1. Due Diligence
What You Don’t Find Out Will Hurt You
Presented by: Brian Abraham
May 17, 2010
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2. Acknowledgments
• Bill Gilliland, Partner – FMC Calgary
• Sarah Sidhu, Associate – FMC Vancouver
• Pia Webster, Summer Student ‐ FMC Vancouver
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3. Overview
1. What is legal due diligence?
2. How does a business deal focus and guide the due diligence
process?
3. The importance of legal due diligence being coordinated with
business due diligence.
4. How legal due diligence provides essential information to the
business transaction.
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4. What is due diligence?
• Due diligence is an important step toward the acquisition of a
business – assets, property interests, shares, and/or mixed
elements
• It is a process by which clients, lawyers and other advisors try
to learn as much as possible about a target business or
property before committing funds to enter into an option;
joint venture lease
• Legal due diligence is just one element of due diligence
process
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5. Why due diligence?
• Lawyer’s role in due diligence is to ensure
achievement of client objectives
• Why does the client want to acquire the ‘target’
CREATING A DUE DILIGENCE FRAMEWORK
property or interest?
• Will the client’s acquisition of target business help
them achieve their end objectives?
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6. Different purposes for due diligence
• Some due diligence is “target” focused, this type of
investigation attempts to address the risks and or issues
regarding what is being acquired
– e.g. existence of underlying agreements,
i.e. royalties
• Transactional due diligence addresses the risks and or issues
concerned with getting the deal done
– e.g. loan agreement requires consent of third parties for
transaction, original owner
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7. Why due diligence?
• According to the B.C. CLE Due Diligence Deskbook, legal due
diligence consists of:
1. Document review
2. Regulatory approval
3. Statutory searches
4. Other steps dictated by transaction circumstances
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8. Why due diligence?
• Time, cost, and transaction constraints are important to consider
• Due diligence expectations and processes should be set out in
writing for both counsel and client and should be re‐assessed as
new information is learned and evaluated throughout the process
• Regularly scheduled meetings for updating purposes
• The creation of a due diligence framework, frequent status
reporting and a simple easy to update format can help make the
process go more smoothly
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9. Legal Due Diligence Checklist
Basic Corporate Documents
Searches
Property Records
Securities Regulation and Issuances
Shareholder Information
Material Contracts
Underlying Contracts
Financial Information
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10. Legal Due Diligence Checklist
Employee Compensation/Benefits Plans
Patent, Trademark and Copyright Matters
Proprietary Information
Tangible Property
Litigation and Audits
Environmental
Management
Local Customs and Practices
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11. Legal Due Diligence Checklist
Basic Corporate Documents
• Bylaws, including all amendments.
• Articles of Incorporation, including all amendments.
• Minutes of all meetings of directors, committees of directors and
shareholders, including copies of any written notices (if given) or
waivers thereof and any written consent to action without a meeting
within the past five years.
• List of all provinces, states and countries where property is owned or
leased or where employees are located, indicating in which provinces,
states and countries the Company is qualified to do business.
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12. Legal Due Diligence Checklist
Basic Corporate Documents
• Copies of any voting trust, shareholder or other similar agreement
covering any portion of the Company’s shares.
• Copies of all agreements relating to repurchases, redemptions,
exchanges, conversions or similar transactions.
• Copies of all agreements containing registration rights or assigning
such rights.
• Copies of all agreements containing pre‐emptive rights or assigning
such rights.
• All quarterly and annual reports, proxy materials and any other
communications to the Company’s shareholders within the past five
years.
• List of all subsidiaries.
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13. Legal Due Diligence Checklist
Searches
• Applicable registries/names/jurisdictions
• Local advice is critical – even in Canada!
• Mining Recorder or equivalent
• Land Offices e.g. BLM, County
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14. Legal Due Diligence Checklist
Securities Regulation and Issuances
• All securities filings, including exhibits, within the past five years.
• Agreements relating to sales of securities by the Company including
any private placement memoranda or other offering circulars within
the past five years.
• Stock option or purchase plans and forms of option or purchase
agreements which have been or may be used.
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15. Legal Due Diligence Checklist
Securities Regulation and Issuances
• Stock option or purchase plans and forms of option or purchase
agreements which have been or may be used.
• All securities permits, registrations, notices of exemption and consents
for issuance or transfer of Company’s securities and evidence of
qualification or exemption under other applicable securities laws.
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16. Legal Due Diligence Checklist
Shareholder Information
• Records setting for all issuances or grants of stock, options and
warrants by the Company, listing the names of the issuees or grantees,
the amounts issued or granted, the dates of the issuances or grants,
the number of shares presently exercisable (if applicable) and the
consideration received (or to be received) by the Company in each
case.
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17. Legal Due Diligence Checklist
• Material Contracts
• Property agreements, areas of interest, consents, royalties, clawback
rights, right to market product
• Confidentiality agreements
• Strategic alliance agreements
• Bank line of credit agreements, including any amendments, renewal
letters, notices, waivers, correspondences, etc.
• Other material agreements evidencing outstanding loans to or
guarantees by the Company, including correspondences.
• Material contracts with suppliers, manufacturers or customers. Please
indicate which suppliers are sole source.
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18. Legal Due Diligence Checklist
• Material Contracts
• Agreements for loans to and any other agreements (including
consulting and employment contracts) with officers, directors or
employees, whether or not now outstanding.
• Schedule of all insurance policies in force covering property of the
Company and any other insurance policies such as "key person"
policies, director indemnification policies or product liability policies.
• Partnership, lease, option or joint venture agreements.
• Any other material contracts outstanding.
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19. Legal Due Diligence Checklist
Financial Information
• All management letters or special reports by auditors and any
responses thereto.
• Federal, provincial and foreign returns (together with exhibits and
schedules thereto) filed by the Company. Also, a schedule describing
any ongoing tax disputes together with copies of reports,
correspondence, etc., relating to pending federal and provincial tax
proceedings, assessments, or investigations, etc. with regard to open
years or items.
• Copies of any tax agreements relating to the Company or any of its
Subsidiaries.
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20. Legal Due Diligence Checklist
Financial Information
• SEDAR, EDGAR, quarterly, MD &A, AIF’s, Annual Reports, News
Releases
• All audited and unaudited financial statements of the Company,
including balance sheets, income statements and statements of
changes in financial position.
• Balance sheet with information concerning the tax basis of assets.
• Any accounting manuals or memoranda that would be helpful in
reviewing any of the requested documents.
• All letters from accountants of the Company regarding the Company’s
control systems, methods of accounting, etc.
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21. Legal Due Diligence Checklist
Financial Information
• Recent analyses of the Company or its industries prepared by
investment bankers. engineers, management consultants, accountants
or others, including marketing studies, credit reports and other types
of reports, financial or otherwise. Company projections for future
periods.
• Company projections for future periods.
• Any special reports by auditors (e.g., as to control procedures).
• Letters of counsel in reply to auditors’ letters for the past 5 years.
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22. Legal Due Diligence Checklist
Financial Information
• List of all fixed assets of the Company and its Subsidiaries together
with depreciation schedule if available.
• Bank letters or agreements regarding lines of credit.
• All documents and agreements that are evidence of other material
financing arrangements, including sale and lease back arrangements,
instalment purchase, securitisation arrangements, etc.
• Correspondence with lenders (including entities committed to lend)
including all compliance reports submitted by the Company, its
Subsidiaries and its accountants.
• Computations demonstrating compliance with covenants in existing
financing documents
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23. Legal Due Diligence Checklist
Employee Compensation/Benefits Plans
• Copies of all domestic and foreign employee benefit plans including
(without limitation):
- equity compensation plans and forms of agreements executed
pursuant thereto.
- employee stock purchase plans.
- all Board resolutions adopting each equity compensation plan and
evidence of shareholders approval, where such approval was
obtained, of the equity compensation plans.
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24. Legal Due Diligence Checklist
Employee Compensation/Benefits Plans
- all pension and deferred compensation plans, including qualified
pension plans of all entities acquired, even if such plans were
frozen or merged into other plans.
- form of promissory note used in connection with plan loans, as well
as any other administrative documents related to plan loans.
- form of election completed by participants to request a plan
distribution or hardship withdrawal, and any other administrative
form used in connection with the plans.
- employment agreements or severance agreements with officers or
key personnel.
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25. Legal Due Diligence Checklist
Employee Compensation/Benefits Plans
- all plans, agreements or arrangements providing benefits
contingent upon a change in control.
- list of outstanding equity compensation awards, showing exercise
price and vesting.
- any material sales compensation plans or arrangements.
- fringe benefit and perquisite arrangements.
• List of existing and potential workers’ compensation claims.
• Description of any significant labour problems or union activities the
Company has experienced including any collective bargaining
agreements.
• Be cautious of foreign jurisdictions.
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26. Legal Due Diligence Checklist
Patent, Trademark and Copyright Matters
• List of all foreign and domestic patents and patent licenses held by the
Company.
• List of any trademarks, trade names or service marks.
• List of any copyrights.
• Copies of all material agreements for licensing of Company technology
to third parties.
• Copies of all material agreements for licensing of technology from
third parties.
• Any correspondence from third parties regarding potential
infringement of intellectual property right of others.
• Proprietary data.
• Any pending patents or trademarks.
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27. Legal Due Diligence Checklist
Tangible Property
• List of real and material personal property owned by the Company.
• Documents of title, mortgages, deeds of trust and security agreements
pertaining to the properties listed in (a) above.
• List of any security interests in personal property.
• Documentation of significant acquisitions or dispositions of assets.
• Claims, concessions, permits, licences, leases (examine terms and
conditions).
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28. Legal Due Diligence Checklist
Litigation and Audits
• All letters which have been sent to auditors in connection with year
end and current interim audits, including "litigation letters".
• Descriptions of (and reasons for) any change in accounting methods in
the past three years.
• Active litigation files, including letters asserting claims, complaints,
answers, etc.
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29. Legal Due Diligence Checklist
Litigation and Audits
• Any material litigation settlement documents.
• Any decrees, orders or judgements of courts or governmental
agencies.
• Information regarding any material litigation to which the Company is
a party or in which it may become involved.
• Property expenditures, write‐offs.
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30. Legal Due Diligence Checklist
Environmental
• Schedule of all instances in the past in which the Company has
corrected unsafe working conditions.
• Schedule of all permits, certificates, registrations or approvals
obtained from any governmental body responsible for environmental
or health regulation.
• Any notices of violation or requests for information that have been
received or threatened at any time for alleged failure of any facility to
comply with applicable environmental laws, permits, certificates,
registrations or approval.
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31. Legal Due Diligence Checklist
Environmental
• Schedule of any environmental problems, conditions or issues known
to the Company concerning the Company’s business or any known
violations or potential violations of applicable environmental laws.
• Schedule of any discharges or releases of Hazardous Materials into the
environment by the Company.
• Schedule of the location, size and contents of any underground or
aboveground storage tanks or PCB transformers owned or used by the
Company.
• Description of all hazardous wastes that are disposed of on and off site
by the Company and a description of the procedures for disposal of
such wastes (including a list of all disposal sites and transporters).
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32. Legal Due Diligence Checklist
Environmental
• Description and status statement of all completed, pending or
threatened regulatory, judicial or administrative actions relating to the
Company.
• Description and status statement of any investigation, remediation,
removal or monitoring actions relating to any of the Company’s
facilities.
• Environmental assessments, reports or audits performed by the
Company or any other party relating to any of the Company’s facilities
or operations.
• Schedule of Hazardous Materials management plans, emergency
response plans, inventory reports, and other environmental reports,
policies and notices required by environmental law to be filed by the
Company with any governmental body.
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33. Legal Due Diligence Checklist
Management
• Founders agreements, management employment agreements,
indemnification agreements, and "golden parachute" agreements, if
any.
• Schedule of all compensation paid in the most recent fiscal year to
officers, directors and key employees showing separately salary,
bonuses and non‐cash compensation (e.g. use of cars, property, etc.).
• Bonus plans, option agreements, retirement plans, pension plans,
deferred compensation plans, profit sharing and management
incentive agreements.
• Agreements for loans to and any other agreements (including
consulting and employment contracts) with officers or directors,
whether or not now outstanding.
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34. Legal Due Diligence Checklist
Management
• Organizational chart.
• Extensive, broad scope.
• Starting point for planning legal investigation.
• Cost limitations.
• Effective use of time available.
• Legal investigation needs to be focused.
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35. Legal Due Diligence Checklist
Local Customs and Practices
• Critical on foreign transactions.
• Unwritten laws.
• Community consultation.
• Aboriginal claims.
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36. Legal Due Diligence Checklist
Where does Legal Due Diligence get their information?1
• Site visits
• Written questionnaires
• Data room visits
• Disclosure letter
• Certificates of title
• Commissioning specialist reports
• Collection of public information
1Rankine,Denzil. “Chapter 5-Investigating the Target”, Acquisition Essentials: A step-by-step guide to smarter deals, E-Book
Accessible through the Carleton University Library website: Harlow, Prentice Hall, 2005, p. 110
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37. How a does a business deal focus and guide the
due diligence process?
How is the Transaction structured?
Objectives:
• staged due diligence
• threshold issues
What should you look at to assess risks?
Value drivers
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38. How a does a business deal focus and guide the
due diligence process?
All the members of due diligence team need a basic understanding of the
particular transaction structure, risks, value drivers, and objectives.
• Plan regular due diligence team meetings, need to know basis
• Team
• Management
• Engineering, geology, metallurgy
• Accounting
• Legal
• Environmental
• Country experts
• Tax advice
• Political risk
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39. Transaction Structure
Is it an Asset purchase, a share purchase or a transaction with mixed
elements?
• This information helps to determine scope and extent of due diligence
What type of business is the “target” involved in?
• This information helps assess risk
Key elements of the business
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40. Transaction Structure
Assets/liabilities
Pre‐closing transactions/conditions
• Transactional due diligence
Transaction structure
• Transactional due diligence
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41. Key Due Diligence Points
Due diligence is a responsive multi‐stage process
This investigation must be as thorough as possible to accurately assess the
‘‘target’’ acquisition or transaction within the particular timeframe, cost,
and client constraints
Due diligence is a value driven process because it serves to further inform
both the acquirer and the “target” of the appropriate “target’’ value
Comprehensive due diligence exposes unexpected or unknown liabilities
before the deal is closed and offers an opportunity for both sides to re‐
assess the preliminary agreement terms
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42. Key Due Diligence Points
Preliminary review of certain issues
Threshold review to identify key issues
Auction process can drive access and economics of due diligence
Thorough due diligence review
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43. Identification and Assessment of Key
Risks
Need background to business being acquired
Public disclosure – securities filings on SEDAR/stock exchange
Websites
Media search
Financial statements
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44. Identification and Assessment of Key
Risks
Notes to financial statements – contingencies/commitments/subsequent
events
Management’s discussion and analysis – trends, uncertainties, liquidity
Risk factor disclosure in public documents
Assessment of risks – identify key risks
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45. Due Diligence as a Value Driven Process
Further refinement and focus to legal due diligence exercise
Where is the value that will be paid for?
• Due diligence will help assess the real underpinnings of value of
acquisition target
What assumptions regarding value are being made by acquirer?
• Assess reliability of assumptions/information e.g. bull boards
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46. Due Diligence as a Value Driven Process
Asset type – determines relevant issues regarding actual value
• e.g. Functioning plant/enforceable contracts
Liability type – determines relevant issues regarding actual value
• e.g. Tax issues regarding structure
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47. Types of Due Diligence – Functional Types
Legal due diligence
Financial due diligence
Accounting due diligence
Operational due diligence
Technical due diligence
Environmental due diligence
Tax due diligence
Regulatory due diligence
Legal element to all types of due diligence
Country risk
Political risk
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48. Business & Legal Due Diligence Done in
Parallel
Coordination
Constant reassessment of findings in light of other findings – consistency of
results, red flags, re‐interpretation
Importance of a legal issue depends on business issues
• Loan covenants more important where company in default?
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49. Business & Legal Due Diligence Done in
Parallel
Regular communication and sharing of results/findings
Work sharing – intranet/portals
War rooms
Issue‐based due diligence rather than functional
• e.g. sales agreement team rather than legal/business/financial teams
Contract review can be confirmed against the due diligence searches that
have been performed
Agreements can relate to one another e.g. areas of interest, overlapping
royalties
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50. Using Due Diligence Results Effectively
Agreement schedules
Due diligence identifies risks
Risks identified can be covered off with representations and warranties
• Risk allocation
• Especially risks relating to key value assumptions
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51. Using Due Diligence Results Effectively
Risks impact indemnity limitations
Transactional due diligence identifies conditions precedent/transaction
timing issues
Due diligence team needs to review transactional documentation
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52. What is not covered by due diligence?
Due diligence impacts the ability to negotiate transaction terms
Representations and warranties are a risk allocation mechanism
Due diligence allows risk assessment and impacts "requirement" for
representations and warranties
• Areas of non‐risk
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53. What is not covered by due diligence?
Due diligence can be a substitute for representations and warranties
• Competitive bid/auction situations
• Allows assessment of need for representations and warranties
• Representations and warranties can be important in the assessment of
non‐financial risk of a transaction
• As Is Where Is deals
Effective due diligence can help get the deal
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54. Mining Considerations
Confidentiality agreements
Proprietary data
Professional obligations to disclose
Overlapping agreements
Technical matters need experts
Access to key people
Material undisclosed information
Cultural differences
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55. Mining Considerations (continued)
Fraudulent activities
Tenure system
Agreement requirements
Foreign entities, operations
Political risk
Country risk
Aboriginal matters
Local customs and practices, cultural matters
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56. Mining Considerations (continued)
Who do you talk too
Confidentiality
Technical questions
Site visits
Detailed checklists
Due diligence questionnaire
Data rooms
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57. Mining Considerations (continued)
Due diligence request list
corporate structure
articles, by‐laws
indebtedness
property interests
mineral projects
ownership
contracts
company rights
access
infrastructure
rights of mineral owner and third parties
third party consents
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58. Mining Considerations (continued)
Due diligence request list (con’t)
employment matters
environmental matters
litigation
related party transactions
intellectual property
assets and business
government reports
insurance
miscellaneous
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59. Denzil Rankine’s Insight into the Due
Diligence Process
“Due diligence. . .involves a lot of people digging up a lot of often
incomplete and conflicting information in a very short time. The
challenge for the person who commissions due diligence is to stay on
top of all this by not getting lost in the detail, having the insight and
experience to spot what is important and what is not...” – Denzil
Rankine, author of Acquisition Essentials: A step‐by‐step guide to
smarter deals2
2 Rankine,
Denzil. “Chapter 5-Investigating the Target”, Acquisition Essentials: A step-by-step guide to smarter deals, E-Book
Accessible through the Carleton University Library website: Harlow, Prentice Hall, 2005, p. 112
59

60. Sources
• B.C. CLE, Due Diligence Deskbook, 2009
• RMMLF, Due Diligence, 1993
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61. Brian E. Abraham
brian.abraham@fmc‐law.com
+1 604 443 7134