Due Diligence – What’s the Big Deal (PART I: – Corporate Housekeeping)

Due diligence is the foundation on which any prospective transaction is built. A shaky foundation can make or break a transaction. Due diligence can uncover major issues with the corporation, including its assets, that need to be addressed.

What’s the worst that can happen? A deal can die on the vine, or pricing of the transaction can be reduced based on the results of comprehensive due diligence. Less dramatic, due diligence can be a laborious process at a time when a company is seeking immediate financing.

This is Part I of a series of important factors that can help move this process along. We will start with Corporate Records:

Corporate Records (Governing Instruments)

1. Formation Documents

   1. If you don’t already have copies in your corporate records, order certified copies of Certificates of Incorporation, Articles of Incorporation and Charters of the Company and its subsidiaries (including all amendments thereto and restatements thereof)

   2. Review the formation documents to insure all information is current (i.e. corporate name, stock information, registered agent, etc.)

2. Bylaws of the Company and its subsidiaries as currently in effect

   1. Review the Bylaws to insure they are accurate and not outdated. Many corporations utilize “form” bylaws that have not been updated or customized. Close attention should be made to jurisdiction references, director number and qualifications, etc.

3. Standing

   1. Good-standing certificates – Every due diligence review will include a check of the company status with the state of formation. Believe it or not, this is a very common occurrence. Almost all states require annual franchise tax and or annual report filings. If these filings are not maintained a corporation will be deemed delinquent and may be subject to dissolution.

   2. Tax status certificates – Some reviews will include an examination from the state tax authority. Most solid agreements will include representations from the corporation that all federal and state tax returns are current.

   3. Qualifications – Are you qualified where you need to be? Did you know that in 2021, total business entities formed in Delaware topped 1.8 million at year-end. In fact, the First State continues to be the domicile of choice for members of the Fortune 500 at nearly 66.8 percent. A corporation domiciled in Delaware may need to qualify to do business in other states, depending on whether they have an established nexus (a connection) in another state and are required to register for foreign qualification. This should include a comprehensive review of where the company does business, has offices or facilities, owns or leases property or conducts business, or has employees. What constitutes doing business will It varies by state, so requires a thorough review by an attorney.

   4. Corporate Authorizations - Shareholder and director minutes and stock ownership books, ledgers or other records of the Company and its subsidiaries, including minutes of executive, audit and other committees (board and non-board) should all be current. This should include a review of all major actions, as certain actions require board and/ or stockholder approval.

I am a seasoned paralegal with over 25 years of managing all things corporate, including formations, mergers, conversions, corporate governance and securities. I have worked closely with many attorneys on corporate transactions and structured financing (including, all series rounds). We would be happy to discuss how we can assist with your next transaction.