Due Diligence in Securities Offerings

TABLE OF CONTENTS

CHAPTER 1
Introduction:
The Role of Due Diligence
§ 1.01    Introduction for Securities Lawyers
[1]    Protecting Issuers and Underwriters
[2]    Basis for Negative Assurance Letter and Opinions
[3]    Protecting the Firm
§ 1.02    Introduction for Investment Bankers
[1]    The Banker as Gatekeeper
[2]    Franchise and Reputational Risk
§ 1.03    Introduction for In-House Legal Counsel
[1]    Protecting the Company
[2]    Protecting the Board
[3]    The Benefit of Strong Disclosure Controls and Procedures
§ 1.04    Integrity and Courage

CHAPTER 2
Overview of the Diligence Process:
A Quick Reference Guide
§ 2.01    Documentary Due Diligence
[1]    Getting Started
[2]    Documentary Due Diligence Process
§ 2.02    Management Due Diligence
[1]    Management Due Diligence Sessions
[2]    Director and Officer Diligence
§ 2.03    Financial Due Diligence
[1]    Auditor Diligence
[2]    Comfort Letter Process
[3]    Financial Review by Underwriter
§ 2.04    Diligence Procedures Performed by Underwriters
§ 2.05    Review and Back-Up of Offering Document
§ 2.06    Documenting the Process

CHAPTER 3
Sources of Liability
§ 3.01    Sources of Liability
[1]    Section 11(a) of the Securities Act
[2]    Section 12(a)(2) of the Securities Act
[3]    Rule 10b-5 Under the Exchange Act
[4]    Section 20(a) Control Person Liability
§ 3.02    The Due Diligence Defense
[1]    Defenses Under Section 11
[a]    Non-Expertized Portions
[b]    Expertized Portions
[2]    Defenses Under Section 12
[3]    Defenses Under Rule 10b-5
[4]    Defenses to Control Person Liability
§ 3.03    Conducting a “Reasonable Investigation”: What the Courts Say
[1]    Rule 176 Under the Securities Act
[2]    Examples of Good and Bad Diligence
[a]    Outside Directors
[b]    Underwriters
[c]    Good Procedures

CHAPTER 4
Documentary Due Diligence
§ 4.01    Introduction to Documentary Due Diligence
[1]    Not a Check-the-Box Exercise
[2]    Getting Started: Review of Background Information
[3]    Summary of Documentary Due Diligence Process
[a]    Prepare a Documentary Due Diligence Request List
[b]    Schedule a Call with Issuer to Review Documentary Due Diligence Request List
[c]    Review Documents Provided
[d]    Continuous and Interactive Diligence Process
[e]    Final Follow Up Before Launch and Pricing
§ 4.02    The Documentary Review and Its Ultimate Goals
[1]    What to Look for Generally
[a]    What Is a Material Fact?
[b]    What Is a Red Flag?
[2]    Reasons for Reviewing the Items Requested
§ 4.03    Foreign Issuer Diligence/Local Counsel Diligence
§ 4.04    Addressing Confidentiality and Privilege Issues
Appendix A    Sample Documentary Due Diligence Request List

CHAPTER 5
Management Due Diligence
§ 5.01    Overview of Management Due Diligence
[1]    Management Diligence Sessions
[2]    When to Hold Sessions
[3]    Who Should Attend
[4]    Specialist Diligence Sessions
[5]    Coordination with Drafting of Offering Document
[6]    Bring-Down Diligence
§ 5.02    Integrity of Management
[1]    Background Checks
[a]    Who to Cover
[b]    Review and Follow Up
[2]    D&O Questionnaires
§ 5.03    Other Investment Banker Diligence Procedures
[1]    Financial Modeling
[2]    Customer/Supplier Interviews
[3]    Site Visits
[4]    Interacting with Research Analysts
Appendix A    Sample Management Diligence Topics
Appendix B    Sample Bring-Down Diligence Questions
Appendix C    Form D&O Questionnaire (IPO)
Appendix D    Form D&O Questionnaire (144A Short-Form Version)
Appendix E    Sample Customer Diligence Questions

CHAPTER 6
Offering Document Review, Back-Up Book
and Form Check
§ 6.01    Offering Document Review
[1]    Initial Public Offerings (IPOs)
[2]    Shelf Take-Downs and Review of Incorporated Documents
[3]    Identifying Forward-Looking Information
§ 6.02    The Back-Up Book
[1]    Scope of Coverage
[2]    Appropriate Support
[3]    Reviewing Roadshow Presentations
§ 6.03    The Form Check
[1]    Check-the-Box Exercise
[2]    Incorporated Documents
[3]    144A Offerings
Appendix A    Sample Cautionary Disclosure Regarding Forward-Looking Statements

CHAPTER 7
Negative Assurance Letters
§ 7.01    Introduction
[1]    Basis for Providing Negative Assurance Letters
[2]    When Negative Assurance Letters Are Provided (And When They Are Not Provided)
[3]    Negative Assurance Letters Provided by One Law Firm
[4]    Negative Assurance Letters Provided by In-House Counsel
§ 7.02    Anatomy of the Negative Assurance Letter
[1]    Addressees
[2]    Description of Process Undertaken
[3]    Statement Regarding Registration Statement
[4]    Statement Regarding Disclosure Package
[5]    Statement Regarding Prospectus or Offering Document
[6]    Exclusion of Financial Data
[7]    Exclusion of Statistical Data
[8]    Other Limitations
[9]    Reliance and Concluding Paragraph
[10]    Statement Regarding Compliance as to Form
§ 7.03    Documenting the Diligence Process
[1]    Diligence Memorandum
[2]    Memoranda to Files
[3]    Document Retention
[4]    Closing Set
Appendix A    Sample Form Negative Assurance Letter

CHAPTER 8
Auditor Due Diligence
§ 8.01    Preparing for Auditor Due Diligence Sessions
[1]    Preparing the Questions
[2]    Scheduling the Session
[3]    Parties in Attendance
[4]    Prior Review of Financial Disclosures
[5]    Review of Audit Committee Materials
[a]    Audit Committee Meeting Minutes
[b]    Management Letters or 404 Materials
[c]    Required Auditor Communications
§ 8.02    Dealing with Non-Cooperative Auditors
§ 8.03    Evaluating Adequacy of Existing Disclosures.
Appendix A    Sample Auditor Due Diligence Questions

CHAPTER 9
The Comfort Letter
§ 9.01    Reasons for the Comfort Letter
§ 9.02    Basic Elements of the Comfort Letter
[1]    Date, Delivery and Staleness
[2]    Addressees
[a]    Underwriters
[b]    Initial Purchasers and 144A Representation Letter
[c]    Board of Directors
[3]    Statement of Independence
[4]    Procedures Regarding Audited Financial Statements
[5]    Procedures Regarding Unaudited Financial Statements
[6]    Change Period Procedures
[7]    Pro Forma Financial Information
[8]    Tables, Statistics and Other Financial Information
[a]    Levels of Tick-Mark Comfort
[b]    Preparing a Circle Up
§ 9.03    Special Issues
[1]    Comfort on Acquired Company Financials
[2]    Comfort on Non-GAAP Financial Measures
[3]    Comfort on Flash Numbers and Issues with Fourth Quarter Results
[4]    Comfort in Offering by Non-U.S. Issuers
§ 9.04    Additional Procedures When Comfort Is Not Available
Appendix A    Sample Comfort Letter
Appendix B    Sample 144A Representation Letter
Appendix C    Sample CFO Comfort Certificate

CHAPTER 10
Debt Instrument Due Diligence
§ 10.01    Identifying Issues in Debt Instrument Due Diligence
[1]    Equity Offerings: What to Look For
[2]    Debt Offerings: What to Look For
[3]    Acquisition Financings: What to Look For
§ 10.02    Resolving Conflicts
[1]    Waiver
[a]    Change of Control
[b]    Restricted Payment
[2]    Consent Solicitation
[3]    Redeem or Repay Existing Debt
[4]    Equal and Ratable
Appendix A    Sample Debt Instrument Review Template

CHAPTER 11
Specialist Due Diligence Topics
§ 11.01    Litigation Diligence
§ 11.02    Regulatory Diligence
§ 11.03    Intellectual Property Diligence
§ 11.04    Employment, Compensation and Benefits Diligence
§ 11.05    Environmental Diligence
[1]    Environmental Compliance and Remediation Obligations
[2]    Material Legal Proceedings
[3]    Assessing Contingent Liabilities
[4]    Asset Retirement Obligations
§ 11.06    Tax Diligence
§ 11.07    Diligence Issues Related to OFAC and Other Sanctions, Trade Restrictions, and Anti-Bribery and Money Laundering
[1]    Sensitive Areas
[a]    OFAC and Other Sanctions
[b]    Trade Restrictions
[c]    Anti-Bribery and Money Laundering
[2]    Due Diligence Procedures
[3]    Specialist Counsel
Appendix A    Sample Intellectual Property and Technology Due Diligence Call Agenda
Appendix B    Sample Intellectual Property and Cybersecurity Due Diligence Request List
Appendix C    Sample Environmental Due Diligence Request List  
Appendix D    Sample FCPA and Anti-Bribery Compliance Due Diligence Questionnaire  
Appendix E    Sample OFAC and Trade Due Diligence Questions and Document Requests

CHAPTER 12
Using the Underwriting Agreement and
Legal Opinions as a Final Due Diligence Check
§ 12.01    The Underwriting Agreement as Diligence Tool
§ 12.02    A Final Check

INDEX