Due Diligence Guidelines –
Expectations of the Listing Applicant and its Directors during the Listing Application Process
3.1.1 Although the regulatory obligations rest with the listing applicant, the listing applicant is a legal entity which cannot act on its own. The listing applicant can only act through its “controlling mind”, which encompasses its officers and, in particular, its directors. It is ultimately the responsibility of the listing applicant’s directors to ensure that the listing applicant complies with its regulatory obligations.
3.1.2 To ensure that both the listing applicant and its directors fulfill their duties and obligations, the directors need to be directly involved in the following key aspects of the listing application process:
(a) Due Diligence: The listing applicant’s directors should actively cooperate and provide assistance to the sponsor to enable the sponsor to gain knowledge and understanding of the listing applicant and to satisfy itself that the listing applicant complies with the Listing Rules. For further guidance on conducting due diligence on a listing applicant and its directors, the sponsor should refer to Chapter 7 “Due Diligence Guidelines – Knowing the Listing Applicant and its Management”;
(b) Listing Document: The production of a listing document is a cooperative exercise which, while coordinated by the sponsor, is the product of input by the listing applicant’s directors and the experts retained by the listing applicant. Accordingly, the listing applicant’s directors should be extensively involved with the preparation of the listing document to ensure the accuracy and completeness of the information contained in the listing document submitted to the SFC and the Stock Exchange;
(c) Communication with the Regulators: The listing applicant should establish effective channels of communication with the Stock Exchange and the SFC. The Regulators should be provided with the means to contact all members of the board of the directors of the listing applicant (including the independent non-executive directors) promptly at all times as and when the regulators wish to contact the board for any matters. For further guidance on communications with the Regulators, the sponsor should refer to Chapter 29 “Due Diligence Guidelines – Communications with Regulators”;
(d) Verification: As each of the listing applicant’s directors assumes full responsibility for the information provided in the prospectus to investors, the directors should actively involve and procure staff members of the listing applicant to cooperate and provide assistance on the verification process, which is carried out for the protection of the listing applicant, the directors, sponsors and all those other parties who may assume liability for misstatements in the prospectus. For further guidance on verification practice, the sponsor should refer to Chapter 6 “Due Diligence Guidelines – Verification Practice”;
(e) Corporate Governance: The listing applicant’s directors should fashion corporate governance policies and practices that satisfy the SFC and the Listing Rules, in particular, the Corporate Governance Code set out in Appendix 14 to the Listing Rules, to meet the investor expectations and enable the listing applicant and its board of directors to function effectively;
(f) Financial Reporting: The listing applicant’s directors should oversee the hiring of a financial management team and the selection of the independent reporting accountant of the listing applicant;
(g) Experts: The listing applicant’s directors should oversee the engagement of third parties and expert advisers. Each expert to be appointed should possess the qualification, experience and expertise in the relevant field and should be independent from the listing applicant, its directors and its controlling shareholder(s). For further guidance on third parties including expert advisers, the sponsor should refer to Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers”; and
(h) Internal Control: The listing applicant’s directors should develop appropriate internal controls and reporting systems in a timely manner to satisfy various financial reporting and disclosure requirements, such that the listing applicant is able to comply with the Listing Rules in the listing application process and immediately upon listing. For further guidance on internal controls, the sponsor should refer to Chapter 13 “Due Diligence Guidelines – Internal Controls”.
3.1.3 Given the unitary nature of a board of directors and the indivisible legal duties of all directors, both executive directors and non-executive directors should exercise due care, skill and diligence to fulfill their roles and obligations in respect of the listing application process. However, as acknowledged in the Corporate Governance Code set out in Appendix 14 to the Listing Rules (Note), non-executive directors normally are not involved in the daily operations of a corporation and would usually rely on a corporation’s internal controls and reporting procedures to ensure that, where appropriate, material information is identified and escalated to the board of directors as a whole. It is for this reason that the board of directors’ responsibility for establishing and monitoring key internal control procedures is of particular significance for non-executive directors as this is an area where they are more likely to be directly involved.
3.1.4 For guidance on recommended topics to be covered in directors’ training, please refer to Appendix II to Chapter 7 “Due Diligence Guidelines – Knowing the Listing Applicant and its Management”.
3.2 Prospectus Liability
3.2.1 The listing applicant and its directors may potentially face civil and criminal liabilities in connection with the issue of a prospectus, in particular liability for any untrue statements or for the omission of any material information.
3.2.2 Under common law, the listing applicant’s directors may be liable for the tort of deceit, misrepresentation or negligent misstatements for untrue representations and false statements made in a listing document, if another person, such as an investor, relied on those representations and/or statements and suffered loss as a result.
3.2.3 An investor who suffers loss as a result of reliance on a misrepresentation in a listing document may also be entitled to damages under the Misrepresentation Ordinance.
3.2.4 Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the listing applicant and its directors may be civilly liable (sections 40 and 342E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance) or criminally liable (sections 40A and 342F of the Companies (Winding Up and Miscellaneous Provisions) Ordinance) for untrue statements in and materials omissions from a prospectus, unless one of the defences applies, e.g. having reasonable grounds to believe that the statement was true or, that the expert was competent and had given its consent (in the case of civil liability in respect of expert sections). They may also be liable to a fine for failing to set out the minimum level of information required in a prospectus (sections 38 and 342 of, and the Third Schedule to, the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
3.2.5 Under the Securities and Futures Ordinance, the listing applicant and its directors may incur civil liability (Part XIII of the SFO) or criminal liability (Part XIV of the SFO) in relation to market misconduct. For listing documents, the main provisions are sections 277 and 298 of the SFO, which cover the situation where the listing applicant and its directors disclose information likely to induce another person to subscribe for, sell or purchase securities, where such information is false or misleading in a material way. Any person who commits market misconduct under section 277 or 298 of the SFO may also be liable to compensate persons who have suffered financial loss as a result of the misconduct (sections 281 and 305 of the SFO). Further, the listing applicant and its directors may be civilly liable (section 108 of the SFO) for negligent, fraudulent or reckless misrepresentations made in a listing document if a person has suffered loss as a result of having relied on the misrepresentation. They may also incur criminal liability (section 107 of the SFO) for any fraudulent or reckless misrepresentation made in a listing document. Section 384 SFO also imposes criminal liability on any person who intentionally or recklessly provides any information which is false or misleading in a material particular in filing with the SFC or the Exchange a prospectus or other listing document.
3.2.6 A director of the listing applicant may also be criminally liable under the Theft Ordinance if he knows that information included in the listing document is misleading, false or deceptive in a material respect and he intends to deceive investors about the listing applicant’s affairs.
Paragraph A.6.2 of Appendix 14 to the Listing Rules. The functions of non-executive directors should include: (a) participating in board meetings to bring an independent judgement to bear on issues of strategy, policy, performance, accountability, resources, key appointments and standards of conduct; (b) taking the lead where potential conflicts of interests arise; (c) serving on the audit, remuneration and other governance committees, if invited; and (d) scrutinising the corporation’s performance in achieving agreed corporate goals and objectives, and monitoring performance reporting.
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.