Mergers – Due Diligence Items

Make the Time for Due Diligence 3d Words Clock Business Obligati

 

I had a nice opportunity today to talk with the folks at La Piana Consulting, a national firm dedicated to strengthening nonprofits and foundations, about nonprofit mergers from a legal perspective.  La Piana Consulting was founded by David La Piana, a leading expert on strategic restructuring – including mergers, joint ventures, consolidations, and joint programming – and my former professor!

Below is a sample of the due diligence items we discussed (with some additions).  Due diligence generally refers to the performance of an investigation of an organization prior to entering into an agreement with such organization.  Thomas A. McLaughlin, author of Nonprofit Mergers & Alliances: A Strategic Planning Guide, prefers the term “mutual learning.”

Governance:

  • Articles/Certificate of Incorporation and all amendments
  • Bylaws and all amendments
  • Conflict of Interest Policy
  • Investment Policy
  • Whistleblower Policy
  • Document Retention/Destruction Policy
  • Form 990 Review Policy
  • Other governance-related policies
  • Minute book
  • Organizational chart
  • Membership roster (if voting membership organization)
  • Good standing certificate
  • Schedule of states where organization is doing business or raising funds, or owns property
  • Foreign qualifications
  • Charitable solicitation registrations
  • Annual reports

Tax:

  • Forms 990, 990-T
  • State tax returns
  • Local tax returns
  • Employment tax filings
  • Communications with IRS, State tax authorities
  • Tax liens

Real Property:

  • Schedule of all real property owned or leased
  • Title policies, deeds, mortgages, security agreements, guaranties
  • Leases
  • Surveys, zoning approvals, variances, use permits
  • Environmental reviews
  • Schedule of hazardous wastes used, disposal methods employed
  • Permits, licenses
  • Communications with EPA and other regulatory agencies
  • Schedules of related litigation, investigations
  • Schedule of contingent environmental liabilities

Physical Property:

  • Schedule of fixed assets and locations
  • UCC filings
  • Equipment leases

Intellectual Property:

  • Schedule of significant IP, including trade secrets (e.g., donor lists, fundraising plans)
  • Registrations and applications
  • “Work for hire” and consulting agreements, nondisclosure agreements

Financials:

  • Financials, audited (if available) – 3 years
  • Budgets, projections, strategic plans
  • Analyses of debt and contingent liabilities
  • Analyses of A/R and A/P
  • Analyses of fixed and variable expenses
  • Depreciation/amortization methods
  • Internal controls

Contracts:

  • Subsidiary, partnership, joint venture, affiliation agreements
  • Agreements with directors and officers
  • Loan agreements, lines of credit, promissory notes
  • Security agreements, mortgages, indentures, collateral pledges
  • Grant agreements, enforceable pledges
  • Restricted gift agreements
  • Sales and service agreements
  • Program-related agreements
  • Nondisclosure and noncompete agreements (applicable to the organization)
  • Letters of intent, memoranda of understanding

Human Resources:

  • Employee information – position, titles, compensation, benefits, years of service, contracts, background checks
  • Nondisclosure and noncompete agreements (applicable to the employees, contractors)
  • Key employee information – resumes
  • Workers’ compensation, unemployment, and other HR-related claims
  • Employment policies and handbooks
  • Retirement plans (qualified and nonqualified)
  • Collective bargaining agreements (if applicable)
  • Description of significant employee problems, including alleged wrongful termination, harassment, discrimination
  • Insurance policies (H/R-related)
  • Employee-independent contractor categorization

Risk Management:

  • Litigation – actual, pending, threatened
  • Settlement agreements
  • Injunctions, court orders, consent decrees
  • Unsatisfied judgments
  • Insurance policies
  • Schedule of claims
  • Risk management policies, practices, known violations

Other:

  • Licenses, permits, accreditations
  • Program-, service-, and product-related due diligence
  • Marketing-related information

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