Due Diligence: The Due Diligence Checklist

– *updated February 17, 2022 –

due diligenceIssuers are often required to engage in a due diligence review by their audit firms, legal counsel, underwriters and other outside third parties in anticipation of: (1) preparing audited financial statements and annual report; (2) a public or private financing transaction; (3) an initial public offering: (4) a merger or acquisition of the issuer’s business; (5) a significant commercial transaction, such as a joint venture; (6) major bank financing; or (7) general risk management.

The due diligence process has several components. Legal counsel and underwriters will usually start by conducting a business and media database review. They will then search various public records to confirm key information and then move on to direct contact with government and industry information sources such as court registries, Canadian Revenue Services, Worker’s Compensation, PPSA, Patent & Trademark Office, etc. Some searches will require written consent from the issuer and may take a few weeks to be returned.

As part of the due diligence process, issuers will be asked to gather and provide a rather long list of documents and detailed written disclosure, often referred to as a “due diligence checklist”. Directors, officers and major stockholders will also be asked to complete a detailed background questionnaire.

It can take a considerable amount of time for an issuer to get the required documents and information together forming a due diligence checklist. It is one of the major stumbling blocks to moving a transaction along at a reasonable pace.

The cost associated with a transaction can also go up considerably when legal counsel is faced with an Easter egg hunt for information and documents delivered in 10 unmarked jumbled boxes with little input from management. Paying a lawyer $400 an hour or more to organize, gather information and identify the missing pieces in a due diligence checklist is crazy unless an issuer has deep pockets and no staff on hand getting paid less than $425 an hour to organize things in-house. Even if a law firm uses a law student or a legal assistant to organize this material for an issuer, they are going to charge $150 an hour for that student or assistant to sort out what would have cost that issuer 1/5th the cost if their own executive assistant or Jerry the temp was engaged to do the work. Of course, the choice is that of the issuer. Law firms will gladly accommodate the wishes of any client wants the law firm to do this type of work for them. Just expect to be charged accordingly.

Issuers can get jump on their audit or major transaction by gathering and organizing the material and information normally requested in a due diligence review. The list below is an example of a due diligence checklist, which a technology or industrial company would likely receive in connection with a major transaction. Resource companies would have a slightly different list focused on their specific industry. Each item in the list is required to be addressed. If an item is not applicable or the answer is “none” it should be noted in the notes column on the right hand side. Issuers should flag documents should with a sticky that corresponding to the item number on the due diligence list. If an answer requires more room than available in the notes column; a page with the item number at the top should be created  as a schedule and the answer provided in that schedule.  Some of our clients like to place their due diligence package in a binder(s). Other clients use a banker box with folders to keep the various items sorted. Either method is fine. What is important is that the information and documents are easy to find. Legal counsel can fine tune the due diligence package once the basics are in place.

An issuer who has a due diligence review package together, whether for audit or other purposes, will find it is relatively easy to update this package moving forward when it is needed for other uses. It is getting the initial due diligence review package together that is time-consuming  Issuers who are prepared will find the due diligence process a relatively painless experience with very few if any surprises.

The due diligence checklist below is presented as an example only. We encourage you to contact your own legal counsel before using this checklist. Almost all attorneys and audit firms have their own version of a due diligence checklist. Please feel free, however, to instruct your legal counsel to adapt this form to your own use if you find it useful as a starting point.


Due Diligence Checklist

Please provide us with the documents referred to below for [NAME OF ISSUER] (“[NAME]”) and each of its subsidiaries and predecessors.(Unless the context otherwise requires, all references to the “Issuer” include [NAME] and each of its subsidiaries and predecessors.) Except where a list, schedule or description is requested, please provide us with a copy of the requested agreement, correspondence or other document. Please do not provide any “privileged” documents; however, please indicate whether any “privileged” documents have been withheld. In addition, you do not need to provide any documents that have been filed on Edgar to the Securities and Exchange Commission (“SEC”) or on SEDAR to various Canadian Securities Regulators by the Issuer, as those documents are deemed to have been provided by you regardless of whether or not you otherwise deliver copies thereof. With respect to any requests below for a copy of an agreement and/or contract, you are not being asked to provide any agreements under which Issuer no longer has any material obligations, rights, or potential liability, as of [DATE] except where we otherwise specifically request any such agreements and/or contracts.

  A. List of assumed names, division names or other names under which the Issuer is conducting or has conducted business.
  B. List of all jurisdictions in which the Issuer (i) owns, stores, leases or licenses properties or assets, (ii) has employees, agents or customers, (iii) is qualified to do business or (iv) conducts business. Provide evidence of qualification to do business where material, where property interests are held or where the Issuer’s business is otherwise conducted.
  C. List of all present and former subsidiaries of the Issuer, including the name and address of such subsidiary’s headquarters (including entities in which the Issuer own less than 100%).
  D. A copy of the charter documents and bylaws with all amendments to date of the Issuer.
  E. List of directors and officers of the Issuer.
  F. All minutes of meetings of directors, committees of directors and stockholders of the Issuer since [DATE].
  G. Any due diligence report prepared for the Issuer or with respect to the Issuer, to the extent available.
  H. Press releases relating to the Issuer not otherwise posted on the Issuer’s website.
  I. All material documentation relating to the Issuer’s disclosure and internal controls and procedures, including any related attestations, reports, correspondence or written materials.
  J. All charters of committees and subcommittees of the Board (including Audit, Compensation, Nominating / Corporate Governance, Disclosure and any other committees).
  K. Issuer representation letters to auditors (last two years).
  A. A capitalization schedule setting forth the number of authorized, issued, outstanding and treasury shares of each class of securities of the Issuer.
  B. Copies of private placement memoranda or offering circulars relating to sales of debt or equity securities and any purchase agreements, indentures or other agreements governing the terms of any indebtedness incurred by the Issuer or its subsidiaries (excluding any PPM or offering circular comprised solely of the Issuer’s filed securities filing reports) for offerings or sales of equity or debt securities made during the prior 2 years.
  C. Copies of any agreements relating to the election of directors.
  D. Copies of all agreements relating to repurchases, redemptions, exchanges, conversions or similar transactions.
  E. Copies of all agreements and instruments containing restrictions on transfer, encumbrances upon, or other restrictions with respect to, the capital stock of the Issuer.
  A. List of banks or other lenders with which the Issuer have a financial relationship and brief description of the nature of relationship, e.g., lines of credit, etc.
  B. Lines of credit and any other loan agreements, promissory notes or guarantees, letters of credit, security agreements, pledge agreements, equipment leases, including any amendments or renewals, etc.
  C. Summary of all currently outstanding interest rate or foreign currency swaps, caps, options, forwards or other derivative instruments or arrangements to which the Issuer is a party.
  D. All instruments evidencing debt obligations and all agreements and material correspondence relating thereto. Any other actual or contingent indebtedness (e.g., loan guarantees, letters of credit, mortgages, liens, pledges, indemnifications, banker’s acceptances, swaps, other derivative agreements relating to indebtedness, or other encumbrances of any nature whatsoever) and all agreements and material correspondence relating thereto.
  E. Any other agreements relating to financing arrangements by the Issuer or its subsidiaries, including any guarantees, sale and leaseback arrangements and mortgages.
  F. All notices of default or noncompliance from lenders during the last year relating to such debt instruments (excluding separately dated default notices for the same default for which at least one notice was provided) and all compliance reports submitted by the Issuer or its accountants.
  G. Correspondence with lenders, including waivers, compliance certificates and opinions of counsel regarding compliance or non-compliance with debt obligations, other than with respect to correspondence older than June 1, 2008 for obligations no longer in default.
  H. All agreements regarding obligations or liabilities of the Issuer as a guarantor. surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any other person or entity.
  I. All agreements by which the Issuer is obligated or required to provide, or under which the Issuer is currently providing, funds in the form of a loan, capital contribution or otherwise.
  J. All loan agreements, inter-company notes and guarantees between the Issuer and any of its employees or affiliates.
  K. Correspondence relating to any violations, waivers, consents and releases from any restrictive covenants.
  L. Material correspondence with any current creditor of the Issuer.
  M. Compliance certificates, including borrowing base certificates and covenant compliance calculations, supplied by the Issuer to any creditor.
  N. Lien searches or other evidences as to outstanding financing statements or other notices of liens.
  A. Summary of any known contingent liabilities or material commitments of the Issuer, excluding any liabilities or commitments that individually involve an amount less than $10,000.
  B. List and description of all concluded, pending or threatened litigation (to the extent such threatened litigation is known to the Issuer), governmental proceedings, investigations, arbitration proceedings, orders, judgments, or other potential claims, disputes, investigations or proceedings relating to the Issuer’s employees, but only to the extent that any such matters were pending at any time since [DATE].
  C. Provide the correspondence regarding any pending or threatened suits, actions, proceedings or governmental actions, proceedings or inquiries; copies of initial pleadings (complaint, answer, demurrers) and any judgments, decrees or orders to which the Issuer is bound or by which any of the Issuer’s business practices are restricted. If there are matters you have previously listed or materials you have already provided in response to another section that would also fall into this section, you may cross reference that section.
  D. List and description of all pending or threatened government or other investigations relating to the Issuer and provide all reports to, notices from, or correspondence, from the prior five fiscal years and the current fiscal year.
  E. All attorneys’ letters to accountants relating to pending or threatened litigation or other contingencies relating to the Issuer for the past three years.
  F. Any existing opinions of or correspondence with counsel as to pending litigation involving the Issuer.
  G. All management letters from the Issuer’s independent registered public accounting firm to the Issuer concerning internal accounting procedures or controls in connection with the current audit and any other audit conducted in the past five years.
  H. Correspondence concerning inquiries from governmental (i) tax authorities, or (ii) authorities regarding equal opportunities violations, antitrust violations, or violations of any other law, rule or regulation.
  I. Any settlement documentation regarding any of the foregoing.
  A. All inspection or regulatory reports, citations and notices received from government agencies or self-regulatory organizations relating to the Issuer.
  B. List of all material governmental permits, franchises, licenses, clearances, permissions and approvals relating to the Issuer (collectively, “Permits”), together with information regarding any such Permits which have been canceled or terminated, required to carry out the business or operations of the Issuer, including such Permits required by foreign, federal, provincial or local authorities, and any evidence of exemption from such permit or license requirement. Copies of all Permits.
  C. All correspondence with any third party who has alleged unfair competition by the Issuer.
  D. List of all pending or contemplated disputes, proceedings, requests for information or other actions or activities affecting or relating to any Permit.
  E. Provide details of all pending or completed governmental audits, cases, etc. for the last three years and identify the governing country in each such case.
  A. Copies of all contracts with customers, suppliers and any other third parties pursuant to which the Issuer would expect to receive or pay more than $100,000 over the life of the contract.
  B. Research and development agreements.
  C. Technical cooperation agreements.
  D. Copies of all outstanding and unfulfilled purchase orders.
  E. Samples of all forms of purchase orders, invoices, etc.
  F. Copies of any joint venture, joint development, partnership or other type of strategic agreement.
  G. Copies of all agreements with distributors, dealers and sales representatives.
  H. Any documents relating to current investments in other companies or entities, acquisitions of companies, assets or disposition of assets.
  I. Copies of any other contracts, agreements or documents that the Issuer believes is material to the business.
  J. Copies of any term sheets, letters of intent, or similar documents relating to any pending transaction that involves an amount in excess of $10,000.
  A. Issuer Workforce
        1. Organizational chart of the Issuer, including titles and locations.
       2. Current roster of employees providing services in connection with the conduct of the Issuer’s business by location, including job title, full-time/part-time/temporary status, department and start date.
       3. List of all independent contractors/consultants/agents providing services in connection with the conduct of the Issuer’s business and rate of compensation and other benefits (including option information) and location.
       4. Listing of employees providing services in connection with the conduct of the Issuer’s business who require immigration sponsorship by office and department, current type of work authorization and country of origin
  A. All financial statements and related reports, including balance sheets, for the last three years and any interim period prepared for the Issuer. [Refer to SEC/SEDAR filings.]
  B. Description of any known liability not revealed in the financial statements described in XII(A) above.
  C. List of any off balance sheet liabilities not appearing in most recent annual financial statement (including the notes thereto).
  D. Accounts receivable aging report, including customer names, as of the close of the last calendar month.
  E. Accounts payable aging report, including vendor or supplier name, as of the close of last calendar month.
  F. Accounts payable and accrued expenses detail by category.
  G. Schedule of all inventory.
  H. Fixed Assets ledger identifying asset, date of acquisition, purchase price, depreciation period/useful life, and book value as of most recent balance sheet date.
  I. Any applicable U.S. Sarbanes-Oxley Act testing and compliance materials and documentation.
  J. Summary of all accounting policies and procedures, detailing reserve methodologies and accounting methods. Detail should include, at a minimum, the following policies: accounts receivable reserve policy, bonus policy, commission policy, fixed asset capitalization policy (lives and capitalization limits), inventory reserve policy, revenue recognition policy, sales returns policy, vacation policy and warranty policy.
  A. For prior five years, provide the following:
       1. Listing of all office locations
       2. Bulk sales returns for any major asset sale
  B. For most recent five years:
       1. Federal and state income tax returns
       2. foreign income tax returns
  C. For prior two years, provide the following:
       1. List of all individuals providing services to the Issuer receiving W-2s
       2. List of all 1099 Recipients providing services to the Issuer
  D. Detail of recent tax notices, including taxing authority, issues status of resolution.
  E. Description of any pending or potential issues with tax authorities (including a list of all tax examinations currently in process). Copies of all notices, assessments, deficiencies, or adjustments (proposed or final), and any agents’ or examiners’ reports received by the Issuer.
  F. Detail of audits including taxing authority, issues raised and status. For closed audits, a copy of closing agreement.
  G. Any correspondence with tax authorities regarding disputed amounts or positions within the last 4 years.
  H. Deficiency assessments filed against the Issuer by federal, state or local tax authorities and the resolution of such deficiency (if any).
  I. Any agreements waiving or extending the statute of limitation for deficiency assessments or in connection with federal, state or local tax matters.
  J. Closing letters and any other material IRS documents and tax assessment documents including, for example, rulings obtained and accounting method changes applied for.
  K. Schedule of taxes payable by the Issuer.
  L. List of jurisdictions where indirect tax returns are filed and a copy of all returns filed for the last 12 months.
  M. All inter-company tax sharing or tax indemnification agreements.
  N. Details on any governmental, public or private entities providing incentives, assistance or loans programs in which the Issuer has participated.
  A. Customer Matters:
       1. List of all active customers and customers for the previous two years,.
       2. Copies of active customer agreements and commitments.
       3. Summary of bad debts, accounts receivable summary detailing account balances and reserves, accounts receivable aging.
  B. Marketing Arrangements:
       1. All agreements or arrangements related to the research, development, manufacturing, testing, marketing, etc. of the Issuer’s products, such as joint development agreements, partnership agreements, agency agreements, manufacturer representation agreements technology exchange agreements, agreements with suppliers and vendors, agreements with subcontractors and component parts manufacturers, agreements with testing laboratories, agreements with foundries or similar agreements.
       2. Listing of all co-branding, private label, alliance, joint venture, partnerships, co-marketing, distribution, content syndication, licensing, equity or debt relationships, or similar agreements with other companies used by the Issuer. Copies of all joint venture, co-branding and joint marketing agreements (including any side letters or oral agreements).
       3. Copies of all contracts with any municipality, state or federal government.
       4. Copies of all standard Issuer sales forms or literature, including price lists.
       5. List and general description of commission or other compensation arrangements with sales personnel.
  C. Other Business Matters:
       1. Copies of all product warranties and listing of warranty claims, reserves and expenses.
       2. Any agreement or arrangement (whether written or unwritten or intended to be legally enforceable or not) restricting or that may restrict the business activities or sale of any assets of the Issuer (including but not limited to non-competition, exclusive territory, non-solicitation, non-disclosure or other similar restrictions).
       3. A list of the Issuer’s major suppliers.
       4. Standard customer credit terms and any significant variations in practice.
       5. License, sublicense, royalty and franchise agreements involving the Issuer.
       6. All material commitments, contracts and/or agreements, or those currently under consideration or negotiation (and the status of negotiation) relating to the Issuer.
       7. Hold-harmless, indemnification or similar agreements of the Issuer (or provisions within agreements).
       8. Any agreement out of the ordinary course of business to which the Issuer is a party or by which it or its properties are bound as it relates to the conduct of the Issuer’s business.
      9. A list of all agreements affected in any manner by a change in control of the Issuer or which require consent or notice of a third party to assignment (please provide copies of such agreements to the extent not covered by a request above).
     10. Summary of pending claims for indemnification under any contract.
     11. All related party agreements, including all documents pertaining to any receivables from or payables to employees or beneficial owners of more than 5% of the Issuer’s stock.
     12. Any waiver or agreement of the Issuer canceling claims or rights of substantial value other than in the ordinary course of business, including any document relating to material write-downs or write-offs of notes or accounts receivable other than in the ordinary course of business.
  Note: for purposes of these requests, “intellectual property” includes, without limitation, patents, trade secrets, know-how, trademarks (including tradenames), and copyrights that are necessary for the conduct of the Issuer’s business.
  A. Complete list, description and key terms, including minimum payment obligations and duration, of all licenses, franchises, royalty agreements, marketing agreements, nondisclosure agreements, use or non-use agreements, collaboration or joint development agreements, distributorships, sales, management and other agreements, covenants not to sue, authorizations, consents or permits relating to the Issuer’s intellectual property and/or technology that are necessary for the conduct of the Issuer’s business, including without limitation (i) licenses and covenants granted to third parties by the Issuer, (ii) licenses and covenants granted by third parties to the Issuer and (iii) technical assistance or technology transfer agreements. Copies of all of the above agreements and (a) royalty-bearing agreements and (b) agreements in which intellectual property and/or technology is being licensed or assigned to or by the Issuer.
  B. Complete list and copies of all agreements, options or other commitments giving anyone rights to acquire any right, title or interest in any of the Issuer’s intellectual property or technology.
  C. Complete list and copies of all assignments relating to intellectual property to which the Issuer is party, whether assignment to or from the Issuer.
  D. Copies of all agreements under which the Issuer acquired, divested or licensed in any intellectual property.
  E. Complete list of any other material agreements or documents relating to intellectual property rights of the Issuer.
  F. Patents:
       1. Complete list and copies of all the Issuer’s issued patents and pending patent applications which are necessary for the conduct of the Issuer’s business (whether filed by the Issuer or obtained from a third party), prosecution histories, and the following information for each:
            a. patent or application numbers by country;
            b. status of pending applications and provide copy of the Issuer’s file history;
            c. name, and employment status with the Issuer, of each inventor;
            d. whether the patent or patent application has been abandoned; and
            e. whether the Issuer has granted any license(s) to the patent or patent application (and, if so, provide copy of each license).
       2. Identify all opposition, reexamination, interference, reissue, confirmation of scope, nullity, inter parts and post grant proceedings. Provide information and documents.
       3. Copies of any communications (provide details if not written), notices, correspondence, or complaints, including without limitation filings with any court or administrative or government agency, received by the Issuer which assert or threaten that the Issuer infringes any third party’s patent rights.
  G. Trademarks:
       1. Complete list of all of the Issuer’s trademarks, trade names and service marks that are necessary for the conduct of the Issuer’s business which are registered, unregistered or applied for, and the following information for each:
            a. registration or application numbers by country;
            b. class(es) in which the mark is or will be registered and whether the trademark is on the primary or secondary register;
            c. status of pending applications;
            d. date of issue for any registrations;
            e. whether the trademark has been abandoned; and
            f. whether the Issuer has granted any license(s) to the trademark (and, if so, provide copy of each license).
       2. Copies of any communications (provide details if not written), notices, correspondence, or complaints, including without limitation any filings with any court or administrative or government agency, received by the Issuer which assert or threaten that the Issuer infringes any third party’s trademark rights.
  H. Domain Names:
       1. List of all domain names used by Issuer during the conduct of the Issuer’s business, including the registration status of each, with all contact and DNS information for each. Identify any domain names which have been reserved or registered but are not in use.
       2. Evidence of ownership or license agreements for all domain names owned or used by the Issuer in the conduct of the Issuer’s business.
  I. Copyrights:
       1. Complete list of all of the Issuer’s registered copyrights and any other significant copyrighted works (even if not registered) that are necessary for the conduct of the Issuer’s business including information related to any proprietary software code developed by the Issuer and utilized in connection with the operation of the Issuer’s business, and the following information for each:
            a. registration number, if registered;
            b. date of issue, if registered;
            c. author;
            d. whether the Issuer has granted any license(s) to the copyright (and, if so, provide copy of each license).
       2. Copies of any communications (provide details if not written), notices, correspondence, or complaints, including without limitation filings with any court or administrative or government agency, received by the Issuer which assert or threaten that the Issuer infringes any third party’s copyright rights.
  J. Trade Secrets:
       1. Copies of any communications (provide details if not written), notices. correspondence, or complaints, including without limitation any filings with any court or administrative or government agency, received by the Issuer which assert or threaten that the Issuer has misappropriated and/or infringes any third party’s trade secrets.
  K. IP Miscellaneous:
       1. Description of the development of the Issuer IP including the first conception date(s) of the idea behind the Issuer IP and the current status of the development of the Issuer IP If Issuer has or has had multiple product lines/business units, please answer the remaining question separately for each product line/business unit.
       2. Describe the individuals and entities who contributed and contribute to the development of the Issuer IP: (i) employees, (ii) non-employee directors, (iii) board of advisor members, (iv) individual consultants, (v) corporate consultants, and (vi) Joint development partners. Did all employee contributors execute the Issuer’s standard form Invention Assignment Agreement? Did each contributor sign an agreement assuring confidentiality and non-disclosure of Issuer IP and assigning all of the contributor’s intellectual property rights in the development work performed by the contributor to Issuer?
       3. Were any employee contributors employed by a competitor of the Issuer prior to or following their employment with the Issuer?
       4. Description of any outstanding suits or claims for infringement of any patents, trademarks, copyrights, domain names or trade secrets owned or used by the Issuer that are necessary for the conduct of the Issuer’s business (whether by or against the Issuer).
       5. Copies of any indemnities or standard form of indemnity provided by the Issuer to third parties regarding intellectual property rights of the Issuer.
       6. Detail of research and development funding by third parties or affiliates. Other than the contributors identified above, did any other individuals or entities (including government entities) assist Issuer in the development or the funding of the Issuer IP? Please provide details.
       7. Lists of all proprietary and third-party patents, processes and other third-party intellectual property employed in the Issuer’s products and services.
      8. At any time during their contribution to the development of the Issuer IP, were any of the individual contributors students, professors or laboratory assistants in a university, college or any other educational or research entity? Please provide details.
  A. Summary documentation relating to all insurance arrangements (including business interruption, earthquake, fidelity insurance, directors and officers insurance, property damage, third party liability, environmental hazard and key employee insurance).
  A. Any information with regard to claims or violations of, or compliance with environmental laws and regulations relating to the Issuer.
  B. All environmental audit or inspection reports relating to the Issuer or any of its properties.
  C. Identify any history of spillage or leakage of any hazardous substance.
  D. If applicable, identify the location of the underground tanks and lines located on property owned or leased, including those no longer used, and set forth any history of spillage or leakage.
  E. All notices and demands by environmental authorities.
  A. Any other documents or information which, in the judgment of officers of the Issuer, are significant with respect to the Issuer or its financial condition of the Issuer or which should be considered and reviewed in making disclosure regarding the Issuer and its financial condition in connection with the transaction/offering.

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The articles on this website are not intended to create, and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.