Prior to investing in or acquiring a company, sophisticated investors and acquirers generally engage in an extensive due diligence process seeking to, among other things, uncover potential liabilities and risks related to the target company. The transaction process can be slowed or even jeopardized if a company has not, among other things, properly maintained corporate books and records, properly issued securities, protected its intellectual property, or taken adequate steps to protect against potential liabilities. In addition, investors and acquirers may provide a lower level of scrutiny in evaluating a company, if the company’s corporate books and records, contracts, and other matters are complete, organized and well presented in a virtual due diligence room. In addition, a complete and well-organized virtual due diligence room will help instil confidence and fast-track the due diligence process.
For various reasons, including, lack of time and/or money, many businesses do not regularly maintain their corporate books and records, corporate contracts and other legal documents, properly protect their intellectual property, or follow the requisite legal formalities or corporate laws in operating their company. For example, corporations may not hold regular board or shareholder meetings, maintain the up-to-date board and shareholder minutes or obtain shareholder or director approval for major corporate actions. Companies also may not properly issue securities, maintain a proper ownership ledger and capitalization table, or enter into appropriate confidentiality and inventions assignment agreements with their employees and consultants.
Prior to commencing financing or engaging in acquisition discussions, companies should be proactive by cleaning up their corporate books and records, taking steps to protect their assets and limit their exposure to potential liabilities, and identifying and remedying any non-compliance with corporate, securities and other laws.
The following are some actions companies can take that can speed up a transaction and increase the likelihood that it will be successfully completed:
• Update corporate minute books with board and shareholder minutes approving all material corporate actions such as the issuance of securities.
• Update corporate minute books with annual shareholder and director meeting minutes.
• Prepare an up-to-date capitalization table, which accurately reflects all outstanding securities.
• Prepare or update stock ledgers, which accurately document all issuances and transfers of stock, options and any other outstanding securities, and which tie into the capitalization table.
• Prepare missing documentation of securities issuances, including, subscription agreements, investor representations and accredited investor questionnaires.
• Ensure proper documentation exists with respect to the cancellation of any securities.
• If appropriate, prepare and have employees and consultants execute non-disclosure, inventions assignment and non-solicitation agreements.
• Ensure intellectual property rights are protected, and that all patents, trademarks and other intellectual property are properly held or licensed by the company.
• Ensure proper employment agreements exist with key employees, and at-will employment letters are executed by other employees.
• Identify areas of significant legal exposure and develop solutions to eliminate or minimize such exposure.
• Create a complete and organized virtual diligence room for potential investors and acquirers.