Most Read Contributor in New Zealand, September 2016
The Australian Securities & Investments Commission
(ASIC) has identified a number of weaknesses in Initial
Public Offering (IPO) practices in Australia and has
proposed a way forward which, if adopted, is likely to influence
ASIC has come out with seven key findings, based on a detailed
review of 12 IPOs between November 2014 and January this year. Poor
due diligence (DD) often leads to defective
DD processes varied among issuers, with small to mid-sized
companies demonstrating less effort and commitment, e.g. convening
a DD committee but doing nothing more.
Often a tick box approach was taken which valued form over
Engagement by the board was often superficial, particularly by
Oversight by Australian lawyers of DD conducted by foreign
advisers was often poor.
Legal advisers demonstrated a less consistent standard in terms
of DD than did investigating accountants.
Quality, not price, should be the determinant in appointing
external advisers and is probably more cost-effective in the
long-run as a "well-advised issuer" will be better placed
to avoid the risk of expensive delays, future liability and
reputational damage from poor quality IPO documentation. ASIC
notes: "We have observed that the extent and scope of the due
diligence process would usually be reflected in the costs incurred
by the issuer".
There is nothing to prevent the Financial Markets Authority
(FMA) undertaking a similar investigation in New Zealand.
It has already looked into the DD behind the Gentrack IPO (Chapman
Tripp commentary available
ASIC's concerns regarding the quality of DD related mostly
to small and medium-sized issuers.
Issuers should ensure:
oversight of the DD process – establishing a DD
committee, providing guidance on a materiality threshold for
investigations, ensuring material matters are escalated to the
board, providing a final report on the DD and a conclusion on the
completeness and accuracy of the offer documents
active investigation into the information presented in the
offer documents, including but not limited to management
interviews, director questionnaires and specific investigations by
accounting/legal/tax experts as necessary
verification of all material statements, and
post-lodgement review of any material developments within the
The DD process should be thorough and "substance over
form" rather than tick-box, and should ensure not only that
the offer documents comply with the law but also that they promote
informed decision-making by investors.
Directors are responsible for ensuring that the DD process is
robust so need to be actively involved. This means: applying an
independent mind and their own skills, knowledge and experience to
the information presented, questioning management and expert
advisers, participating in the verification processes and ensuring
all "red flag" issues are followed up.
Those matters which require expert advice should be identified
and the appropriate advisers engaged.
Local advisers should provide effective oversight of the DD
carried out by foreign legal and other advisers for emerging market
issuers. This will require developing a familiarity with the home
political, cultural, business and regulatory environment in which
the issuer operates.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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