You are on page 1of 4

Private Placement

Due Diligence Checklist

Hugh H. Makens
Hugh H. Makens is a partner with Warner Norcross & Judd LLP, Grand Rapids, Michigan. He is the co-chair of the Uniform
Securities Act of 2002 Subcommittee of the Michigan Bar Association, Business Law Section, a member of the Michigan
Corporation & Securities Bureau’s Advisory Committee, and an adjunct professor at Michigan State University, Detroit
college of Law in conjunction with Grand Valley University, where he teaches advanced securities law. He is also a member
of the editorial board of the Business Law Section of American Bar Association’s eSource Newsletter.
A complete set of the course materials from which this outline was drawn may be purchased from ALI-ABA. Call 1-800-
CLE-NEWS and ask for Customer Service. Have the order number of the course materials—SH067—-handy.

A. Introduction

1. Included below is a form of checklist that can be used to commence due diligence in a private
offering. This is a sample only and is not intended for any specific transaction or for any particular type
of offering.

2. Checklists can be a valuable asset or a major hindrance to due diligence. Followed blindly, they
often lead the attorney to miss essential information and waste valuable time. Due diligence is finding
material information, or other information necessary to understanding or completing the transaction.
Therefore, it is a flexible process that must be adapted based on on-site observations and review of
documentation or outside resources.

3. A due diligence list can simply be a list of documents that have been requested for review, or may be
a detailed listing of documents, background information and management questions designed to obtain
the information necessary to proceed with the transaction.

4. In building the checklist, you start with a background inquiry on the company. Customarily an initial
checklist listing basic documents is sent to the issuer. Organization documents, financial statements,
product advertising, governmental filings, business plan, management questionnaires, and litigation are
usually included in the initial request. From those documents, as well as a background check through
search services, an Internet search, and credit checks, the ingredients for the principal checklist are

5. An analysis of the financial statements is usually the best starting place to identify unusual items that
should be included in the due diligence list. An examination of revenues and expenses reveals much
about the entity. Footnotes can serve as guideposts to areas of inquiry. Even in Enron, the partnerships
were mentioned in the footnotes, and that should be sufficient to raise questions about the nature of the
partnerships, the manner in which they were offered, securities compliance, potential conflicts of interest
and diversion of corporate opportunity, exposures as the result of guarantees or other commitments,
inter-entity dealings, and the like.
6. The principal thrust of due diligence focuses on compensation, self-dealing, background of insiders,
litigation history or potential, risks, and accurate discussion of the nature of the business. These are the
areas principally targeted in both civil and governmental litigation against issuers and insiders. The
regulators’ adage is “follow the money” and this statement is equally true in due diligence.

7. Once inside the issuer, the checklist should be used as a tool, but it is not a substitute for awareness,
following up on leads from conversations or documents, or trying to make sense out of information that
is provided. There is a logical explanation for everything, and if you don’t have it, then more inquiry is

Due Diligence Document and Information Request
The following documents and other items are requested in connection with the due diligence
investigation of ABC CORP. (the “Company”). Please provide responses for the company and each of
its subsidiaries, if any. To the extent that any information requested below does not apply to a Company
or any subsidiary, please simply indicate that the item does not apply. To assist you in your response,
please let us know if it would be helpful to have this due diligence request document sent to you on disk
or via email. A supplemental request may be made depending on the responses provided.

A. Organization and Standing

1. Articles of Incorporation, including amendments.

2. Current bylaws.

3. Corporate minute books.

4. A list of all jurisdictions in which the Company or any subsidiary owns or leases assets
(including real property), has employees or is qualified to do business as a foreign corporation.

5. A list of all current and former subsidiaries of the Company.

B. Capitalization

1. Up-to-date stock record books and all outstanding stock certificates.

2. All agreements relating to the beneficial ownership, voting rights, or pledge of the Company’s
or any subsidiary’s common or preferred stock.

3. All agreements under which registration or preemptive rights are granted to shareholders of the
Company or any subsidiary.
4. All agreements, offering circulars, letters of intent, written proposals, or memoranda of any oral
proposals for the disposition, acquisition, or distribution of any assets or shares of the Company or any

C. Financial Statements

1. Year-end financial statements for the last five fiscal years.

2. Interim financial statements for each month during the current fiscal year.

3. Budgets (including capital expenditure budgets) for the last three fiscal years and any reports
comparing actual results with the budgeted amounts.

4. Budgets (including capital expenditure budgets) for the next fiscal year, if prepared.

5. A description of all indebtedness (other than current trade payables) owed by the Company or
any subsidiary, including the name of the lender, the terms of payment, and the amount currently due and

6. Copies of any work papers for the last three fiscal years developed by external auditors.

7. Gross sales and the discount, price allowance, and all other returns and allowances subtracted to
arrive at net sales.

8. Description of any material “other” income or expenses (e.g., interest expense, extraordinary
items, and the like) for the past four years.

9. Description of intercompany obligations.

10. Detail of prepaid expenses.

11. Analysis of inventory valuation policies, turnover, and obsolescence.

12. All management letters, reports or studies on internal controls or other special or regular
reports, studies, or recommendations produced by external or internal auditors for the last three years,
and management’s responses to them.

D. Taxes

1. Federal, state, local, and foreign tax returns for the last five fiscal years.

2. A description of all audits by any federal, state, local, or foreign taxing authorities, including the
date and a summary of each audit.

3. All tax elections filed by the Company or any subsidiary.

4. All legal or accounting tax opinions received by the Company or any subsidiary during the last
five calendar years from outside advisors that relate to any tax-reporting matters.
E. Employee Relations

1. A list of names, positions, salaries, wage rates, bonuses, and fringe benefits of all directors,
officers, employees, and agents. Provide an employee organization chart when possible.

2. Any current and former collective bargaining agreements or other contracts or arrangements
with any labor union.

3. All employment, consulting, sales representative, and similar contracts (and describe any oral
arrangements) with any present or former directors, officers, employees, or agents.

4. Past and present employee policy manuals and handbooks.

5. Past and present employment application forms.

6. All consulting agreements and other agreements with independent contractors, whether oral or

7. All non-competition agreements, confidentiality, and trade secret agreements.

8. Listing of all loans made to directors, officers, or other persons related to the Company or any

9. Copies of any analyses or reports concerning the economic effect on the Company or any
subsidiary of a change in control under any existing employment or change in control agreements or any
Plans (as defined below).

F. Employee Benefit Plans

1. All Plans (including any frozen or terminated Plans) and related actuarial valuations and
summary plan descriptions. (“Plans” means any “employee pension benefit plans” and “employee
welfare benefit plans” within the respective meanings of ERISA §§3(1) & (2), 29 U.S.C. §§1002(1)
&(2), all incentive compensation plans, benefit plans for retired employees, and all other employee
benefit plans maintained by the company or any subsidiary, or to which the company or any subsidiary
has made payments or contributions on behalf of its employees, including, without limitation, all plans
or contracts providing for bonuses, pensions, profit-sharing, stock options, stock purchase rights,
deferred compensation, insurance, and retirement benefits of any nature, whether formal, or informal and
whether legally binding or not.)

2. Most recent determination letter for any qualified Plans.

3. Each Annual Report for each Plan filed with the Internal Revenue Service or the U.S.
Department of Labor.

4. All employee benefit books or manuals.