Third-party logistics (3PL) provider due diligence

Once a letter of intent is signed, diligence on a 3PL has a particular shape. The business holds other people’s goods in a leased building, serves them under written terms and uses a crew. So the work runs along four lines: what the clients can do when ownership changes, what the building allows, who else has a claim on the assets, and what the operator owes for goods it holds. Each line has documents to request and a registry or statute to check. The findings below are ones to weigh before going ahead.

The client agreements

Request every client agreement with all amendments and rate schedules. For each one, record the term, volume commitments, termination rights, liability limits for loss and damage, insurance requirements and any change-of-control or assignment wording. A clause that lets the client terminate or withhold consent on a sale is a finding. So is a client who has the right but has not used it, because you need to know whether it will. Whether the deal is a share purchase or an asset purchase, read the assignment and change-of-control wording, and ask counsel how it applies. Compare the fees billed over the past year with each rate schedule, and look at credit notes issued to clients. Ask for correspondence about price disputes and service failures.

Registry searches and security claims

A lender or equipment lessor may have registered a claim over racking, forklifts, conveyors or receivables. In Ontario, section 43 of the Personal Property Security Act provides that the registrar issues a certificate on request and payment of the fee, stating whether a financing statement or financing change statement is registered against the debtor name or vehicle identification number searched, and that the certificate is proof, in the absence of evidence to the contrary, of its contents. The Government of Ontario’s Access Now page explains how a notice of security interest is registered and a lien search is conducted. Ask counsel which searches the deal needs, including searches outside Ontario and of real property, and which names to use. Compare the results with the seller’s list of debts and leases, and require that any claim the seller cannot explain is discharged or dealt with in the closing documents.

The lease and the premises

Read the full lease and any renewal, assignment and guarantee provisions. In Ontario, section 23 of the Commercial Tenancies Act deems a covenant against assigning without consent to carry a proviso that consent is not to be unreasonably withheld, unless the lease contains an express provision to the contrary, and, where the landlord refuses or neglects to consent, subsection 23(2) lets a judge of the Superior Court of Justice, on application, determine whether consent is unreasonably withheld. Elsewhere the rule may differ. A lease that cannot be assigned or renewed on workable terms can end the deal, because the building is where the business operates. Ask for any landlord estoppel letter, and confirm that the permitted use covers what is stored. Check who is responsible for repairs, restoration and any environmental condition of the premises, and whether a personal guarantee given by the seller must be replaced by yours.

Inventory held for clients, and compliance records

Ask for cycle-count results and reconciliations by client, along with the history of shortages, damage claims and insurance recoveries. Check whether liability for client goods is recorded in the financial statements. Where dangerous goods are handled, section 5 of the Transportation of Dangerous Goods Act, 1992 prohibits importing, offering for transport, handling or transporting them unless, among other conditions, the person complies with all safety and security requirements that apply under the regulations, so request training and emergency-plan records. Where personal information moves in the data room, section 7.2 of the federal privacy act allows parties to a prospective business transaction to use and disclose personal information without the knowledge or consent of the individual if, among other conditions, they have an agreement with set terms.

Staff records

Under Ontario’s Employment Standards Act, 2000, section 9, if the purchaser employs an employee of the seller after a sale, the employment is deemed not to have been terminated or severed for the purposes of the Act, subject to the 13-week condition in subsection 9(2). Request an organization chart, tenure, pay, agency-labour arrangements and any outstanding claims, and ask counsel how your province treats the same facts. If agency labour makes up part of the crew, confirm who employs those workers and whether the agency agreement continues after closing.

• A client whose agreement ends or is renegotiable on a change of control, and who signals that it will use the right
• A lease that cannot be assigned or renewed on workable terms
• Registered security claims that the seller has not disclosed or cannot discharge at closing
• Shortages or damage claims for client goods that the books do not record
• Staff or compliance gaps serious enough to put service levels at risk after closing