The due diligence process from the underwriter's - Fried Frank

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useful to compare the company’s profit margins with those of the other companies in the industry. • Increases in profits and sales can mask margin difficulties. Acquisitions may also mask margin difficulties. Sometimes margin issues can be detected by focusing on product mix. • Year to year comparisons are of less value in acquisitive companies or companies in the process of increasing their number of stores or outlets. Underwriters need to review the base business or same store sales to determine what is really happening. • Additionally, underwriters should diligence the definition of same store sales or base business sales to make sure the periods are comparable. For example, some companies may include a renovated store as a same store which could skew results or include a new plant in the base business which could skew the results. e. Legal Due Diligence • Attorneys submit a due diligence request list and review some or all of the following: • board of director minutes of the company and principal subsidiaries • board of director packages • lawyer letters to accountants • reports to management from accountants • charters and bylaws • stockholders agreements, registration rights agreements, warrants, preferred stock and other documents relating to the company’s outstanding securities • indentures, loan agreements and credit facilities • other material business contracts • employment agreements, stock option plans and stock purchase plans • D&O questionnaires 14 102
• Correspondence with the SEC or other regulators (including comment letters and responses) • Attorneys typically review the company’s outstanding litigation and, where necessary, interview outside counsel handling principal litigation. • Other areas where attorneys may provide particular expertise in due diligence includes: • tax diligence, particularly involving IRS investigations, • intellectual property and a review of the company’s licensing agreements, • employee benefit plans and stock option plans, • special regulatory issues, involving telecommunications or other areas, and • government, antitrust, SEC or other investigations of the company’s business. • The underwriters’ counsel typically provides a 10b-5 opinion to the underwriter which states that the underwriters’ counsel is not aware of any material misstatement or material omission in the time of sale information package (i.e., the preliminary prospectus together with a final term sheet or oral conveyance of final terms) as well as the final prospectus. The underwriters will receive a similar opinion from the issuer’s counsel. Courts have cited receipt of this opinion as a factor in evaluating the underwriters’ diligence. • Sometimes negotiation of the representations and warranties in the underwriting agreement can raise due diligence issues if the company is unable to make standard representations. • Company counsel may prepare a formal legal due diligence report in a European context. f. Accounting Due Diligence • The bankers and lawyers should interview the company’s principal accountants and, where material, accountants of acquired entities. Principal topics of discussion may include: • the company’s accounting policies generally, 15 103
Page 1: 3 THE DUE DILIGENCE PROCESS FROM TH
Page 5 and 6: 1. WHY DO UNDERWRITERS CONDUCT DUE
Page 7 and 8: or other written or oral statement
Page 9 and 10: numbers which become available for
Page 11 and 12: • interviews with senior manageme
Page 13: • revenue recognition • goodwil
Page 17 and 18: • In U.K. public equity offerings
Page 19 and 20: j. Audit Committee Due Diligence
Page 21 and 22: • During the due diligence proces
Page 23 and 24: • Even though the financial state
Page 25 and 26: • “It argues in particular with

The due diligence process from the underwriter's - Fried Frank

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