“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:
A.
Corporate Organization:
Background:
1.
Type of
Entity:
2.
EIN:
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.
Amendment(s)
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
B.
Capitalization and Records
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.)
C.
Third Party and Customer Matters
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.
DISCLAIMER: 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.
