Chapter 27

Due Diligence Guidelines –

Expectations of the Listing Applicant and its Directors during the Listing Application Process

2. Standards

2.1 Information to the Investors

2.1.1 Primary responsibility for the information in the listing document undoubtedly rests with the directors of a listing applicant. Their obligations to investors are contained in statute (principally the Securities and Futures Ordinance (SFO) and the Companies Ordinance (CO)), in the common law as well as the Listing Rules (see Chapter 3A) … The SFC will not hesitate to take appropriate action in the interests of investors against directors, experts and other persons who breach statutory provisions relevant to IPOs. [Paragraph 49 of the Consultation Conclusions on the Regulation of Sponsors]

2.1.2 The health of any stock market is dependent on the confidence that investors have in the reliability and timeliness of information provided to them at the time a company first joins the market through an IPO and thereafter through the dissemination of periodic financial and other updates. In both cases the directors of a company are primarily responsible to investors to ensure that they are fully informed; directors have the deepest knowledge of the business and its prospects and are best placed to ensure that disclosure is accurate and meaningful. [Paragraph 2 of the Consultation Paper on the Regulation of Sponsors]

2.1.3 An IPO is the culmination of an intensive and collaborative process, with the directors performing a key role and taking primary responsibility for information in the listing document, but also involving reporting accountants, legal counsel, valuers and other experts as well as underwriters, sponsors and the regulators. [Paragraph 4 of the Consultation Paper on the Regulation of Sponsors]

2.2 Listing Document

2.2.1 … the information contained in the [listing] document must be accurate and complete in all material respects and not be misleading or deceptive. In complying with this requirement, the issuer must not, among other things: (a) omit material facts of an unfavourable nature or fail to accord them with appropriate significance; (b) present favourable possibilities as certain or as more probable than is likely to be the case; (c) present projections without sufficient qualification or explanation; or (d) present risk factors in a misleading way. [Listing Rule 2.13(2)]

2.2.2 [A]ll listing documents … must, as an overriding principle, contain such particulars and information which, according to the particular nature of the issuer and the securities for which listing is sought, is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and of its profits and losses and of the rights attaching to such securities. [Listing Rule 11.07]

2.2.3 [The listing document must include the following paragraph:] This document, for which the directors of the issuer collectively and individually accept full responsibility, includes particulars given in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited for the purpose of giving information with regard to the issuer. The directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this document is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this document misleading. [Listing Rule 11.12 and paragraph 2 of Part A of Appendix 1 to the Listing Rules]

2.2.4 [The listing applicant must lodge with the Exchange] with its listing application:

(3a) a written confirmation signed by each director/supervisor that the information in the Application Proof is accurate and complete in all material respects and is not misleading or deceptive;

(3b) a written confirmation and undertaking signed by each director/supervisor and proposed director/supervisor to the following effect:

(i) that the Application Proof … contains all information about the biographical details of such director/supervisor or proposed director/supervisor as set out in rule 13.51(2) and that those details are true, accurate and complete;

(ii) where, before dealings commence, there are any changes in the biographical details …, to inform the Exchange as soon as practicable of such changes; and

(iii) to lodge with the Exchange … a declaration and undertaking, in Form B/H/I in Appendix 5, duly signed by each director/supervisor and proposed director/supervisor. [Listing Rule 9.11]

2.3 Responsibilities of Directors

2.3.1 The board of directors of an issuer is collectively responsible for its management and operations. The Exchange expects … that every director must, in the performance of his duties as a director:—

(a) act honestly and in good faith in the interests of the company as a whole;

(b) act for proper purpose;

(c) be answerable to the issuer for the application or misapplication of its assets;

(d) avoid actual and potential conflicts of interest and duty;

(e) disclose fully and fairly his interests in contracts with the issuer; and

(f) apply such degree of skill, care and diligence as may reasonably be expected of a person of his knowledge and experience and holding his office within the issuer. [Listing Rule 3.08]

2.3.2 Every newly appointed director of an issuer should receive a comprehensive, formal and tailored induction on appointment. Subsequently he should receive any briefing and professional development necessary to ensure that he has a proper understanding of the issuer’s operations and business and is fully aware of his responsibilities under statute and common law, the Exchange Listing Rules, legal and other regulatory requirements and the issuer’s business and governance policies. [Paragraph A.6.1 of Appendix 14 to the Listing Rules]

2.3.3 All directors should participate in continuous professional development to develop and refresh their knowledge and skills. This is to ensure that their contribution to the board remains informed and relevant. The issuer should be responsible for arranging and funding suitable training, placing an appropriate emphasis on the roles, functions and duties of a listed company director.

Note: Directors should provide a record of the training they received to the issuer. [Paragraph A.6.5 of Appendix 14 to the Listing Rule]

2.4 Sponsor’s Role

2.4.1 A new applicant and its directors must assist the sponsor to perform its role and must ensure that its substantial shareholders and associates also assist the sponsor. To facilitate the sponsor to meet its obligations and responsibilities under the Exchange Listing Rules and the Code of Conduct, the written engagement agreement referred to in Rule 3A.02 must contain at least the following obligations for the applicant and its directors:

(1) to fully assist the sponsor to perform its due diligence work;

(2) to procure all relevant parties engaged by the new applicant in connection with its listing application (including financial advisers, experts and other third parties) to cooperate fully with the sponsor to facilitate the sponsor’s performance of its duties;

(3) to give each sponsor every assistance, to meet its obligations and responsibilities under the Exchange Listing Rules and the Code of Conduct to provide information to the regulators including without limitation, notifying the regulators of reasons when the sponsor ceases to act;

(4) to enable the sponsor to gain access to all relevant records in connection with the listing application. In particular, terms of engagement with experts retained to perform services related to the listing application, whether or not retained in respect of an expert section, should contain clauses entitling every sponsor appointed by the new applicant access to:

(a) any such expert;

(b) the expert’s reports, draft reports (both written and oral), and terms of engagement;

(c) information provided to or relied on by the expert;

(d) information provided by the expert to the Exchange or Commission; and

(e) all correspondence exchanged between (i) the new applicant or its agents and the expert; and (ii) between the expert and the Exchange or Commission;

Note: The Exchange expects that access to documents for the purposes of this rule would include the right to take copies of the documents without charge.

(5) to keep the sponsor informed of any material change to:

(a) any information previously given to the sponsor under paragraph (3) above; and

(b) any information previously accessed by the sponsor under paragraph (4) above;

(6) to provide to or procure for the sponsor all necessary consents to the provision of the information referred to in paragraphs (1) to (5) above to the sponsor; and

(7) to procure the entering into of such supplements to the engagement letters with experts referred to in Rule 3A.05(4) as is necessary for such engagements of experts to comply with that rule. [Listing Rule 3A.05]

2.4.2 The appointment should clearly:

(i) specify the listing applicant’s responsibilities to facilitate the sponsor to perform its duties and to meet its obligations under the Code and the Listing Rules. In particular provisions should be set out to the effect that the listing applicant should:

(A) fully assist the sponsor to perform due diligence;

(B) procure all relevant parties engaged by the listing applicant in connection with the listing application (including financial advisers, experts and other third parties) to cooperate fully with the sponsor to facilitate the sponsor’s performance of its duties;

(C) acknowledge that the sponsor is required, and should be given every assistance, to meet its obligations and responsibilities under the Code and the Listing Rules to provide information to the regulators including without limitation, notifying the regulators of reasons when the sponsor ceases to act under paragraph 17.9(d); and

(D) enable the sponsor to gain access to all relevant records in connection with the listing application. [Paragraph 17.11(b)(i) of the Code of Conduct]

2.5 Dealings with the Exchange

[The listing applicant must give the following undertakings in the listing application form:]

We … the issuer, hereby undertake: …

(b) to advise the Exchange if any change of circumstance arises prior to the hearing date of the application by the Listing Committee that would render any information contained in this application form or the draft listing document submitted herewith misleading in any material respect [Form A1 of Appendix 5 to the Listing Rules]