name of the law firm and a contact person at such law firm that handles patent, trademark or copyright matters for the Company.

6.5 A list and copies of all copyright registrations and applications pending, held or being prosecuted by the Company in the United States or elsewhere, specifying the descriptive titles, numbers and jurisdiction.

6.6 List of all copyrightable materials (including software and documentation) material to the Company’s business, as to which there is no copyright registration or pending application therefor.

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To Be Provided

Not Applicable

6.7 List and copies of all registered or unregistered trademarks, trade names or service marks used by the Company, whether owned by or licensed to the Company, with a description of products or services associated therewith, and numbers, jurisdiction and status of any registration applications pending and copies of all state and federal registration and recordation documents and certifications pertaining to each (including associated affidavits).

6.8 Copies of all documents sufficient to provide evidence of current trademark usage such as copies of catalogues, price lists, sales brochures, web pages, invoices for products sold, or royalties due from licensees.

6.9 List of all Internet domain names used by the Company, specifying the name and address of the registrant (with InterNIC or some other registry) of each domain name; copies of all agreements relating to the Company’s use of such domain names; copies of all filings, notices and other correspondence between the Company or the registrant and the applicable domain name registry.

6.10 List of all categories of technology (whether or not patented or patentable) that are material to the business of the Company, including a brief description of how each such technology was developed or acquired.

6.11 All licenses, leases or other agreements entered into by the Company transferring or licensing intellectual property rights to or from any third parties.

6.12 All sublicenses, releases, confidential disclosure agreements, co-branding agreements, website development agreements, website hosting agreements, technology escrow agreements, technology exchange agreements, royalty agreements or other agreements relating to patents, trademarks, copyrights, technical assistance, know-how, inventions, trade secrets and similar intellectual property rights, entered into by the Company.

6.13 All research and development agreements, technology service or consulting agreements, entered into by the Company.

6.14 List of engineers and other employees who have participated or contributed in a material way to the development of the Company’s intellectual property, including a brief description of their roles and copies of their resumes or other evidence of previous job history.

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To Be Provided

Not Applicable

6.15 Standard forms of agreements with founders, employees, consultants and others regarding confidentiality, nondisclosure, noncompetition, and assignment of inventions; and a list of all founders, employees and consultants, specifying whether or not such individuals have executed such agreements.

6.16 Agreements regarding confidentiality, noncompetition, and assignment of inventions that are different from the standard forms described in item 6.15 above.

6.17 All written Company policies regarding intellectual property including with respect to the transmission of obscene or indecent materials, the exercise of editorial control over postings to its internet services and the copying or distribution of copyrighted materials.

6.18 All security agreements pursuant to which a lender or creditor has taken a security interest in any of the Company’s intellectual properties.

6.19 Uniform Commercial Code filings, or other state and federal filings, that relate in any way to any of the Company’s intellectual property.

6.20 All documents, correspondence, pleadings, memoranda, notes, and other written materials relating to any pending or threatened intellectual property infringement litigation or claim made by or against the Company, or any other assertion, suggestion, or inquiry that a third party is infringing the Company’s intellectual property rights or that the Company is infringing a third party’s rights.

6.21 All documents, correspondence, memoranda, notes, and other written materials relating to any development by the Company that involves the derivation or use of specifications or technical information derived from the products of third parties.

6.22 All documents, correspondence, memoranda, notes, and other written materials analyzing or assessing the validity or scope of any Company copyright, patent, or trademark.

6.23 List of proprietary processes controlled by the Company and other trade secrets.

6.24 Copies of all information security policies, including prior versions thereof, and a list of any alleged breaches of any of such policies.

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To Be Provided

Not Applicable

7. Information Technology

7.1 A narrative/diagrammatic explanation of the operation and interaction of the computer systems used by the Company, the sites at which such computer systems are based and how they are connected.

7.2 Schedule of IT hardware used by the Company and details of its ownership.

7.3 Schedule of all software which is loaded on to computers (or peripherals) in the possession or in the control of the Company and, in relation to each program, including whether:

� it was developed internally and, if so, identify the author(s) of the program and, if relevant, any external consultants who were involved; and

� it is licensed from a third party and, if so, identify the licensor and terms on which the program is licensed.

7.4 Schedule of databases used by the Company including details of ownership, control and any third party use of such databases.

7.5 Schedule of material IT failures in the past 12 months.

7.6 Details of any Internet domain names registered in the name of the Company or used in the course of the Company.

7.7 Copies of all agreements in respect of the IT hardware used by the Company.

7.8 Copies of all software licensing agreements in respect of the software used by the Company.

7.9 Copies of all documents and agreements in respect of the databases used by the Company.

7.10 Copies of all support and maintenance agreements to which each member of the Company is a party.

7.11 Details of the Company’s disaster recovery plan in the event of system failure.

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To Be Provided

Not Applicable

7.12 Provide any agreements to which the Company is a party that may contain restrictions on the activities of the Company or that might otherwise restrict or affect the business of the Company (including as a result of the Transaction), including, without limitation change of control provisions or non-assignment provisions.

8. Debt Financings

8.1 A schedule showing all outstanding debt of the Company on a consolidated basis, as of a recent date (including capitalized leases).

8.2 All agreements relating to debt incurred by the Company that is convertible into equity.

8.3 All agreements relating to other debt incurred by the Company, including agreements to acquire any debt obligations of others and agreements relating to leasing transactions of a type required to be capitalized in accordance with GAAP.

8.4 All agreements relating to the Company’s obligations as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any other person.

8.5 All agreements by which the Company is subject to any obligation to provide funds to or to make investments in any other entity (in the form of a loan, capital contribution or otherwise).

8.6 Detailed description of any defaults of the Company relating to any existing or prior debt obligations of the Company.

8.7 Any agreements with investment bankers, finders and brokers with respect to any loans to the Company.

8.8 All material correspondence with and from lenders since the Company’s incorporation.

8.9 All other documents and agreements relating to any material financing arrangements currently outstanding or entered into by the Company during the last 5 years.

9. Insurance

9.1 A schedule and copies of all insurance policies of the Company or self-insurance arrangements, including professional liability, officers' and directors' liability, key-man life insurance, property, liability, business interruption and product liability, specifying coverage limits and other significant terms.

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To Be Provided

Not Applicable

9.2 A schedule of all insurance claims submitted by the Company since its incorporation.

10. Litigation

10.1 Description of all past (within the last 5 years), pending or threatened litigation, proceedings (including arbitrations), administrative proceedings, governmental investigations or inquiries or claims affecting the Company. The description should include the name of the proceeding, the other parties, the relief demanded and the current status.

10.2 All injunctions, consent decrees, other decrees, judgments, or orders of courts or governmental agencies affecting the Company’s future activities.

10.3 Description of all customer complaints since the Company’s incorporation and resolution of such complaints.

10.4 Any settlement agreements and/or releases.

10.5 Description of any warranty claims that have been made against the Company and the resolution of such claims.

10.6 All letters from the Company’s legal counsel to the Company’s independent public accountants since the Company’s incorporation regarding litigation in which the Company is or may be involved or concerning any of the matters identified in this Section 10.

11. Government Regulation

11.1 List of all material licenses, authorizations, consents, permits, qualifications and approvals issued to the Company by any United States federal, state, municipal, foreign or other governmental authority in connection with the operation of the Company’s business (collectively, “Permits”). Please provide a summary overview for maintaining all required licensures.

11.2 Copies of all Permits described in item 11.1 above.

11.3 A list of all marketed products.

11.4 Representative product labeling for the products listed in item 11.3 above.

11.5 Copies of representative promotional materials.

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To Be Provided

Not Applicable

11.6 Procedures for regulatory/quality compliance.

11.7 All documents, information, reports, and material correspondence filed with, any United States federal, state, municipal, foreign or other governmental authority since the Company’s incorporation.

11.8 Any material agreements with any United States federal, state, municipal, foreign or other governmental authority.

11.9 Correspondence and notices relating to any Permits or agreements with any governmental entity regarding: (a) any alleged violation or omission, (b) any negative determinations of responsibility issued against the Company with respect to any bid, quotation or proposal submitted by the Company, (c) any disallowance or questioning by the federal government of material costs incurred by the Company, (d) any assessment of penalties or damages of any kind against the Company, (e) any audit, and (f) any denial of security clearances and permits necessary for the execution of the Company’s obligations under any government contract, past or present.

11.10 All approvals, refusals or revocations received from any federal, state, municipal or foreign regulatory authorities with respect to the Permits, business or assets of the Company within the past 5 years.

11.11 List of all of the Company’s properties or assets that have been the subject of any governmental (foreign, federal, state or municipal) investigation or inquiry or any proceedings threatened with respect thereto.

11.12 List of any default, violation of or other non-compliance by the Company with, any order, writ, injunction, or decree of any court or any United States federal, state, municipal, foreign, or other governmental authority. Provide copies of any documentation regarding any such default, violation or other non-compliance.

11.13 Documentation regarding potential liabilities with foreign governments or entities.

11.14 Summary of any pending or threatened state or federal inquiries or proceedings (e.g., OSHA, EPA, EEOC, APCP or Department of Labor) and notices related thereto.

11.15 Summary of any investigation, prosecution or conviction of the Company or any director, officer, employee, intermediary or business partner (including parties to any material contracts) of the Company for bribery or corruption in any jurisdiction and notices related thereto.

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To Be Provided

Not Applicable

11.16 Summary of any actual or potential violation of anti-corruption laws or related company policy by the Company or any director, officer, employee, intermediary or business partner of the Company and notices related thereto.

11.17 Summary of any checks the Company carries out on its customers/potential customers to ensure that they are not on any applicable “blacklist” such as the US OFAC list or equivalent (include a description of the process adopted by the Company and details of any customers/potential customers that have been identified on such lists).

11.18 Describe any settlement agreements, consent orders, stipulations of dismissal, releases and other documentation pertaining to any government action, investigation, audit or review.

11.19 Compliance plan, policies and procedures. Describe the training, audits and mechanisms to ensure and verify compliance with regulatory requirements.

11.20 Identify compliance personnel and reporting structure.

11.21 Copies of any internal compliance reports, reviews, analyses, or opinions regarding the Companies’ compliance with federal and state government health care program laws, including the federal false claims act, the federal anti-kickback statute, the federal physician self-referral law, the federal civil money penalty law, and similar state laws.

11.22 Compliance committee charter, if any; minutes of all compliance committee meetings.

11.23 Copies of any external compliance reports prepared for the Companies or their counsel.

11.24 Has the Company ever received any notice from any governmental authority, indicating that it is or has been operating out of compliance with a relevant government rule or practice? If so, please describe.

12. Management, Employees and Consultants

12.1 Forms of employment agreements, consulting agreements, and offer letters.

12.2 All employment agreements for officers and key employees.

12.3 All agreements with consultants currently in effect.

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To Be Provided

Not Applicable

12.4 List of all compensation paid to officers, directors, employees and consultants during the previous and current fiscal year, specifying each person’s salary, bonuses and non-cash compensation (e.g., use of cars, property).

12.5 Any agreements for loans, guarantees, or material transactions with any officer, director, employee or shareholder and their immediate families.

12.6 List of all current employees, specifying each person’s title, department, functional area (e.g., sales, administration, part-time/full-time), and job description.

12.7 List of work addresses for all current employees who do not work at a Company-owned or Company-leased facility.

12.8 List of all current and previous consultants used by the Company and copies of all reports or documents prepared by such consultants for the Company.

12.9 Current organizational chart of the Company.

12.10 Any labor contracts or collective bargaining agreements.

12.11 Description of any significant labor problems or union activities the Company has experienced since its incorporation.

12.12 Any indemnification agreements with any employees, consultants or directors.

12.13 Any employee manual or other literature regarding policies, procedures and benefits distributed to employees.

12.14 All documents regarding NLRB, Department of Labor, OSHA, Labor Commissioners, EEOC, or DFEH filings or proceedings within the last 5 years.

12.15 All separation, severance or other agreements regarding the termination or resignation of employees within the last 5 years.

12.16 List of employees terminated in the past 5 years.

12.17 All settlement agreements, consent decrees or other agreements regarding litigation or legal proceedings pertaining to employees within the last 5 years.

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To Be Provided

Not Applicable

12.18 Letters, grievances, written complaints or other documents asserting claims or alleging violations of law with respect to or by employees.

12.19 Warning notices, probation memos, or other documents regarding significant employee performance or disciplinary problems.

12.20 Any other material agreements with any employee, consultant or director, past or present.

12.21 Copies of all privacy policies, agreements, training materials and manuals relating to the handling and cross-border transfer of personal information of employees and temporary and other workers.

12.22 All federal and state workplace posters and employee notices and a description of their location.

12.23 A description of your employment background check procedures, a listing of all vendors used for this purpose, and all certifications relating thereto.

12.24 Please confirm when annual bonus payments were made, and if any 409A analysis was undertaken with respect to the payments.

13. Benefits Plans

13.1 All stock incentive, option, stock purchase, bonus, incentive compensation, pension and similar plans of the Company.

13.2 Any purchase agreements and promissory notes relating to purchases under stock purchase plans.

13.3 Any stock option agreements relating to grants under stock incentive or option plans.

13.4 Schedule of all stock options granted, specifying name of employee, date of grant, exercise price, vesting schedule and any exercises.

13.5 Schedule of all restricted stock awards granted, specifying name of employee, date of grant, vesting schedule, nature of restrictions, extent to which restrictions have lapsed, and form of stock certificates.

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To Be Provided

Not Applicable

13.6 Any “employee pension benefit plan” (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) that is maintained, administered or contributed to by the Company, including any retirement, pension, profit-sharing, 401(k), thrift, employee stock ownership, deferred compensation or excess benefit plan, including any such plan that is exempt from coverage under ERISA, and any prior plan of such type that was maintained, administered or contributed to by the Company (or any entity that was merged into the Company) in any of the past 6 years.

13.7 Any “employee welfare benefit plan” (as defined in Section 3(1) of ERISA) that is maintained, administered or contributed to by the Company, including any health, medical, dental, vision services, flexible benefits, cafeteria, vacation, sick pay, disability, life insurance, legal services, and severance plans, including any such plan that is exempt from coverage under ERISA, and any prior plan of such type that was maintained, administered or contributed to by the Company (or any entity that was merged into the Company) in any of the past 6 years.

13.8 The determination letter issued by the Internal Revenue Service with respect to each plan described in 13.6.

13.9 For each plan described in 13.6 and 13.7 for which such a report is filed, the annual report on Form 5500, including any actuarial report or financial statement required to be filed therewith, for each plan year for which such a report has been filed, and, if the report for the most recent plan year has not yet been filed, any draft that has been prepared.

13.10 For each plan described in 13.6 and 13.7 for which the same is required, the current summary plan description, each previous summary plan description that was used within the past six years, and any summary of material modification that was used within the past 6 years.

13.11 Any other plan booklet provided to employees.

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To Be Provided

Not Applicable

13.12 Any other plan or arrangement providing for insurance coverage (including any self-insured arrangement), workers’ compensation, disability benefits, supplemental unemployment benefits, severance pay, vacation pay, deferred compensation, bonuses, profit sharing, stock options or other forms of incentive compensation or post-retirement insurance, compensation or other benefits which has been promised (and if such plan or arrangement is not in writing, a written description of it), by any officer or other employee authorized to do so, or entered into, maintained or contributed to by the Company and covering any employee or prior employee of the Company.

13.13 Each trust, custodial and escrow agreement pursuant to which any of the foregoing benefits are funded.

13.14 Each policy or contract of insurance pursuant to which any of the foregoing benefits are provided.

13.15 All correspondence with and communication from the U.S. Department of Labor, the Internal Revenue Service, the Pension Benefit Guaranty Corporation, or any other federal, state, local or other nation’s governmental agency relating to any of the foregoing benefit plans, arrangements or insurance, or any related trust or other funding mechanism.

13.16 A list of all trades and businesses, whether or not incorporated, which would be treated as a single employer with the Company under Section 4001 of ERISA or Section 414(b), (c), (m) or (o) of the Code, and for each such trade or business, a list of all employee pension benefit plans maintained, administered by or contributed to it in any of the last 6 years that are either defined benefit plans (including multiemployer plans) or subject to the minimum funding rules of Section 412 of the Code.

14. Environmental Matters

14.1 List of all properties and facilities currently or previously owned, operated, leased, or otherwise used by the Company and description of current and, if known, discontinued operations conducted thereon, including the primary Standard Industrial Classification for each line of business conducted thereon.

14.2 Description of structure of environmental management of Company, including information on experience, qualifications, and duties of each person responsible for significant environmental compliance obligations.

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To Be Provided

Not Applicable

14.3 Copies of all Company environmental policies, procedures and plans, including, without limitation, those relating to asbestos, PCBs, lead-based paint and hazardous materials or waste handling and disposal.

14.4 Copies of all existing environmental permits (including any pending applications, and any environmental impact statements prepared in connection with such applications) and variances relating to emissions, discharges, hazardous materials, waste storage, treatment, recycling or disposal.

14.5 Copies of all environmental compliance, assessment or investigation audits and reports (including, without limitation, Phase I, II or III audits and reports) generated by the Company or by environmental consultants, and description of any actions taken in response to such reports.

14.6 Copies of documents relating to possible environmental compliance and pollution issues and claims, including, without limitation, correspondence and filings with U.S. federal, state or local governmental agencies and internal consultant reports regarding same.

14.7 Copies of files, correspondence (including, without limitation, letters of inquiry from any governmental agency), memoranda, agreements, analyses, notices, reports and other information relating to environmental compliance, pollution, exposure, possible violations, possible need to make capital expenditures, possible fines and penalties, and possible exposure to injured employees, customers, other third parties, etc.

14.8 List of hazardous substances used in the Company’s facilities and operations.

14.9 List of wastes generated by current and, if known, discontinued operations and description of the manner of storing, treating and/or disposing of such wastes.

14.10 List of all transporters and sites historically or currently used by the Company for transfer, storage, treatment, recycling, or disposal of wastes.

14.11 Copies of agreements with third parties related to environmental management, including waste storage, treatment, recycling and disposal.

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To Be Provided

Not Applicable

14.12 Description of any citations (including, without limitation, notices of violation), orders, judgments or civil or criminal penalties by any federal, state or local agency relating to environmental matters.

14.13 Description of any notice that the Company or any operation or business related to the Company is not in compliance with applicable environmental laws.

14.14 List of any spill events that have occurred, and description of the resolution or status of each such spill event, including the payment or expected payment of fines or penalties.

14.15 List of all wells and underground and above-ground storage tanks owned, operated, leased, or otherwise used, and description of any suspected or actual contamination of soil, surface water, or groundwater from the wells or tanks.

14.16 Copies of reports of inspection conducted by any regulatory agency.

14.17 List of any notices of violation, claims, demands, lawsuits, or complaints against the Company (or its parent or any subsidiary), or suspected of being prepared by, governmental agencies, citizen groups, employees, or any other entity or person that relate to environmental, health, and safety matters, and description the resolution or status of each such matter, including the payment or expected payment of fines or penalties.

14.18 List all significant environmentally-related accidents and description of any existing or reasonably foreseeable employee health and safety concerns or claims arising out of exposure to any waste or toxic chemical.

14.19 Copies of all correspondence (i) requesting information pursuant to Section 104 of the federal Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. § 9604 or similar state requirements), (ii) alleging that the Company is a de minimis or potentially responsible party, or (iii) alleging that the Company has potential liability for known or suspected state or federal Superfund sites.

14.20 Disclose whether the Company has indemnified any third parties for environmental concerns in connection with the conveyance of properties or facilities or has otherwise contractually agreed to retain, assume, or be subject to any environmental liabilities for assets or properties previously owned, operated, leased, or otherwise used.

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To Be Provided

Not Applicable

14.21 Description of any financial assurances (surety and performance bonds, letters of credit, accounting reserves, etc.) provided or maintained by the Company with respect to any environmental obligations (e.g., management of hazardous wastes, plugging and abandonment of wells).

14.22 Description of historical and current insurance coverage of the Company for environmental liabilities and contamination, and copies of current insurance policies.

14.23 List of all claims made by persons against the Company’s insurance policies for environmental, health or safety matters, and description of the status of all such claims.

14.24 Description of any planned or proposed capital expenditures with respect to any environmental matter.

15. Miscellaneous

15.1 All press releases issued by the Company.

15.2 Documents relating to all previous or contemplated acquisitions and dispositions by the Company.

15.3 Any material foreign currency exchange agreements.

15.4 Agreements (including proposed transactions) to which any director, officer or beneficial owner of more than 5% of any class of voting securities of the Company is a party, including, without limitation, loan agreements with any such person and/or any entity controlled by any such person.

15.5 Any business plans of the Company.

15.6 Published studies relating to the business of the Company.

15.7 Any joint venture, participation, partnership or cooperative agreements, including any development and licensing agreements.

15.8 All material information in the Company’s possession relating to companies in the same industry.

15.9 A schedule of all memberships held by or on behalf of the Company in any trade, merchants’ marketing or other professional or industry-related organization or association.

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To Be Provided

Not Applicable

15.10 Any reports prepared for the Company by third parties since its incorporation (e.g., independent public accountants, internal auditors, actuaries, marketing consultants, appraisers and management consultants).

15.11 Recent sales and marketing literature.

15.12 Market research and marketing studies prepared by or for the Company since its incorporation.

15.13 All other documents and information which are significant with respect to any portion of the Company’s business or which should be considered and reviewed in making disclosures regarding the business and financial condition of the Company to prospective investors or the Securities and Exchange Commission.

15.14 Any other material written (and a list of all material oral) agreements to which the Company or an officer or director of the Company is a party.

15.15 Any other documents or information that is material to the business of the Company.


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EXHIBIT B

DUE DILIGENCE ISSUES General Corporate Primarily looking to understand entity fundamentals, including entity structure and management, what approvals are required to authorize transaction, whether anyone has special consent rights relating to operation of Target’s business and whether Target generally maintains good records.

Was Target properly formed? What is Target’s jurisdiction of formation? What type of entity is Target (corporation, LLC, limited partnership, etc.)? Where is Target qualified to do business as a foreign entity? Is Target qualified to do business in each jurisdiction where it “transacts business” and is

required to be so qualified? Is Target in good standing? Has Target maintained good corporate books, including minutes, resolutions, stock

ledgers and stock certificates? Have previous actions (stock issuances, prior sales, board appointments, etc.) been properly approved and documented?

How much equity and what types of equity are authorized? Are stock records clear, consistent and current? What legends are on stock certificates?

What is the dividend policy? How can it be changed? Does Target have any subsidiaries? Are they wholly-owned? Are there any unusual provisions that could impact the transaction or future operation of

the Target business (e.g., is anyone guaranteed representation on the board of directors or other governing body, are there any rights of first refusal, drag along rights, tag along rights, preemptive rights, etc.)?

Equity Securities Issuances Primarily looking to understand equity capitalization, what equity financing activities have taken place, whether they complied with applicable law and, more generally, who has what interests in the deal.

What and how much equity is outstanding (e.g., preferred stock, common stock, options, warrants and other convertible securities)? Is there room for further issuances?

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Who owns how much of which type of equity? Is there a distribution waterfall and, if so, how does it work? Is there an equity holder or group of equity holders that has control of the Target

business? Are any special votes or consents required in connection with the transaction? What

actions require consent of specific equity holders or groups? What level of consent is required (majority, supermajority, etc.)?

Are there any restrictions on the transfer of equity (ROFR, drag along, tag along, poison pill, etc.)?

Do any equity holders have preemptive rights in future issuances of equity? Have prior issuances of securities complied with applicable securities laws (e.g., met

Reg. D conditions)? Do any private placement memoranda exist and, if so, how do they describe the business and the risks associated with it?

Suppliers, Distributors, and Customers Primarily looking to understand where money comes from and where it goes, the consistency of inflows and outflows, what consents are required to transfer key contracts and whether there unique aspects of any supplier or customer relationships that might limit or otherwise impact operations.

Supplier, distributor and customer information – Who are they? What do they supply, sell or purchase?

Does the Target have “key” suppliers, distributors or customers on which the business is dependent (e.g., who are top ten suppliers by expense and top ten distributors and/or customers by revenue)?

Do customers pay on a timely basis? What does the AR aging summary look like? What factors regularly impact sales and expenses? Is the business cyclical or seasonal? What is Target’s collection, bad debt and write off policies? What reserves are required

for bad AR? Does Target timely pay suppliers? If not why, not? Have any suppliers, distributors or customers ceased to work with the Target over the

past three years? If so, why? If any suppliers, distributors or customers are foreign, has the Target complied with

FCPA rules (e.g., anti-bribery of foreign officials)? For agreements with suppliers, distributors and customers, who are the parties to the

agreement? When was the agreement entered into? What type of relationship does the agreement cover? What are the basic economics of the contract? Are the economics of the contract fixed or do they fluctuate? How is the pricing determined? Are there any anti-assignment or change of control provisions? What consents are required? Are there any unusual provisions that restrict the Target business or provide special benefits to the other party such as non-compete, purchase or sale requirements, exclusivity, most-favored nations or right of first refusal provisions? When does the contract terminate? Is

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there a renewal provision? Can either party terminate without consent? Is the contract still effective? Is there a fully executed copy of the agreement? If not, does one exist?

Sales and Marketing Primarily looking to understand how Target markets and sells its products or services, confirm compliance with any applicable regulations and what the competitive landscape looks like.

Does Target use direct sales force, distributors or sales agents? Does the Target provide warranties for its products and services? What are the terms?

What is warranty claim history? What types of promotions, contests and discounts does Target offer? Do the Target’s advertisements, promotional materials and labels comply with all

applicable regulations, including FTC, FDA, etc.? Is Target restricted from selling or marketing in any particular industry or geographic

region? What market research information and reports does the Target have? What is the Target’s market and competition?

Real Property Primarily looking to understand Target’s real property position and the extent to which any real property Target owns or uses is encumbered, conforms with zoning rules and what material lease terms are.

What real property is owned by Target (with street address and legal description for each parcel)?

What real property that is leased by or to Target (with street address and legal description for each parcel)?

What easements, rights of way, and other encumbrances burden the property? What are the property boundaries? Is property properly zoned for use – is it conforming or permitted nonconforming? Do

structures conform? Are property taxes paid? What is the physical condition of the property and any improvements? Is the property mortgaged? Who holds the mortgage? What is the payoff amount? How

can mortgage be released or property transferred? Are there any other liens on the property?

For leased property, what are lease terms? Who are parties? What is rent? When does lease expire? Are there any renewal provisions? Is rent current? Have there been any breaches? Are there restrictions on subleasing? Do you have an executed copy?

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Personal Property Primarily looking to understand what assets, other than real property, the Target owns or leases, which are the most valuable and crucial to success of the business, and the extent to which they are encumbered.

What kind of personal property does Target have (e.g., equipment, rolling stock, inventory, intellectual property, AR, marketing collateral, etc.)?

What are key assets to success of business? Is personal property owned, leased or licensed? Are any encumbered? If lease terms,

what are key lease terms, including payoff amount? Has the Target historically invested in its facilities and equipment? Has the Target maintained its assets in good working physical condition? What is the expected useful life of key assets (licenses, permits, equipment, etc.) and

what difficulties are there to being able to replace key assets? Where are assets located?

Intellectual Property

Primarily looking to identify intellectual property, confirm inventorship, authorship and ownership, assess any validity and infringement issues to the extent possible, understand licensing relationships and determine steps for transfer.

What registered intellectual property (e.g., patent applications, patents, copyrights, trademarks, domain names, social website accounts) and unregistered intellectual property (e.g., trade secrets such as processes, formulae or software code) is owned by Target?

Who are inventors, authors, creators of intellectual property? Has all owned intellectual property been properly assigned or transferred and registered

in the name of the Target? Is Target’s intellectual property valid (e.g., patent claims not obvious, trademarks not

merely descriptive)? Does the Target’s intellectual property infringe on any third party’s intellectual property? Does any third party’s intellectual property infringe on the Target’s intellectual property? Are all employees and third-parties contractors involved in the development of

intellectual property the subject of invention assignment, non-disclosure and work for hire agreements, as may be appropriate?

What policies, procedures and agreements does the Target have in place to protect trade secrets and other proprietary information?

Is any intellectual property encumbered and, if so, how and by whom? What intellectual property is licensed to or from third parties and what are the terms of

those license agreements? Who are the parties? When was the agreement entered into? What is being licensed? Is license in-bound or out-bound? Is it exclusive or non-

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exclusive? Are there limitations as to territory or fields of use? To what extent is sublicensing permitted? What are the basic economics? What types of fees are payable – upfront, fixed annual, milestones, royalties, maintenance? Are there any anti-assignment provisions or change of control provisions? What consents are required? Are there any unique provisions that restrict the Target business or provide special benefits to the other party such as non-compete, most-favored nations or right of first refusal provisions? Are there any IP ownership provisions? When does the contract terminate? Is there a renewal provision? Is there a fully executed copy of the agreement? If not, does one exist?

Information Technology Primarily looking to understand what information technology systems and software the Target business is dependent upon.

What information technology systems – hardware and software- does the Target use? Which ones are critical to operations? Are they owned, leased or license?

What problems – downtime, maintenance issues, bugs, etc. – has the Target experienced? Have there been any security breaches? Are the systems transferable? What consents are required?

Debt Financings Primarily reviewing Target’s loans and credit facilities to understand how it uses debt, what its cost of capital is, who has security interests in assets, what rights lenders have with respect to Target’s business and what would be required to pay it off.

What type of debt does Target have (term loans, credit line, revolver, etc.)? Who are the lenders? What debt is outstanding? What are the interest rates? How often are payments due? When do the loans mature?

Are there any guarantees and, if so, by whom (e.g., a parent company or other affiliate)? Are there any affirmative or restrictive covenants and how do they impact the business? Has the Target defaulted under any of its loan documents? Are there any anti-assignment provisions or change of control provisions in loan

documents? What consents are required? Will debt need to be paid upon a change of control? What are termination provisions if Buyer will not assume debt (or lender will not permit

assumption)? Are there any mandatory prepayment obligations or prepayment penalties? Is the debt secured by any liens on the Target’s business or its assets? Has the Target’s

equity been pledged? Are there fully executed copies of the loan documents? If not, do they exist?

Insurance

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Primarily looking to understand how Target manages and insures its risks and the extent to which it has made claims.

What insurance policies (e.g., CGL, D&O, Fidelity, Auto, Property, Workers Comp, etc.) does Target maintain with whom and what are basic terms (e.g., coverage period, policy limits, etc.)?

Is the Target self-insured for any losses? What reserves does it maintain? Is Target adequately insured (based on industry norms)? Is the Target subject to any bonding or other government-mandated insurance

requirements and, if so, is it in compliance? What insurance claims have been made? What does Target’s claims history look like?

Litigation Primarily looking to understand what disputes Target is involved in, what its exposure is and how litigious it is.

Are there any claims currently pending? What type of claims, including basic supporting facts? What is the estimate of damages? What is the current status of each claim? What is the likelihood of success on the merits?

Is there any threatened litigation? If so, same questions as above? Were there any large claims paid out in the past (3 to 5 years)? Any class actions? What

kind of claims is the Target business a party to? What are the common types of litigation? What is the average amount of damages? Are

most claims settled or litigated? Do the terms of any settlement agreements create ongoing payment obligations or

restrictive covenants affecting the Target’s business? Is Target subject to any court orders? What compliance obligations or potential liabilities

exists as a result? Has the Target been the subject of any government proceedings (OSHA, EPA, EEOC,

DOL, etc.)? Has the Target been involved in litigation with key customers or vendors?

Government Regulation Primarily looking to understand what governmental agencies Target must answer to, what regulations it must comply with and that Target has and is incompliance with all permits and licenses it is required to maintain.

Is Target subject to the authority and jurisdiction of any governmental agencies? Does it or the transaction require any regulatory approvals? For example:

o HSR –anti-trust concerns depending on size of parties in transaction and markets

in which they both operate

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o FCC – Broadcasting o Federal Reserve – Banking o FDA – Food, Drugs and Medical Devices o HHS – Healthcare (Medicare and Medicaid) o DOD – Defense Contractor o CFIUS – Foreign investment in businesses that could affect national security

interests

What Federal, state, or local licenses and permits are required for the operation of the Target’s business? Does Target have all of them and are they currently effective?

Are any permits transferable and, if so, what is the transfer process? If not, what is the process and estimated timing for Buyer to obtain new permits?

Has the Target received any notices of revocation or violation with respect to any permits?

Have any assets or activities of the Target been the subject of any governmental inquiry or investigation?

Is Target aware of any violations or potential violations of applicable government regulations, including anti-corrupt practices rules?

Management, Employees and Consultants Primarily looking to understand the composition of Target’s workforce, the health of employee relations, that Target is in compliance with applicable employment laws, whether any portion of the workforce is unionized, and the material terms of any employment agreements it has.

Who comprises Target’s workforce (names, position, date of hire, salaried versus hourly, base compensation, benefits, accrued vacation and other time off)?

Does the Target have independent contractors and consultants? If so, who are they, what do they do and what are the material terms of their engagement?

Does the Target have an employee handbook or other written policies and procedures for employees or other service providers?

Do the Target’s policies comply with EEOC, OSHA, etc.? If the Target has conducted layoffs, has it complied with the WARN Act or any state

counterpart? Is the Target party to any collective bargaining agreements and, if so, what are the terms? Has the Target experienced any strikes or other labor issues? What employee grievances or workers’ compensation issues have arisen? What does

worker’s compensation claims history look like? Have there been significant disciplinary issues with any key employees? Does the Target have any foreign employees and, if so, what are the jurisdiction-specific

rules on termination and compensation? For employment and consulting agreements, what are material terms? Who are the

parties? When was the agreement entered into? Does agreement establish an employee

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or independent contractor relationship? What are the basic economics of the contract- base compensation, bonuses, commissions, benefits? What is the term or length of service? Will change of control accelerate any benefits, e.g., bonus payments or vesting of equity? Is there a severance provision and, if so how does it work? Are there any non-competition, non-solicitation or other restrictive covenants? If so, what are their terms (e.g., duration, scope and territory)? Are they enforceable? Are their invention disclosure and assignment provisions? Are their confidentiality provisions? Is there a fully executed copy of the agreement? If not, does one exist?

Benefit Plans Primarily looking to understand what benefits are offered to employees, that there are no underlying employer liabilities, that Target has been operating them in accordance with applicable law and that the transaction won’t trigger any penalties or other problems.

What benefits are offered to employees (pension, 401(k), medical, dental, and vision insurance, short-term and long-term disability, life insurance, vacation, etc.) and what are the costs?

Do health and welfare plans comply with ARRA (e.g., non-discrimination rules)? Have any stock options, restricted stock, SARs or other similar economic instruments

been issued? Will the transaction result in the acceleration of benefits or other payments to any

employees (e.g., vesting of equity awards or SARs, bonuses, golden parachute payments)?

Are applicable employee benefit plans adequately funded? What are the future contribution obligations?

If Target a party to any multiemployer plan, what is the withdrawal liability? Do all employee benefits and compensation plans comply with Sections 280G (golden

parachute payment rules) and 409A (deferred compensation rules) of the Internal Revenue Code?

Environmental Matters Primarily looking for actual environmental liability or sources of potential environmental issues as well as environmental permitting paradigm for business.

Does the Target handle hazardous materials? If so, what kind, how often, for what purpose?

Is the Target aware of any spills of hazardous materials on or offsite? What storage and waste removal policies does the Target have in place for hazardous

materials? Is the Target are of any underground storage tanks on any property owned or leased by it?

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Has the Target been the subject of any EPA audit, inquiry or proceedings or have any similar lawsuits been initiated or threatened?

Has the Target conducted any site reviews or obtained any environmental analysis reports (e.g., Phase Is or Phase IIs)? If so, what were the conclusions?

Are there any ongoing environmental proceedings or remediation projects? If so, what are projected costs to complete them

Is the Target insured for environmental claims? What environmental permits is Target required to have (air, water, transport, noise, etc.)?

Does it have them? Are they effective? Can they be transferred and, if so, how? If not, what is procedure for Buyer to obtain new permits?

Miscellaneous

Is the Target part of any joint ventures and, if so, what are the terms of the joint venture relationship?

Is Target a party to any affiliate transactions? With which affiliates, what is the nature of the transaction? What are the material terms?

Has the Target been involved in any acquisitions or divestures in past three years? If so, with whom and when? What was bought or sold? What type of deal was it (asset, stock or merger)? What was the purchase price and are there any outstanding purchase price adjustments or earn outs? Are any proceeds being held back by the Buyer or being held in escrow? If so, why (what are the funds intended to cover)? What are the release conditions? What indemnifications obligations remain? Has the survival period run for any of the representations and warranties? Are any claims pending or anticipated? Are there any provisions that could impact the transaction or future operation of the Target business such as a continuing non-compete or obligation to pay liabilities or expenses of the other party? Are there any anti-assignment or change of control provisions? What consents are required? Is there a fully executed copy of the definitive agreement? If not, does one exist?

What recent press releases has the Target made?

* * * *

PROFESSIONAL EDUCATION BROADCAST NETWORK

Speaker Contact Information

DUE DILIGENCE IN COMMERCIAL REAL ESTATE TRANSACTIONS

Richard Goldberg

Ballard Spahr, LLP - Philadelphia

(o) (215) 864-8730

(m) (215) 837-8401

[email protected]

John S. Hollyfield

Norton Rose Fulbright, LLP - Houston

(o) (713) 651-3717

[email protected]



DUE DILIGENCE IN REAL ESTATE: HOW TO CONDUCT AND …underwriters, investment bankers and lead...

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Transcript of DUE DILIGENCE IN REAL ESTATE: HOW TO CONDUCT AND …underwriters, investment bankers and lead...