Due diligence checklist before buying a chemical factory

Due diligence checklist before buying a chemical factory

Introduction

This article is about due diligence checklist before buying a chemical factory. There are three different aspects the prospective buyer should look for before buying a chemical business. Those can be categorized under the following broad heads. 1. Corporate structure, 2. Operation of business (Manufacturing, export, etc), and 3. Compliance with legal regulations. Let us look into it in detail in the following pages.

Corporate Structure

The buyer should check the following documents. Usually it is easy to transfer ownership or transfer shares with a Private Limited Company than any other structure.

  1. Corporate documents of the company:

The following are important corporate documents[1] one should check before buying the business. Those are a) Incorporation documents[2] including the articles of association and memorandum, b) By Law of the company and all amendments thereto, c) Minutes of the general body meetings, other meetings of directors, meetings of shareholders, meetings of officials , including copies of any written notices (if given) or waivers thereof and any written-consent to action without a meeting,  d) List of branch offices with details of staff and details of properties belonging to the company (whether owned or leased), e) List of branches of company in various other countries, number of staffs in each country and the details of properties belonging to the company (whether owned or leased), indicating in which countries the Company is authorized to do business, f) documents related to stock, securities, debentures and other financial transactions, g) Documents related to voting rights, agreement with shareholders or any other agreement regarding any part of the shares of the company, h) all other documents regarding the transfers, redemptions, repurchases, exchanges, conversions or similar transactions, i) all agreements and documents relating to assignment of rights and voting rights etc, j) all documents relating to pre-emption and preferential shares and rights of the company, k) Company’s stock documents and books of accounts etc, l) All reports including quarterly and annual reports, bulletins and any other document or communication to the Company’s shareholders and directors from the beginning of the companies operation, m) All public communications, press releases published by the company from the time of conception of business, n) Details about the subsidiaries, number of employees in the subsidiaries etc.

  1. Documents related to Subsidiary (If any):

The following are important corporate documents of the subsidiary[3] one should check before buying the business. Those are a) Incorporation documents including the articles of association and memorandum of the subsidiary, b) By Law of the subsidiary and all amendments thereto, c) Minutes of the general body meetings, other meetings of directors, meetings of shareholders, meetings of officials , including copies of any written notices (if given) or waivers thereof and any written-consent to action without a meeting,  d) List of branch offices with details of staff and details of properties belonging to the subsidiary (whether owned or leased), e) List of branches of subsidiary in various other countries, number of staffs in each country and the details of properties belonging to the subsidiary (whether owned or leased), indicating in which countries the Company is authorized to do business, f) documents related to stock, securities, debentures and other financial transactions, g) Documents related to voting rights, agreement with shareholders or any other agreement regarding any part of the shares of the subsidiary, h) all other documents regarding the transfers, redemptions, repurchases, exchanges, conversions or similar transactions, i) all agreements and documents relating to assignment of rights and voting rights etc, j) all documents relating to pre-emption and preferential shares and rights of the subsidiary, k) Subsidiary’s stock documents and books of accounts etc.

  1. Issuance of Securities:
  2. a) Financing of equities: documents and agreements relating to stock purchase[4], b) Debt Financings: documents and agreements relating to convertible debts, c) Stock options or purchase plans and forms of option or purchase agreements which have been or may be utilized there under., d) Documents and any other agreements regarding the sales of securities, transfer of shares by the Company including any other circulars, communications etc, e) documents relating to communications and notices of exemption and consents for issuance or transfer of Company’s securities/shares/stocks and evidence of qualification or exemption, f) Any other documents relating to corporate compliance.
  3. Information about the Shareholders:
  4. a) documents regarding all issuances or selling of shares, stocks and options by the Company, listing the names of the all shareholders or grantees, the amounts paid or granted, the dates of the issuances or grants, the number of shares presently exercisable (if applicable) and the consideration received (or to be received) by the Company in each case, b) Detailed information about all current shareholders, their information including addresses, contact details and numbers of shares owned by each of the shareholders,  c) A full listing of share documents and certificates clearly mentioning the serial number of the certificate along with the date of issuance, name and address of the shareholder, number of shares issued to the shareholder, date on which the approval of board is obtained etc, d) A full listing of option documents and certificates clearly mentioning the serial number of the certificate along with the date of issuance, name and address of the optionholder, number of shares issued to the shareholder, date on which the approval of board is obtained etc.

 

  1. Important Contracts, Agreements and Documents:
  2. a) Agreements with bank regarding line of credit, any other documents related to existing credit with bank, including any amendments, renewal documents regarding line of credit, all notices and correspondences from the bank and communications sent to bank, etc., b) All other documents and agreements regarding the existing loans and outstanding balance of the loans, all documents relating to guarantees given by the Company to the bank for obtaining loans, including all correspondences between the bank and the company, c) Documents, agreements and contracts regarding all previously existing leases for real estate and personal property, d) Other Important contracts and documents existing between the company and suppliers, sources of raw material and contracts with customers or buyers. A complete list of suppliers of raw materials and list of existing customers, e) All documents and agreements regarding the sales, supply and manufacturing, f) All documents and agreements for loans, any other documents, contracts, agreements regarding consulting and employment contracts with officers, directors or employees, g) A list and documents regarding all insurance policies, regarding the business, property owned by the company, policies regarding transportation of the raw materials and finished products, insurance policy for manufacturing machineries etc, h) All other documents and agreements regarding Partnership or joint venture, i) any documents regarding bonus to employees, regarding the retirement policies, documents regarding pensions, agreements regarding profit sharing, co-founder agreements and any incentive agreements, if any., j) confidentiality agreement, non-disclosure agreement with any employees or officers of the company or any outsourcing companies, k) Any other important contracts and agreements.
  3. Any documents regarding Patent and Trademark or any other intellectual property owned by the company:
  4. a) Details and documents regarding all patents and/or patent licenses[5] (whether from a foreign country or from own country) currently in possession of the Company, b) Details and documents regarding the trademarks, any trade names or service marks owned by the company,  c) Details and documents regarding any copyrights owned by the company, d) documents and agreements regarding the licensing of technologies owned by the company to any third party individual or company, e) documents and agreements regarding the licensing of technologies owned by the third party company or individual to the company in question, f) details regarding any other intellectual property owned by the company and importance of the same, g) All documents, communications and correspondence from or to any third parties relating to infringement of intellectual property right owned by the company or third party. h) All details and documents regarding the proprietary processes owned and controlled by the Company.[6] i) Details regarding the name, address and communication details of the law firms which are handling the intellectual property rights matters of the Company and any other relevant details.

Operation of business (Manufacturing, export, etc):

  1. Details and documents regarding manufacturing:
  2. a) List of manufacturing units of the company, the products manufactured in each of the units, number and details of staffs and employees of each of these units, number of shifts and capacity of the manufacturing units etc, b) Details and documents regarding the suppliers showing total purchases and type of raw materials and quantity from each of the suppliers., c) Details and documents regarding the outsourcing and contract manufacturers, if any, showing complete details of the type and quantity of products given to/by the contract manufacturers, d) Details and documents regarding the important contract and business contracts outside the ordinary course of business, with suppliers, contractors, customers, manufacturers, etc., if any. e) Details of all toxic chemicals and hazardous chemicals used in production or manufacturing of products,[7] and the manner in which the toxic and hazardous chemicals are stored and how such toxic and hazardous chemicals are disposed.

 

  1. Details regarding Operations:
  2. a) Details and documents regarding the third party outsourcing manufacturers clearly describing the products manufactured by each of the outsourced manufacturers, type and total number of products, contact names, addresses, contact details including phone numbers, together with all documents and agreements entered into with such third party outsourced manufacturers, b) List of third party manufacturers and suppliers showing total and type of products from each such third party manufacturers, c) documents and details regarding the manufacturing equipments.

 3.Details and documents regarding Sales and Marketing of manufactured products:

  1. a) All documents and agreements regarding the market research and studies about the market for manufactured products conducted during the conception of business and then eventually during the operation of the business, b) detailed documents regarding the manufactured chemical products and any other services offered by the compan, c) Details about the competitors manufacturing similar or same chemical products, or offering same or similar services, d) Detailed document listing the major customers or companies or group of customers buying large quantities of manufactured chemical products, along with the details of the products sold to such large customers, the types of such products,  the quantity of the products purchased by the large customers, and name, address and contact details (including phone number) of each such major customer, e) All documents regarding licensing agreements given to the third party companies, franchisee agreements, wholesale or retail (distributor or dealer) agreements entered by the company, f) Any agreements entered with sales representatives or a group of such sales representatives to promote or market the manufactured products, g) any document regarding the sales contract entered with any third party or company, h) all documents regarding purchase agreements, company financed agreements entered with any party by the company, i) all documents regarding the service agreements, support contracts and marketing agreements executed by the company,  j) All agreements entered regarding the agencies of the company, appointments of agents and contracts or agreements relating to marketing of manufactured chemicals in which the company is one of the parties, k) all documents regarding the guarantees and warrantees given to the buyers in relation to the manufactured products or offered services,  l) detailed report about the market in which the manufactured products are sold, and the growth potential of the business in such market in the future and documents regarding any other similar research regarding the market and potential of the business, m) All documents regarding sales, including the prospectus, handbills,  sales related documents, all forms and applications related to sale, along with price list of manufactured products and charges for services offered by the company, catalogs of the manufactured products and offered services by the company, n) detailed list of major account receivables along with the contacts details (Name, address and phone number) of each such, o) details regarding the backlog during the last financial year and total backlog since the conception of the business etc.
  2. Properties owned by the company:
  3. a) Detailed documents related to the real estate, buildings, manufacturing units, manufacturing machinery and any other real or material property owned or leased by the company, b) All documents and agreements regarding the ownership of the above said properties, title deeds, mortgage agreements, lease deeds, and guarantee or security documents regarding the above said properties of the company, c) All documents regarding the lease of the any of the above said properties in which the company is either a lessee or lesser, d) details and documents regarding the property with security arrangements (security for loan) in which the company is one of the parties, e) Detailed documents regarding acquisitions of properties and assets by the company and sales or disposal of such properties or assets of the company, etc.

Compliance with legal regulations:

  1. Audits and legal compliances (along with litigations if any):
  2. a) All correspondences and letters between the company and company’s auditors regarding the audits, compliance with rules of Registrar of Companies or Ministry of Corporate Affairs along with all reports given by the auditors since the conception of the business,[8] b) all correspondences with the auditors or letters sent by the auditors regarding the management and accounting of the company, and any changes suggested by the auditors regarding management and accounting of the company, c) Details about the changes in management and accounting of the company along with the reasons for the same,  d) All documents related to litigations pending in any court of law or in any stage by or against the company, along with all letters and notices regarding complaints, claims and the replies by the company sent since the conception of the business, e) all documents and agreements regarding the settlement of disputes outside the court of law, f) all documents and detailed reports along with copies of orders, judgments and decrees issued by the Court of law or any other Government office like ROC, g) Details regarding all warranty claims filed against  the Company, any of the subsidiaries of the company and details regarding the resolution of such claims, details regarding any such pending warranty claims, if any., h) details regarding any active litigation by or against the company or any litigation in which the company is involved, etc.
  3. Environment related information:
  4. a) Details regarding the toxic chemicals and Hazardous Chemicals or Materials used for manufacturing, stored by any of the units of the company, manufactured by the company in any of its units, and kept in any units of the company at present as well as since the conception of the business, or any such materials or chemicals the company transports from one location to another etc. (Hazardous Chemicals and materials includes[9] any substance or any chemical or any material containing a substance that is considered to be toxic or hazardous under law, including solvents, petroleum, pesticides, paints, asbestos containing materials, lead based batteries, radioactive materials and PCB containing transformers.) b) Details regarding the toxic or hazardous chemicals, toxic substances or air contaminants which are regulated by the pollution control board of the state, c) Any incidents in which such hazardous materials released by the company due to human error etc and the consequences of the same, d) details regarding all instances since the conception of the business in which the Company has corrected unsafe working conditions, e) Detailed report about all the units of the company that sends out waste into any water body, stream or any sanitation systems if any, f) Detailed report along with documentation of all permits and approvals obtained from concerned governmental body responsible for environmental or health regulation, g) detailed report regarding all incidents in which a gas, liquid or solid waste material or any fuel or other Hazardous Material was accidentally or intentionally spilled or released, h) Detailed report along with documentation regarding notices received since the conception of the business, regarding failure to comply with the permits and approvals given by the concerned government bodies regarding pollution and environmental issues, etc.
  5. Information about employees:
  6. a) Detailed report along with documents regarding any major labor problems faced by the company or Trade Union operating in the premises of the company and any agreements entered with such union, if any, b) Detailed list of employees categorized by type or work they perform along with organization chart of the company.
  7. Information regarding management of the business:
  8. a) Detailed list of directors and officers of the company, b) Resumes and CVs of directors and top management officers of the company, c) Co-Founders agreements, management agreements, employment agreements, if any, d) Detailed documentation regarding the salary and compensations paid to the top officers, directors and key personals of the company clearly mentioning salary, allowances, bonuses and gifts (non cash compensation including cars, housing etc), e) Details regarding Bonus given to employees, top officers and directors, retirement benefits given to such officers, details regarding pension given to such officers, profit sharing agreements with any such directors or top officers etc, f) All agreements entered by the company for obtaining loans along with consulting and employment contracts entered by the company with officers or directors still in force and any such agreements entered by the company since the conception of business, g) Detailed report regarding any of the transactions between the Company and any officer, director, shareholder of the company etc.
  9. Other Documentation:
  10. a) Copy of all permits and approvals necessary to operate a chemical business,[10] b) documents regarding the study about the potential of the company, available market for the manufactured products and expansion plans if any, c) Corporate Social Responsibility reports, d) Details regarding all inquiries by the Labor officers since the conception of the business, and the replies given by the company, e) Detailed report regarding the income-tax status, state taxes and copies of the returns filed along with a report regarding any outstanding dues to the government etc.

Conclusion

The above is a due diligence checklist one should go through before buying a chemical factory. Environmental law is a fast-growing field and the growing interest in sustainability and increase in environmental regulations makes rapid changes in the above checklist. One should go through current updates regarding the environmental regulations and regulations regarding hazardous and toxic materials before buying a chemical factory.

Works Cited – Bibliography

Theodore L. Banks, ‎Frederick Z. Banks: Corporate Legal Compliance Handbook

Fred Aftalion: A History of the International Chemical Industry

Dan Fagin, Marianne Lavelle: Toxic Deception: How the Chemical Industry Manipulates Science, Bends the Law, and Endangers Your Health

Society of Chemical Industry (Great Britain): Journal of the Society of Chemical Industry

Stanley E. Manahan: Fundamentals of Environmental Chemistry, Third Edition

J.H. Clark: Chemistry of Waste Minimization

Nancy Marion: Making Environmental Law: The Politics of Protecting the Earth

Stanley Manahan, ‎Stanley E. Manahan: Environmental Chemistry, Ninth Edition

  1. J. Fawcett, ‎Paul Torremans: Intellectual Property and Private International Law

Ved Nanda, ‎George (Rock) Pring: International Environmental Law and Policy for the 21st Century

Alexandre Kiss, ‎Dinah Shelton: Guide to International Environmental Law

Junaid Javaid: Raising Capital Cost Of Issuing Securities

David A. Burge: Patent and Trademark Tactics and Practice

 

Written while pursuing the NUJS M.A. in Business Laws

 

[1]https://en.wikipedia.org/wiki/Constitutional_documents

[2] ioserv.com/en/theor/company_documents/

[3] http://smallbusiness.chron.com/relationship-between-company-its-subsidiary-14696.html

[4] Junaid Javaid: Raising Capital Cost Of Issuing Securities

[5] David A. Burge: Patent and Trademark Tactics and Practice – Page 106

[6] J. J. Fawcett, ‎Paul Torremans: Intellectual Property and Private International Law

[7] J.H. Clark: Chemistry of Waste Minimization

[8] Theodore L. Banks, ‎Frederick Z. Banks: Corporate Legal Compliance Handbook

[9] Nancy Marion: Making Environmental Law: The Politics of Protecting the Earth

[10] Fred Aftalion: A History of the International Chemical Industry

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