Tip of the Week: Due Diligence

Most people look for “clean” shells, companies with well-kept, organized records and no history of unsavory activity, but what they get more often are “messy” or even “dirty” shells. Due diligence is extremely important in reverse merger deals to weed out the good shells versus the bad shells. Taking shortcuts in the due diligence process is a very risky idea.

Messy shells are shells with bad housekeeping. Often times, agreements were made but there are no copies of such agreements or the agreements were never signed. Shell owners give information a little bit at a time and nothing is organized. Here is a list of practice tips for dealing with messy shells.
· Review every document carefully and more than once.
· Be cautious if SEC filings are not current.
· Be sure the board and officers of the shell were properly elected.
· Check everything and check it twice!

Dirty shells are shells in which possible abuses have taken place and bad guys may be involved. Most of the time shady practices are easy to spot. Run as fast and as far away from these shells as possible!

Here is a shortened list, taken from my book, of the major areas to investigate when performing due diligence on a public shell.

• Corporate structure and history, including certificate of incorporation, by laws, stock, records, and stock issuances
• SEC filing history of the shell, whether the shell is a reporting company or is only claiming to be, whether there are any SEC investigations past or present, and the whole story of how the shell went public
• Any litigation or threat of litigation by or against the shell
• Any contracts the company had entered into for any reason which might still be technically in force
• Review of the list of shareholders to attempt to garner information about who they are and what long term interest they may have in the company post merger
  

Bottom line, insist on proper due diligence because a bad deal can be much worse than no deal at all!