Chapter 16

Due Diligence Guidelines –

Material Contracts

3. Assessing Any Potential Non-Compliance with Legal and Regulatory Requirements

3.1 Guidance

3.1.1 The sponsor should review critically material contracts and identify those contracts, the entering into and/or performance of which may lead to potential non-compliance with the relevant legal and regulatory requirements.18

3.1.2 In particular, the sponsor should ascertain whether the listing applicant has entered into any contracts which impose covenants obliging it to perform certain acts in violation of the relevant legal and regulatory requirements.19

3.1.3 The sponsor should consider whether it is necessary to seek a legal opinion on the legality and enforceability of the relevant material contract, particularly for jurisdictions where the common law system does not apply. The sponsor should comply with the requirements of Paragraph 17.6(g) of the Code of Conduct in relation to any legal opinion sought.20

3.1.4 See also Chapter 17 “Due Diligence Guidelines – Legal and Regulatory Compliance and Legal Proceedings and Disputes”, Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties Including Expert Advisers” and Chapter 19 “Due Diligence Guidelines – Foreign Lawyers”.

Endnotes

18. Paragraph 17.6(d)(vii) of the Code of Conduct.

19. Paragraph 12 of Exchange Listing Decision LD19-2011: In determining the impact of non-compliances with relevant laws and regulations on a listing application, the Stock Exchange considered:

(a) the nature, the extent and the seriousness of the breaches, for example whether the breaches involved dishonesty, or newly established laws and regulations which may be subject to different interpretations by legal professionals.

(b) the reasons for the breaches: whether the breaches were intentional or due to recklessness or negligence;

(c) the impact of the breaches on the issuer’s operations;

(d) the rectification measures adopted;

(e) the precautionary measures put in place to avoid future breaches; and

(f) whether the issuer’s business and financial performance could be sustained without reliance on the non-compliant activities.

See also Exchange Listing Decision LD97-1 and Exchange Listing Decision LD73-2013.

20. See the SFC Report on Sponsor Theme Inspection Findings of March 2011. The SFC stated that sponsors should (among other things) ensure that the scope of work done by third party professionals and/or experts is appropriate with reference to the work required. The SFC was critical of a sponsor for failing to question the basis of legal advice, given the other information known to the sponsor was inconsistent with the facts and assumptions upon which the legal advice was based. See also SFC Dual Filing Update of July 2010 in which the SFC commented that “(w)here the sponsor lacks the relevant expertise in assessing the listing applicant’s compliance with special rules and regulations, to properly discharge its responsibilities, the sponsor would need to consult its own independent advisers and obtain clarification from the competent authorities as appropriate.”