The Importance of Due Diligence
Perhaps the most important aspect of any corporate transaction, whether a private offering of securities, a public offering, a merger or acquisition or otherwise, is what is known as “due diligence”.
“Diligence is the mother of good fortune.” – Benjamin Disraeli
Due diligence requires the review of all material documents and other information with respect to a company in order to ensure that any disclosures which a company makes, whether in offering materials or an agreement, are true and correct and satisfies any applicable standard of liability.
The Supreme Court has held that something is “material” if there is a substantial likelihood that it would be deemed important by a reasonable investor in making a decision to purchase or sell a company or its stock or as to how to vote their shares.
A due diligence review will inform you as to the material attributes of a company or person, including their commitments, contracts, and liabilities, their business, prospects, financial condition, and results of operations.
The answer to these questions, as well as many more, lies with effective due diligence.
Securities offerings are governed federally by the Securities Act of 1933, as amended. Pursuant to Section 11 of such Act, as a general matter, if any disclosure with respect to an offering of securities contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the issuer of such securities, the officers and directors of the issuer, partners in the issuer, the investment bankers conducting such offering, and professionals retained by the issuer with respect to such offering, are subject to liable for such material misstatements or omissions.
While there are no defenses to the foregoing available to the issuer and only limited defenses available to the members of the board or executive officers of the issuer, the other parties listed above may rely upon what is known as the “due diligence defense”. The Act provides that it shall be a defense to such liability if such other party had, after reasonable investigation, e.g., a “due diligence review”, reasonable grounds to believe and did believe that the statements in such disclosure were true and that there were no omissions to state a material fact required to be stated therein or necessary to make the statements therein not misleading.