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

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• the company may not have enough money to back up the indemnity, • for foreign issuers, the company’s assets may be located outside the United States, making them much harder to access, and • even if the indemnity is enforceable and the underwriter can recoup its monetary losses, the harm to the underwriter’s reputation from bad publicity, and the time and resources necessary to defend against securities litigation, can be significant. 3. WHEN IS THE DUE DILIGENCE PERFORMED • Due diligence is an ongoing process which should be continuously done from the date of receipt of the initial mandate through the closing date. • In a typical U.S. registered underwritten offering, most of the due diligence is done before the first filing of the registration statement with the SEC. This includes most of the legal due diligence, the management interviews and the accounting due diligence. (This is completed before the distribution of the “red herring” or preliminary offering memorandum in a Rule 144A/Regulation S offering, as the SEC does not review and comment on such offerings.) • Sometimes site tours are done after the first filing. In a Rule 144A offering, this is typically done before printing of the preliminary offering memorandum. • Although it is a better practice to finalize customer and supplier interviews before the first filing, sometimes customer and supplier interviews are done after the first filing because companies are concerned about prematurely disclosing their transaction. • Frequently, the drafting sessions can be extremely useful as due diligence sessions. Sometimes more due diligence can be accomplished with management at a drafting session than at the management interviews themselves. • The underwriters should have a separate due diligence discussion with the company with respect to new quarterly or year-end 8 96
numbers which become available for inclusion in the offering document. • In particular, it is important to update the due diligence between the time of filing the initial registration statement and the time of printing red herrings, and between the time of printing red herrings and the pricing date. • When markets are uncertain and offerings are delayed for long periods of time, it is particularly important to update the due diligence when printing red herrings or pricing the deal because changes in the business may be more numerous over the longer time period. • Results for the business since the end of the most recent publicly reported quarter need to be carefully scrutinized because they are typically not disclosed in the offering memorandum or prospectus. • Underwriters should conduct “pre-pricing” and “pre-closing” due diligence bring-down telephone calls with the company. 4. WHAT ARE THE COMPONENTS OF THE DUE DILIGENCE PROCESS • The amount of due diligence performed will of necessity vary from deal to deal. It is therefore difficult to establish a uniform set of procedures for all deals. • In an offering of debt securities, the company’s existing and future liquidity and cash flows may be more significant than in an equity deal. In equity deals, the growth prospects of the company may be more important than the company’s short term cash flows. This will impact the type of due diligence performed. • The various components of the due diligence process include: • background due diligence, • business due diligence, • financial due diligence, • MD&A due diligence, • legal due diligence, 9 97
Page 1: 3 THE DUE DILIGENCE PROCESS FROM TH
Page 5 and 6: 1. WHY DO UNDERWRITERS CONDUCT DUE
Page 7: or other written or oral statement
Page 11 and 12: • interviews with senior manageme
Page 13 and 14: • revenue recognition • goodwil
Page 15 and 16: • Correspondence with the SEC or
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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