“An ounce of prevention is worth a pound of cure.” - Benjamin Franklin
A company legal checkup is similar to one that you would have with your personal physician. It’s evaluating the status of your business’s legal matters currently and prioritizing areas for improvement.
With a legal checkup, you’re conducting a high-level review of your business’s legal records. Matters that may need to be addressed include: i) updating internal agreements such as shareholder agreements if one or more key shareholders have sold their interests in the prior year; ii) updating/modifying existing customer agreements to reflect most current terms of service (or frequently negotiated provisions); and iii) updating lease agreements.
Following is an overview of key areas of your business for ongoing maintenance and areas that a buyer would likely ask to review (all should be included as part of your business’s legal checkup) in the event of a sale or merger:
1. Type of Entity:
2. Articles of Incorporation (or if not a corporation, other organizational filing):
1. Action by Majority Written Consent
2. Board of Directors and Officers: Indemnification
3. By-Laws and Amendments
4. Director and Shareholder Meetings/Actions
1. Note missing meetings/minutes (Prepare "make-up" minutes)
2. List and history of Officers and Directors
3. Voting requirements/action by written consent
1. List of Owners (including each related company and subsidiary)
2. Unit of ownership:
1. Record of units issued (transfer ledger)
3. Shareholder Rights
4. Shareholder Agreements
5. Voting Agreements
6. Equity Financing
1. Common Units
2. Preferred Units (preferences)
7. Debt Financing (e.g. line of credit, term loan, etc.)
1. Service Agreements
2. Purchase Order Agreements
3. Consulting Agreements
4. Sales Agreements
When representing buyers and sellers of businesses, the due diligence items listed above are almost universally requested for review, however another important and ongoing goal for the legal checkup is to end up having all of your legal records in a format where they are easily accessible by you and your professional advisors during regular operations.
Due to the fact that the legal records are so often required for due diligence, having those materials current will streamline any due diligence process and help avoid surprises. Also, if companies do not have their records readily available and current, it can lead to reduced expectations on the Buyer’s part and may very well negatively impact the sales price, however clean up prior to a sale may be cost or time prohibitive, so ongoing maintenance is advisable.
Why is a legal checkup important even if you’re not actively or planning to sell your business?
- Your business may find documents or agreements that need to be updated or modified (shareholder documents, customer agreements, leases and other areas often change over time, either because of changed business circumstance or changes in the legal environment) to help avoid potential risks;
- Searching for missing/incomplete records can be time consuming and wasteful of your resources; and
- Complete corporate and sales records are ‘good housekeeping’ for all of your future management activities and helps ensure quality information for planning decisions.
Ready to get your ‘legal house’ in order? Call me and let’s discuss how we can help you do so. The ‘ounce of prevention’ approach will save your business time and money.
None of the foregoing items from the list should be deemed exhaustive, nor should this post be construed as legal advice. Consult a local attorney to evaluate your specific situation.