Preemptive and predictive for some things, corrective for others

In the corporate practice -especially in industrial activities- it is usually considered a good practice to do a systematic maintenance of the machinery and equipments in order to avoid down times, breakage, accidents and other circumstances that could generate loss of production and, thus, of money.

It is paradoxical that business men and women, who understand and apply modern criteria of predictive and preemptive maintenance, and only in the last place the corrective maintenance, do not usually act in the same way with other areas related to the management of issues considered "soft", among which we could mention the legal field. In these areas, the usual behavior is reactive, leaving the "corrective" aspects to the lawyers.

In my 20 years as a corporate lawyer, most of them as in-house corporate attorney, I have taken part in a countless amount of "due diligences".+¡

What is understood by "due diligence" (DD)?

The DD is an unavoidable step for a "good business man" in any acquisition or financing of companies operation.

Many times, neither the shareholders nor the directors of the companies actually know the risks they are living with.

A preemptive vision leads to ascertain that value would be added by making a comprehensive Due Diligence, without the rush of a sale or debt operation.

After the respective report and the identification and assessment of existing legal risks, certain plans of action could arise to minimize / eliminate such risks, allowing their management without the urgency of a transaction, which usually forces the companies to close the deals “soon and badly”, to enter into disadvantageous agreements, or to endure cuts in prices or higher financing costs.

Notwithstanding the above, it rarely occurs that a DD is conducted to make a systematic assessment of a company and its management as a “baseline”, in terms often used for environmental impact studies.

In health terms, you could say that companies performs “check-ups” only in extreme circumstances, where an “operation” is pending.

When performing such audits, risks, contingencies and even unregistered liabilities are usually detected. These could be from mere formal delays (e.g. failure to keep the company's books updated -minutes of meetings of the Board of Directors, Minutes of Shareholders meetings) to hidden liabilities due to environmental issues not properly disclosed, which could generate serious patrimonial and personal responsibilities for the company, its directors, managers and shareholders.

A preemptive and proactive legal approach denotes that it would be a good managing practice to conduct such studies, with different levels of depth according to the company, sector, work conditions and risks inherent to the particular activity. It is absolutely not necessary to have the sale of the company or the taking of a loan in mind.

Due Diligence and Intellectual Property (IP). From understanding the transaction (acquisition/financing) to comprehending and knowing the business.

In terms of a traditional DD, the practice teaches you that it is essential to understand what the transaction is about.
IP issues, as it happens with every other aspects that are key factors in the corporate agenda, especially those issues intended to verify the integrity of the assets to be transferred during an acquisition, or those that conforms the patrimony that guarantees a financing operation, need to be identified, verified, highlighted and assessed in the context of the overall transaction .

Categorizing and putting in order the issue according to priority and relevance

As when dealing with Preemptive and Predictive Due Diligences we are not faced with the urgency of the “closure” of a "deal" or a financing, and we are focused on working in the prevention of problems, the task lacks the drama and frenetic urgency that usually surround this kind of analysis in acquisitions or loans operations.

For the sake of its analysis, it is useful to place the topics that could arise in categories according to their priority: high, medium or low. In typical DD's, the top priorities cannot be covered by guarantees, compensations or appropriate rectifying measures, the medium priorities can be treated so, and the low priorities, that do not or could not materially affect the purchase price or the transaction structure, may be left for correction at a later time.

The immersion required by this kind of proceedings leads the experienced team to rapidly have a fairly deep knowledge of the company and, thus, go to “the point” in certain key issues that should always be taken into account, but that, sometimes, do not arise from an internal routine study or analysis, such as a traditional audit, because people get used to or have adapted to live with them.

Investment in risk management and in costs optimizations. A necessity

My personal experience led me once to review about 10,000 trademark Certificates of Registration of a company that, even though it had in use many marks of different business units, was not using more than 50 or 60 trademarks. This circumstance was an absolute excess, even if I took into account the “defensive” registrations, that are protected when we are interested in a trademark in a certain class, so that no third party could use it in other classes that could damage our mark (e.g. by using a mark with which we primarily identify food to distinguish an insecticide). In fact, the different heads of the business units, when being asked whether a trademark registration should be renewed or not, chose to renew it merely to prevent anyone from holding them to blame in the hypothetical case that anyone, in the future, should attempt to use such mark to distinguish a product. Thus, trademarks that would never be used were being indefinitely renewed.

SBM, through its corporate law department, is beginning to offer to its clients a “mapping” of risks that would trigger concrete predictive, preemptive and, if there is no other option, corrective actions to face eventual risks detected. That is all this is about, collaborating with the company and its in-house attorneys or day to day lawyers in focusing on and establishing management priorities, taking into account an independent analysis of the legal situation and the eventual risks.