If you have not been involved in business at management level in the past, you may not know how to ensure that your business can withstand the scrutiny of potential investors and buyers in a legal due diligence process. You might find it useful to ask yourself these questions:-
1. Can I show I own my company?
Most will know that the register of members of a company is prima facie evidence of the legal ownership of a company. You should ensure that your company’s register is up-to-date and that your company has maintained any original share transfers and minutes concerning shares issues so that the accuracy of the register can be readily demonstrated.
2. Can I demonstrate that my company owns its trade secrets and intellectual property?
A lot of businesses have trade secrets or own intellectual property in some form or another, perhaps sometimes without fully realising it. It is advisable to obtain confidentiality and intellectual property undertakings from all key personnel. You may also have to consider incorporating restrictive covenants into your contracts depending on the seniority of the person involved. It is vital to ensure your company retains full records of written contracts with contributors to its confidential information and IP together with any amendments/extensions to such contracts.
3. Do I understand what it means to be a director?
A shareholder generally speaking has limited liability but as a director may have personal liability in certain circumstances. We would in the first instance suggest that you refer to the Office of the Director of Corporate Enforcement’s website as a lot of information is readily available in a concise and clear form in respect of director duties and risk in respect of personal liability. If you have any concern in respect of any particular issue, legal advice should be obtained.
4. Should the terms and conditions in writing with my employees cover matters other than strictly required by law?
The answer is invariably yes. For example, clear provisions in respect of probationary periods should be inserted. Consideration should also be given to having a disciplinary and grievance policy (even if it is only possible to prepare a policy in a very concise form given the size of your business) as well as some of the other more common policies and procedures found in the work place.
The appropriateness of certain terms will vary depending on the seniority of the staff involved.
5. Do I know what my company’s liability position under contracts or terms and conditions with suppliers/customers?
At the very least ensure you are maintaining full records of all documents signed by your company in connection with its business. It is important to understand your company’s exposure under each contract. You should consider the insertion of a cap on your company’s liability or appropriate carve outs in respect of certain types of liability, for example consequential loss or damage to a supplier’s business.
6. Do I know what my company’s liability position is under any applicable grant agreements? Do I have up-to-date records to demonstrate the position?
It is important to be able to readily demonstrate with accuracy a company’s contingent grant liability position. Investors and buyers often require this information.
7. Is my shareholders agreement and/ or my company’s Articles of Association appropriate?
The Articles of Association of a company form a contract between the company and its members. Whilst many companies adopt the model articles contained in the Companies Acts, these Articles may not be appropriate for your company and may not deal with issues such as rights of first refusal in respect of share transfers etc. It may also be that a shareholders agreement is advisable even before a third party invests in your company depending on the circumstances.
If you are a start up to early stage company take a little time to consider these questions and how you might fair if placed under the microscope of a potential investor or buyer at a later stage. Remember that you are now forming the legal history of your business and that generally speaking what is done cannot be undone!
- How to withstand scrutiny in a legal due diligence process
- Look at some key areas such as ownership of trade secrets and intellectual property, liability position under contracts and contingent grant liability
- Take a little time to consider how your company might deal with a legal due diligence process.