Chapter 8

Due Diligence Guidelines –

Business Model

8. Changes Affecting the Business Model

8.1 Guidance

Any past or potential changes of the listing applicant’s business model is an important due diligence issue. Due diligence may focus, among other things, on:

(a) any change in government policies affecting specific industry sectors (e.g., alternative energy) such as subsidies, price controls, tax benefits, etc.;

(b) a past conversion of the legal structure of the business;54

(c) the impact on the business model of corporate events such as mergers and acquisitions, disposals or divestments of key assets, joint ventures, etc.;

(d) any external factors that may result in a shift of business focus;55

(e) any new products and developments in geographical segments or markets; and

(f) (for mining companies yet to commence commercial production) the future business model after commencement of commercial production.56


54. See SFC Dual Filing Update of July 2012 where a listing applicant operated various non-profit entities that were prohibited by law from distributing dividends. To allow for dividend distribution, the entities must be converted into for-profit enterprises, which would operate under a different business model and tax regime. The SFC emphasised the importance in this case of disclosing clearly the risks associated with such conversion and the different business model following conversion. The application did not proceed.

55. In paragraph 4(a) of the SFC Report on Sponsors Theme Inspection Findings of March 2011, the SFC cited a case where a new customer emerged shortly after the last audited balance sheet date (but before the listing) and became the largest customer of the listing applicant. The presence of the new customer might have implication on the listing applicant’s business model (e.g. a gradual shift of business focus from domestic sales to export sales) and was a cause for concern for the SFC.

56. Paragraph 14(iv) of Exchange Listing Decision LD48-2013, regarding such information as (i) details of outstanding permits, approvals and licences for commercial production and (ii) which activities would be carried out by the listing applicant or contractors, and where the functions are outsourced, details of these functions and experience of the contractors.


HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.

Changes Affecting Listing Applicants Business Model

Conversion of Listing Applicants Legal Structure

Impact on the Business Model of Corporate Events

Changes in Government Policies Affecting Specific Industry Sectors

Past Conversion of Legal Structure

Corporate events and changes of business model

mergers and acquisitions impact on business model

External Factors resulting in shift of business focus

New Products and Developments in Geographical Segments or Markets

Future Business Model

Table of contents