Chapter 18

Due Diligence Guidelines –

Interaction with Third Parties including Expert Advisers1

7. Consistency and Sufficiency of the Work Results

7.1 Standards

Non-expert third parties

…[T]he sponsor should:… assess the results of the work performed by the third party and arrive at its own opinion whether the work provides a sufficient basis to determine that reasonable due diligence has been conducted and whether further due diligence is required. [Paragraph 17.6(g)(iii) of the Code of Conduct]

…[T]he sponsor should:… assess whether the results of the work are consistent with other information known to the sponsor including that derived from its other due diligence work. [Paragraph 17.6(g)(iv) of the Code of Conduct]

Experts

[A]s regards the expert’s opinion and the rest of the information contained in the report, the sponsor should:

(i) critically review the expert’s opinion and the rest of the information in the report against the totality of all other information known to the sponsor about the listing applicant (including the business model, track record, operations, forecast, sector performance and any relevant information publicly available) through due diligence and the sponsor’s knowledge and experience of the listing applicant, the market in which the listing applicant operates and of comparable companies;

(ii) corroborate the information in the expert report with the information disclosed in non-expert sections and the sponsor’s knowledge and experience of the listing applicant to ascertain whether the information throughout is consistent and coherent; and

(iii) conduct follow up work to resolve any material discrepancies, irregularities or inconsistencies. [Paragraph 17.7(d) of the Code of Conduct]

7.2 Guidance

7.2.1 The sponsor should critically review and assess the results of work performed by the third party to ensure such results are consistent with other information known to the sponsor and sufficient for the purpose of the listing application in question. Such review and assessment should be conducted on an on-going basis.

7.2.2 In arriving at its own opinion regarding the work results, the sponsor should apply its knowledge of the listing applicant, the market in which the listing applicant operates and other comparable companies, its experience in dealing with the listing applicant’s management, information sourced through its due diligence, its sector and industry expertise, its financial knowledge and other information known to the sponsor including information from the third party.16

7.2.3 The sponsor should adopt a proactive approach when assessing the results of work performed by the third party. If the sponsor is aware of any information (including the history of the applicant, the markets in which it operates and its business model) which may impact on the accuracy or completeness of such work results, it is essential that the sponsor makes further enquiries.17

7.2.4 The sponsor should be alert to any material discrepancies, irregularities or inconsistencies found during its review process. The sponsor must conduct the necessary follow-up work to resolve such problem.18

7.3 Recommended Steps

7.3.1 The sponsor should start reviewing and assessing the results of work performed by the third parties as early as when an initial product is ready.

7.3.2 If there is an opinion provided by the third party in its professional capacity, the sponsor should review such opinion together with the rest of the information disclosed in the third party’s work product.19

7.3.3 When reviewing and assessing the results of work performed by the third party, the sponsor should take into account all other information known to itself about the listing application. Such other information may be sourced through due diligence as well as the sponsor’s knowledge and experience. If the results of the work performed by the third party contain statements that are inconsistent with other information known to the sponsor about the listing applicant, the sponsor is expected not to rely on the work performed by the third party but to make further due diligence enquiries to clarify the issues.20

7.3.4 The sponsor should also corroborate the information in the third party’s work product with the rest of disclosure made in the listing document to ensure the information throughout is consistent and coherent.

7.3.5 When discrepancies, irregularities or inconsistencies are uncovered during the review process, the sponsor should ascertain whether they are material in nature. If yes, the sponsor should seek to identify the causes for and address such discrepancies, irregularities or inconsistencies whether through performing additional work itself or requesting the relevant third party to conducting follow-up work.

C. Sample Due Diligence Questions for Third Parties Including Expert Advisers

Endnotes

16. Paragraph 65 of the Consultation Paper on the Regulations of Sponsors: A sponsor should satisfy itself that it is reasonable to rely on the expert’s report or opinion taking into account its own in-depth and wide-ranging knowledge of the listing applicant accumulated since the point at which the sponsor was first engaged, whether formally or informally.

17. Paragraph 65 of the Consultation Paper on the Regulation of Sponsors: If the sponsor has any information (including the history of the applicant, the markets in which it operates and its business model) which may impact on the accuracy and completeness of any expert report, or any information in any expert report is of relevance to the accuracy or completeness of other information relied on by the sponsor in preparing the applicant for listing, it is essential that the sponsor makes further enquiries.

18. Paragraph 162 of the Consultation Conclusions on the Regulation of Sponsors: The sponsor should be alert to any material discrepancies, irregularities or inconsistencies and conduct follow up work to resolve any problems.

19. Paragraph 162 of the Consultation Conclusions on the Regulation of Sponsors: “a sponsor should first of all critically review the expert’s opinion together with the rest of the information disclosed on the face of the report against the totality of all other information known to the sponsor about the listing applicant, including the business model, track record, operations and sector performance. This other information may be sourced through due diligence as well as, for example, the sponsor’s knowledge and experience of the listing applicant, the market in which it operates and of comparable companies.

20. Paragraph 53 of the Report on Sponsor Theme Inspection Findings issued by the SFC in March 2011.