Due Diligence Guidelines –
3. Management Experience and Listing Rule 18.04 Waiver of Listing Rule 8.05 Tests
3.1.1 If a Mineral Company is unable to satisfy the [tests in Listing Rule 8.05], it may still apply to be listed if it can establish to the Exchange’s satisfaction that its directors and senior managers, taken together, have sufficient experience relevant to the exploration and/or extraction activity that the Mineral Company is pursuing. Individuals relied on must have a minimum of five years relevant industry experience. Details of the relevant experience must be included in the listing document of the new applicant. [Listing Rule 18.04]
3.1.2 Before submitting an application on behalf of a listing applicant to the Stock Exchange a sponsor should come to a reasonable opinion that the directors of the listing applicant collectively have the experience, qualifications and competence to manage the listing applicant’s business and comply with the Listing Rules, and individually have the experience, qualifications and competence to perform their individual roles, including an understanding of their obligations and those of the listing applicant as an issuer under the Listing Rules and other legal and regulatory requirements relevant to their role. [Paragraph 17.4(c)(iv) of the Code of Conduct]
3.1.3 Regarding the preparation of a listing document, a sponsor should perform, without limitation…examine and consider the integrity, qualifications and competence of the directors, including reviewing internal records, board minutes and public filings. [Paragraph 17.6(d)(iv) of the Code of Conduct]
3.2.1 To obtain the benefit of the waiver in Listing Rule 18.04, the Listing Committee would expect that the Mineral Company must (1) be unable to comply with the financial standards requirements due to pre-production activities or where the relevant mine is not yet in full production, (2) have the requisite management experience required by Listing Rule 18.04 and (3) demonstrate that its primary activity is exploration for and/or extraction of Natural Resources, as pre-conditions of the waiver although the Listing Committee may have regard to any other relevant facts and circumstances on a case-by-case basis.5
3.2.2 The directors and senior managers will be assessed collectively for relevant industry experience, and directors and senior managers taken together must have sufficient experience relevant to the exploration and/or extraction activity that the Mineral Company is pursuing. Individuals relied on must have a minimum of five years’ relevant industry experience.6
Inability to comply with financial standards
3.2.3 To obtain the waiver in Listing Rule 18.04, a new applicant Mineral Company must demonstrate to the Exchange’s satisfaction that their inability to comply with the profit, revenue or cash flow tests of Listing Rule 8.05 is due to the fact that throughout the track record period, the Company has been in a pre-production, exploration and/or development phase (rather than simply insufficient economic performance from producing assets).7 Mineral Companies applying for the waiver must demonstrate a clear path to commercial production, and applicants already in production but unable to present a demonstrable path to profitability are unlikely to be considered favourably under Listing Rule 18.04.8 See also paragraphs 7.4 to 7.6 of this due diligence guideline which relate to the requirement for a Mineral Company to demonstrate that it has credible and plausible plans to proceed to production.
3.2.4 Mineral Companies relying on the exemption from the financial standard requirements in Listing Rule 8.05 must demonstrate that its primary activity is exploration for and/or extraction of Natural Resources.9 This does not have to be their sole activity but should be their main business activity.10
3.3 Recommended Steps
3.3.1 The sponsor should obtain a functional organisation chart of the Mineral Company’s group to identify senior management and review the past experience of the directors/senior managers. The sponsor should also confirm whether persons fulfilling senior management roles are employed on a full-time basis or whether they were engaged as consultants to the Mineral Company as this could impact whether such persons can be considered senior management.
3.3.2 Where an applicant seeks to rely on Listing Rule 18.04, a sponsor should analyse the prior experience of directors and senior managers and review the verification materials supporting these. The sponsor should:
(a) interview the senior executive team to determine which roles are critical in the operation and development of the Mineral Company;
(b) request biographies and examine the past experience of the individuals relied upon to fulfil such functions (including conducting interviews with such individuals with regard to this experience). For a mining company, these will be likely to include the CEO and CFO, the chief geologist and the individuals responsible for executing the mine plan, the development/operation of the processing plant; and any other critical technical roles such as metallurgy and engineering;
(c) satisfy themselves that the past experience of the individuals relied upon is relevant to the activity they are expected to fulfil within the listing applicant. The sponsor may take into account factors including the particular mineral to be extracted, the mining or extraction methods, the geography and geology, and the operating environment (including logistics and sales) in determining whether experience is “relevant”. The importance of these factors may vary depending on the role being fulfilled by the senior manager in question, but at least some of the experience should be relevant to the specific mineral to be extracted. Sponsors would not normally be expected to interview former employers.
Inability to comply with financial standards
3.3.3 If an applicant is relying on a waiver of the Listing Rule 8.05 tests under Listing Rule 18.04, the sponsor should also carry out an analysis of the company’s financial results to determine whether its failure to meet the standards is essentially due to pre-production or development activities and not the inadequate economic performance of producing assets.
3.3.4 Where the failure to meet the standards is due to pre-production or development activities, the sponsor should consider the issues and recommended steps set out in paragraphs 7.4 to 7.6 of this due diligence guideline which relate to the requirement for a Mineral Company to demonstrate that it has credible and plausible plans to proceed to production.
3.3.5 The sponsor should request information from the listing applicant on the scope of its business operations and principal activities to gain an understanding of whether the primary activity of the listing applicant is exploration and/or extraction of Natural Resources. This should also be cross-checked against any segmental reporting in the financial information of the listing applicant.
5. Exchange Guidance Letter GL22-10.
6. FAQ 6 of the Exchange’s Frequently Asked Questions Series 12 and paragraph 3.11 of Exchange Guidance Letter GL22-10.
7. Paragraphs 3.3 to 3.8 of Exchange Guidance Letter GL22-10.
8. Paragraphs 6 and 7, Executive Summary of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010.
9. Note to Listing Rule 18.04.
10. Paragraph 3.13 of Exchange Guidance Letter GL22-10 of October 2010 and FAQ 7 of the Exchange’s Frequently Asked Questions Series 12.
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.