Chapter 10

Due Diligence Guidelines –

Controlling Shareholders’ Relationship with the Listing Applicant

3. Disclosure in Listing Document

3.1 Standards

Regarding the preparation of a listing document, a sponsor should perform, without limitation, each of the following: … achieve a thorough understanding of the listing applicant, including its business, history, background, structure and systems. [Paragraph 17.6(d)(ii) of the Code of Conduct]

3.2 Guidance

3.2.1 The general principles for disclosure in the listing document include that the sponsor, after reasonable due diligence, should have reasonable grounds to believe and should believe that:

(a) the information (in the non-expert sections) of the listing document is accurate and complete in all material respects and not misleading or deceptive in any material respect;27 and

(b) the listing document contains sufficient particulars and information to enable a reasonable person to form as a result thereof a valid and justifiable opinion of the shares and the financial condition and profitability of the listing applicant.28

3.2.2 The sponsor should obtain sufficient information regarding a controlling shareholder to assist it in understanding how a controlling shareholder has participated in and affected the business, history and background of the listing applicant for the purpose of disclosure in the listing document. Paragraphs 3.2.3 to 3.2.6 below set out areas of disclosure in the listing document derived in part from the Listing Rules, guidance letters and listing decisions (as footnoted) which should also serve as guidance for the sponsor’s due diligence effort and to which reference should be made by the sponsor in relation to the listing document.

3.2.3 History and Development

The sponsor should review the listing document to determine whether the following information should be disclosed:

(a) establishment and development of the listing applicant and its major subsidiaries – including information on the founders, material developments since establishment and incorporation and commencement of business of each member of the Group that made material contribution to the Group’s track record results;

(b) corporate structure – structure charts before and after major reorganisations and material steps in reorganisation; and

(c) shareholders – including:

(i) the identities of the shareholders;

(ii) relationship among shareholders (for example, family members, relatives and parties acting in concert); and

(iii) where there are significant shareholding changes during the track record period:

(A) the background of the then shareholders;

(B) their relationships with the listing applicant and its core connected persons and/or connected persons; and

(C) reasons for the shareholding transfer and particulars including the amount, settlement date and basis of consideration involved.29

3.2.4 Details of Controlling Shareholder

The sponsor should review the listing document to check whether the following details of the controlling shareholder(s) have been disclosed:

(a) the name of the controlling shareholder(s);

(b) its interest in the share capital of the listing applicant;

(c) the background of the controlling shareholder(s), including principal activities and shareholding of each listed company owned by the controlling shareholder(s);30 and

(d) details of relationships with other shareholders and significant shareholding changes under paragraph 3.2.3 above.

3.2.5 Independence

The sponsor should review the listing document to check whether the following information has been disclosed:

(a) a statement explaining how the listing applicant is satisfied that it is capable of carrying on its business independently of a controlling shareholder or its close associate, and particulars of matters that the listing applicant relied on in making such statement;31

(b) the basis that the listing applicant is financially and operationally independent of its controlling shareholder(s);32 and

(c) the basis of management independence. Details of overlapping directors and senior management between the listing applicant and its controlling shareholder(s) should preferably be in tabular form. Where there are overlapping directors, the disclosure should include detailed mechanisms to address conflicts of interests to ensure that the listing applicant’s remaining board can properly function taking into account their expertise and experience.33

3.2.6 Competing Interests

(a) Where a controlling shareholder has an interest in a business which competes or is likely to compete with the listing applicant’s business, the sponsor should ensure the following information is prominently disclosed in the listing document for investors to assess whether the competition is “extreme”:

(i) the reasons for excluding the competing business from the Group;34

(ii) a description of the competing business and its management with relevant financial information of the competing business and an explanation of how such business may compete with the listing applicant’s business;35

(iii) facts demonstrating that the listing applicant is capable of carrying on its business independently, including:

(A) details to demonstrate how the listing applicant’s business and the competing business could be clearly delineated; and

(B) details of adequate and effective corporate governance measures to manage and resolve conflicts of interest and competition between them. These could include:

(1) abstention of conflicted directors from voting at the relevant meetings;

(2) review by the independent non-executive directors for compliance with any non-competition undertakings;

(3) provision by the controlling shareholder of all information necessary for the independent non-executive directors’ annual review; and

(4) disclosure by the listing applicant of decisions on matters reviewed by the independent non-executive directors (including why business opportunities referred to it by the controlling shareholder were not taken up) either through its annual report or by way of announcements;36

(iv) whether a controlling shareholder intends to inject the competing business into the listing applicant in future, and the time frame for the injection;37

(v) if a first right of refusal or option to acquire the competing business is granted to the listing applicant, explanation as to how such right or option could work in practice (for instance, criteria to exercise the first right of refusal or option to acquire the competing business and the details of the independent non-executive directors’ expertise and experience in approving the exercise of such right or option).38

(b) The listing document should disclose the details of any non-competition undertakings, including:

(i) clear disclosure of “restricted or excluded businesses” under the non-competition undertakings; and

(ii) mechanisms for:

(A) the controlling shareholder first referring business opportunities that compete or are likely to compete with the listing applicant (right of first refusal); and

(B) the listing applicant determining whether to take up the business opportunities and the basis which the board will consider.39

The sponsor and the listing applicant may consider including a risk factor in the listing document to draw the attention of investors to potential competition between the Group and a controlling shareholder.

3.3 Recommended Steps

The sponsor should review the listing document to ensure that:

(a) the listing document contains particulars and information on the controlling shareholder(s) that are necessary for an investor to make an informed assessment of the listing applicant;

(b) the listing document contains disclosure that is required under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the Listing Rules and related guidance; and

(c) the disclosure relating to the controlling shareholder(s) is consistent with the information that the sponsor obtained in the course of the due diligence process.


27. Paragraph 17.5(b)(1) of the Code of Conduct and Listing Rule 2.13(2).

28. Paragraph 17.5(a) of the Code of Conduct and Listing Rule 11.07.

29. Exchange Guidance Letter GL86-16, Appendix 1, Section D.

30. Exchange Guidance Letter GL56-13.

31. Paragraph 27A of Part A of Appendix 1 to the Listing Rules.

32. Exchange Guidance Letter GL56-13, Exchange Listing Decision LD69-1 and Exchange Listing Decision LD30-2012.

33. Exchange Guidance Letter GL56-13 and Exchange Listing Decision LD52-2.

34. Listing Rule 8.10(1).

35. Listing Rule 8.10(1) and Exchange Guidance Letter GL56-13.

36. Listing Rule 8.10(1), Exchange Listing Decision LD48-2013 and Exchange Guidance Letter GL56-13.

37. Listing Rule 8.10(1).

38. Exchange Listing Decision LD84-2014.

39. Exchange Guidance Letter GL56-13.


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.

Disclosure Details of Controlling Shareholder

Disclosure in Listing Document

Competing Interests of Controlling Shareholder

Controlling Shareholders’ Relationship with the Listing Applicant Disclosure in Listing Document

Paragraph 17.6(d)(ii) of the Code of Conduct

Establishment and Development of the Listing Applicant

Corporate Structure of Listing Applicant

Details of Controlling Shareholder

Including a Risk Factor In The Listing Document

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