Chapter 5 Practice Question Answers
1. Answer: D. Just before a deal is finalized, the investment bankers and other professionals confirm that the information discovered or verified by previous due diligence is still valid. This is known as bring-down due diligence. Bring-down due diligence usually culminates in an all-hands meeting or conference call. In a securities offering, this typically occurs just before the final decision on pricing. In an M&A transaction, it typically comes after the terms of the deal are finalized, but before the deal closes.
2. Answer: A. Answer choices B, C, and D could each make a difference as to the person’s liability. This is because each of these persons may potentially use a due diligence defense, and each of the given circumstances is among the “relevant circumstance” for determining if the person conducted a reasonable investigation. Answer choice A, however, is not relevant, because an issuer is subject to strict liability—meaning a due diligence defense is not available—for any misstatements or omissions in a registration statement.
3. Answer: A. Financial and accounting due diligence involves verifying the company’s capital structure and historical financial statements and attempting to predict its future financial performance. This may include requesting a comfort letter from the company’s accountant, stating that the company’s financial statements are accurate. Conducting a site visit is an element of business and operational due diligence. Uncovering pending litigation is an element of legal due diligence. Confirming that the information discovered or verified by previous due diligence is still valid is bring-down due diligence.
4. Answer: D. Unless the client is an emerging growth company, joint due diligence is prohibited for any investment banking transaction prior to the issuer selecting an underwriter. Joint due diligence refers to any due diligence activities performed by a research