2020 edition (v4.0.0)

HKCFEF Limited

HKCFEF Limited is a Hong Kong company limited by guarantee, established to hold the copyright of these due diligence guidelines.

Published in Hong Kong by HKCFEF Limited

Copyright © 2013-2020 HKCFEF Limited

Fourth Edition

ISBN: 978-988-12920-6-3 (electronic version)

The moral rights of the author have been asserted

Database right HKCFEF Limited

First published 2013

Second Edition January 2015

Third Edition March 2016

Fourth Edition 2020

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This publication is distributed with the understanding, and anyone who accesses or uses this publication will be deemed to agree, that HKCFEF Limited, editors, authors, contributors and endorsers of this publication are not rendering legal, accounting, financial or other professional advice or opinions on specific facts or matters and, accordingly, shall not be responsible for and specifically exclude any liability for any loss or damages sustained by any person in any way from the use of, or reliance on, this publication. Application of the information provided in this publication to specific situations will depend upon the particular circumstances involved and these due diligence guidelines should not be relied upon as a substitute for obtaining appropriate professional advice. Before making any decision or taking any action that may affect your business, you should consult a qualified professional.

This publication is intended as a general guide solely designed to provide information on the subjects discussed and is based on the experience of HKCFEF Limited and contributing law firms, accountants and sponsors. This publication has been compiled from the contributions of the author law firms indicated in each chapter, which have been subject to review, comments and revisions from various industry participants, including other law firms, accountants and sponsors, and the views expressed in each chapter are intended to represent the more generally accepted views among industry participants.

Not all chapters of this fourth edition have been updated. Each chapter is only correct as at the date stated in the relevant chapter.

While all reasonable care has been taken in the preparation of this publication, neither HKCFEF Limited nor any contributing law firm, accountant or sponsor accepts responsibility for any errors it may contain or for any losses or damages howsoever arising from, or in reliance on, any of its contents. Each of HKCFEF Limited and each of the contributing law firms, accountants and sponsors hereby expressly disclaims any duty or obligation to update any of the information or analysis contained in this publication or to forward any revised due diligence guidelines to any previous recipients. HKCFEF Limited and the contributing law firms, accountants and sponsors make no representations or warranties of any kind and assume no liabilities or obligations of any kind with respect to the accuracy or completeness of the contents and specifically disclaim any implied warranties of merchantability or fitness of use for a particular purpose. No responsibility for loss or damages occasioned to any person acting or refraining from action as a result of the information or material in this publication can or will be accepted by HKCFEF Limited, editors, authors, contributing law firms or endorsers of this publication. Laws and regulations and interpretations of those laws and regulations change frequently and therefore qualified professionals should be consulted in relation to any laws and regulations mentioned in these due diligence guidelines. While all reasonable care has been taken in the preparation of this publication, the conduct of IPOs in Hong Kong is an area of regulation subject to ongoing guidance from the Regulators.

References are provided for information only and do not constitute endorsement of or by any websites or other sources. Readers should be aware that the websites and links listed in this publication may change. Where Exchange Guidance Letters and Listing Decisions are referenced in this publication, readers should be aware that The Stock Exchange of Hong Kong Limited has emphasised that the preparation of such Exchange Listing Decisions and Exchange Guidance Letters are based on facts and circumstances, which may not be a precedent for future cases having a different fact pattern. Readers should note that Exchange Guidance Letters and Exchange Listing Decisions may be amended from time to time and that reference should be made to the latest published versions.

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Acknowledgements

There are a number of persons without whom these due diligence guidelines would not have been possible.

These due diligence guidelines would never have seen the light of day without the tireless voluntary work of the following law firms, who managed the initial drafting and commenting processes for the individual chapters: Baker & McKenzie, Charltons, Clifford Chance, Debevoise & Plimpton LLP, Freshfields Bruckhaus Deringer, Herbert Smith Freehills, Hogan Lovells, Jones Day, Kirkland & Ellis, Linklaters, Mayer Brown JSM, Morrison & Foerster LLP, Norton Rose Fulbright, Sidley Austin, Simpson Thacher & Bartlett, Slaughter and May, Skadden, Arps, Slate, Meagher & Flom and White & Case.

Thanks for their support and input are also due to the following: Altus Capital Limited, AM Capital Limited, Anglo Chinese Corporate Finance, Limited, Boase Cohen & Collins, CCB International (Holdings) Limited, Hong Kong Securities and Investment Institute, KPMG, Mining Associates Ltd, PricewaterhouseCoopers and Somerley Limited.

Preface

These due diligence guidelines have been developed in the light of the new Paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code of Conduct), which sets out the standards and certain procedures, taken together with the requirements of the Listing Rules, expected by the SFC of sponsors in the conduct of a due diligence to support the listing of equity securities in Hong Kong.

In its initiative to provide a regulatory basis for defining the expected quality of sponsor work in the interests of public investors and all other stock market participants,1 the Code of Conduct sets out the outcomes the SFC expects but not generally how they are to be achieved. This leaves for sponsors and their advisers the practical issue of how best to achieve these standards. These due diligence guidelines are intended to address this question, with the objective of compiling know-how from across the industry in respect of the conduct of due diligence in respect of Hong Kong listings of equity securities and with a view to maintaining the integrity of the Hong Kong market and, in particular, to assuring the quality of information disclosed in listing documents. It is hoped that it will be one of the important reference points to guide sponsors bearing in mind that sponsors work is ultimately to be judged based on what a sponsors peers would consider objectively appropriate having regard to all relevant facts and circumstances at the time of making a listing application.2 It should have an additional benefit of serving as an educational tool for less experienced market practitioners or those who come to Hong Kong from other jurisdictions.

A common format was agreed for each chapter of the due diligence guidelines: a statement of the standard set out in Paragraph 17 of the Code of Conduct, followed by guidance on the scope and objectives of the standard and then recommended steps to achieve the standard. As far as possible the style of each chapter has been conformed. The underlying intention is that, as far as possible, the due diligence guidelines should set out practical steps that could be considered at each stage of a due diligence. The process of due diligence is well established and well known and in most cases can be applied in a fairly conventional and consistent manner. Obviously there will be outliers and exceptions but this does not mean that standard procedures cannot be described and this was felt to be important, if the due diligence guidelines were to be helpful to those actually engaged in sponsor work. It was also decided to include all the relevant references we could identify on guidance and decisions from the SFC and the Stock Exchange relating to listing documents and sponsorship work. While this may go beyond a due diligence exercise, these publications may impact on the design of a due diligence and are an essential input to the drafting of a listing document. A decision was also made to self-publish the due diligence guidelines. This has an advantage in terms of cost and flexibility but there are disadvantages too. The principal disadvantage is that, absent the support of a professional publisher, there can be no commitment to the regular updating of the due diligence guidelines. Even if it is not updated, it at least provides a base on which new precedents can be added by those who use it.

The due diligence guidelines have taken thousands of hours of hard work and involved many people who gave their time generously and freely. They cannot all be mentioned by name, although each of their contributions is greatly appreciated: the due diligence guidelines are intended to be very much a collective and collaborative effort. But one firm, Charltons, should be singled out, who acted effectively as the co-ordinating law firm. Their effort in managing and driving this endeavour was extraordinary and it is doubtful whether the due diligence guidelines would ever have been completed, certainly within the timetable to introduce the application of Paragraph 17 of the Code of Conduct set by the SFC, even if they had been started.

It is believed that this publication will prove useful to those directly involved in sponsorship work on a day to day basis, those supervising that work and advising sponsors on it, and those charged with ensuring their compliance and that it will achieve its objective of providing the means to meet what the SFC and the Stock Exchange expect of a sponsor. If it does, this endeavour will have succeeded.

Hong Kong, March 2016