Diligence (GLU)(247122_3_HK)

nullTransactional Due DiligenceTransactional Due Diligence OverviewOverviewConducted in a broad range of commercial transactionsWhy Do We Care?Why Do We Care?Can mean real trouble for our clients Can mean real trouble for the firm Due Diligence StandardDue Diligence StandardNo one checklist that can be used to ensure our diligence is sufficiently reasonable – varies with each transaction Key is to think broadly about how everything you review might be important in the context of the particular transaction and the interests of our clientThe Purpose of Due DiligenceThe Purpose of Due DiligenceGenerally – to conduct an investigation of facts to identify issues of significance to our client’s decision on how to structure and whether to engage in a transaction Specific purpose will depend on the nature of the transaction Securities offerings M&A Leveraged financeThe Securities Offerings ContextThe Securities Offerings ContextStems from Section 11 of the Securities Act of 1933 No material untrue statement or material fact omitted The “prudent man” standard Not an audit, but must make a reasonable attempt to verify all information Designed to identify and confirm the accuracy of the relevant facts so that: the parties can prepare an accurate and complete offering document; we can establish a basis on which to deliver our legal opinion; and our underwriter clients can successfully assert the due diligence defense. The M&A Context (Buyer Side)The M&A Context (Buyer Side)Most extensive diligence is done when we are representing the acquiror. Designed to: identify structural and business characteristics of the target that might (a) affect our client’s decision to complete the transaction, (b) affect the price our client is willing to pay or (c) affect the structure of the transaction; and identify information essential to the negotiation and closing of the acquisition agreement.The M&A Context (Seller Side)The M&A Context (Seller Side)May have to conduct diligence of both the target (T) and the acquiror (A) Diligence of T (our client) Confirm the accuracy of T’s reps & warranties and related disclosure schedules May be responsible for setting up the virtual data room (e.g., deciding what goes in, what is material/sensitive, when bidders get access, etc.) Diligence of A (if T’s shareholders will receive A’s securities in the transaction) Confirm the accuracy of A’s reps & warranties and related disclosure schedules Identify issues that may affect the structure of the acquisition or A’s ability to consummate the transaction Confirm the accuracy of material statements concerning A made in the proxy statement/prospectus issued to T’s shareholders in connection with the transactionThe Due Diligence TeamThe Due Diligence TeamSize of team will depend on the nature, complexity and timing of the transaction Will often need to coordinate review by certain experts (e.g., tax, environmental, regulatory, IP, real estate, litigation) Accountants will be involved if there are financial statements to review You should still look for “red flags” Comfort letters READ THE FOOTNOTES – this is typically where relevant information will be includedTips for Conducting Effective Due Diligence Tips for Conducting Effective Due Diligence Develop a thorough understanding of the big picture and the company Flag any potential issues early so you can look for more detailed information as you do your diligence Remain fluid so that the process can be modified regularly Start as early as possible, and pursue diligently (review often takes longer than expected!) Tips for Conducting Effective Due Diligence Tips for Conducting Effective Due Diligence Prioritize your review (and review in order of priority) and keep clear notes of what you have already reviewed Keep in mind each party’s role in the transaction: Purchaser? Borrower? Lender? Seller? Issuer? (and note that each party can have more than one role in the transaction) Ask your supervisor questions early and often to help streamline your review process and prevent you from missing issues Tips for Conducting Effective Due Diligence Tips for Conducting Effective Due Diligence Keep notes of not just issues/potential red flags, but also of information that you may need later in the transaction (jurisdictions and exact names of the parties, locations and types of assets, etc.) Make life easy for specialists: involve them early and provide them with all of the information they need (c/m number, name of client, timing, description of transaction, contract people on the deal, necessary documents, etc.) Set alerts to monitor when new documents are provided Commencing the Diligence ProcessCommencing the Diligence ProcessDrafting and submitting the diligence request list Start with relevant form/precedent, but Remember to remove notes from our forms! Don’t blindly follow forms/precedent Always send draft to supervisor before sending to client/other side Identify the proper addressee If the request is voluminous and timing is short, consider identifying high priority itemsCommencing the Diligence ProcessCommencing the Diligence ProcessAssembling the documents Company may set up a physical or an electronic “data room” Ask whether copies of documents (or certain categories of documents) can be made Request that the documents be organized according to the numbering scheme provided in your diligence request letterCommencing the Diligence ProcessCommencing the Diligence ProcessHow to start your review Identify the items that are missing first and ask when they will be provided Ask your supervisor! Remember to think about the transaction and how the document you are reviewing might be significant to our client Makes notes of possible issues or items for follow-up and discuss immediately with your supervisor If there is an electronic data room, print out the index and review it to get an overall picture of the data room’s organization and to help prioritize your review and keep track of what you have already reviewedCommencing the Diligence ProcessCommencing the Diligence ProcessCoordinating diligence efforts with company employees May be your first direct client contact! Treat them with respect and in a non-threatening way Do not disclose the issues you uncover directly to company employees; discuss with your supervisor first Maintain the confidentiality of the transaction at all times (especially risky when you are reviewing documents onsite) Common Diligence DocumentsCommon Diligence DocumentsSEC FilingsSEC FilingsProvide an excellent source of information on the company, its business and its management Form 10-K (annual report) – includes detailed description of the company’s business, including material contracts and litigation Form 10-Q (quarterly report) – includes primarily financial statements, but may also contain material contracts Form 8-K – reports on certain significant events, like material acquisitions/dispositions, director resignations and changes in auditors Schedules 13-D/G – filed by the company’s significant shareholders; help you understand who controls the companyRegulatory FilingsRegulatory FilingsWill probably need an expert to assist with this review Talk to your supervisor about who to contact Coordinating with experts will be one of your primary responsibilitiesManagement LettersManagement LettersLetter from accountants to the company describing any weaknesses in internal accounting controls Also review the company’s response letter(s) to the accountants Any material deficiencies should be flagged as an issue General Overview of Due Diligence Exercise for a HKIPOGeneral Overview of Due Diligence Exercise for a HKIPODue diligence is an ongoing process Additional due diligence may be needed when new issues arise / discoveredGeneral Overview of Due Diligence Exercise for a HKIPOGeneral Overview of Due Diligence Exercise for a HKIPODue diligence request checklist Data room / Online data room Practice Note 21 work plan Searches Interviews with suppliers, customers, banks, etc. Legal opinions Due diligences sessions with management Bring-down due diligenceDocumenting the Results of Your DiligenceDocumenting the Results of Your DiligenceGenerally, only send the final diligence request list to the file All notes taken during the course of your diligence should be discarded when the transaction is complete