Due diligence: Types of documents reviewed

By now, you’re probably more than familiar with due diligence investigations. In our previous blog posts, we’ve discussed the importance of due diligence and how you can get the results you need from it. In the third part of our series on due diligence, we’ll tackle the documents usually reviewed as part of due diligence investigations before mergers and acquisitions. Let’s get started.


Before you purchase a company, your DD teams will perform separate investigations on the legal and financial background of the company you’re about to acquire. Here are documents typically reviewed in both investigations.

Legal examination checklist

  • Corporate Structure and Standing – This will give you an accurate picture of the company’s current structure and standing. In addition, examining this will allow you to follow the company’s usual regulatory files.Documents included in this review: articles of incorporation (original and amended), by-laws (original and amended), stock transfer book, stock certificate book and unissued stock certificates, receipts of issued stock certificates, cancelled stock certificates, general information sheets, minutes book, audited financial statements since incorporation (including tax returns), in-house (un-audited) financial statements for the past 5 years, etc.
  • The shares to be acquired – By examining these, you’ll be able to know if any shares have been transferred since the time of AOI incorporation, and if these transfers were done with Certificate Authorizing Registration (CAR) and stock certificates cancelled.Documents included in this review: stock certificates of shares of stock included in the acquisition, chattel mortgages, pledges or documents that includes claims, burdens, liens on the shares, documents on restriction of transfer of shares, any contracts that affect the shares.
  • Material contracts – This allows you to appraise the company based on its reputation, warranties, commitments, and rights and obligations.Documents included in this review: existing and past contracts and agreements, contracts with contractors, suppliers, developers, etc., outstanding performance guarantees and bonds, documents on acquisition and disposition of significant assets or businesses since incorporation, contracts with the government or any related agency/body, secrecy, confidentiality, and non-disclosure agreements, etc.
  • Assets – Lets you take a look at whether the target company’s assets are encumbered.Documents included in this review: list of company’s real and personal properties (with relevant information), Transfer Certificates of Titles, documents on leases and mortgages, etc., documents on investments made, appraisal reports on company’s real and personal properties, insurance policies on assets of the company.
  • Liabilities – Allows you to learn about any outstanding loans the target company has taken upon purchase.Documents included in the review: Debt or loan instruments and documents, materials showing contingent liabilities, etc.
  • Taxes – Informs you about the target company’s tax obligations, if these have all been met accordingly or whether there were issues before.Documents included in the review: Documents on payments of taxes and custom duties since incorporation, importations, tax or customs duty liabilities, tax rulings, applications for tax rulings, tax claims, etc.
  • Litigations – Lets you know about the target company’s cases since incorporation, and if these claims were won or lost.Documents included in the review: Complains, petitions, pleadings, demand letters by or against the target company, court clearance, etc.
  • Employment issues – Examines the company’s employment practices.Documents included in the review: List of employees, employment contracts, collective bargaining agreements, notices from the Department of Labor and Employment in regards to labor standards and practices, complaints, petitions, pension plans, clearance from DOLE and NCMB, etc.
  • Intellectual Property – Reviews the target company’s intellectual property, including patents, trademarks, copyrights, and licensing agreements.Documents included in the review: Certificates of registration of patents, trademarks, copyrights, intellectual property rights. Licensing agreements, management contracts, technical assistance agreements, etc.

Financial examination checklist

  • General corporate information – Includes the target company’s organizational chart and corporate structure, detailing subsidiaries and affiliates, if there are any.
  • General financial information – Examines the target company’s financial standing for the past 3-5 years, and includes revenues, forecast financials, historical detailed budgets, operations reports, and cost and profit breakdown for the historical period by specific drivers.
  • History of profit and loss – Examines the target company’s business performance in the past 3-5 years, as well the target company’s expenses and list of clients.
  • Assets – Lets you take a look at the target company’s assets and how far along they are in depreciation. Examining the target company’s assets also lets you know if the company has plans to purchase other assets in the future, and the method of acquisition.
  • Receivables – Examines whether the target company’s receivables are deemed good or written off, aging receivables.
  • Payables – Informs you if the target company has any outstanding or pending payments as well as reasons why these payments have yet to be made.
  • Related party transactions – Examines the target company’s practice in relation to transactions, most especially if the buyer still has to make loose ends meet concerning contracts with previous owners.
  • Tax filings – To see if the target company has pending audit lenders and if tax obligations are consistently met.

 

For more information, get in touch with Duran & Duran-Schulze Law today at info@duranschulze.com or (+632) 478 5826.