Chapter 6

Due Diligence Guidelines –

Verification Practice

1. Appropriate Verification

1.1 Standards

A sponsor should not merely accept statements and representations made and documents produced by a listing applicant or its directors at face value. Depending on the nature and source of the information and the context in which the information is given, the sponsor should perform verification procedures that are appropriate in the circumstances, such as reviewing source documents, inquiring of knowledgeable persons or obtaining independently sourced information. Where the sponsor becomes aware of circumstances that may cast doubt on information provided to it or otherwise indicate a potential problem or risk, the sponsor should undertake additional due diligence to ascertain the truth and completeness of the matter and information concerned. Over reliance on management’s representations or confirmations for the purposes of verifying information received from a listing applicant cannot be regarded as reasonable due diligence. [Paragraph 17.6(c) of the Code of Conduct]

1.2 Guidance

1.2.1 Verification is concerned with checking the accuracy of statements contained in a listing document and does not seek to probe into other material matters relating to the listing applicant which ought to be covered in the overall due diligence process. In other words, verification is a sub-set of the wider due diligence process and as a check for the accuracy and completeness of the listing document, it brings together all the due diligence work done by the sponsor.

1.2.2 The purpose of verification is to assist the listing applicant and its directors in fulfilling their obligations to check that the listing document is accurate and complete in all material respects and not misleading or deceptive and to support their reliance on any defence to liability that may be required and potentially available. It involves the checking of the contents of the listing document so that:

(a) there are reasonable grounds for believing that each material statement is true and not misleading;

(b) statements of opinion, estimates and forecasts are identified as such and are based on reasonable grounds;

(c) any inferences which might reasonably be drawn from each such statement are correct and not misleading;

(d) nothing has been omitted from the listing document which makes any such statement inaccurate or misleading; and

(e) appropriate source documents are identified and preserved for future reference.

1.2.3 Verification does not typically cover financial information set out in the listing document, which will be the subject of a separate comfort/verification process carried out by the listing applicant’s reporting accountants – see Chapter 12 “Due Diligence Guidelines – Financial” for further guidance.

1.2.4 For the expert sections of a listing document which are typically not covered by verification, see Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers” for further guidance.

1.2.5 Verification of the listing document interacts with the due diligence process and should not be seen as an independent separate exercise conducted solely by lawyers. For example, the sponsor should conduct due diligence to gain understanding of the listing applicant’s directors and senior management, but because the qualifications and details of such persons also appear in listing document, the sponsor and the underwriters’ lawyers should go through the verification process to check the accuracy of those statements as well. For further guidance, see Chapter 7 “Due Diligence Guidelines – Knowing the Listing Applicant and its Management” and paragraph 3.2 for guidance on conducting independent checks on such information. During the verification process where the sponsor becomes aware of circumstances that may cast doubt on the information provided to it or otherwise indicate a potential problem or risk, the sponsor should consider undertaking additional due diligence to resolve its concerns.

1.2.6 The sponsor and the underwriters’ lawyers should examine the nature of the supporting materials requested to verify statements made in the listing document, particularly those relating to matters of opinion. Information request lists and responses to the requests should show that the person with responsibility for verifying the statement has looked not only at the statement and the facts or judgment supporting its being made but also what inference can be or is intended to be drawn from the statement as well as whether or not the statement provides the whole picture. However, good drafting in a prospectus will normally avoid such ambiguous statements.

1.2.7 Much of the verification exercise will comprise obtaining independently sourced information or enquiring of independent third parties who may be knowledgeable on the subject. See paragraph 3.2 for further guidance on independently sourced materials. However, where such independent corroboration is not available (for example where the statement relates to the directors’ expectations of future events relating to the issuer’s business or a matter involving a subjective judgment), then the statement may be verified by a confirmation from a director or other senior executive who is appropriate to judge. A confirmation, particularly one drafted specifically enough, can show that the listing applicant and/or its directors have addressed their mind to the issue. It should be noted that Paragraph 17.6(c) of the Code of Conduct does not prohibit sponsors from relying on management’s representations or confirmations for the purposes of verification – it cautions them against over relying on such confirmations. The sponsor should still exercise its judgment and if necessary make additional enquiries to ascertain whether there are reasonable grounds on which that statement can be based and that it is not misleading.

1.3 Recommended Steps

1.3.1 Verification requires input from across the listing applicant’s business. It is recommended that the listing applicant appoints a dedicated and sufficiently senior person at the beginning of the transaction to project manage the internal aspects of this process, particularly when many subsidiaries are involved. Key senior individuals within the company should be allocated responsibility for the relevant sections of the listing document denoting their business sections. This will ensure those individuals who have direct business experience of those parts of the listing document being verified will have input to the relevant drafting of the listing document. They should be given the whole draft listing document plus the requests for supporting materials. The sections of the listing document for which they are responsible should be clearly flagged, although they should be asked to review the whole business section.

1.3.2 It is inherently difficult for the underwriters’ lawyers (as the party typically responsible for drawing up the verification information request lists), with limited and non-specialist knowledge of the listing applicant’s business, to formulate questions which will reveal all relevant omissions. The persons best placed to identify any omissions are the company personnel, and especially the directors (as persons responsible for the listing document).

1.3.3 The verification notes are not made public as part of the listing exercise but the final version should be reviewed and adopted by the directors at a board meeting as confirmation on the board’s behalf of the accuracy and completeness of the listing document. See paragraphs 2.3.6 and 2.3.8 for recommended procedures for tabling the verification notes at board meetings.

1.3.4 Sponsors and other professional advisers should not be asked to accept responsibility for verifying any section of the listing document except for confirming their names and descriptions of their organisations. In particular, accountants or experts such as engineers or property valuers should not need to sign the verification notes where the relevant statements will be covered by reports that form part of the listing document for which they take responsibility accordingly. Similarly, lawyers should not be expected to sign the verification notes provided that they will cover the accuracy of the relevant legal statements in their legal opinion(s). See Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers” for further guidance on the standard of care to be exercised when relying on expert reports.