Is your early-stage company organized and ready for outside investment or acquisition? Have you considered what investors or potential buyers will be expecting to see when you provide access to your corporate records? Are your corporate documents complete, up-to-date and provide adequate legal protection and flexibility to grow your business while remaining in line with market standards?
This blog post sets out a general walk-through of legal matters you should consider – with the assistance of legal counsel – as you prepare your early-stage company for outside investment or an exit.
Due diligence
Depending on the prospective investor/purchaser and the size and nature of the proposed transaction, the individual prospective investor/purchaser may wish to first conduct a comprehensive due diligence review of your company. This due diligence review could involve a combination of standard due diligence searches (such as corporate, tax and bankruptcy searches), as well as a review of your company’s corporate records.
Corporate records could include your minute book, material contracts (including leases), financials, intellectual property, employment contracts, tax records, legal disputes and other matters that are material to your business.
As the adage goes, “an ounce of prevention is worth a pound of cure.” It is no different with investor readiness.
As part of a prudent investment readiness practice, companies can conduct their own cost-effective due diligence process on their corporate records, with the assistance of legal counsel. This would ensure, among other things, that all the company’s securities are validly issued, material corporate actions have been properly authorized and material agreements are in effect and contain no provisions that might restrict or prohibit the proposed transaction.
Identifying and neutralizing issues identified within your corporate records in advance of an external due diligence process can result in a much more efficient transaction process, assist in negotiating and managing risk allocations, and reduce legal expenses associated with completing the transaction.
IP strategy
For early-stage companies, developing an intellectual property (IP) strategy early on can pay dividends as your business grows or on an exit transaction. This topic is addressed in the following blog: The importance of IP in M&A transactions. Putting together an IP strategy typically involves working with IP professionals to conduct a thorough audit and examination of your intangible assets to identify competitive advantages and potential risks in order to develop a baseline value for your IP.
From there, the focus is on developing a comprehensive action plan to support the company’s goals and maximize long-term value which might include pursuing IP registrations (be it for patents, industrial designs or trademarks), reviewing licensing and other third-party agreements. It is key to regularly check-in with the company’s leadership to provide ongoing support.
To prepare your company for an investor’s due diligence review, an investment readiness process will typically also include an analysis and review of:
- The company’s capitalization table and security documents to ensure that all of your company’s securities are accounted for and properly issued in accordance with applicable laws and your company’s corporate documents (i.e. articles by-laws);
- The company’s unanimous shareholder agreement, if any, to determine the rights of shareholders and how the company is to be operated is in advance of any transaction;
- The rights and privileges of classes and series of shares authorized under your company’s corporate documents to determine if any amendments are required to your articles in advance of any transaction;
- The size and makeup of your board of directors and whether you intend to give investors a seat on the board or any board observer positions;
- Potential access to government tax incentive programs and flow-share program eligibility;
- The company’s investor presentation, if any, to ensure that the company is providing appropriate disclosure and that the presentation is in compliance with applicable securities laws; and
- The company’s financial statements, which will often be requested by investors so that they may properly assess your company’s valuation and financial projections.
As a best practice, companies should also have each prospective investor/purchaser sign a non-disclosure agreement (NDA) prior to accessing any corporate documents.
One of the advantages of engaging a full-service firm is having access to broad range of legal professionals in each of these respective fields of law. If you are getting ready to approach investors or looking to raise capital in the private or public markets, contact Kyle Mirecki in Winnipeg or Mark Mielke in Calgary to discuss your potential business needs.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.