Are you a LatAm based investor or entrepreneur interested in performing due diligence on a US company?

Due diligence is a key factor in mergers and acquisitions. A proper diligence process gives the buyer the tools that it needs to make an informed decision about entering into a transaction with the target company; particularly with respect to potential risks involved. 

Pre-transaction due diligence should at a minimum include a review of the following:

1. Corporate Records

As part of a corporate records analysis, it is important to review, among others, copies of the organizational documents of the target (i.e., certificates of incorporation, by-laws, certificates of partnership, partnership agreements, certificates of formation, limited liability company agreements), minute books, organizational structure charts and lists of stockholders or members. An examination of these items is meant to confirm that the target is validly existing and in good standing in its state of incorporation, and reveal any outstanding fees owed in the target’s state of incorporation or in the states where it is registered to do business. To the extent the target has outstanding fees, the buyer / potential strategic partner should ensure that they are either paid by the target before the transaction or demand a reduction in purchase price for any fees that the buyer may have to pay on the target’s behalf. 

2. Material Contracts

A review of the target’s material contracts includes an examination of any partnership, joint venture, distributorship, franchise, licensing, management, research and development, or similar agreements or contracts to which the target is a party. The buyer should also request information related to any indemnification agreements, material agreements currently in place as well as drafts of proposed material agreements and details of any material negotiations currently in progress. A material contract review will include an examination of the change of control and/or assignment provisions in the contracts to which the target is a party. The inability to assign or take over certain material contracts may result in the buyer choosing not to move forward with the transaction. 

3. Litigation and Audits

A review of the target’s current and past litigation and any existing audits, including tax-related audits, allows the buyer to assess risks and its potential exposure. Buyer may choose not to complete the transaction or to withhold a portion of the purchase price to cover any costs that may arise as a result of pending or threatened litigation. 

4. Insurance

It is important that the target has the appropriate insurance coverage in place for the business that it conducts. In this regard, the buyer should review copies of all insurance policies including medical, workers compensation, disability, automobile, general liability, fire and casualty, products liability, professional liability, business interruption, officers' and directors' liability and key-man life insurance. The buyer should also request a schedule of insurance claims from the preceding 3-5 years and a summary of loss history for such period. An understanding of any pending, and threatened, claims will allow the buyer to determine whether the proper coverages are in place and whether there is a chance that premiums may increase in the coming years. 

5. Taxes

A review of the target’s tax documents is an important part of the diligence process. The buyer should request copies of all federal, state, local and foreign tax returns for the last 3 years as well as copies of any correspondence from the Internal Revenue Service. It is also important to request information with respect to any foreign, federal, state or local tax examination or audit of the target or any of its subsidiaries or their respective predecessor's returns and the results of each audit, if decided, as well as copies of all documents related to pending tax litigation, or any appeals process or hearing. A review of these items will allow the buyer to determine whether potential tax risks may keep it from entering into the transaction or if it needs to include protections in the transaction documents to mitigate potential risks.

A thorough diligence process is essential to a successful transaction, as it allows the buyer to evaluate potential risks and mitigate them where possible. 

To the extent you consider investing in a US company, acquiring an interest in one, entering into a joint-venture or other form of merger, and would like guidance on how to create a tailor-made due diligence questionnaire and handle the document review, please let us know!