Practice Quiz

Paralegal

Category - Judgement

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Artigue & Associates is a mid-size law firm that focuses on business law and real estate transactions. Paula is a paralegal with the firm and working with Alex Associate on a transaction involving the sale of Clifford Client’s 100% interest in a construction company. One day, Paula gets a call from Clifford. Clifford explains that Alex told him that it’s necessary to do considerable “due diligence” to complete the sale of his business. Clifford says, “I don’t understand. I’ve always been diligent about doing my own work, but I’m just selling my construction company. Why do I need to do anything other than sign the contract and accept the payment?” Of the options listed below, what is the Paula’s best approach to answering Clifford’s question?
  1. Explain to Clifford that Alex was mistaken and that due diligence applies only to buyers in any transaction.
  2. Explain to Clifford that due diligence involves taking reasonable steps to meet the duty of care required of all businesspersons, such as using the business judgment rule and avoiding insider trading.
  3. Explain to Clifford that due diligence involves taking reasonable care to avoid problems that could arise, such as selling to a corporation that does not exist or to a buyer that cannot qualify for a loan.
  4. Explain to Clifford that she does not really understand due diligence and that he should ask Clifford.
Explanation
Answer: C - Explain to Clifford that due diligence involves taking reasonable care to avoid problems that could arise, such as selling to a corporation that does not exist or to a buyer that cannot qualify for a loan. Answer C is the best choice because it provides a short answer to Clifford’s question with a couple of examples. Answer A is not the best choice because due diligence applies to both parties to a transaction. Answer B is not the best choice because the duty of care is specific to board members and officers, and here Clifford is a shareholder selling all of his shares. Answer D is not the best choice because a paralegal in a transactional law firm can be expected to understand due diligence.
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