Due Diligence

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Getting to Know You: Due Diligence Cannabis Law Institute Lauren Rudick (Moderator) (Hiller, PC) Sept. 7-8, 2018 Matt Lapple (Lapple Ubell) Avis Bulbulyan (Siva) Andrea Hill (Skylaw) Daniel Straga (Venable) DUE DILIGENCE -- OVERVIEW • Due Diligence is the investigation of a person or business • Frequently used in M&A transactions, the process is used to gather information about the business that is for sale or raising capital • Information enables the buyer to: (i) negotiate price and other contractual provisions; or (ii) decide whether to abandon the transaction According to Black’s Law Dictionary, Due Diligence is: Such a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case. DUE DILIGENCE -- GOALS 1. Confirm title to assets and stock that are for sale 2. Investigate risks and liabilities 3. Confirm value of the target 4. Identify steps necessary to integrate the target business 5. Learn about the operations of the target business 6. Identify potential impediments to the transaction (i.e., corporate formalities) 7. Determine ancillary documents (e.g., disclosure schedules) DUE DILIGENCE – PRELIMINARY CONSIDERATIONS 1. Establish Budget 2. Assemble the Team: legal, accounting, business, and tax specialists 3. Determine Scope of Review - asset sale vs. stock sale - public vs. private - global considerations - need for confidentiality - time constraints - deal breakers - engage outside consultants - type of industry -Is the target in compliance with applicable regulations? THE INVESTIGATORY PROCESS -- CHECKLISTS Categories of Diligence (cannabis-specific): 1. Deal Terms 2. Corporate Governance 3. Financial and Legal Information 4. Product 5. Product Testing 6. Product Safety/Product Liability 7. Patients/Customers 8. Applicable Disclosures/Risk Factors 9. Banking 10. Insurance 11. Security 12. Intellectual Property 13. Marketing and Sales (forecasts) 14. Systems and Processes 15. Miscellaneous (weather, oversupply, etc.) FAILURE TO CONDUCT DUE DILIGENCE HAVE COPORATE DIRECTORS COMPLIED WITH THEIR FIDUCIARY DUTIES? • Fact intensive; case-by-case; evolving standards • Due Diligence – implicates fiduciary duty of care The Business Judgment Rule: The rule sets forth a presumption that, “in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action was in the best interest of the company • The Business Judgment Rule insulates an officer or director of a corporation from liability for a business decision made in good faith if: (i) he is not interested in the subject of the business judgment; (ii) is informed with respect to the subject of the business judgment to the extent he reasonably believes to be appropriate under the circumstances; and (iii) rationally believes that the business judgment is in the best interests of the corporation The Entire Fairness Standard: becomes an issue if the Business Judgment Rule is defeated (e.g., Directors lack independence or otherwise breach their fiduciary duties) – is the transaction, viewed in its entirety, fair to the stockholders? PREVENTATIVE CARE 1. REPRESENTATIONS AND WARRANTIES 2. INDEMNIFICATION AND INSURANCE 3. NON-DISCLOSURE AGREEMENTS.

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