Legal due diligence processes and frameworks

¶ … Diligence

This report aims to provide insights into the process of critical thinking from the perspective of an analyst of a venture capital firm that is being asked to assess the viability of investing in a company. This entails applying critical thinking methodologies for associated issues as well the identification and risk assessment. From this view, the report presents an applicable legal due diligence checklist. The objective therefore, is to explain the importance of each checklist item and how they may impact the making of the investment decision. Legal experts, philosophers and psychologists concur that the critical thinking process is an ongoing progression that stems from some observation or unanswered question. From the legal perspective, that means critical thinking is a process that never ends and is more likely to create new questions or points. Critical thinking as a process involves detailed curiosity, open-mindedness, skepticism, and persistent reasoning and is a sound tool to approach the specific details of a case, purchase or event.

The case points are that five acquaintances formed a commercial business called Newco Company. Of the five, two have sizable assets, some experience running companies, but minute construction experience. The remaining friends have minute amounts of capital and their contribution is experience since all three worked for successful homebuilders and one headed a local division of a national construction company for the past two years. The group has tied their assets together but they still need additional funding and therefore seek venture capitalist assistance. The external venture capitalist will not demand personal collateral, but instead requests controlling interest in the company.

Critical thinking has been identified as a very personal process with each individual coming to conclusions based on their own experiences. Sometimes it is not feasible to have varying outcomes so the scientific method of critical thinking is an excellent alternative.

The critical thinking process used was the scientific method and the phenomenon measured followed these four steps:

Observe and describe a stimulus or a phenomenon

Create a hypothesis

With the hypothesis as the source, predict other phenomena

Create experiments to verify the hypothesis

As the capitalist's analyst, it is our responsibility to assess the viability of investing in this company by creating a Due Diligence Checklist. Therefore, we aim to implement a legal venture capital due diligence checklists but it would also be recommended to implement a business due diligence checklist that also implies additional research. The business due diligence should review the market for the product of the company, a thorough background check on the founders and key management team, assess the competition, detail current or potential customers and distinguish key customers, of the company assess the analysis of financial projections and obviously review any holes in the management team.

Through the critical thinking process, the legal due diligence will discover key contracts and employment agreements, minutes and consents of the board of directors and shareholders, confidentiality and invention assignment agreements with employees, corporate charter and bylaws, outstanding or potential litigation-related documents and any patents, copyrights or other intellectual property-related documents. The intention is that the process of reviewing and also readying any of these documents helps expedite the closing of the agreement.

The checklist therefore is as follows:

Agreement Preparation

Confidentiality, Assignment & Assumption Agreements

Asset, Stock and Real Estate Purchase Agreement

Bills of Sale, Compliance Certificates and schedules to Agreements

Opinions of Counsel and Officer's Certificate

Determine Position on Key Points (such as Conditions to closing and covenants of the buyer)

Asset Schedules

Detailed list of assets

Determine which assets are subject to liens

Determine which assets are leased or licensed

Confidentiality Agreements

Prepare form of Confidentiality Agreement

Determine which points seller or buyer will be flexible on Ensure that Confidentiality Agreement fully executed prior to providing information

Corporate Documents of the Company and Subsidiaries

Articles of Incorporation

Bylaws and all amendments

Minutes of all Board of Directors, committee and shareholders meetings

List of states and jurisdictions with recently obtained good standing certificates where company has offices, holds property or conducts business

Stockholder information, indicating number of shares held, dates of issuance, and consideration paid.

Powers of attorney on any matter.

List of banks or other lenders with whom a financial relationship exists

Credit agreements, debt instruments, security agreements, mortgages, financial or performance guaranties, indemnifications, liens, equipment leases or other agreements evidencing outstanding loans

List of major clients and their locations.

Litigation with Summary of disputes with suppliers, competitors, or customers Decrees, orders or judgments of courts or governmental agencies or settlement documentation.

A management organization chart with biographical information

List of negotiations with any group seeking to become the bargaining unit for any employee

All employment and consulting agreements, loan agreements and documents

CC:

Re: Legal Due Diligence Checklist

Upon completion of the review associated with the Legal Due Diligence Checklist this memo is to provide our recommendation against an investment in the Newco Company with the rationale of the recommendation.

First and foremost, we found through the application of the legal due diligence search, several points of concern which leads to a recommendation of not investing in the Newco venture. There were several compliance issues and the confidentially agreements were not signed by the five holding partners. Through additional research, it was discovered that the five partners were not forthright regarding the company's asset, stock distribution.