Due Diligence Guidelines –
Interviews of Major Business Stakeholders
Code of Conduct Paragraphs
Key Stock Exchange Guidance Letters
1.1.1 Based on reasonable due diligence, a sponsor should have a sound understanding of: … (i) a listing applicant, including its history and background, business and performance, financial condition and prospects, operations and structure, procedures and systems; [Paragraph 17.3(a)(i) of the Code of Conduct]
1.1.2 A sponsor should conduct the following independent due diligence steps: … (iii) interview major business stakeholders such as the listing applicant’s customers, suppliers, creditors and bankers; [Paragraph 17.6(e)(iii) of the Code of Conduct]
1.2.1 Examples of the major business stakeholders which a sponsor should consider interviewing include a listing applicant’s customers, suppliers, creditors and bankers. Other examples include debtors, distributors, franchisees, agents and joint venture partners. As regards customers, this means, other than in relation to consumer goods or services, the ultimate customer, and in relation to consumer goods or services, the ultimate wholesaler or retailer as the case may be, and suppliers mean the ultimate supplier of items which are not of a capital nature.
1.2.2 As part of its due diligence, the sponsor should assess the listing applicant’s performance and finances and this assessment should normally include interviewing major business stakeholders.1
1.2.3 The main aims of interviews with major business stakeholders are:
(a) understanding the industry and value chain context in which the listing applicant operates;
(b) understanding the listing applicant’s business and performance, financial condition and prospects;
(c) establishing the existence of, and basic facts about, each major business stakeholder;
(d) verifying the details of their relationship with the listing applicant as described by the listing applicant’s management;
(e) assessing whether the listing applicant is materially dependent on any particular business stakeholder;
(f) in relation to the business relationship between the business stakeholder and the listing applicant, seeking to identify any interruptions, difficulties or disputes;2 and
(g) assessing whether the relationship has changed materially since the end of the track record period or seems likely to change materially in the near future.
1.2.4 For general guidance on conducting due diligence on a listing applicant’s major business stakeholders, the sponsor should refer to section 2 of Chapter 7 “Due Diligence Guidelines – Knowing the Listing Applicant and its Management”.
1.2.5 The sponsor should refer in particular to Exchange Guidance Letter GL86-163 which identifies certain key focus areas for disclosure in the listing document with respect to a listing applicant’s suppliers, customers and sub-contractors. The sponsor’s interviews of such parties should be informed by the requirements of that guidance letter.
1.2.6 If the listing applicant’s business involves distributorship, franchising or consignment, the sponsor should refer to Exchange Guidance Letter GL36-124 which discusses the Exchange’s observations on the risks involving these business models and gives guidance on how disclosure should be made in the listing document. The sponsor’s interviews of distributors, franchisees and consignees should be informed by the provisions of that guidance letter. The sponsor should also refer to Chapter 14 “Due Diligence Guidelines – Distributorship, Franchisees and Consignees” for guidance on due diligence of a business involving these business models. In the case of listing applicants engaged in the restaurant business, the sponsor should refer to Exchange Guidance Letter GL28-12.5
1.2.7 The due diligence required on the listing applicant’s major business stakeholders should not be confused with or limited by reference to the minimum content requirements of listing documents.
1.2.8 The information relating to a new listing applicant’s major customers and suppliers which is required to be included in a listing document by Part A of Appendix 1 to the Listing Rules is reproduced in Appendix I.
1. Paragraph 13(b) of Practice Note 21 to the Listing Rules: Typical due diligence inquiries include “assessing the new applicant’s performance and finances, business plan and any profit forecast or estimate, including an assessment of the reasonableness of budgets, projections and assumptions made when compared with past performance, including historical sales, revenue and investment returns, payment terms with suppliers, costs of financing, long-term liabilities and working capital requirements. This would normally include interviewing the new applicant’s senior management and would often involve interviewing the new applicant’s major suppliers and customers, creditors and bankers.”
2. See SFC Dual Filing Update of December 2007 in which the SFC commented on the importance of disclosing in the listing document material litigation or disputes with the listing applicant’s major customers and suppliers, including the implications for the listing applicant’s operations and financial position.
3. See Exchange Guidance Letter GL86-16, Appendix 1, Section A (“Summary and Highlights”) and Section E (“Business”).
4. Exchange Guidance Letter GL36-12.
5. Exchange Guidance Letter GL28-12 gives guidance on disclosure of matters in listing documents of applicants engaged in the restaurant business to which the sponsor should refer when conducting interviews of major suppliers to such listing applicants. Matters for disclosure include, inter alia, if material: (i) the number of the listing applicant’s authorised suppliers during the track record period and their average years of relationship with the listing applicant; and (ii) incidents of food supply interruption, early termination of contractual arrangements with suppliers or failure to secure sufficient quantities of food materials during the track record.
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.