Yogi and Casey and Due Diligence

You Can See a Lot Just By Looking (Yogi)

Try reading the law. What it says can be crucial to a due diligence examination. What does the state corporation statute say about quorum requirements for a board of directors meeting? Does the statute require the presence of a majority of directors in order to be able to transact business legally? But there is more. Section 141(b) of the Delaware General Corporation Law provides that “a majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number. Unless the certificate of incorporation provides” otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum which in no case shall be less than one third of the total number of directors.” To conduct an effective due diligence examination, the careful and effective lawyer must consult the law and the company's certificate of incorporation and bylaws. But her job is not yet completed. She must review the Board minutes to determine whether the requisite quorum standard was indeed satisfied. And determining whether there was a quorum of directors for a particular meeting is but one small step in the process!

Bill Dickey Is Learning Me His Experience (Casey)

The bulk of due diligence examinations ' that is, the difficult work in the trenches reviewing core documents ' is largely handled by newly admitted (to the bar, that is) and generally inexperienced attorneys. Therein lies the problem as well as the solution. Only by conducting examinations can the young lawyer become an experienced and effective examiner during the due diligence process. Therefore, the immediate solution is for more experienced lawyers to work closely with the neophyte. By this process, the inexperienced lawyer will gain valuable experience, not a minimal achievement, and more importantly, the interests of the company and outside counsel will be well served.

Johnny Sain Don't Say Much, But That Don't Matter Much, Because When You're Out There on the Mound, You Got Nobody to Talk to (Casey)

Communication is one of the most crucial components of an effective due diligence examination. During the examination, the junior lawyer discovers that the company's articles of incorporation provide for a six-member board of directors, and also discovers that the bylaws provide for an eight-member board (An actual occurrence in the due diligence experience of the authors). Obviously, upon this discovery the first thing the lawyer must do is to alert his senior lawyer supervisor, so that lawyer can in turn communicate with his supervisor and in turn craft a plan of action to determine the implications of this situation. And to contradict the words of Casey, an effective due diligence team must be an effective communicating unit, both internally and externally.

All Right, Everyone, Line Up Alphabetically According to Your Height (Casey)

What documents to review? That's where the due diligence document request memo comes into play. That's where counsel must be perceptive and efficient. Let's tailor the memo to the needs of the transaction and the company. By requesting the relevant documents in a well constructed and considered memo ' as opposed to a waste-of-time dragnet of all documents ever produced by the company, the proverbial fishing expedition ' counsel will be able to proceed with a time- and cost-effective due diligence examination. This well constructed document request memo takes a great deal of forethought and preparation, including knowledge of the company and its business operations. An investment of time and preparation by counsel at the beginning of the due diligence process will result in a better-constructed and smoother due diligence examination.

We Made Too Many Wrong Mistakes (Yogi)

To state the obvious, errors can be costly, to both the company and its outside counsel. For instance, the company is within a few days of closing its IPO, and opinion counsel raises the issue of pre-emptive rights ' what does the law provide, and how are such rights handled in the articles of incorporation? This is an absolute deal killer if the company's articles of incorporation do not make proper provision in accordance with state law. What does the state corporation law provide ' do such rights exist if the articles of incorporation are silent? Must the shareholders affirmatively amend the articles of incorporation to exclude such rights (“opt out” rights) or do such rights exist only at such time as the company's shareholders shall have affirmatively adopted such rights into the articles of incorporation (“opt in” rights)? If pre-emptive rights in fact exist, their existence will block the company's IPO; no funding will come to the company; and the law firm can expect to be sued by the company for its failure to conduct an effective due diligence examination. This is but one example of what can go wrong if a law firm doesn't conduct a due diligence investigation diligently.

You've Got to Be Very Careful if You Don't Know Where You Are Going, Because You Might Not Get There (Yogi)

What to do? How do we solve this problem? We've reviewed the articles of incorporation. They state that the corporate existence of the company was to be 20 years; but that means that the company's legal existence ended in 1960. Oh, well, the company amended its articles of incorporation in 1990 to provide for perpetual existence (An actual occurrence in the due diligence experience of the authors). Yet it is now 2008 ' what does counsel do with the 30 years of illegal existence and business activity by the company? Other than “Spahn and Sain, and pray for rain,” counsel must meet with management to determine whether there are any deal killers within that 30-year period, and to craft workable solutions for this not-so-ancient faux pas.

How Can a Guy Think and Hit at the Same Time? (Yogi)

Too many documents to consider and review. What does the law provide? How does this contract relate to the company's debt facility from two years ago ' will the debt facility permit the sale of stock, or the incurrence of additional debt? Is there a shareholder agreement or other company contract that restricts the ability of the company to raise capital, to transfer assets, or even to pay a dividend? Management should know the answers, but management may have forgotten or may otherwise be preoccupied. Counsel must focus on the relationships; management must communicate with counsel to allow counsel to have the correct perspective.

A Nickel Ain't Worth a Dime Anymore (Yogi)

Counsel ' most importantly, the young associate who is conducting the lion's share of the due diligence examination ' must be ever aware that as a result of an unsuccessful examination ' that is, where important legal barriers to completion of the transaction were not discovered or were not communicated effectively, or where material facts remained hidden, either of which situations cratered the IPO or the asset sale ' it is likely that the disappointed, disgraced, livid, fire-breathing, bankrupted (counsel ' choose your poison) company will now visit a negligence lawsuit upon counsel, as being a proximate cause for the failure of the subject transaction. The results of this due diligence failure are that: 1) the company did not get its money upon completion of the failed IPO or proposed asset sale; and 2) money damages must be paid because of an inadequate due diligence examination. And in the words of Yogi, never so true, in monetary and reputational measures, following this disastrous due diligence failure, counsel will understand (to their detriment) that a nickel ain't worth a dime anymore.

In conclusion, we are extraordinarily grateful to both Yogi and Casey for their brilliance and leadership as they guide us through another effective and successful due diligence examination. Now if we could only hit a curve ball!

Laurence Lese is a partner and Geoffrey Weber an associate in the Corporate Practice Group of Duane Morris LLP. Lese is based in the Washington office and Weber in Philadelphia.

Those of us who are baseball fans are mesmerized by the statements of those legendary personalities, Yogi Berra and Casey Stengel, who remain icons in the lore of baseball. As attorneys, little did we realize that Yogi and Casey, in making their baseball remarks, were actually intending to guide us through the due diligence process that counsel deals with on a regular basis. The following examples of “Yogi-isms” and “Stengel-ese” bear testimony to our reverence for Yogi and Casey and to give them proper accolades for enhancing the due diligence process. In effect, what Yogi and Casey are preaching, and the lesson we learn from them, are that throughout the due diligence examination and process, the team of due diligence lawyers must choose and consider the documents carefully, understand the relevant law and communicate effectively.

If You Come to a Fork in the Road, Take It (Yogi)

Management is an integral part of the due diligence examination. Its major job is to communicate with counsel, make relevant documents readily available to counsel and alert counsel to the material documents. After all, the due diligence process is predicated upon providing full disclosure to either the investing public in the case of an IPO or other securities offering or in the case of an acquisition to the company which is making the subject asset purchase. Therefore, many corporate executives, faced with the difficult decision to disclose a seeming securities violation, or to try to resolve the problem internally without talking to SEC or to due diligence counsel for that matter, are going to discover a difficult fork in the road indeed, as Yogi suggests.

You Can See a Lot Just By Looking (Yogi)

Try reading the law. What it says can be crucial to a due diligence examination. What does the state corporation statute say about quorum requirements for a board of directors meeting? Does the statute require the presence of a majority of directors in order to be able to transact business legally? But there is more. Section 141(b) of the Delaware General Corporation Law provides that “a majority of the total number of directors shall constitute a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number. Unless the certificate of incorporation provides” otherwise, the bylaws may provide that a number less than a majority shall constitute a quorum which in no case shall be less than one third of the total number of directors.” To conduct an effective due diligence examination, the careful and effective lawyer must consult the law and the company's certificate of incorporation and bylaws. But her job is not yet completed. She must review the Board minutes to determine whether the requisite quorum standard was indeed satisfied. And determining whether there was a quorum of directors for a particular meeting is but one small step in the process!

Bill Dickey Is Learning Me His Experience (Casey)

The bulk of due diligence examinations ' that is, the difficult work in the trenches reviewing core documents ' is largely handled by newly admitted (to the bar, that is) and generally inexperienced attorneys. Therein lies the problem as well as the solution. Only by conducting examinations can the young lawyer become an experienced and effective examiner during the due diligence process. Therefore, the immediate solution is for more experienced lawyers to work closely with the neophyte. By this process, the inexperienced lawyer will gain valuable experience, not a minimal achievement, and more importantly, the interests of the company and outside counsel will be well served.

Johnny Sain Don't Say Much, But That Don't Matter Much, Because When You're Out There on the Mound, You Got Nobody to Talk to (Casey)

Communication is one of the most crucial components of an effective due diligence examination. During the examination, the junior lawyer discovers that the company's articles of incorporation provide for a six-member board of directors, and also discovers that the bylaws provide for an eight-member board (An actual occurrence in the due diligence experience of the authors). Obviously, upon this discovery the first thing the lawyer must do is to alert his senior lawyer supervisor, so that lawyer can in turn communicate with his supervisor and in turn craft a plan of action to determine the implications of this situation. And to contradict the words of Casey, an effective due diligence team must be an effective communicating unit, both internally and externally.

All Right, Everyone, Line Up Alphabetically According to Your Height (Casey)

What documents to review? That's where the due diligence document request memo comes into play. That's where counsel must be perceptive and efficient. Let's tailor the memo to the needs of the transaction and the company. By requesting the relevant documents in a well constructed and considered memo ' as opposed to a waste-of-time dragnet of all documents ever produced by the company, the proverbial fishing expedition ' counsel will be able to proceed with a time- and cost-effective due diligence examination. This well constructed document request memo takes a great deal of forethought and preparation, including knowledge of the company and its business operations. An investment of time and preparation by counsel at the beginning of the due diligence process will result in a better-constructed and smoother due diligence examination.

We Made Too Many Wrong Mistakes (Yogi)

To state the obvious, errors can be costly, to both the company and its outside counsel. For instance, the company is within a few days of closing its IPO, and opinion counsel raises the issue of pre-emptive rights ' what does the law provide, and how are such rights handled in the articles of incorporation? This is an absolute deal killer if the company's articles of incorporation do not make proper provision in accordance with state law. What does the state corporation law provide ' do such rights exist if the articles of incorporation are silent? Must the shareholders affirmatively amend the articles of incorporation to exclude such rights (“opt out” rights) or do such rights exist only at such time as the company's shareholders shall have affirmatively adopted such rights into the articles of incorporation (“opt in” rights)? If pre-emptive rights in fact exist, their existence will block the company's IPO; no funding will come to the company; and the law firm can expect to be sued by the company for its failure to conduct an effective due diligence examination. This is but one example of what can go wrong if a law firm doesn't conduct a due diligence investigation diligently.

You've Got to Be Very Careful if You Don't Know Where You Are Going, Because You Might Not Get There (Yogi)

What to do? How do we solve this problem? We've reviewed the articles of incorporation. They state that the corporate existence of the company was to be 20 years; but that means that the company's legal existence ended in 1960. Oh, well, the company amended its articles of incorporation in 1990 to provide for perpetual existence (An actual occurrence in the due diligence experience of the authors). Yet it is now 2008 ' what does counsel do with the 30 years of illegal existence and business activity by the company? Other than “Spahn and Sain, and pray for rain,” counsel must meet with management to determine whether there are any deal killers within that 30-year period, and to craft workable solutions for this not-so-ancient faux pas.

How Can a Guy Think and Hit at the Same Time? (Yogi)

Too many documents to consider and review. What does the law provide? How does this contract relate to the company's debt facility from two years ago ' will the debt facility permit the sale of stock, or the incurrence of additional debt? Is there a shareholder agreement or other company contract that restricts the ability of the company to raise capital, to transfer assets, or even to pay a dividend? Management should know the answers, but management may have forgotten or may otherwise be preoccupied. Counsel must focus on the relationships; management must communicate with counsel to allow counsel to have the correct perspective.

A Nickel Ain't Worth a Dime Anymore (Yogi)

Counsel ' most importantly, the young associate who is conducting the lion's share of the due diligence examination ' must be ever aware that as a result of an unsuccessful examination ' that is, where important legal barriers to completion of the transaction were not discovered or were not communicated effectively, or where material facts remained hidden, either of which situations cratered the IPO or the asset sale ' it is likely that the disappointed, disgraced, livid, fire-breathing, bankrupted (counsel ' choose your poison) company will now visit a negligence lawsuit upon counsel, as being a proximate cause for the failure of the subject transaction. The results of this due diligence failure are that: 1) the company did not get its money upon completion of the failed IPO or proposed asset sale; and 2) money damages must be paid because of an inadequate due diligence examination. And in the words of Yogi, never so true, in monetary and reputational measures, following this disastrous due diligence failure, counsel will understand (to their detriment) that a nickel ain't worth a dime anymore.

In conclusion, we are extraordinarily grateful to both Yogi and Casey for their brilliance and leadership as they guide us through another effective and successful due diligence examination. Now if we could only hit a curve ball!

Laurence Lese is a partner and Geoffrey Weber an associate in the Corporate Practice Group of Duane Morris LLP. Lese is based in the Washington office and Weber in Philadelphia.