Common Topics of Review in M&A Due Diligence Go to: Charter Documents, Bylaws, and Other Corporate Documents | Contract Diligence | Financial and Debt Instruments | Real Property Diligence | Litigation Diligence | Licenses, Permits, and Regulations | Environmental Diligence | Labor and Employment Diligence | Employee Compensation and Benefits Diligence | Intellectual Property Diligence | Foreign Corrupt Practices Act and Other Corruption Diligence | Antitrust Concerns | Tax Diligence | Cybersecurity and Privacy Diligence | Social Media Diligence | Emergency Preparedness and Business Interruption Diligence | Representation and Warranty Insurance | Related Content Current as of: 05/28/2020 by Candice Choh and Carlos Soto, Gibson, Dunn & Crutcher LLP This practice note discusses the topics of review that counsel generally should consider in a due diligence investigation for an M&A transaction, including: • Charter Documents, Bylaws, and Other Corporate Documents • Contract Diligence • Financial and Debt Instruments • Real Property Diligence • Litigation Diligence • Licenses, Permits and Regulations • Environmental Diligence • Labor and Employment Diligence • Employee Compensation and Benefits Diligence • Intellectual Property Diligence • Foreign Corrupt Practices Act and Other Corruption Diligence • Antitrust Concerns • Tax Diligence • Cybersecurity and Privacy Diligence • Social Media Diligence • Emergency Preparedness and Business Interruption Diligence • Representation and Warranty Insurance Charter Documents, Bylaws, and Other Corporate Documents Review of the target company's organizational documents requires obtaining documents from both the seller and the Secretary of State of the state in which the company was formed. The fundamental organizational documents, such as a corporation’s certificate or articles of incorporation, or a limited liability company’s certificate of formation, are public records; on the other hand, the governing documents, such as bylaws, limited liability company agreements (also known as operating agreements), and stockholders' agreements are typically not publicly filed (except for public companies) and must be obtained from the seller. Corporate records, including the minutes of Common Topics of Review in M&A Due Diligence board and committee meetings, are also not public documents and must typically be obtained directly from the seller. The company's organizational document will name the state in which the target company was formed, which in turn will tell the buyer's counsel what statutes to look to for voting requirements, merger mechanics, and similar transaction matters. The buyer's counsel will also want to obtain confirmation from the Secretary of State that the target company is (or is not) in good standing. In the case of a corporation with preferred stock, the certificates of designation (or analogous documents defining the rights of such preferred stock) may also be public documents, and in any event must be reviewed carefully to determine how any shareholder consent required for the transaction must be obtained, and what special treatment, if any, those shareholders are entitled to in respect of their shares. The governing documents — bylaws, limited liability agreement, stockholders' agreement, if any, and similar documents — may also contain information that affects the structure of the transaction and specific director or stockholder consent rights and must be reviewed with care. The buyer's counsel should review the applicable statutes and confirm that the documents were properly adopted by the company. Similarly, counsel should review the minutes of board meetings and any resolutions of the board, to confirm that proper procedures were followed when the company issued equity interests, adopted or amended corporate documents, or took other formal actions. Depending on the form of transaction, the buyer's counsel may want to pay particular attention to reviewing information regarding the target company's capitalization structure provided in these documents. These documents may grant the holders of equity interests in the target company rights which affect the allocation of consideration in the transaction, and which must be factored into the negotiation of the deal and drafting of the transaction documents. The buyer’s counsel should also pay particular attention to subsidiaries that are not wholly-owned by the seller, as third parties may have governance or other rights with respect to those subsidiaries. A template for reviewing a target company’s organizational documents is available at Organizational Documents Due Diligence Template (Corporation). Contract Diligence For many companies, existing contracts represent some of their most valuable assets and the source of significant operating obligations and even potential liability, so buyers will often want to make sure they have a proper understanding of the target’s rights and obligations thereunder. Depending on the nature of the target company's business, the number of contracts provided for review can be quite daunting. The level of detail the buyer will want to see and the specific terms the buyer will want buyer’s counsel to focus on varies widely from transaction to transaction—the buyer's counsel should consult with its client before beginning contract diligence to determine what information the buyer is seeking to discover from the various contracts provided for review and whether any additional contracts should be requested from the seller. Once the focus is properly tailored, a common approach to managing the information gathered from contracts is to create a table to summarize the contracts reviewed. These tables can then be appended to the due diligence memorandum, to the extent one is provided, for easy reference. As an initial matter, the buyer's counsel should confirm that each agreement provided in the due diligence investigation is complete and fully executed, constituting a valid contract. One of the most basic inquiries when reviewing a contract is whether it contains any provisions that would render the contract void or would require consent as a result of the proposed transaction. These provisions can take the form of change of control termination or acceleration rights, anti-assignment clauses, or other transfer restrictions. In an asset acquisition, because the buyer is acquiring the assets of the business and not the target company itself, the seller will have to assign contracts to the buyer, so the buyer or a buyer affiliate can take over for the seller as a party to the contract post-closing; this will usually violate any anti-assignment clauses or change of control or transfer restriction, so the counterparty’s consent will typically be required before the agreement can be assigned to the buyer. In a merger or stock acquisition, the entity being acquired frequently survives the transaction, and Page 2 of 17 Common Topics of Review in M&A Due Diligence therefore no change to the parties to the contract will be required, so whether an anti-assignment clause or change of control or transfer restriction is triggered depends on how the provision is formulated. If the contract defines a change in ownership as constituting a transfer, the restriction is potentially applicable to a merger or stock acquisition, and consent may be required. For any contracts that are critical to the value of the business being acquired, the buyer may want to consider requiring that appropriate consents be obtained as a condition to closing the transaction or that there be a reduction to the transaction consideration if they are not obtained. Similarly, the parties may want to clarify what efforts should be expended to obtain material consents, including who should be responsible for any expenses associated with obtaining such consents. Failing to account for these provisions may result in the counterparty to a critical agreement having the right to terminate it immediately or shortly after the transaction closes. Depending on the context of the deal, the buyer may also be interested in duration, pricing, indemnification obligations, warranties, or any number of other provisions. The buyer may also ask buyer's counsel to focus on ongoing liabilities arising from the contracts that will survive the consummation of the transaction and/or the target’s (as opposed to the counterparty’s) termination rights thereunder. Additionally, a buyer may be ask buyer’s counsel to summarize any exclusivity provisions, which , in certain circumstances, may reach beyond the contracting parties to their affiliates. For example, an agreement may contain a non-compete provision providing that neither the target company nor any of its affiliates may seek to sell certain products outside of a defined territory (e.g., North America). If the buyer is going to assume that agreement and enter into the shoes of the target company in doing so, the prohibition will similarly extend beyond the target company to its affiliates acquired as a consequence of the transaction, which would include the buyer and its other subsidiaries following consummation of the acquisition. The buyer's counsel should pay particular attention to such provisions, as they may result in unintended restrictions being placed on the buyer's business. When the buyer is a strategic buyer, this is an area that merits particular attention. Contracts in foreign languages or with extensive redactions can require additional time and consideration. With foreign-language documents, the buyer