Happy New Year! My best wishes to you for a safe, healthy and prosperous 2017.
A quote that I like a lot is “[a]n ounce of prevention is worth a pound of cure.” I understand this quote has been attributed to Benjamin Franklin.
I often use this quote in the context of a business exploring options to minimize their potential legal liability. As your company gets started on the New Year, I strongly encourage you to include a legal checkup as part of its first quarter 2017 ‘housekeeping.’
Think of the legal checkup as being similar to one that you would have with your personal physician – basically, it’s taking stock of where your business’s legal and strategic matters are currently and will likely to identify areas for improvement/updates. By identifying the areas for improvements and updates now, they can be addressed with a deliberate approach and without undue time pressure (the ‘ounce of prevention’).
With a legal checkup, you’re conducting a top-level review for your business’s legal records. Examples of 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) preparing for anticipated M&A activity.
For this legal checkup blog, the rest of this commentary will use the example of a prospective purchaser (“Buyer”) interested in buying your business. Specifically, there are certain basic items the Buyer will ask to review during their research on your business (note: this process is often referred to as “due diligence”). The Buyer conducts due diligence to understand “what” they are buying – both in the way of liabilities and customer driven income. Following is an overview of key items and areas of your business a Buyer will likely ask to review (note: all should be included as part of your business’s legal checkup):
I. Corporate Organization:
1. Type of Entity;
B. Articles of Incorporation (or if not a corporation, other organizational filing)
1. Action by Majority Written Consent;
2. Board of Directors and Officers (Indemnification);
C. Bylaws and amendments (or similar internal org. doc such as an operating agreement for a limited liability company)
D. Director and Shareholder Meetings/Actions
1. Note missing meetings/minutes;
2. List and history of officers and directors;
3. Voting requirements/action by written consent.
II. Capitalization and Records
A. List of Owners (including each related company and subsidiary)
B. Unit of ownership
1. Record of units issued (transfer ledger)
C. Shareholder Rights
D. Shareholder Agreements
E. Voting Agreements
F. Equity Financing
1. Common Units;
2. Preferred Units (preferences).
G. Debt Financing (e.g. line of credit, term loan, etc.)
III. Third Party and Customer Matters
A. Service Agreements
B. Purchase Order Agreements
C. Consulting Agreements
D. Sales Agreements.
From my experience representing buyers and sellers of businesses, due diligence review of the items listed above is almost universal. An important objective for your 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.
Due to the fact that the legal records are so often required for due diligence, having those materials current will benefit and expedite any due diligence process. Hence, one of the reasons why an annual legal checkup can be so helpful for your business. Further, when 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.
Why is a legal checkup important today (even if you’re not actively selling your business)?
• Your business may find agreements that need to be updated or modified (remember the example of the shareholders and customer agreements noted above);
• 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 endeavors.
Ready to get your ‘legal house’ in order for 2017? Please 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.
LAWYERLY DISCLAIMER: none of the foregoing items from the list should be deemed exhaustive, nor should this post be construed as legal advice.