Due Diligence and IPO’s

On 14 July 2016 ASIC released Report 484 “Due Diligence Practices in Initial Public Offerings”.  The Report outlines ASIC’s key findings from its review of due diligence practices of issuers of securities in relation to twelve initial public offers (IPO’s).  The Report is designed to help issuers of securities, their directors and advisors to conduct effective due diligence.

Due diligence practice is the process issuers adopt to comply  with their obligations under Part 6D.2 of the Corporations Act 2001 (Cth) in the preparation of IPO (and other rights issues) prospectuses.  The due diligence process involves among other things a thorough investigation into the issuer and its activities to ensure that all material information is contained within the relevant prospectus for consideration by investors.

Responsibility for the quality of the information in prospectuses lies with the issuers of securities and their directors who must ensure the prospectus is accurate and complete.

Typically the due diligence process comprises the establishment of a due diligence committee, the preparation of and adherence to a due diligence compliance program, the participation by directors, management and advisors of the issuer in investigating particular tasks and the verification of the content of draft prospectuses to ensure they do not contain false and misleading statements.

The key findings of the Report are as follows:

1. Poor due diligence often leads to defective disclosure, such as misleading and deceptive statements, statements with no reasonable basis or the omission of material information;
2. There was considerable variation in due diligence processes which led to different levels of investigation resulting in sometimes less desirable outcomes;
3. Some issuers adopted a “form over substance” approach to due diligence indicating less focus on actual disclosure in prospectuses and more on “ticking the boxes”;
4. Instances of superficial involvement by boards, despite significant directors’ liabilities under the Corporations Act;
5. Poor oversite by some Australian legal advisors of due diligence enquiries conducted by foreign advisors;
6. Inconsistent quality of contribution in the due diligence process between investigating accountants (who usually ranked high in their contribution) compared to legal advisors, which in some cases demonstrated a less consistent standard in conducting due diligence;
7. The costs of conducting due diligence may have an effect on the result.  It was found that a well-advised issuer would be better placed to mitigate risks.

The Report makes 5 recommendations for effective due diligence:

1. Issuers should adopt a due diligence process that promotes the oversight of the process, promotes investigations into the information contained in the prospectus, promotes record keeping of significant matters, promotes verification of all material statements contained in prospectuses and involves the continuation of the process after lodgement of the prospectus to capture any further material issues arising after lodgement;
2. Issuers should adopt a “substance over form” approach to ensure prospectuses comply with the law and promote informed decision making by investors who are relying on the content of prospectuses;
3. Directors should take an active role in the process and ensure that a robust due diligence process is undertaken;
4. Competent expert advisors should be engaged to identify material matters in the preparation of the prospectus; and
5. Australian advisors should focus on effective overside of due diligence carried by foreign legal advisors.

The clear message in the Report is that issuers should adopt a more rigorous approach to due diligence, their obligations under Part 6D.2 of the Corporations Act and to prospectus writing.

If you require assistance with IPO due diligence planning please contact Andrew Bini.