TITLE IX - MERGER AND CONSOLI DATION
Statement of changes
Section 76. Plan of merger or consolidation. - Two or more
corporations may merge into a single corporation which shall be
one of the constituent corporations or may consolidate into a new
single corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party
to the merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following:
1. The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent
corporations;
2. The terms of the merger or consolidation and the mode
of carrying the same into effect;
3. A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of
merger; and, with respect to the consolidated corporation
in case of consolidation, all the statements required to be
set forth in the articles of incorporation for corporations
organized under this Code; and
4. Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
desirable. (n)
What must be in the plan of merger or consolidation?
(NaTSOpro)
1. Names of the parties
2. Terms of the merger or consolidation
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3.
4. Other provisions
Section 77. Stockholder's or member's approval. - Upon approval
by majority vote of each of the board of directors or trustees of
the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate
corporate meetings duly called for the purpose. Notice of such
meetings shall be given to all stockholders or members of the
respective corporations, at least two (2) weeks prior to the date of
the meeting, either personally or by registered mail. Said notice
shall state the purpose of the meeting and shall include a copy or a
summary of the plan of merger or consolidation. The affirmative
vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the members in the
case of non-stock shall be necessary for the approval of such plan.
Any dissenting stockholder in stock corporations may exercise his
appraisal right in accordance with the Code: Provided, That if after
the approval by the stockholders of such plan, the board of
directors decides to abandon the plan, the appraisal right shall be
extinguished.
Any amendment to the plan of merger or consolidation may
be made, provided such amendment is approved by majority vote
of the respective boards of directors or trustees of all the
constituent corporations and ratified by the affirmative vote of
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members
of each of the constituent corporations. Such plan, together with
any amendment, shall be considered as the agreement of merger
or consolidation. (n)
Who must approve the plan of merger or consolidation?
1. Majority of the Board of each of the constituent corporations;
and
2. Thereafter, at least 2/3 of the outstanding capital stock or
members of each corporation.
After the stockholders have approved, if the Board
decides to abandon the plan, what happens?
The appraisal right will be extinguished.
Can the plan be amended?
Yes, upon approval of a majority of the respective Boards of all
the constituent corporations and ratification of at least 2/3 of the
outstanding capital stock or members of each corporation.
What is an agreement of merger or consolidation?
It comprises the approved plan together with the approved
amendments.
Section 78. Articles of merger or consolidation. - After the
approval by the stockholders or members as required by the
preceding section, articles of merger or articles of consolidation
shall be executed by each of the constituent corporations, to
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be signed by the president or vice-president and certified by the
secretary or assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares
outstanding, or in the case of
non-stock corporations, the number of members;
and
3. As to each corporation, the number of shares or members
voting for and against such
plan, respectively. (n)
Who must execute the articles of merger or articles of
consolidation?
Each of the constituent corporations.
Who are the signatories in the articles of merger or
articles of consolidation?
The President or Vice-president, and certified by the secretary or
assistant secretary of each corporation.
What must the articles contain?
(PlaNOS/NOM-Vote)
1. Plan of merger or consolidation
2. Number Of Shares or Number Of Members
3. How they Voted
Section 79. Effectivity of merger or consolidation. - The articles
of merger or of consolidation, signed and certified as herein above
required, shall be submitted to the Securities and Exchange
Commission in quadruplicate for its approval: Provided, That in the
case of merger or consolidation of banks or banking institutions,
building and loan associations, trust companies, insurance
companies, public utilities, educational institutions and other
special corporations governed by special laws, the favorable
recommendation of the appropriate government agency shall first
be obtained. If the Commission is satisfied that the merger or
consolidation of the corporations concerned is not inconsistent
with the provisions of this Code and existing laws, it shall
issue a certificate of merger or of consolidation, at which time the
merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange
Commission has reason to believe that the proposed merger or
consolidation is contrary to or inconsistent with the provisions of
this Code or existing laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard. Written
notice of the date, time and place of hearing shall be given to each
constituent corporation at least two (2) weeks before said hearing.
The Commission shall thereafter proceed as provided in this Code.
(n)
How many copies of the articles must be submitted to
the SEC for approval?
Four (4).
Are there other requirements besides the plan?
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In the case of special corporations enumerated in the law, there is
need for the recommendation of the appropriate government
agency.
When does the merger or consolidation take effect?
Upon issuance of the Certificate of Merger or Certificate of
Consolidation by the SEC. (See also §19, Corp. Code)
What happens if the SEC finds the articles contrary to
law?
A hearing will be held to give an opportunity to the corporations to
explain themselves.
Section 80. Effects of merger or consolidation. - The merger or
consolidation shall have the following effects:
a) The constituent corporations shall become a single
corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case
of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
b) The separate existence of the constituent corporations shall
cease, except that of the surviving or the consolidated
corporation;
3. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and powers and
shall be subject to all the duties and liabilities of a
corporation organized under this Code;
 4. The surviving or the consolidated corporation shall clear rules under Section 80, there is no legal "break" in such
thereupon and thereafter possess all the rights, privileges, juridical personalities and business enterprises as they end up
immunities and franchises of each of the constituent combined in the surviving or consolidated corporation (CLV at
corporations; and all property, real or personal, and all 701-702).
receivables due on whatever account, including
subscriptions to shares and other choses in action, and all What is the effect of non-compliance with the
and every other interest of, or belonging to, or due to each procedures prescribed under Title IX of the Corporation
constituent corporation, shall be deemed transferred to and Code?
vested in such surviving or consolidated corporation There can be no merger or consolidation, and corporate
without further act or deed; and separateness between the constituent corporations remains, and
5. The surviving or consolidated corporation shall be the liabilities of one entity cannot be enforced against another
responsible and liable for all the liabilities and obligations of entity. (PNB v. Andrada)
each of the constituent corporations in the same manner as
if such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any pending
claim, action or proceeding brought by or against any of
such constituent corporations may be prosecuted by or
against the surviving or consolidated corporation. The rights
of creditors or liens upon the property of any of such
constituent corporations shall not be impaired by such
merger or consolidation. (n)

What is the advantage of the process of merger or

consolidation under the Corporation Code?
The processes of merger or consolidation, unlike the regular
transfer and acquisition processes, are able to achieve a
"continuous" or "seamless" flow of the juridical personalities and
business enterprises of the constituent corporations, and under the
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Type of Acquisition Liability of Exceptions Supplement
Acquirer in
Relation to
Acquisition
(General
Rule)

Assets-Only No Liability 1. express or implied agreement to assume debts
of seller
2. acquisition in fraud of creditors
3. sale of all or substantially all of the assets of
the seller corporation = Business-Enterprise
Transfer (CLV on § 40, Corp. Code)
When another corporation takes over the assets of
another corporation, which is dissolved, the
succeeding corporation is liable for the claims
against the dissolved corporation to the extent of
the fair value of the assets assumed. (Gonzales v.
SRA)

Business-Enterprise Liable As to labor claims, the transferee has no Free and harmless clause, if any, is binding only to
Transfer obligation to absorb the employment of the the transferor and the transferee and is non-binding
existing employees in the acquired business on the creditors of the enterprise. (CLV at 692)
enterprise because the employee's contractual
relationship is personal and only with the original
employer. (Central Azucarera v. CA, see also
clear break rule under Avon Dale v. NLRC)
In the case of a transfer of all or substantially all
of the assets of a corporation, (i.e. business
enterprise transfers), the liabilities of the
previous owners to its employees are not
enforceable against the transferee, unless
(a) the latter unequivocally assumes them;
or (b) the transfer was made in bad faith.
(Barayoga v. APT)

Equity Transfer Not Liable express or implied agreement to assume debts of An Equity Transfer is characterized by the acquirer's
the transferor motive to take control of the business enterprise by
means of electing members of the Board. (CLV at
693)

Mergers or Liable NoneCHUA. CASTILLO. MANZANA. PALAD. RABANG. SALGADO.

A de facto merger is one where the acquiring
Consolidations under corporation buys the business enterprise of the
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the Corporation Code target corporation with its (the acquiring
corporation's) own shares of stock. (Reyes v. Blouse)
Here, the succession provisions of § 80 do not apply
but the jurisprudence on business enterprise
transfers applies. (CLV at 704)
 CHAPTER 1
CONDUCTI NG DUE DILIGENCE: AN OVERVIEW
How is the term due diligence used in landmark legal
cases?
• The standard of due diligence in law tends to be ordinary in
the average case.
• Due diligence in law, means doing everything reasonable
not everything possible
• Due diligence does not require unusual efforts or
expenditures, but only such constancy in the pursuit of the
undertaking as is usual with in like enterprises. Such
assiduity as shows a bona fide intention to do or complete it
within a reasonable time.
What exactly is M&A due diligence?
• M&A due diligence refers to the ff.:
o Refers primarily to an acquirer’s review of an
acquisition candidate to make sure that its purchase
would pose no unnecessary risks to the acquirer’s
shareholders.
o Also refers to the mutual review by the two parties to
a merger
o Candidate Company’s review of the acquirer to
ensure relinquishing control will not violate any
duties to the company’s owners
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• Basic function of M&A due diligence: to assess the benefits
and liabilities of a proposed acquisition by inquiring into all
relevant aspects of the past present and predictable future
of the business to be purchased. Should focus on RISK.
• Acquirers generally do this by:
o creating a checklist of needed information
o then obtaining that information by
 Examining financial statements
 Assessing management and operations
 Reviewing legal liability
• In this process, acquirers may conduct interviews, visit sites.
• Should the acquirer discover every possible risk?
o No, an acquirer cannot, and should not be expected
to discover every possible risk. The sheer effort
required to do so would surely bankrupt the acquirer
and alienate the seller.
• Due diligence must be REASONABLE, NOT PERFECT.
T HE SCOPE OF DUE DILI GENCE
What general areas should due diligence review cover?
• At a minimum:
o Financial statements review
o Management and operation review
o Legal compliance review
o Document and transaction review
 • Generally, the most accessible information is reviewed first
and the least accessible is reviewed last. However it may or
may not be in this order, ex. If an acquisition candidate is
close to resolving a major law suit, legal compliance may
occur very early on.
How extensive should a due diligence be?
• Generally, for the buyer depends on:
o How much time the buyer has
o How much money it has to investigate the company it
wishes to buy
• Brokers, usually require the acquirer to undertake due
diligence.
• Extent of due diligence could also vary depending on the
company.
o Acquisition of a large, global, or highly regulated
company. More extensive than
o Small, domestic, or unregulated co.
• Extent of due diligence could also depend on the type of
transaction
o In sale of stock, resulting entity bears all the liabilities
of both parties. Requires due diligence as extensive
as possible
o In sale of assets, the successor is usually not liable
for debts and legal liabilities of the predecessor
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therefore need not include a study of debts and legal
liability exposure.
• Extent of due diligence could also depend on source of
financing
o In acquisitions that are financed through equity all
the parties are interested in uncovering problems
early, because post deal problems could be
expensive to resolve.
• It is important that the company doing the due diligence ask
what could go wrong, and to disclose “MATERIAL” risk.
• What is material?
o Materiality is not merely a matter of percentages or
amounts. Rather it is a highly relative term. It refers to
a level that would be considered significant by the
average investor.
o Material weakness in internal controls is “a
deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a
reasonable possibility that material misstatement of
the registrant’s annual or interim financial
statements will not be prevented or detected on a
timely basis.”
o Deficiency in internal controls is a deficiency, or a
combination of deficiencies, in internal control over
financial reporting that is less severe that a material
 weakness, yet important enough to merit attention by
those responsible for the oversight of the registrant’s
financial reporting.
How is due diligence different for public and private
companies?
• Public Company
o Have greater disclosure obligations.
o Downside for acquirers is future work disclosure
obligations going forward
o Upside in can draw on past work, because any
company that has issued securities has already been
subject to due diligence by its underwriters and their
counsel in preparing the company’s prospectus,
Acquirers can use the company’s prospectus as a
guide.
o Acquirers can rely on the due diligence conducted
by the underwriter(if done recently ex. Last several
months), with “bringdown” updates as necessary.
• Private Company
o Due diligence much more intensive
o Seller ask to provide representations (statements)
and warranties (promises) , although these are also
present in public company deals, it is more extensive
in private company deals.
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o Investigation depends in part on what information
the seller is willing to give in the form of
representations and warranties.
o Seller that resist to make representation and
warranties, are high risk.
How can the buyer conduct proper due diligence without
harming its relationship with the seller?
• Communication is key
• Process begins with:
o Letter of intent.
o Reinforced in the acquisition agreement.
 These documents should lay down the ground
rules for due diligence, fore example the
should
• State the time available for due
diligence
• Promise the buyer access to the selling
company’s personnel, sites and files.
• “Acquisition Agreement”, there is an example in page 13
which contains the following
o “Investigation Covenant”, ensures that the seller will
cooperate with buyer by granting access and
logistical support for the buyers due diligence
review.
 o “Burn or Return” provision, helps allay the seller’s
fears about confidentiality.
o “Off the Hook Clause”, removes the burden of
perfect investigation from the acquirer. Without such
statement the seller can avoid liability following a
breach of contract.
How can the buyer ensure seller cooperation in due
diligence investigation of broad scope?
• Convey the message that full exploration of facts and risks
benefits everyone.
• Make the process thorough yet reasonable
• Buyer can invite seller to conduct due diligence
o All sellers need to conduct some due diligence in
connection with the legal options given.
o Seller need to conduct due diligence in connection
with the buyer’s financial condition when the buyer
is paying with its own stock
o Is in the interest of the seller to investigate the buyer
if the seller’s ownership and/employment will
continue after sale.
Suppose the seller refuses to produce the requested
documentation but offers access to its files?
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• If the buyer is faced with a do-it-yourself due diligence, it
must organize a document review effort.
• The acquisition agreement will form the basis for a checklist,
which the acquirer may expand.
• The seller should be willing to direct the buyer to employees
with knowledge of each subject of inquiry detailed on the
checklist, or at least relevant files.
• Buyer should also ask the seller for sufficient personnel to
transmit electronic copies of all significant documents
produced by the review effort.
• File management expectation may also be specified in the
acquisition agreement.
• If seller refuses to cooperate, buyer may hire help on its own
expense.
• To avoid confusion over documents, some identification
system involving numbering should be devised, to keep
track of the document produced.
What forms can an acquirer use to keep the due
diligence review on track?
• The Due Diligence Checklist and the Acquisition
Agreement.
o Due Diligence Checklist
 Drafted first
 Undergo constant revision as the acquirer
discover important points
 Express most important elements on the
checklist
 Should parallel acquisition agreement and
vice versa
 Reminds buyers issue they should investigate
 Living document, changes as the investigation
continues
 Concentrate on areas that are of particular
relevance to the transaction ex:
• Frequency of returned goods for
consumer goods retail business than to
a management consulting business.
• Environmental violations more critical
in manufacturing than department
store chain
 In the acquisition of large companies, the
checklist may reflect a threshold for
materiality ex:
• Include only capital expenditure above
$50,000 or
• Limit of five years back for certain
documents.
• Materiality limits are practical when all-
inclusive checklist would impose high
costs and provide little benefit.
Nonetheless such limits should be
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used with caution. Another drawback
of materiality thresholds is that the
seller may try to apply the same
threshold to its representations and
warranties.
 Broad not overly ambitious
 Whenever possible, the checklist should
require the seller to produce only documents
that are already in existence. The seller
should attempt to obtain other data through
interviews.
o Acquisition Agreement
What other forms are useful in conducting due
diligence?
o Transaction time table
o Document request lists
• For Collecting and managing information
o “Closing Memorandum,” including:
 Abstract for review of minute books
 Index of documents
What agreements should the acquirer sign before
engaging in due diligence?
• Initial forms include:
o Confidentiality agreement
o Engagement letter for consultation
How can technology such as a virtual data room help in
the gathering and management of due diligence?
• Virtual data room (VDR) may supplement or replace a
traditional paper data room. Accessible from an internet
browser
• Allows multiple parties participation in due diligence
concurrently
How can an acquirer make sure that its VDR is secure?
• The best VDR solutions are certified
o Some VDRs meet the requirements of ISO 270001
o Other are certified by SAS 70 Level II
THE DURATION OF DUE DILI GENCE
• Initial Stages unfold during the search, valuation and
financing processes. In this phases the acquirer asks the
three questions:
o Is it in our stockholders’ long term interests for us to
own and operate this company?
o How much is the company worth?
o Can we afford it?
• A more thorough due diligence in addition asks:
o Do the firm’s financial statements reveal any signs of
insolvency or fraud?
o Do the firm’s operations show any signs of weak
internal controls?
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o Does the firm run the risk of any major post-merger
litigation?
How long should the due diligence process take?
• As long as it takes but not longer
o If the parties are eager to deal they may substitute
extensive warranties for the due diligence process.
o A speedy due diligence ensures minimal disruption
of on-going business activities and lower out-of-
pocket costs for both parties.
What is bringdown due diligence?
• Bringdown due diligence is the performance of due
diligence right up until the closing data.
• Deal makers speak of “bringing down” the due diligence
through additional meetings, reexamination of disclosure
items, updating warranties and representation.
• Protect a buyer against a claim that it should have
th
uncovered some 11 hour development that was not
included in the representation and warranties.
• There is usually a bringdown due diligence at the very end,
but this need not extend the deal indefinitely.
When does the due diligence process properly end?
• Should extend beyond closing
 • This bringdown list can be extensive and may require What are some working definitions of “conflict of
extension of closing or 2 closings interest” for the purpose of due diligence investigation?
• To avoid double closing, some wait until absolutely every • If a firm has a consulting engagement with the company it is
aspect of the transaction is completed studying, it may have a conflict of interest
• Most egregious conflict of interest are banned or
discouraged by existing laws and standards
THE KEY PARTI CIPANTS IN DUE DILIGENCE • Under the Sarbnes-Oxley Act of 2002, public company
Who conducts due diligence?
auditing firms may not also serve as consultants to the
• Acquirer typically draws from in-house sources of expertise
companies that they audit.
and from retained consultant and advisors. At minimum it • Some conflicts do not violate standards and law only
includes:
common sense ex:
o Accounting personnel o Some acquirers pay their advisors a contingency for
o Legal personnel
the completion of the transaction
• May also include
o Management consultants DUE DILIGENCE IN T HE LAW
o Financial advisors (I did not include this part because sir did not discuss this, but he
o Engineer still might ask something on this depending on his mood)
o Other professional talent VERIFI CATION AND RISK PREVENTION
To what extent is an acquirer expected to verify
representations made by the seller
Who directs the review? • It would be unreasonable to rely on management
• Typically, the AQUIRERS OUTSIDE COUNSEL, with the help representation when said representations could have been
of other agents of the acquirer. reasonably verified
• Party directing the review must be from any conflict of • However it is NOT unreasonable to rely on management
interest representations with regard to information that is solely in

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 the possession of the issuer and cannot be reasonably o Direct contact with the issuing firms
verified by third parties.  Accountants
• Some kinds of information can be verified independently,  Bankers
and others cannot be  Customers
• Independent verification of facts is needed whenever it is  Distributors
reasonable.  Lenders
 Licenses
Can you give an example of a reasonable independent  Suppliers
verification of facts? o Efforts to cross check made by insider of a firm
• In securities offerings, this independent verification usually o On site visits
means referencing information sources outside the o Examining documents that provide the factual basis
company as well as inside the company. for officers statements
• If a company is subject of a tender offer, the board of that o Reviewing press and analysts reports about the
company might wish to obtain a fairness opinion as to the company and its industry
appropriateness of the offering price. The opinion must be o One’s own economic models can be used to test
form a qualified independent source such as an investment those offered by the company
financing firm
• To verify fairness of opinion it is not sufficient to ask What kinds of “negative” or “questionable” information
might an acquirer look for?
questions, to obtain which, if true, would be thought
• Financial Red Flags
satisfactory, and to let it go at that without seeking to
• Operational Red Flags
ascertain from the records whether the answers in fact are • Liability Red Flags
true and complete • Transactional Red Flags
• Due diligence practices applicable to Underwriters and
M&A transactions, when an acquirer is looking to buy the
shares or assets of another company (these practices may In addition to identifying such risk, the acquirer can take steps to
limit them, ex. Consult with brokers of liability insurance, which
satisfy due diligence) :
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protects directors and officers of the acquiring company against
acquisition-related risks, and to enter into an agreement with
insurance provide.
In seeking acquisition candidates, favor companies with strong
programs for financial reporting, risk management and legal
compliance. If suspicion arises use private investigators.
Make various deal-related agreements include adequate
protections against post-acquisition losses stemming from pre-
acquisition conditions.
Acquirer needs to make sure that its own due diligence process
includes all the steps that are generally considered to show “due
care” under relevant law.
CONCLUDI NG COMMENTS
Due diligence provide the following benefits:
• Individuals who have had hands-on involvement in the due
diligence process will gain good insight into the financial,
operational, and legal areas the studied.
• In the event of a claim by the buyer or the seller against the
other, the resolution of the claim may go back to a due
diligence issue that is, whether or not one party disclosed
certain facts or made certain documents available.
Insofar as the acquisition agreement fails to identify the information
that the defendant was supposed to know or learn, the due
diligence process may be examined to determine where liability
lies.
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CHAPT ER 2
THE FINANCI AL STATEMENT S REVI EW
Introduction
The purpose of due diligence is to spot any anomalies that others
may have missed in the process of valuing the company. Spotting
such anomalies begins with a review of the financial statements.
Financial statement review entails, at a minimum, a thorough
reading of the candidate's company's filings with the relevant
government agencies. In particular, the acquirer should pay special
attention to the classic financial statements contained in theses
filings and the key ratios derived from them. To assess the quality
of a company's numbers, an acquirer needs to assess the strength
of the company's internal controls, adopting the perspective of a
state-of-the-art audit committee.
Financial Statements
What are the "classic" financial statements that the acquirer should
study?
The balance sheet and earnings or income statement are the most
important followed by the cash flow statement.
What does the balance sheet show an acquirer?
For a particular date (typically at the end of the year), the balance
sheet shows:
-what a company owns (ASSETS) on the left
-how the company finance its assets (EQUITIES, which is composed
of liabilities and owner's equity) on the right
Key assets: cash, short-term&long-term investments, property plant
& equipment, trade receivables, inventories, prepaid expenses,
deferred charges and other assets
Key equities: current and long term liabilities and owner's equity
(share capital and retained earnings)
In studying a balance sheet, where should the acquirer focus?
ASSETS: Level of Assets
FIRST: tangible assets used in the business that are independently
marketable-- machinery, real property, inventories.
SECOND: tangible assets not used in business-- unused real
property, marketable securities, excess raw material.
THIRD: intangibles--- patent or trademarks.
Assess the value of these assets (appraise) and look for hidden
values.
LIABILITIES: focus on the ratios
What does the income statement show an acquirer?
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The income statement shows how a company made and spent
money during a particular period.
SALES minus EXPENSE equals EARNINGS or NET EARNINGS
-Sales: revenue from goods and services sold
-Cost of goods sold: direct expense to produce the goods or
services
-Additional expenses: operations expenses (selling, general,
administrative expenses) and interest expenses (interest paid on
loans outstanding)
-Operating earnings: sales minus operating expenses. Also called
EARNINGS BEFORE INTEREST AND TAXES.
What does the cash flow statement show an acquirer?
This shows the amounts of cash moving in (sources) and out (uses)
during the previous fiscal year. Acquirers will prefer a company that
has an overall positive (more coming in than out) cash flow with
most of the cash coming from operations rather than from investing
or financing activities.
Major Contributors:
a. Cash flow from Operations – will be similar to net earnings
(losses) with adjustments for items that were not received or not
paid in cash
b. Cash flow from investing – if the company purchases new assets
or securities, it will use cash, thus lowering the cash level. If it sells
assets or securities, it will receive cash
c. Cash flow from financing – borrowing/repaying debt, selling
shares, paying dividends, purchasing treasury stock
What about statements that the seller makes about the FUTURE of
the candidate company (e.g. registrations statements, press
releases, management discussion of the annual report) Can the
acquirer rely on those?
This wise acquirer will take such statements with a grain of salt and
the wise seller will make a disclaimer against its "forward looking
statements".
Key Ratios
What are some valuable ratios to calculate when studying a
company's financial statements?
Most popular ratios come from the balance sheet, the income
statements, or a combination of the two.
A. Balance Sheet Ratios – show what a company has
Kinds of balance sheet ratios:
a. Current Ratio – shows liquidity
b. Debt Ratio – shows quality of leverage
c. Debt/Equity – shows degree of leverage
d. Net Working Capital – shows available funds
e. Quick Ratio – measures liability
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B. Income Statement Ratios – show how a company is doing
Kinds of income statement ratios: a. Contribution Margin – shows
rate of contribution to profits
b. Contribution Margin per unit – shows how much each unit is
contributing
c. Gross Margin – shows efficiency
d. Interest Coverage – shows strength of earnings
e. Operating Margin – shows efficiency of operations
f. Profit Margin – shows degree of profitability
C. Hybrid Ratios – combining items from both the balance sheet
and the income statement
Kinds of hybrid ratios:
a. Asset Turnover – shows productivity of assets
b. Debt to sales- shows how well the company is employing its
borrowed capital
c. Dividend payout ratio – shows the generosity of the company's
dividend policy
d. Return on assets – shows productivity of assets
e. Return on equity – shows shareholder wealth derived from
ongoing operation of the company
D. Market-driven Ratios – includes the current price of the
company's shares (used for public companies)
a. Earnings per share (EPS) – the earnings of the company for the
previous year divided by the number of shares outstanding
b. Market cap to sales – shows the worth of the company in the C. Financial Statement Review – intentional misstatement or
marketplace omission of material information in the organization's financial
c. Price/earning ratio reports ie inflating assets and hiding liabilities in the balance sheet.

E. Other ratios: Note: remember that the kinds of red flags depends on the case.
a. Sales per employee – shows market productivity of employees
b. Earnings per employee – shows operational efficiency of Assessing Internal Controls
employees
Why is it important that an acquisition candidate have strong
Special Industry Considerations internal controls?

How much does financial analysis vary by industry? If a company's internal controls are strong, the risk of post
It varies greatly by industry and even within the same broad acquisition surprises is relatively low. Thus, determining the
industry groupings. (Banks, insurance companies, high technology strength of internal controls should one of the chief aims of due
companies were discussed in the reading) diligence.

Red flags What exactly is an internal control system?

What kind of red flags should acquirers be able to spot? A process, effected by an entity's board of directors, management,
A. Asset Misappropriation – perpetrator steals/misuses an and other personnel, designed to promote reasonable assurance
organization's resources (fraud) ie false invoicing, payroll fraud, and regarding the achievement of objectives in the following
skimming. categories:
B. Corruption – perpetrators use their influence in business
transactions in order to obtain a benefit for themselves or someone a. Effectiveness and efficiency of operations – addresses an entity's
else, rather than being loyal to their employer ie employees might basic business objectives
receive or offer bribes, extort funds from third parties or engage in
conflict of interest. b. Reliability of financial reporting- relates to published financial
statements
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c. Compliance with applicable laws and regulations – compliance
Internal controls have 5 components:
a. Control environment. – managements philosophy and operating
style, and the attention and direction of the board
b. Risk assessment.- Identification, analysis, and monitoring of key
risks
c. Control activities.- Policies and procedures
d. Information and communication.- reports to shareholders and
others
e. Monitoring.- ongoing evaluation and the quality of the
monitoring
KEY FACTOR: AUDIT COMMITTEE. An acquirer should ASSESS THE
QUALITY OF THE AUDIT COMMITTEE. If the audit committee is
weak, the acquirer needs to assume this important role on a
temporary basis.
What is the role of an audit committee, and how does this relate to
the review of a candidate company's financial statements and
internal control?
-‐ Company's financial statements are prepared in accordance with
the appropriate regulatory guidelines
-‐ Risk management as well as reporting
-‐ Define and use timely, focused information that is responsive to
important performance measures and to the key risks they oversee
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-‐ Function as an organ of the board, focus the attention of the
board, top management, and the internal and external auditors on
the importance of strong financial reporting and risk management
Thus, if the audit committee of an acquisition candidate meets
such a standard, it may already be in possession of precisely the
information needed by an acquirer. An acquirer can and should ask
for this information from the directors of the candidate company.
Concluding Comments
When reviewing financial statements, acquirers need to look for the
positives of hidden values as well as for the negatives such as
potential fraud and insolvency. The financial statements contain
many of the clues needed
CHAPT ER 3
T HE OPERATIONS AND MANAGEMENT REVI EW
Why is it important to analyze a target company’s operations and
management?
The financial reports tell a story, but the operations and
management are the “real thing.” This just means there is more to
a company’s state than what is reflected on the financial
statements. Hence, you have to dig deeper and study the
company’s operations and management to see its true colors.
Definitions
OPERATIONS- an entity’s basic business objectives, including
performance, profitability goals and safeguarding resources.
MANAGEMENT – The people setting and reaching company goals.
OPERATIONS AND MANAGEMENT – encompasses the essential
what and who of any company: its activities and the people who
direct them.
When you study these elements, you are considered to be
conducting BUSINESS DUE DILIGENCE.
EVALUATING OPERATIONS AND MANAGEMENT: AN OVERVIEW
When acquiring a company, the only aspect of operations and
management that must concern the investigator is MATERIAL RISK.
However, there are other non-traditional forms of operations and
management due diligence, including:
- Marketing due diligence – The study of the marketing efforts
of the combining firms to ensure that the combination will
produce maximum synergies. Includes branding, advertising,
positioning, pricing and product research, among others.
- IT due diligence – research on technological currency,
hardware and software status, level of automation, financial
implications of a company’s technology plans, opportunities
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for leveraging the technologies of the company’s operations
or tasks needed to merge the companies “technologies.”
- Cultural due diligence – Research into what the people in
an organization routinely believe, think and do, including
attitudes and mental processes, behavior, functions, norms,
structures, symbols and history.
-
Pursuing all forms of non-traditional due diligence, while ideal,
would be costly, time consuming and ultimately unreasonable.
Hence, to determine MATERIAL RISK, one must look at the
INTERNAL CONTROL SYSTEM of the company, which, as we have
learned from the previous chapter, is a process effected by the
board, management and other personnel, designed to promote
reasonable assurance of goal achievement in terms of efficient
operations, reliable financial reporting and legal and regulatory
compliance.
How can an acquitting the riskiness of the operations and
management of a company?
By reading analyst reports, articles in the business press, analyses
from credit reporting agencies, newspapers, magazines, annual
reports and management’ s discussion and analysis
(MD&A), which is the most important.
How can an acquirer use the MD&A as a checklist?
The MD&A discusses the following information for a company, its
units or divisions:
- Demands, commitments, events and uncertainties that may
decrease the company’s liquidity
- Material commitments for capital expenditures
- Trends, favorable or unfavorable in capital resources
- Significant economic changes that have affected the
amount of reported income from continuing operations
- Known trends or uncertainties that have had or could have a
major impact on net sales or will cause a major change in
profits
- Sources of higher profits, if any
- Impact of inflation
- Impact of seasonal factors
- Overall material changes in the result of operations
The acquirer should conduct its own study to confirm the
information contained in the candidate company’s MD&A,
particularly when the company is non-public.
MD&A Areas include:
- Liquidity –trends, demands, commitments, events or
uncertainties that are reasonably likely to result in
registrant’s liquidity.
- Capital resources – Material commitments for capital
expenditures as of the end of the latest fiscal period,
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material trends favorable or unfavorable to the registrant’s
capital resources.
- Results of operations – Unusual or infrequent events
that materially affected the amount of reported income from
continuing operations
Another source of information relevant in acquisitions is the
offering memorandum or prospectus of the target company or its
competitors. These documents can give the acquirer a good idea of
the risks inherent in conduct the target company’s business.
While analyzing the company’s operations and management by
studying the sources of information abovementioned may entail a
lot of work, it is important to remember that there is no need to feel
overwhelmed. You only have to focus on material risk, and not
attempt to discover every possible risk. In determining what form of
due diligence to undertake, it is important to consider the
attendant circumstances such as the time available, the cost the
acquirer is willing to shoulder and the type of business involved.
DUE DILIGENCE IN PRIVATE COMPANIES
What factors should be considered in conducting due diligence
involving private companies?
When dealing with a privately owned company you must first
confirm that the it was legally formed and continues legally to exist.
-Check articles of incorporation, where company was formed, the
by-laws and amendments.

Also, check all public records available in relation to the company,
both past and present.
-Check registered trade names, service names, protected
intellectual property and any possible infringement the company
might have committed.
It is also necessary to review the board books, including their
minutes to determine if the records are up to date and that the by-
laws are being followed. Moreover, it is useful to know the authority
of the company to conduct business in other jurisdictions.
Once the acquirer satisfies itself with respect to the corporation’s
formation, qualification and good standing, it should then confirm
that the company actually owns the assets that it claims to own.
- Having confirmed the ownership of the assets, the team
should search for liens, encumbrances, and judgments that
may exist against the company or ay of its assets.
Aside from public records, due diligence investigations on
operations and management rely on access to files and on-site
interviews the allowance of which shall depend on the acquirer’s
relationship with the seller.
CONDUCTING INTERVIEWS
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- Interviewing directors and officers comes first. it is a good idea to
request and organization chart to know exactly where the
interviewee lies vis-à-vis the entire organization.
The choice of who to interview will depend on the risks uncovered.
The most important interviewee, if still alive, is the company
founder to get a good sense of the company’s “heart and soul”
Interviews must seek to corroborate and fill gaps in the documents
on the due diligence checklist, and must identify any other areas of
potential liability not otherwise identified in such documents.
Keep a record of the incidents of the interviews such as time,
place, name and title of interviewee, scope, significant disclosures
and status of the interview, whether confidential or otherwise.
Interviewing is important because:
1. It will give the acquirer a better understanding of post-
merger risks
2. It will give the acquirer a better defense any charge of
negligence if sued
Matters uncovered
If additional assets that were previously undisclosed are uncovered
– good sign.
If an overstatement of assets is uncovered – might be a sign of
fraud.
Off-site interviews
Suppliers, customers, private lenders, former key employees
including directors and officers may be interviewed.
When interviewing customers with standing agreements with the
company, the interview may take the form of a negotiation, where
the customer agrees to assign standing agreements to the acquirer.
Acquirers should take special care when discussing the seller’s
business with third parties as they may give rise to tensions
between the buyer and the seller. A letter of confidentiality and the
engagement letter may provide some assurance.
WHAT RECORDS SHOULD BE KEPT?
-Due diligence meetings and interviews
-Documents reviewed
-Visits to facilities
-Discussions and interviews with third-party
personnel
-Outlines, checklists used in interviewing issuers and third-party
personnel
-Director and officer questionnaires and certificates
-Reports by investigators and other independent experts
IDENTIFYING KEY ASSETS AND ASSESSING RISKS TO THEM
Two main steps in identifying risks in any company:
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1. Identifying key assets, tangible and intangible
2. Identifying threats to these assets
Naturally the more valuable the assets, the more importance
should be giving in identifying threats related to it.
Key assets include:
- Brand (Reputation, brand name, logo, license, trademark,
service mark)
- Cash
- Culture
- Global reach
- Market position (market share and industry leadership
- Operations (standards of performance and process integrity)
- People
- Intellectual property
- Scale (number and geographic variety of offices)
-
How can an acquirer asses the risks to key assets?
Identify two types of potential risks with emphasis on the first:
1. Regular or routine business threats such as threat of frost
for a citrus grower
Routine business threats are categorized into the following:
 • Financial threats (normal fluctuations in interest rates,
foreign exchange rates, working capital availability)
• Operational threats (non-catastrophic accidents, raw
material shortages, product design challenges, technology
shifts, labor shortages)
• Competitive threats (pricing, cost shifts, new product
introductions)
2. Irregular non routine business threats (not encountered in
the normal course of business such as fraud)
- Intentional illegal and/or hostile action on the part of a
company employee, agent of the company, etc.
- Catastrophic accidents involving company property
- Major, unexpected, catastrophic changes in business
environment
- Major lawsuits
- Gross mismanagement or negligence
DUE DILIGENCE IN CONFLICT MANAGEMENT, CULTURE, HUMAN
CAPITAL, MARKETING, AND OTHER SOFT AREAS
Traditional due diligence does not take into consideration the
many issues that can arise from both companies being combined,
such as interpersonal conflicts between acquiring and acquired
management. This can be addressed through cultural due diligence
and human capital due diligence.
Approaches to cultural due diligence include:
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- Integrating cultural criteria into the earliest merger
discussions
- Staffing and preparing the due diligence team with an eye
toward cultural criteria
- Adding cultural criteria to due diligence data collection
- Using formal tools to assess culture fit
Human capital due diligence is the study of the company’s
programs for human resources management to determine the
effectiveness of the programs. It studies the combination of the two
companies’ programs.
Areas of human capital to consider:
- recruitment, retention and retirement
- performance management and rewards
- organizational structure
- organizational enablers
- career development, training and succession planning
CHAPT ER 4
T HE LEGAL COMPLIANCE REVIEW
Legal compliance -- responsible due diligence process that
uncovers current and potential causes of financial, operational,
and legal problems.

Vast terrain of potential litigation that expands when an acquirer
buys another company --seller's vulnerabilities are usually
transferred to the buyer unless it is an asset sale
U.S. LEGAL SYSTEM
1. Common law -- aka "case law", a body of law created
through court decisions. (Covers right or wrong in a number
of areas, issues of fairness that transcend financial
considerations i.e. equitable action: to restrain threatened
inflictions of injury and illegal action when damages not not
adequate compensation, among others.) Under the Uniform
Commercial Code, relevant to due diligence is the section
on Sales (formation of contracts, terms of sale, good faith
transactions, etc)
2. Statutory law -- series of laws passed by legislatures, then
interpreted and enforced y the courts through judicial
process
3. Regulatory law -- composed of administrative regulations
(federal and state agencies) and executive orders, which are
rules set forth by the executive branch of the government
(not legislature nor courts, yet they have the force of law).
-- admin law poses a problem for acquirers and business because
agencies have the power to issue regulations that have the force of
law, initiate proceedings thereunder, power to investigate,
prosecute and even decide matters.
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SOURCES OF LITIGATION
1. Acquirer sued for its own negligence in making the
acquisition.
1. Acquirer may be sued for alleged violations of law by the
company it is buying-- even if occurred prior to sale.
To avoid:
(1), due diligence. If shown to have exercised due care, not
subject to lawsuit.
(2) or minimize liability exposures it inherits from seller, for
example-- build protections into the acquisition agreement
(i.e. stipulate that risks from undisclosed liabilities will fall
on seller)
Litigation Analysis
--examination of existing claims against the company to determine
their validity and potential financial impact.
--ideally conducted by attorneys who specialize in commercial or
corporate litigation and who are familiar with seller's history
1. Planning and finding--acquirers demand a strong
compliance system as requirement for acquisition
2. Valuation--allocate known liabilities in accounting for a
transaction, and adjust pricing accordingly.
 3. Financing--satisfy lenders' requirements w respect to
compliance
4. Structuring--extent of legal liabilities can influence decision
to structure a transaction as stock or asset purchase
5. Negotiation--verify accuracy of representations and
warranties
6. Closing--liability exposure analysis concluded, can make or
break transaction
--senior counsel for acquirer (usually external counsel) should take
lead; should shape due diligence study according to direction of
senior managers BUT have strong sense of discretion and
autonomy; remain in regular communication w people doing due
diligence review;
Steps in litigation review:
1. Determine parameters for review, what levels of exposure
considered material
1. Identify litigation or administrative actions that warrant
particular scrutiny
1. Obtains schedule of all litigation, pending and threatened.
1. Arrange to have copies of relevant pleadings
1. Arrange to receive copies of all relevant liability insurance
policies, including director and officer (d&o) liability
insurance
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Materiality of lawsuit--relative; examples: one small lawsuit relating
to a large transaction considered not material--unless there's a lot
of them small lawsuits in one large transaction; product liability
case that looks like it could be the first of many
Counsel
- seek summary of all material pending or threatened actions,
including circumstances in each cases (names, nature of
proceedings, when instituted, status, relief sought,
settlements offered, etc.)
- also summary of all civil and criminal suits involving
company or its employees, investigations conducted by
government, tax claims, etc.
- also material correspondence the past 5 years with any
government or regulatory agency, to which seller is subject
How Conducted:
1. Determine who will analyze claims (ideally attorney with
most knowledge in each area)
1. Arrange to receive pleadings and documents and have
access to attorneys representing seller's company
1. Must establish good working relationship with attorneys
representing the company considered for acquisition, but at
the same time be cautious in accepting representations
made by them.
1. Each pending material case be systematically evaluated
and money set aside to pending liability

--reviewer consider cases that have "ripple effect"-- if lost, could
have increasingly adverse impact on business operations
--also other known cases involving companies in the same industry
Compliance Review
1. Find out if acquirer has active compliance program.
1. Also the likelihood of different types of lawsuits that may
occur following an acquisition
Main constituencies that might file lawsuits against acquirer:
1. Employees or union, past present or prospective (example:
breach of employment contract, discrimination, employment
conditions/safety; failure to hire or promote; pension, other
benefits, etc)
1. Shareholders or investors (example: bid or threat by another
company to take over shareholders' company/another
company; breach of duty to minority holders; challenge to
take over defense measures; contract disputes; general
breach of fiduciary duty)
1. Customers, suppliers, competitors and other contractors
(example: contract disputes, cost or quality of a product or
service; debt collection, includes foreclosure,
dishonesty/fraud, extension or refusal of credit,
infringement, business interference, etc)
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1. Government, regulatory, and third party claimants (example:
alleged violations of law--taxes, environment, securities,
consumer protection)
CHAPT ER 5
THE DOCUMENT ATION AND TRANSACTI ON REVIEW
T ransac ti ona l D ue D ili gence - involves risks inherent
in the deal making itself
a) Plays vital role in post-acquisition success
Acquisition Agreement- is a legally binding agreement
5 basic goals:
1. Set the structure and terms of the transaction
2. Disclose all the important legal and financial issues that
affect the company being acquired
3. Obligates both parties to do their best to complete the
transaction
(pursue in good faith clause)
4. Obligates the seller not to change the company in any
significant way before the deal closes
5. Governs what happens if before or after the closing the
parties
discover problems that should have been disclosed
either in the agreement or before the closing but were
not properly disclosed
 What the buyer wants to be certain:
Material Adverse Change Clauses- In the event something 1. to have enough time to conduct due diligence
happens to the target company after the signing of the 2. to be able to get some or all of purchase price back if
acquisition agreement, there are certain provisions in the negative events occur after the closing
agreement that provides for the parties’ right to cancel the
transaction or change the price. Who should bear the risk of loss associated with undisclosed legal
defects in the company after the closing?
1. to prevent this from ruining the deal, a seller can
carve out factors that will not be considered MACs - Customary to hold seller accountable (but only for a
ie. General economics, regulatory or political defined time period) for the following reasons:
conditions, etc o If it is unlikely that a problem will be discovered, then
an as is transaction with reduced pricing forces the
seller to accept less money
To correct “buyer bias” in an agreement, seller may ask for: o If a problem is discovered before closing it would
• deposit (for situations where seller would not be able to result in a lower price anyway.
collect damages in the event of a breach of contract. o Sharing of the risk between buyer and seller will
• liquidated damages provision (payment of damages if provide for a stronger incentive to try to discover
problems before the deal is closed.
buyer backs out for reason beyond seller’s control)
- However, this should not mean that every seller should cave
in. In the end it would depend on the bargaining powers of
• transfer of risk to the buyer as of the date of the both parties.
signing not the date of closing
Parts of the agreement:
The concerns of the buyer and seller are “mirror opposites” 1. Introductory matter- “whereas clauses”; describes the
intentions of each party and the purpose of the agreement.
What the seller wants to be certain: 2. Price and Mechanics of the transfer- identifies structure of
- closing will occur the transaction
- no postclosing events will require a refund of purchase (kind of transfer, how, and for how much)
price • stock acquisition/merger: dollar amount per
share by shareholders, which company will
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 survive, articles of incorporation, composition of contract.
surviving company’s board. - must be material, that is, important to an average, reasonable
• asset acquisition: which assets are conveyed and which investor in determining whether to make the investment
liabilities the seller will assume.

How can seller narrow the scope of its reps/warranties:

Difference of due diligence for stock and asset transactions:
- Stock Sales - acquirer assume the seller’s debts unless the
seller agrees otherwise. • either refuse to make any about specific items
- Asset Sales - acquirer will not assume seller’s debts and • refuse to make any about matters not material to the
liabilities transaction
• make rep/warranties only to the “ best of its
Stock sales are more preferred because: knowledge”
• Insert word “material” (“material liabilities”, “Material
• As to seller – they can unload their debts and legal liabilites litigation”)
unto the acquirer
• As to buyer: Note that it is in buyer’s interest to have broadest possible
o Asset sales require a more onerous feature reps/warranties. However, unreasonable requests of disclosure
(numerous contracts, deeds, licenses. can threaten a deal.
o Higher tax cost • buyer should assure the seller that extensive disclosures
o Third-party consent is required for transfer of some will not threaten the deal or increase the seller’s post
assets such as intangibles and leases
closing liabilities.
o Compliance with legal technicalities (Bulk Sales Law)

“Ordinary Course of Business”

3. Representation and Warranties- seller makes detailed
- “ordinary course of business” phrase narrows down the
statements about the legal and financial conditions of the
scope of seller’s reps/warranties
company, property, and his ability to actually consummate the
- it will depend upon the normal practices of the business being
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acquired, and its transactions. • usually its is about the seller agreeing not to do
- buyer and seller may agree on what “ordinary course of anything to change the picture in any material way
business” means for clarification except as necessary in the normal course of business

Note: for strong transactional due diligence, key data must

“Best of Knowledge”
be identified and listed in the acquisition agreement and
- similar functions as ordinary course phrase. obtained and managed throughout the course of the
- buyer may counter this by adding “after due inquiry” to the transaction (to do this a comprehensive acquisition agreement
phrase best of knowledge. would help which states that acquirer will have access to
all target company documents reasonably required for due
What if the seller claims later on that it had no knowledge on an diligence)
area of its warranty?
5. Conditions of Closing- consists of conditions that must be
- It is possible that uncertainties may arise. It is important for
fulfilled if the transaction is to close; if not fulfilled, can result
both parties to recognize that the reps and warranties are not a
to non- completion of transaction
test of the integrity of the parties making them. They should view
• required to close if seller has breached any covenant
the process as a device for allocating risk for it to become more
and/or reps/warranties of the seller and company were
manageable. (In short, wag daw magsisihan. LABOOO.)
not true when they were made; assurance that on
closing date company bargained for remains the same
Reps/warranties about financial statements, litigation,
• Bringdown Provision – most significant condition. States
undisclosed liabilities and taxes are usually the most
that the buyer will not be required to close if:
important
o seller has breached any of its covenants
4. Covenant- defines the obligations of the parties with o any of the representations and warranties of the
respect to the seller and the candidate company were not true
conduct during the period between the signing of the when they were made - or true when made, but
agreement and the closing are not true on the closing date.
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 - The effect of the bringdown condition is to assure the
buyer that, on the closing date the company it is Main phases in closing:
acquiring wil; be the same company that it bargained for. 1. Preclosing/Preclosing drill- “dress rehearsal” for closing
no earlier than 3 days prior to closing;
• Bringdown Due Diligence means continued due • parties put all closing documents on closing room
diligence activities through additional meetings, table so that all parties can make sure closing
reexamination of disclosure items, updating conditions have been met
reps/warranties; this can protect buyer against a claim • Counsel for parties conduct the preclosing, their clients
that it should have uncovered some late-breaking and other persons will be present as needed.
development not included in reps/warranties. • Execute as many docs as possible to save time on closing
day
How can the buyer make sure that it will have legal recourse in
the event of a breach of representation? 2. Closing- parties and counsel will r ev i e w the documents
that have been revised or newly generated, execute previously
unexecuted documents, r echec k all documents lined up on
- “Officer’s Certificate” –Statement of an officer of the company closing table against closing checklist and wiring of funds or
file/record documents
being sold certifying that the reps and warranties are accurate in
all material respects as of the closing date. (Made in behalf of 3. Postclosing- document distribution and cleanup
the company and not a personal liability of the officer.)
1. doc distribution- impractical to have complete collection
Do buyers close even if a breach has been discovered? – This of closing docs for record, so counsel must prepare a
happens. For a reduced price or if the representation is good closing document checklist which will be turned
unimportant. into closing memorandum
clean up- complete tasks and documents that were not or could
6. Indemnification not have been completed prior to closing (ie recording of
7. Termination procedures and remedies mortgages, restructuring of pension plans, correct/amend
ancillary documents, etc.
8. Legal Miscellany
CHUA. CASTILLO. MANZANA. PALAD. RABANG. SALGADO.
CUSTODIO, DIZON. ILAGAN. NOBLE. PEÑA. RAYMUNDO
 Mergers & Acquisitions
Finals Reviewer
i. Agreements with Management
DUE DILIGENCE CHECKLIST j. Security Agreements or Other Agreements Giving Other
Parties the Right to Acquire Assets of theCompany
I. Documents k. Sales and Product Warranty Agreements
(Co-Fi-Ma-KeyI-KeyT-Con-IP) l. Selected Correspondence
1. Corporate Documents m. Acquisition Agreements
a. Articles of Incorporation, Including All Amendments, n. Pension and Profit-Sharing Plans
Name Changes, and Mergers o. Welfare Benefit Plans
b. Bylaws p. Multiemployer Plans
c. Minutes q. Deferred Compensation Plan and Stock Option Plan
2. Financial Statements r. Supplemental or Excess Pension Plan
a. Engineering Reports 7. Insurance Policies
3. Market Studies/Reports on Company's Products
4. Key Intangibles II. Key Information From the Company's Management
a. Patents, Trademarks, Trade Names, and Copyrights (FOGI-LiM)
b. Licenses and Permits 1. Financial, Ownership, and Governance Information
5. Key Tangibles a. Financial Information
a. Mortgages b. Relative Profitability of the Company's Various Classes
b. Title Documents to Real Estate and Personal Property of Products and Business Segments
c. Identification of Real Property and Assets c. Ownership of the Company's Securities
6. Contracts d. Governance Information
a. Supply and Sales Agreements 2. Litigation Matters
b. Employment and Consulting Agreements a. Potential Defaults under Existing Contracts or Potential
c. Leases Litigation
d. License and Franchise Agreements b. Product Backlogs, Purchasing, Inventory, and Pricing
e. Loan Agreements Policies
f. Shareholder Agreements c. Pending Negotiations for the Purchase or Disposition
g. Sponsorship Agreements of
h. Agreements with Labor Assets or Liens

CHUA. CASTILLO. MANZANA. PALAD. RABANG. SALGADO.

CUSTODIO, DIZON. ILAGAN. NOBLE. PEÑA. RAYMUNDO
 Mergers & Acquisitions
Finals Reviewer
d. State and Local Tax Challenges
e. Recent or Pending Changes in Laws or Regulations
That Might Affect the Company's Business

III. Key Information From Outside Sources

(MaCIn-Li-Cred-OS)
1. Market and Capital Information
a. Market and Product Studies
b. Capital Information
2. Lien Search
a. Ordering a Search
b. Reviewing a Search
c. Bringdown of Search
3. Creditor Check
a. Assumption of Debt
4. Other Searches
a. Patent and Trademark Searches for Possible
Infringement of Products or Product Names
b. Certificates of Good Standing for All Corporate
Subsidies, Whether Active or Inactive
c. Title Search/Acquisition of Title Insurance
d. Appraisals of Company-Owned Real Property and
Improvements
e. Any Equipment Appraisals Made by or for Insurance
Companies

CHUA. CASTILLO. MANZANA. PALAD. RABANG. SALGADO.

CUSTODIO, DIZON. ILAGAN. NOBLE. PEÑA. RAYMUNDO