Legal Due Diligence Checklist

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Legal Due Diligence Checklist

“While the term cannot be found in the dictionary, due diligence can be defined as the careful inspection of an item intended for purchase” (Stern, 1993). “Scrupulous due diligence is critical to determine if the offering is cost-effective” (Stern, 1993). Most potential purchasers of businesses now agree that they should carry out due diligence on a business before agreeing to buy it. According to Hall (2004), “the reasons for due diligence will vary and may, in any particular instance, include verification of the commercial rationale for the acquisition, planning the integration of the acquisition, understanding accounting principles, assessing the quality of assets and seeking to quantify contingent liabilities.”

Analysts of Future Venture Capital Firm must assess the viability of investing in the LTC Landscaping and Tree Trimming Newco Project. The analysts will examine and identify investment issues via a legal due diligence checklist. The importance of each due diligence checklist item will be explained, as well as, how this item may impact the investment decision. The legal due diligence checklist will consist of the following eight key checklist items comprising the investigative process phase: corporate record information; business, operational information; personnel information; property information; contracts and leases; financial and asset information; environmental information; and litigation.

Corporate Record Information
The first step in our due diligence checklist will be to conduct research regarding the company’s public disclosed information and corporate records. This section of the checklist will include information such as corporate certificates and articles of incorporation, determination or organization; corporate by-laws; partnerships, joint ventures or affiliates; stock ownership and stock ledger book; schedule of officers, directors and committee members. One primary source of information that may be used is the Electronic Data Gathering, Analysis and Retrieval (EDGAR) database, produced by the U.S. Securities and Exchange Commission (SEC) which anyone can access at no charge (Kassel, 2005). According to Tergesen (2006), “a little sleuthing online can (also) turn up information that may signal trouble ahead.” “A search of public databases – including those maintained by Google, LexisNexis, and various federal, state and county courts” – can dredge up enough dirt on a prospective investment company to cause alarm (Tergesen, 2006). The corporate record information checklist item also will determine company state qualifications and list of jurisdictions including office locations, company inventory and equipment. The checklist item also includes a schedule of owned real property, material suppliers and other third party service providers; and a schedule of property, liability and current and pending worker’s comp insurance policies including policy limits, deductibles and retroactive premium adjustments; and copies of all insurance policies and contracts (Astute Diligence, 2008). This checklist item is important to assessing the rationale for the acquisition, investment and may impact planning the integration of the business investment.

Business, Operational Information
The second legal due diligence checklist item is business, operational information which will include a description of the Newco product lines and individual products and services provided, and a listing of the main customer base for Newco. The business operational information checklist will also include names of principal competitors with competitive market information. The checklist item will further include identifying and analyzing operations technology, marketing and advertising activities and analyzing quality control procedures. This checklist item will further include copies of promotional and advertising materials, product literature and brochures and government...
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