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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
The IPO process • document review by the company’s and underwriters’ counsel, including: • charter documents of the company and its material subsidiaries; • minutes of meetings of shareholders, the board of directors and key committees, and materials prepared for board and committee meetings; • material contracts, including shareholders’ agreements and joint venture agreements, and forms of contracts; • filings, correspondence and other communications with supervisory and regulatory authorities; • materials relating to intellectual property, including licenses, patents and trademarks; • materials relating to pending litigation, including counsel’s litigation letters to auditors; • auditors’ letters to management; • D&O questionnaires; and • other documents that may further the legal due diligence investigation. Corporate governance due diligence: Underwriters and their counsel typically review the company’s corporate governance policies and Sarbanes-Oxley compliance programs. Issues to be considered may include: • the company’s disclosure controls and procedures and internal controls; • the company’s code of ethics, exemptions to the code and past waivers; • the independence of the board of directors; • the company’s policy on handling whistleblower complaints; • the company’s document retention policy; and • nonaudit services provided by the company’s independent auditors. Legal opinion and negative comfort letter: It is typically a condition to closing the IPO that counsel for the company and the underwriters provide both a legal opinion and a negative comfort letter, or “Rule 10b-5 letter.” The due diligence investigation provides counsel with the basis for these letters, and the letters in turn form part of the due diligence process on which offering participants rely. Opinions usually cover such matters as observance of corporate formalities, existence of the company and material subsidiaries and matters relating to the securities themselves. They may also address compliance with material contracts, among many other matters. The negative comfort letter generally says that nothing has come to the attention of counsel that would cause counsel to believe that the registration statement or prospectus is false or misleading in any material respect. Identifying potential problems: The due diligence process also aims to identify potential impediments to the transaction. Examples include contractual rights of another party that the IPO could trigger or modify, because it results in a change in the company’s share ownership. Provisions of this kind may exist in financing documentation, agreements with or among the company’s shareholders (e.g., preemptive or registration rights) or other important contracts or governmental authorizations. The process should also identify risks to future financial performance or competitive position and limitations on operational or financial flexibility. Examples include upcoming expiration or renewal dates, or early termination provisions, in customer or supplier contracts, government authorizations or IP licenses. Paper data room v virtual data room: A secure repository for the documents to be reviewed during the due diligence process is critical. The company or its counsel may host a “paper data room,” in which hard copies of proprietary business documents and financial data are made available for inspection. The paper data room has obvious limitations, given that participants may be spread across several cities, states or countries. Not only is inspection limited to the hours of operation of the host but review of documents for out-of-town participants is inconvenient. The “virtual data room” provides an excellent solution to the challenges presented by a traditional paper data room. Virtual data rooms can offer secure, webbased access to documents, particularly in convenient PDF format, and parallel access for each of the review groups. Moreover, the use of a virtual data room eliminates the need for travel and increases efficiencies by making documents available around the clock. The following points can be important factors in selecting a virtual data room provider: • Established track record—The provider should have proven technology and a strong customer-focused background. • Leading technology—The ideal solution should integrate leading technology, support industry standards and work with globally accepted data formats. • Project management expertise— Confidentiality is paramount, as is the provider’s ability to understand the transactional business environment and assign project managers who are educated and experienced in the specific transaction at hand. • Global production facilities—Choosing a provider with document-scanning facilities in cities around the world will ensure that accelerated document capture is quick and efficient. • User support—It should be possible to make changes and address questions immediately, for all users and in multiple languages. • Security—Security processes on application, staff and infrastructure; SSAE 16 Type II, multilocation data hosting with zero-downtime network guarantee; database replication at multiple locations; and a core competency in handling sensitive financial and business information are critical. (A SSAE 16 Type II service auditor’s report (or a SOC 1 Report) includes the service auditor’s opinion on the fairness of the presentation of the service organization’s description of the system, the suitability of the design of the system to achieve the specified control objectives, and whether the system was operating effectively during the period under review.) • Rapid deployment—Top-tier providers should be able to provide the tools to create indexes in minutes, not days, and enable document review in real time as documents are captured, processed and posted. NYSE IPO Guide 39
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Page 8 and 9: Preface Congratulations on making i
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Contributor profiles NYSE IPO Guide
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Contributor profiles (SEC) register
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Contributor profiles The Children
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Contributor profiles KPMG 345 Park
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Contributor profiles Morrow & Co.,
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