Australia – ASIC Reports On Due Diligence Practices In Initial Public Offerings.

Approach 

Recommendation 

Findings 

Adopt a robust due diligence  process 

A due diligence process should involve:

  effective oversight of the process.

  a proper scope of investigations.

  good record keeping.

  verification of all material statements.

  continuation of the process throughout the offer period to capture material developments. 

Many small to mid-sized issuers, including emerging market issuers, adopt fewer due diligence processes (e.g. convening a due diligence committee (DDC) but nothing more) and were more likely to produce prospectuses with defective disclosure and omit material information that would have been included had the issuer conducted all reasonable investigations. 

Substance over form 

The due diligence process should not only seek to ensure compliance with the law but promote informed decision-making by investors. Issuers and advisers should approach the due diligence process with rigour and independent mindedness.

Documentation should demonstrate this approach has been taken (e.g. DDC minutes should evidence discussion of material issues). 

Even in instances where a number of due diligence processes have been followed, ASIC has observed instances of issuers adopting a 'box ticking' approach to due diligence which has led to:

  the failure to discover critical issues.

  lack of evidence of robust deliberations of issues to be included in the prospectus.

  verification of material statements as ‘statements of belief’ rather than relying on independent and objective evidence. 

Ensure engagement by directors in process 

Directors should engage in the process by:

  having a robust dialogue with management and advisers.

  critically reviewing the issuer’s internal reporting systems, continuous disclosure policies and procedures and corporate governance policies.

  participating in verification.

  ensuring there is an effective system of inquiry and adequate supervision at all stages of the due diligence process.

  applying an independent mind to the process and applying their own skills, knowledge and experience in reviewing the prospectus.

For emerging market issuers (e.g. China), important due diligence documents (e.g. prospectuses and directors' questionnaires) should be translated for non-English speaking directors. 

ASIC have observed instances where certain directors have had little involvement with the prospectus before giving sign-off, particularly for emerging market issuers where the prospectus and other important documents were not translated for directors who could not read English. 

Oversight of due diligence conducted by foreign advisers 

Australian advisers should provide effective oversight and apply sufficient scepticism of the due diligence work carried out by foreign legal and other advisers (e.g. ensuring legal reports do not make assumptions about issues important for disclosure). 

Poor oversight on foreign advisers has resulted in inadequate descriptions in the prospectus of how foreign laws apply to the issuer, and the impact of the political and cultural environment in which the issuer operates. 

Engaging quality legal professional and expert advisers 

Appropriate professional and expert advisers should be engaged (particularly legal advisers). 

Legal advisers are the drivers behind the issuer’s entire due diligence process and need to be well resourced. The standards exhibited by some legal advisers has been found to be less consistent when conducting legal due diligence. 

cutting 

A well-advised issuer conducting the necessary due diligence processes is better placed to mitigate the risk of added delays and related costs, future liability and reputational damage from a poor-quality prospectus. 

Cost cutting during due diligence can lead to significant problems with the prospectus, which may result in an ASIC stop order and the consequential reputational damage to the issuer and the IPO.