Due Diligence: Part Eight, Specialist Review

By Jeff Wolfe

At the Forrest Firm, we often represent clients as they negotiate and enter into strategic transactions with other companies, such as mergers and acquisitions, strategic alliances, and joint ventures and licensing. One of our most important jobs as corporate attorneys is guiding our clients through the process of due diligence associated with these types of transactions, especially regarding the mergers and acquisitions that occur between companies on a regular basis.

Our series of articles focusing on due diligence first discussed the big picture, taking an overall view of the process and its proper execution in the context of a strategic transaction. Next, we looked at due diligence with specific regard to assignment and change of control provisions, corporate records, commercial contracts, financing documents, intellectual property, and litigation. In the eighth and final installment of the series, we’ll look at when it may be necessary and appropriate to have a specialist review certain documents as part of a full-scale due diligence review.

A full-scale due diligence review of a target company may require specialists in many practice areas (e.g., tax, intellectual property, labor and employment, employee benefits, real estate, and environmental). Depending on the scope of the due diligence request list and the operations of the target company, the amount of information provided by a target company can be overwhelming and additional specialists may need to be brought in to review documents.

The key here is for a business attorney to recognize that he or she may not have the experience or expertise required to analyze documents that fall under these categories. This is not the time for pride to get in the way. For example, a real estate attorney is better equipped to review surveys, appraisals, titles, title insurance policies, zoning and land use restrictions, and mortgage documents. For employment agreements, a business attorney may be able to determine that the agreement can be assigned, but only an employment lawyer will be able to determine if the duties described are consistent with the employee’s exempt status or if payments upon closing of the transaction will trigger 409A tax obligations.

Although a goal in structuring an efficient due diligence process is to ensure that documents are looked at as few times as possible, sometimes a business attorney and specialist input is needed for a document (e.g., an important contract that includes a complex intellectual property provision). Generally, a business attorney is the main point of contact for the buyer, so any business attorneys in contact with the buyer will need to familiarize themselves with all legal due diligence issues.

It’s also important that business attorneys provide all necessary information to the specialist. It is unlikely that the specialists have been involved with the transaction at this stage, so it is the responsibility of the business attorney to provide an overview of the transaction, including the transaction structure and key terms. Other information will also be important, depending on the practice area. For instance, an employment lawyer will need to know the number of employees, among other things, and an intellectual property attorney will need to see the organizational chart to search the USPTO’s records for all entities involved in the transaction.

Besides typical outside consultants (e.g., accountants, financial advisors), other outside consultants may be necessary if there are specific needs, such as an environmental site assessment (e.g., Phase I, Phase II, Phase III). In specific industries, third-party appraisers may also be necessary to evaluate intellectual property or other unique assets.

This concludes our series on due diligence. If you’re looking for help with evaluating strategic opportunities like joint ventures, mergers, and acquisitions, the attorneys of the Forrest Firm stand ready to assist. Please please feel free to contact me at the firm today.