Due Diligence Guidelines –
Escalation of Critical Matters
Code of Conduct Paragraphs
1. Escalation of Critical Matters to Management
1.1.1 [T]here must be clear and effective reporting lines and channels so that decisions on critical matters are not made by the Transaction Team but by Management or a committee designated by Management for this purpose. Members of such designated committee should be independent of the Transaction Team and should have appropriate seniority and expertise necessary to consider the following matters as a minimum:
(i) acceptance of a mandate to act as a sponsor;
(ii) appointment of the Transaction Team and any significant variation to such appointment; and
(iii) resolution of suspicious circumstances, difficult or sensitive issues, conflicting information and material non-compliance by a listing applicant.
[Paragraph 17.11(d) of the Code of Conduct]
1.1.2 Management must put in place appropriate systems, controls and procedures to govern sponsor work, which include: … escalation of critical matters including but not limited to those set out in paragraph 17.11(d) to Management or its designated committee for decision
[Paragraph 17.11(e)(vi) of the Code of Conduct]
1.2.1 For who will constitute “Management” for these purposes, the starting point is Paragraph 17.15(i) of the Code of Conduct. In meeting for the purposes described in paragraphs 1.3.9, 1.3.12 and 1.3.13, Management may meet in the form of a special committee formed for that purpose or as part of a larger committee, e.g., what is sometimes called a “franchise committee” and different groupings of people may consider matters in respect of a specific listing application at different points in time during the sponsor’s work, provided that those involved satisfy the requirement of independence set out in Paragraph 17.11(d) of the Code of Conduct.
1.2.2 For who will constitute the Transaction Team for these purposes, see Paragraph 17.15(s) of the Code of Conduct.
1.2.3 For documentation of the Transaction Team and any subsequent variations to the Transaction Team, see Chapter 25 “Due Diligence Guidelines – Record Keeping”.
1.2.4 The requirement is in respect of “critical” matters, examples of which are provided for in Paragraph 17.11(d)(iii) of the Code of Conduct, namely resolution of suspicious circumstances, difficult issues, sensitive issues, conflicting information and material non-compliance by a listing applicant.
1.2.5 The Transaction Team may encounter a matter which appears upon initial encounter to be suspicious, difficult or sensitive, or involve a conflict of information or apparent material non-compliance by a listing applicant. However, if the Transaction Team is able readily and definitively to resolve the matter, without any residual concern or doubt, then that matter would not require escalation to Management.
1.2.6 Having said that, the Transaction Team should be alert to the possible desirability of escalating to Management the question of how to deal with a listing application where the listing applicant’s representatives appear to be frequently careless in the provision of information to the sponsor, albeit that each individual piece of carelessness is not material because it can be resolved readily and definitively without any residual concern or doubt.
1.2.7 The requirement is that the matters must be escalated to Management which is independent of the Transaction Team. This means that the representatives of Management to whom the matter is escalated must not comprise any members of the Transaction Team. There is no reason, however, why Management dealing with the escalation of critical matters in respect of a particular listing application should not include one or more members of Transaction Teams in respect of other listing applications, provided that the connection between the different listing applications is not so close that viewed objectively, it could not be said that the relevant Transaction Teams are acting independently of each other in relation to their respective listing applications. For the avoidance of doubt, under Listing Rule 19A.19, a PRC Governmental Body will not normally be treated as a connected person of a PRC issuer and therefore, absent other factors, there would not normally be such a close connection between PRC listing applicants with PRC Governmental Body ownership by virtue only of such ownership for the purposes of this paragraph.
1.3 Recommended Steps
1.3.1 The sponsor should have clear procedures for identifying which representatives of Management will be responsible for handling the escalation of critical matters by the Transaction Team, so that there is no delay in consideration of any matters escalated.
1.3.2 Generally, members of Management should be of appropriate seniority relative to the leaders of the Transaction Team.
1.3.3 It is important that at each stage that a matter is escalated to Management, it has available to it records in respect of prior escalation of matters for the listing application. Continuity of Management considering matters escalated may facilitate this, but such continuity is not essential.
1.3.4 Written notes should be made and kept summarising all discussions by Management, including conclusions reached and recommendations made, as well as a set of all papers received by them in respect of each matter escalated to them.
1.3.5 If at any time any of the Management are not satisfied that they have sufficient information in order to perform their role properly, they should request further information which should be provided to them as soon as reasonably possible.
1.3.6 Management must ensure that they make available sufficient time to consider properly any report made to them by the Transaction Team.
1.3.7 It is preferable for Management to meet together in person but if necessary meetings can be conducted by telephone.
1.3.8 An e-mail should be sent to all members of the Transaction Team at the outset of the mandate reminding them of the obligation to elevate to Management any matter that appears to be critical as soon as the matter is identified, and telling them that if in doubt they should elevate matters.
1.3.9 Prior to acceptance of any mandate to act as sponsor, Management should meet to consider and make recommendations in respect of (a) whether the mandate to act as sponsor should be accepted, (b) the likely timescale for the listing application, and (c) the proposed composition of the Transaction Team (including whether the Principal has the requisite experience and adequate time to devote to the listing application).
1.3.10 Management should receive a timely notification in respect of, and consider the adequacy of, any change to the leadership of, or in any specialist in, or generally in a change in a significant proportion of the members of, the Transaction Team. Where Management makes recommendations for changes to the Transaction Team which are different from those set out in the report received by it, those recommendations must be implemented.
1.3.11 Whenever critical matters are identified during the listing application process, they should be elevated to Management as soon as possible by the leaders of the Transaction Team, with sufficient supporting documentation and information to allow Management to consider the matter properly and make appropriate recommendations. If the leaders of the Transaction Team are in any real doubt as to whether a matter should be regarded as critical, they should elevate the matter to Management.
1.3.12 Management should receive and consider, either as a stand-alone document or as part of a broader document dealing with each listing application a written notification from the Transaction Team prior to the submission of the Application Proof in respect of the listing application. The written notification should either confirm that the Transaction Team has encountered no critical matters during the listing application process up to that point or record any such critical matters, how they were elevated to Management and addressed, including in particular how the recommendations (if any) made by Management in respect of them were implemented. Management should raise any issues it considers appropriate before the Application Proof is submitted.
1.3.13 Management should also receive and consider a report from the Transaction Team in conjunction with production of the final proof listing document and raise any issues it considers appropriate before the listing proceeds.
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