Due Diligence Guidelines –
Connected Persons and Connected Transactions
2. Identifying the Listing Applicant’s Connected Persons and Connected Transactions
2.1.1 At the time of issue of a listing document, a sponsor, after reasonable due diligence, should have reasonable grounds to believe and should believe that 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. [Paragraph 17.5(a) of the Code of Conduct]
2.1.2 At the time of issue of a listing document, a sponsor, after reasonable due diligence, should have reasonable grounds to believe and should believe that: (i) the information in the non-expert sections of the listing document is true, accurate and complete in all material respects and not misleading or deceptive in any material respect; and (ii) there are no matters or facts the omission of which would make any information in the non-expert sections of a listing document or any other part of the listing document misleading in a material respect. [Paragraph 17.5(b) of the Code of Conduct]
2.2.1 The listing document should include a description of all current connected transactions entered into by the listing applicant and all connected transactions into which the listing applicant intends to enter.
2.2.2 Connected persons of the listing applicant are persons who can control or exercise significant influence over the group. They include directors, chief executives and substantial shareholders of the listing applicant or its subsidiaries and any persons associated with them.3
2.2.3 In addition, the Stock Exchange has the power to deem a person as a connected person of the listing applicant on the basis of:
(a) that person’s relationship with the listing applicant or its connected persons; or
(b) that person entering into or proposing to enter into any agreement, arrangement, understanding or undertaking, whether formal or informal and whether express or implied in relation to a particular transaction.4,5
2.2.4 Set out in Appendix I is a list of the Exchange listing decisions involving connected persons and connected transactions. The sponsor should also refer to the Stock Exchange’s website for the latest listing decisions and guidance letters on connected persons and connected transactions published by the Stock Exchange from time to time.
2.2.5 In relation to a listing applicant with weighted voting rights (WVR), any WVR beneficiary and any vehicle through which the beneficiary holds the WVR shares are deemed to be connected persons and core connected persons of the listing applicant.
2.2.6 The sponsor should familiarise itself with the rules concerning connected persons and connected transactions and should, together with the listing applicant’s lawyers, seek to identify connected persons of a listing applicant and connected transactions of the listing applicant, in particular those connected transactions which will continue after the listing of the listing applicant.
2.2.7 When in doubt as to whether a person is a connected person or a transaction is a connected transaction, the sponsor should seek guidance from the Stock Exchange.
2.3 Recommended Steps
2.3.1 Training and Training Materials on Connected Transactions
(a) The listing applicant’s lawyers should carry out a directors’ training session and prepare training materials for the listing applicant that describe the background and relevant rules relating to connected transactions. The sponsor, together with the sponsor’s lawyers, should review the training materials to ensure that they are complete and contain the appropriate guidance. The training materials should also be tailored to the specific listing applicant, taking into account matters such as its shareholding structure and proposed listing structure and industry.
(b) The training session and materials should explain the definitions of connected persons, associates and connected transactions under the Listing Rules, and provide information on the implications of entering into connected transactions in connection with the listing and post-listing.
(c) The sponsor should attend the training session to ensure that all directors and senior management who are responsible for identifying and monitoring connected party transactions of the listing applicant attend the training session and are given a copy of the training materials.
(d) A copy of the training materials and records of the attendance and questions raised, should be kept by the sponsor. For guidance on sponsors’ record keeping obligations, reference should be made to Chapter 25 “Due Diligence Guidelines – Record Keeping”.
(e) In addition, the sponsor should obtain signed confirmations from the directors that they have attended the training session(s) and have read the training materials.
2.3.2 Information Provided by the Listing Applicant, its Board of Directors and the Controlling Shareholder(s)
(a) As part of the exercise to identify connected persons and connected transactions, it is common for the listing applicant’s lawyers to submit an information request to the listing applicant (including its Board of Directors) and its controlling shareholder(s) seeking details of all connected persons and connected transactions. The sponsor, with its lawyers, should request and review the information request prepared by the listing applicant’s lawyers to ensure that it covers the necessary matters. Please see Chapter 10 “Due Diligence Guidelines – Controlling Shareholders’ Relationship with the Listing Applicant” for more information relating to controlling shareholders.
(b) The sponsor should examine the information provided in response to the information request. The sponsor should follow-up on any missing information and pursue red flags, and ask additional questions if necessary. A copy of the information provided and any follow-up information obtained should be kept by the sponsor.
2.3.3 Other Due Diligence Steps to Identify Connected Persons and Connected Transactions
(a) The sponsor’s due diligence is ongoing and does not end when a listing applicant has provided responses to the information request referred to in paragraph 2.3.2 above.
(b) The sponsor should assess the information provided in relation to connected transactions against the other information known to the sponsor through due diligence. For example, the sponsor should apply its mind to any discussions involving transactions into which the listing applicant has entered or intends to enter and consider whether these could be connected transactions. The sponsor should make appropriate enquiries to clarify any inconsistencies arising out of the information provided in response to the information request. In particular, as part of the business and management due diligence sessions with the listing applicant, including interviews and listing document drafting sessions with management, where there are discussions involving transactions, the sponsor should raise questions to satisfy itself that such transactions do not involve connected persons.
(c) When conducting interviews with the listing applicant’s major business stakeholders, such as major customers, suppliers, creditors and bankers, the sponsor should confirm with them that they are not connected persons. Please see Chapter 9 “Due Diligence Guidelines – Interviews of Major Business Stakeholders” for more information on conducting interviews with major business stakeholders.
(d) The sponsor should also review and consider whether any related party transactions mentioned in the notes to the accountants’ reports on related party transactions could be connected transactions and if so, whether there are any inconsistencies between the information provided therein and the disclosure of such transactions in the listing document. Please see Chapter 20 “Due Diligence Guidelines – Accountants” for more information on related party transactions.
5. In an October 2017 listing decision (), the Stock Exchange clarified that (a) and (b) are not the only circumstances where it may deem a person as a connected person. In that case, the Stock Exchange considered it appropriate to deem a company (X) as a connected person due to a close association that it had with the issuer’s controlling shareholder. Among other things, the controlling shareholder had an interest in X by way of a profit sharing arrangement which would enable it to benefit from the issuer’s transactions with X. In that decision, the Stock Exchange also expressed that the lack of an intention or incentive to circumvent the rules, or the fact that the transactions were negotiated on an arm’s length basis, were not relevant tests to determining whether the Stock Exchange may exercise its deeming power.
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.