Chapter 1: Due Diligence Activities

Question 1

Business and Operational DD

Answer 1

Identify & evaluate a company’s operations, facilities, strategy, and growth potential.
Performs a detailed analysis of the company’s competitive position and the drivers that affect the business

Question 2

Financial and Accounting DD

Answer 2

Analyzes the company’s capital structure and historical financial performance.
Attempts to predict future financial performance.
Ensures proper audit controls are in place.

Question 3

Legal DD

Answer 3

Attorneys verify that management has followed all corporate formalities and applicable laws.
Assess any pending or current litigation for liability concerns.

Question 4

Bring Down DD

Answer 4

Bankers confirm that all DD information about the company is still true and that the offer is still valid just before pricing and finalizing the registration statement.

Question 5

Registration Statement Disclosure Standards

Answer 5

The Securities Act requires that all information in a registration statement or offering document be complete and accurate.
The statements must not contain untrue statements or any material omissions of fact.

Question 6

Due Diligence Defense

Answer 6

Banker must prove that a reasonable investigation was conducted and they had reason to believe that the information provided was true and not misleading.

Question 7

Sell Side DD

Answer 7

The advisor needs to fully understand the business in order to value and market the company.
Advisor needs to be able to anticipate and address any concerns of the buyer.

Question 8

Sell Side Business and Financial DD

Answer 8

Advisor must have an excellent handle on the company’s business operations and finances.

Question 9

Sell Side M&A process

Answer 9

1. Business and financial DD
2. Assisting company management in compiling DD materials for potential buyers.
3. Set up the data room.
4. Manage and monitor access to the dataroom.
5. Assist buyers with DD.
6. Assist company with performing DD on prospective buyers.

Question 10

Data Room Contents

Answer 10

Basic corporate info
Financial info
Business and operational data
Human Resources info
Legal and litigation info
Real and personal property info
Environmental compliance info
Intellectual property info

Question 11

Rule 176 of the Securities Act of 1933

Answer 11

In determining whether or not the conduct of a person constitutes a reasonable investigation or a reasonable ground for belief meeting the standard set forth in Rule 176, relevant circumstances include, with respect to a person other than the issuer:
Type of issuer
Type of security
Type of person
If the individual is an officer
Relationship the person has with the issuer
Did the person reasonably rely on officers info
Is the person an underwriter
If the person had responsibility for documents

Question 12

Sarbanes Oxley Section 402

Answer 12

Enhanced Conflicts of Interest Provision
Prohibits any issuer from making a loan or extending credit to executives or directors.
Not applicable for private companies who extended loans before the registration filing for an IPO.

Question 13

Sarbanes Oxley Section 403

Answer 13

Disclosures of transactions including officers, directors, and beneficial owners.
Requires a beneficial ownership form to be filed within 10 days after filer becomes an officer, director, or beneficial owner.
Changes in beneficial ownership must be reported before the end of the 2nd business day following the transaction.
Forms must be filed electronically and posted on the company’s website.

Question 14

Sarbanes Oxley Section 404

Answer 14

Management’s assessment of internal controls
States managements responsibility for establishing and maintaining internal controls.
Assessment of effectiveness of internal controls.
Audit firm attests to and reports on management’s assessment of internal controls.