Chapter 25

Due Diligence Guidelines –

Record Keeping

3. Documenting Due Diligence

3.1 Standards

In respect of each listing assignment, a sponsor should keep records, including relevant supporting documents and correspondence, within its control, relating to: … due diligence, (A) a due diligence plan identifying the required time and skill sets of persons needed to implement the plan; (B) changes to the due diligence plan and reasons; (C) the nature, timing and extent of due diligence procedures; and (D) the results of due diligence performed together with [the sponsor’s] assessment of these results; [Paragraph 17.10(c)(ii) of the Code of Conduct]

3.2 Guidance

3.2.1 At the outset of the sponsor’s work for the listing assignment, the sponsor should design and develop a due diligence plan for the listing assignment that contains the due diligence steps and procedures which would, after the sponsor having conducted the due diligence, enable the sponsor to:

(a) have a thorough knowledge and understanding of the listing applicant, including its history and background, business and performance, financial condition and prospects, operations and structure, procedures and systems, and risks and the personal and business backgrounds of its directors, key senior managers and controlling shareholders;3

(b) identify material issues that, in the reasonable opinion of the sponsor, are necessary for the sponsor’s consideration of whether the listing applicant is suitable for listing and whether the listing of the listing applicant’s securities is contrary to the interest of the investing public or to the public interest;4 and

(c) be satisfied that the sponsor has reasonable grounds to believe that, at the time of issue, 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 securities and the financial condition and profitability of the listing applicant.5

3.2.2 The main aim of the due diligence plan is to map out key details of the intended due diligence steps and procedures which the sponsor intends to conduct on the listing assignment. The due diligence plan should also contain the key parties (including the sponsor, the listing applicant and third parties from whom the sponsor expects to seek assistance) that should be involved in each step. The due diligence plan should then operate as a tool to guide and direct the sponsor in the commencement of its due diligence work.

3.2.3 During the conduct of the sponsor’s due diligence, more facts and circumstances may come to the knowledge of the sponsor which may require significant changes to be made to the due diligence plan. The sponsor should apply its mind and critically and carefully consider the changes to be made to the initial due diligence plan and initial due diligence steps and procedures by considering whether the uncovered facts and circumstances of the listing applicant have necessitated some different and/or additional steps, procedures or enquiries to be undertaken or have made certain steps, procedures or enquiries more or less reasonably practicable.

3.2.4 If changes to the due diligence plan are required, the due diligence plan should be revised and updated accordingly and the key reasons and bases for such changes should be recorded.6 The further due diligence steps and procedures should be determined and added to the due diligence plan.

3.2.5 Throughout the conduct of the sponsor’s due diligence work, key findings and results of each of the material due diligence steps and procedures performed should be noted in the due diligence plan or referenced to relevant supporting documents and correspondence as appropriate.

3.3 Recommended Steps

3.3.1 In the design and development of the due diligence plan, in appropriate cases, the sponsor may consider adopting a materiality approach in formulating the requisite due diligence steps and procedures. Where a materiality test is adopted, the due diligence plan should note this. For further guidance, please refer to Chapter 3 “Due Diligence Guidelines – Approach and Scope”.

3.3.2 The due diligence plan should set out the due diligence steps and procedures that should be conducted prior to the submission of the listing application to the Stock Exchange, as well as the due diligence steps and procedures that should be conducted at each critical stage of the listing assignment and offering. When a listing assignment has been reactivated after it has lapsed or been suspended for a reasonable period of time, the sponsor should carefully review the due diligence plan and determine the extent of due diligence work that should be redone.

3.3.3 After the due diligence plan and the detailed due diligence steps and procedures have been developed, the sponsor should review the plan at Transaction Team meetings to review the status and progress of the due diligence work, to consider and discuss material issues identified to date, to consider whether changes should be made to the plan (including in terms of due diligence steps) and/or whether further due diligence steps and procedures should be added by reference to the facts and circumstances known to the sponsor throughout the due diligence process. If changes should be made, the sponsor should notify the listing applicant and relevant responsible parties and update the due diligence plan.

3.3.4 Upon the conduct of the due diligence steps and procedures, for matters that may be considered to give rise to a material issue and hence the sponsor’s reasonable assessment of such issue, the sponsor may prepare a brief note which sets out the sponsor’s assessment and the sponsor’s considerations, rationale, relevant views and opinions of the listing applicant (and reference to any supporting documents from the listing applicant) and relevant views and opinions of third parties (including experts) which relate to the sponsor’s assessment.

Endnotes

3. Paragraph 17.3(a) of the Code of Conduct.

4. Paragraph 17.4(d) of the Code of Conduct.

5. Paragraph 17.5(a) of the Code of Conduct.

6. Paragraph 4 of Practice Note 21 to the Listing Rules provides that the Stock Exchange expects sponsors to document their due diligence planning and significant deviations from their plans. This includes demonstrating that they have turned their minds to the question of what enquiries are necessary and reasonably practicable in the context and circumstances of the case.