Chapter 30

Due Diligence Guidelines –

Provision of Information to Analysts

1. Information Provided to Analysts in New Listings

1.1 Standards

A sponsor should take reasonable steps to ensure that all material information, including forward-looking information (whether quantitative or qualitative) concerning a listing applicant or listing application disclosed or provided to analysts is contained in the relevant listing document. [Paragraph 17.14 of the Code of Conduct]

1.2 Guidance

1.2.1 During the listing application process, there is often a concern that listing applicants may seek to influence the formulation of analysis and views in the pre-deal research reports by providing research analysts, whether or not to the knowledge of the sponsors, with information about the listing applicant that is not contained or not reasonably expected to be contained in the prospectus (“impermissible information”). A concern has also been expressed that research analysts from firms connected to the listing applicant could be put at an advantage by being provided with impermissible information that is not made available to other research analysts.1

1.2.2 In order to ensure equality of the source information and to prevent pre-deal research reports from being used as a vehicle for the listing applicant to disseminate material information relating to an offer without formal prospectus liability, the SFC issued a Consultation Paper on the Regulatory Framework for Pre-deal Research in September 2010 (the “Consultation Paper on the Regulatory Framework for Pre-deal Research”) inviting public comments on, among others, the proposal to codify certain sponsors’ practices and require sponsors to take steps to ensure that all material information, including forward-looking information (whether quantitative or qualitative), disclosed or provided to research analysts in connection with the listing applicant or its securities, is contained in the relevant prospectus or listing document (the “Disclosure Requirement”). The Consultation Paper on the Regulatory Framework for Pre-deal Research suggested that, where material information or forward-looking information (whether qualitative or quantitative) is inadvertently disclosed to research analysts, the sponsor should advise the listing applicant as to what changes are needed to the draft prospectus to ensure the prospectus includes all material information provided to research analysts.2

1.2.3 In June 2011, the SFC published the Consultation Conclusions on the Regulatory Framework for Pre-deal Research (the “Consultation Conclusions on the Regulatory Framework for Pre-deal Research”), which codified certain sponsors’ practices through amendments to the Code of Conduct and the CFA Code.3 As a result of the Consultation Conclusions on the Regulatory Framework for Pre-deal Research, paragraph 5.10 of the CFA Code was amended to give effect to the Disclosure Requirement:

“[W]here a Corporate Finance Adviser acts as a sponsor in relation to a listing of equity securities by a company on the Stock Exchange, the sponsor should take reasonable steps to ensure that all material information, including forward-looking information (whether quantitative or qualitative) disclosed or provided to analysts is contained in the relevant prospectus or where the proposed listing does not involve a prospectus, the relevant listing document, offering circular or similar document.”4

1.2.4 In judging whether any information, particularly any forward-looking information, is material, consideration has to be given as to whether, if included in a prospectus, it is likely to significantly influence a reasonable person’s opinion of the listing applicant and its financial condition and profitability.5

1.2.5 Since the publication of the Consultation Conclusions on the Regulatory Framework for Pre-deal Research, representatives of certain market participants, including investment banks and other market practitioners (the “industry group”), have discussed possible changes to the market practices relating to the preparation of pre-deal research for Hong Kong IPOs.  The industry group has memorialised the proposed changes and developed a set of proposed standard form documentation (the “Recommended Addenda”, the forms of which are set out in Appendix I to this chapter), which includes a standard form research report guidelines, riders for existing forms of documents and additional forms of documentation, all of which are intended to address issues of complying with the SFC’s regulations and to develop consistency across the market. Sponsors may choose to adopt the Recommended Addenda either in part or in full.

1.2.6 On 12 December 2012, the SFC published the Consultation Conclusions on the Regulation of Sponsors. To consolidate all key obligations applicable to sponsors in one code (including the Disclosure Requirement), the Consultation Conclusions on the Regulation of Sponsors transferred the sponsors’ obligation under paragraph 5.10 of the CFA Code to a new Paragraph 17.14 of the Code of Conduct.

1.3 Recommended Steps

1.3.1 The sponsor should educate the listing applicant to ensure that the listing applicant is properly briefed and advised on how to deal with research analysts and what information can and cannot be disclosed to research analysts. In particular, the sponsor should:

(a) explain to the listing applicant the importance of the Disclosure Requirement at the earliest opportunity after receiving the listing applicant’s mandate.6

(b) ensure that the listing applicant is aware of important Hong Kong laws and regulations regarding communications between the listing applicant and research analysts during the listing application process.7

(c) attend the training of the directors of the listing applicant conducted by the listing applicant’s lawyers (“Directors’ Training”) and ensure that the listing applicant is aware of the restrictions on disclosure of material information to research analysts.8

1.3.2 The sponsor should remind its advisers, including intermediaries and lawyers, on the Disclosure Requirement. In particular, the sponsor should:

(a) alert the listing applicant, its directors and senior management members, among other issues, to the implications of providing impermissible information to research analysts.9

(b) ensure that the publicity memorandum contains a description of the Disclosure Requirement and the publicity memorandum is circulated to, among others, the listing applicant and other intermediaries.10

(c) prepare and distribute the research guidelines11 which contain a description of the Disclosure Requirement (“Research Guidelines”) to syndicate members.12

1.3.3 The sponsor should consider appropriate steps to exercise reasonable control over and understand the content of information passed from the listing applicant to research analysts. For example, the sponsor may instruct the listing applicant to either pass along all information provided or to be provided to research analysts to the listing applicant’s lawyers, or to require the listing applicant to obtain the listing applicant’s lawyers’ consent before passing information along to research analysts.

1.3.4 The sponsor should prepare materials for, and arrange and supervise the analysts’ briefing and presentations by the listing applicant to research analysts. In particular, the sponsor should:

(a) assist the listing applicant to develop the analysts’ presentation and presentation script to ensure they do not contain any impermissible information (e.g., financial projections) and instruct the listing applicant not to answer any questions of research analysts that are not dealt with in the presentation script.

(b) ask the listing applicant’s lawyers and underwriters’ lawyers to review the analysts’ presentation and the presentation script to ensure they do not contain any impermissible information.

(c) adopt measures to ensure that research analysts from the firms involved with the listing application process are only provided with information in the analysts’ briefings and presentations arranged and supervised by the sponsor.13

(d) consider requiring research analysts to acknowledge and confirm that they have read and agree to the restrictions and observations set out in the Research Guidelines,14 and if research analysts have questions prior to the analysts’ presentation, they should submit the questions to the sponsor in writing.

(e) ensure that at the outset of the first meeting between research analysts and the listing applicant, the listing applicant should confirm that it is aware of the Disclosure Requirement.15

(f) should the sponsor attend analysts’ briefings and presentations,16 during such briefings and presentations, be attentive to research analysts’ questions and the listing applicant’s answers to ensure the listing applicant does not communicate impermissible information to research analysts. To the extent that the sponsor is aware of any communication of impermissible information, the sponsor should intervene with the discussion and clarify that such information is impermissible information.

(g) consider requesting the listing applicant’s lawyers and underwriters’ lawyers to chaperone the analysts’ briefings and presentations and to point out to the listing applicant and research analysts whenever they realise impermissible information is being shared with research analysts. In the event of one-on-one communication between the listing applicant and research analysts, the sponsor should consider involving the listing applicant’s lawyers, underwriters’ lawyers and/or its in-house lawyer(s) to the communication.

1.3.5 The sponsor may consider seeking confirmation from the listing applicant and other intermediaries by:

(a) adding a listing applicant’s undertaking to comply with the Disclosure Requirement in the sponsor’s mandate letter.

(b) requiring the listing applicant to confirm that it has not provided research analysts with any impermissible information as part of the listing applicant’s A1 back-to-back confirmation to the sponsor.

(c) requiring each syndicate member to represent, warrant, undertake and confirm its compliance with the Research Guidelines.17

(d) requiring the listing applicant to represent, warrant, undertake and confirm its compliance with the Disclosure Requirements.18

1.3.6 The sponsor should take steps to ensure that pre-deal research reports do not contain (i) any factual inaccuracies, or (ii) any material information that could have been sourced from the listing applicant that cannot reasonably be expected to be included in the listing document or is not publicly available. For example, the sponsor may consider:

(a) reminding the underwriters’ lawyers regarding the review of pre-deal research reports.19

(b) requiring research analysts to confirm prior to printing and distribution of pre-deal research reports that they have not sought nor received any impermissible information.

1.3.7 The sponsor should ensure the listing document disclosure is revised to contain all material information, including forward-looking statements (whether quantitative or qualitative), concerning the listing applicant or listing application that it knows has been disclosed or provided to the research analysts during the process of conducting any preventive measures outlined in the foregoing paragraphs. To the extent that the sponsor is aware of any material information or forward-looking information (whether qualitative or quantitative) being disclosed to research analysts (whether inadvertently or otherwise), the sponsor should advise the listing applicant as to what changes are needed to the draft listing document.20 The sponsor should also work with the drafting lawyers to ensure that any such proposed changes are disclosed in the listing document. The sponsor and the listing applicant may also consider including a risk factor in the listing document, stating that the investors should not place any reliance on any media or research reports regarding the listing applicant, and that the investors should make their investment decisions on the basis of the information contained in the listing document only.

Endnotes

1. Paragraph 24 of the Consultation Paper on the Regulatory Framework for Pre-deal Research.

2. Paragraph 33 of the Consultation Paper on the Regulatory Framework for Pre-deal Research.

3. Paragraph 50 of the Consultation Conclusions on the Regulatory Framework for Pre-deal Research.

4. Paragraph 5.10 of the CFA Code.

5. Paragraph 40 of the Consultation Conclusions on the Regulatory Framework for Pre-deal Research.

6. The sponsor should consider adding a rider on “restrictions on disclosure of material information to research analysts” in its kick-off meeting materials. For the suggested form of the rider, please refer to Addendum 3(a) of the Recommended Addenda.

7. The sponsor should consider sending the listing applicant a memorandum which sets out the important Hong Kong laws and regulations regarding communications between the listing applicant and research analysts during the listing application process. For the suggested form of the memorandum, please refer to Addendum 5 of the Recommended Addenda.

8. The sponsor should consider adding a rider on “restrictions on disclosure of material information to research analysts” in the Directors’ Training materials. For the suggested form of the rider, please refer to Addendum 7 of the Recommended Addenda.

9. The sponsor should consider asking the listing applicant’s lawyers to alert the listing applicant, its directors and senior management members, among other issues, to the implications of providing impermissible information to research analysts. For the suggested form of the reminder, please refer to Addendum 6 of the Recommended Addenda.

10. The sponsor should consider adding a rider on “restrictions on disclosure of material information to research analysts” in the publicity memorandum prepared by the listing applicant’s lawyers. For the suggested form of the rider, please refer to Addendum 3(b) of the Recommended Addenda.

11. For the suggested form of the Research Guidelines, please refer to Addendum 4 of the Recommended Addenda.

12. The sponsor should consider requiring each syndicate member to confirm in writing that it will comply with the Research Guidelines prior to the analysts’ presentation. For the suggested form of the confirmation letter, please refer to Addendum 9 of the Recommended Addenda.

13. Paragraphs 26 and 33 of the Consultation Paper on the Regulatory Framework for Pre-deal Research.

14. The sponsor should consider adding a rider in its invitation letter to research analysts to attend the analysts’ presentation to acknowledge and confirm that they have read and agree to the restrictions and observations set out in the Research Guidelines. For the suggested form of the rider, please refer to Addendum 8 of the Recommended Addenda.

15. If the listing applicant is not aware of the Disclosure Requirement prior to its meeting with research analysts, the sponsor should consider requiring research analysts to hand out a written notice summarising such requirements prior to the meeting. For the suggested form of the written notice, please refer to Addendum 2 of the Recommended Addenda.

16. Note that some banks may have a practice of disallowing the sponsor to attend meetings between research analysts and the listing applicant.

17. The sponsor should consider adding a rider in the agreement among underwriting syndicates requiring each syndicate member to represent, warrant, undertake and confirm its compliance with the Research Guidelines. For the suggested form of the rider, please refer to Addendum 12 of the Recommended Addenda.

18. The sponsor should consider adding a rider in the underwriting agreements requiring the listing applicant to represent, warrant, undertake and confirm its compliance with the Disclosure Requirements. For the suggested form of the rider, please refer to Addendum 11 of the Recommended Addenda.

19. The sponsor should consider sending a written reminder to the underwriters’ lawyers regarding the review of pre-deal research reports. For the suggested form of the reminder, please refer to Addendum 10 of the Recommended Addenda.

20. Paragraph 33 of the Consultation Paper on the Regulatory Framework for Pre-deal Research.