RED FLAG DUE DILIGENCE

This is a checklist for a red flag due diligence of a business or an asset. The checklist can serve as guidelines for your inhouse legal team or can be used as a basis for determining a scope of work for an external counsel.

Area of analysis	Procedure	Purpose
1. Overview of key risks
Key risks	Brief description of identified key risks	Identification of risks
2. Structure of the group of companies
Structure of the group of companies	Describing the group structure	Identifying the companies within the group involved or affected by the transaction
3. Corporate matters
Company/group status	Due diligence of the basic set of constituent documents of all companies within the group	Due diligence of corporate status of all group companies, identifying companies in the process of reorganization, liquidation, transformation or bankruptcy
Shareholders' rights	Verification of title	Detecting risks regarding the absence of title to shares
Third party rights	Checking shareholders agreements and options with current shareholders and third parties	Identifying individuals who can directly or indirectly control companies within the group
4. Essential real estate
Rights and encumbrances on significant real estate property	Due diligence of significant real estate, including title verification and encumbrances (seizure, pledge, etc)	Confirmation of title (or other rights) to real estate and encumbrances
5. Essential movable property
Rights and encumbrances on movable property	Due diligence of significant movable property, including title verification and encumbrances (seizure, pledge, etc)	Confirmation of title (or other rights) to movable property and encumbrances
6. Major contracts
Sales	Review of up to five contracts with the largest customers	Analysis with a focus on any unusual terms and conditions
Procurement	Review of up to five contracts with the largest suppliers	Analysis with a focus on any unusual terms and conditions
Financing	Review of up to five loan agreements with key lenders	Analysis with a focus on any unusual terms and conditions
7. Significant intellectual property
Title to significant IP	Verification of title to IP and identifying any third-party rights to IP	Confirmation of IP rights of the group of companies and third parties
8. Regulatory issues
Licenses and permits	Verification of key licenses and permits required to conduct business	Confirmation of the group’s legal ability to conduct business
9. Labor relations
Employment contracts	Review of top manager contracts and template employment contracts for other staff	Confirmation of absence of unusual terms and conditions in the employment contracts, including excessive bonus payments or “golden parachutes”
10. Significant litigation and investigations
Significant litigation and public investigations	Due diligence of litigation cases and materials of audits or investigations conducted by public authorities in relation to the group of companies	Confirmation of absence of material disputes (and the status of such disputes, if any) and unresolved inspection issues with public authorities
11. Analysis of historical financial information
RAS accounting statements	Determination of availability - yes / no	Availability of reliable historical financial information
Audit of RAS financial statements	Preparation of a summary of material irregularities	Availability of reliable historical financial information
IFRS financial statements	Determination of availability - yes / no	Availability of reliable historical financial information
Audit of IFRS statements	Preparation of a summary of material irregularities	Availability of reliable historical financial information
Management reporting	Determination of availability - yes / no	Availability of reliable historical financial information
Audit of management accounts	Analysis of material differences from RAS / IFRS	Availability of reliable historical financial information
Analytical overview	· Brief review of historical financial information. The most relevant data source for analysis (accounting, financial or management reports) will be selected · Preparing comments on issues requiring additional analysis · Presentation of adjusted net income (EBITDA)	Brief analysis of historical financial information
12. Analysis of forecast information
Business plan, budget	Determination of availability - yes / no	Availability of forecast information
Business plan, budget	Assessment of the quality of business plan and budget (linking actual and forecast indicators, driver analysis, assumptions)	Assessment of the quality of forecast information, assessment of the company's / group of companies' prospects
13. Analysis of tax information
Tax audits	· Review of the results of tax audits and court proceedings (current and completed withing the analyzed period), comments on the status of their settlement · Express analysis of industry ratios (risk-oriented approach)	Tax risks
Tax risks	Comments on potential tax risks (if identified as part of the above procedures)	Tax risks

Please contact Marat Agabalyan at marat.agabalyan@ta-lc.com if you would like to discuss.

We provide the above scope of work at a fixed fee subject to the following:
1. The report is a high-level study of the company/group of companies (red flag report).
2. Due diligence will take not more than 60 hours.
3. Due diligence is an investigation of legal and financial issues of the company / group of companies.
4. The report is presented in the form of up to 20 slides in Microsoft Power Point.
5. There is no descriptive part in the report except for the general representation of the structure of the group of companies.
6. The scope of due diligence includes two operating companies and one holding company incorporated in Russia. If there are more companies, the billable hours and price proposal for due diligence will be adjusted accordingly. If there are foreign companies, local contractors will be engaged at an additional fee.
7. The materiality criteria for due diligence are set based on the depth of the due diligence requested by the client. If the materiality threshold is low, the counsel may independently determine the most significant items to be checked (applies to sections 4, 5, 6, 7, 10, 11 and 13 of the table above).
8. Currency control, customs, antitrust and other aspects will be reviewed at the request of the client at a separate fee.