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The IPO process
and equipment that is accessible 24
hours a day. Customer service should be
reliable and capable of supporting a deal of
international scope. The financial printer
should make use of technology tools to
streamline delivery of the project, which
may require making use of best practices
in manufacturing concepts, analytical
techniques, process management and
standardized procedures. Following
the IPO, the financial printer should be
equipped to handle annual compliance and
future transaction needs. The benefit of
using the same financial printer for future
needs is that it reduces the time required
for data collection and ensures that former
project knowledge is properly applied.
(c) Due diligence investigation
The process of verifying that the
information in the prospectus and the
registration statement is materially
complete and accurate is broadly referred
to as “due diligence.” While the guiding
purpose is to limit the risk of liability,
the accuracy and completeness of the
prospectus are essential goals for other
reasons as well. For the company and its
personnel, they provide the foundation
for applying best disclosure practices
and building the confidence of investors.
For underwriters, a robust due diligence
exercise is required under a formal internal
approval or commitments process designed
to protect against reputational risks and
to meet other institutional goals. An
underwriting firm has a vital reputational
interest in the soundness of the company’s
business plan and a disclosure document
that completely and accurately describes
the risks associated with that plan. Similar
reputational concerns apply to directors
and shareholders. In addition, due diligence
can help identify business issues that
need to be addressed, such as necessary
third-party consents and waivers for the
transaction.
Although these additional goals are
important, the due diligence process is
driven by the risk of liability. The parties
that may be liable if there are material
misstatements and omissions in the
prospectus and registration statement
(including documents incorporated
by reference) include the company,
its directors, the officers who sign the
registration statement, the company’s
auditors, any selling shareholders and the
underwriters. Controlling shareholders
may also be liable. Chapter 8 contains a
further discussion of the risk of liability
facing directors and officers.
The company itself faces strict
liability, but underwriters, directors
and officers may assert a defense if they
performed a reasonable investigation and
believed the registration statement and
prospectus were materially accurate and
complete. This defense is often referred
to as the “due diligence defense.” The
applicable liability standards—and some
subtleties applicable to the liability of
particular IPO participants—are discussed
more specifically in Section 8.1.
In practice, the due diligence process
requires an organized approach to verifying
the information in the prospectus and
registration statement and to asking
questions about the company. Key general
questions to explore at the beginning of
the process include the following:
• What are the strengths and weaknesses
of the company’s business plan? Is the
company’s management capable of
executing the plan?
• What internal or external events or
trends could jeopardize success?
• Is there anything that, a year or
two from now, with the benefit of
hindsight, the company might wish it
had disclosed?
Financial and business due diligence:
Financial and business due diligence
involves extensive review and discussion
of the company’s historical financial
information, operations, current business,
business plans, projections and other data.
It is generally carried out through:
• formal due diligence sessions with key
members of management;
• informal meetings with key members
of management;
• drafting sessions;
• facility visits;
• preparation and review of forecasts;
• “sensitivity” analysis;
• discussions with key customers,
suppliers, creditors and investors;
• review of securities analyst reports;
• review of industry information and
disclosure regarding comparable
companies (e.g., SEC filings and annual
reports of other companies in the same
industry, research reports on industry
and competitors, trade publications);
• meetings with auditors and obtaining
auditor comfort letters on financial
information;
• third-party reports, where appropriate;
and
• involvement of specialized counsel,
where appropriate (e.g., issues of
intellectual property, mining rights or
regulatory matters).
In carrying out business due diligence,
underwriters and their counsel should
conduct extensive interviews with
management. Specific questions about
the business should be asked. Moreover,
additional information may be gleaned
and inconsistencies identified by asking
different members of management
the same questions. Back-up data for
industry data and statistics should also
be requested and reviewed. Specialized
consultants may be called upon to assist in
the investigation where the nature of the
business or a particular issue warrants it.
Although the investment bankers
and their staff will conduct the lion’s
share of the financial due diligence, it is
important for the lawyers to be actively
involved in the process, to understand
the financial status of the company and
identify possible problems presented in
the financial statements.
Legal due diligence: Underwriters’
counsel will generally take the lead
in conducting legal due diligence by
preparing a document request list that
exhaustively identifies materials they
wish to review. During the preparation
process, it may be helpful to review
document request lists for companies
in the same industry or from the same
country. The list should be used as a
checklist and aid to organizing the due
diligence process, rather than an inflexible
set of bureaucratic requirements or limits
for the due diligence investigation.
Legal due diligence will often involve
the following:
• discussions with company personnel
about the company’s legal affairs;
• closing documents, including
officer certificates, public authority
certificates such as certified charters
and good standing certificates; and
38 NYSE IPO Guide