Chapter 17

Due Diligence Guidelines –

Legal and Regulatory Compliance and Legal Proceedings and Disputes

3. Material Legal Proceedings and Disputes

3.1 Standard

Regarding the preparation of a listing document, a sponsor should perform, without limitation, each of the following: … assess … whether the listing applicant is subject to any material legal proceedings or disputes [Paragraph 17.6(d)(vii) of the Code of Conduct]

3.2 Guidance and Recommended Steps

3.2.1 Material legal proceedings or disputes are required to be disclosed in listing documents to enable potential investors to assess the listing applicant’s business. Listing document disclosure of such material legal proceedings and disputes should enable potential investors to assess the potential financial and operational impact on the listing applicant.35

3.2.2 The sponsor should review material legal proceedings and other material disputes that are current or recently resolved (for example, resolved in the previous 12 months) and in which the listing applicant is or was involved, and all material proceedings or disputes the listing applicant knows to be contemplated and which may involve the listing applicant or one of its subsidiaries.36

3.2.3 As a starting point, the sponsor or its lawyers will typically submit an information request seeking information and documents which may include:

(a) details of material pending or threatened legal actions or claims, administrative proceedings, governmental investigations or enquiries against or involving the Group;

(b) details of material legal actions, claims, administrative proceedings, governmental investigations or enquiries against or involving the Group resolved during the previous 12 months;

(c) copies of correspondence with major suppliers or customers relating to complaints or disputes;

(d) details of any significant disputes with competitors or neighbours;

(e) correspondence with auditors or accountants regarding threatened or pending litigation, assessment or claims;

(f) copies of any court or governmental agency decrees, orders or judgements affecting the Group which are material to its business; and

(g) copies of settlement documentation relating to material legal proceedings involving the Group issued during the track record period.

3.2.4 Where practicable and appropriate, taking into account relevant factors on a case by case basis, local lawyers should carry out litigation and insolvency searches on:

(a) the listing applicant; and

(b) each company whose profits or assets make or will make a material contribution to the figures in the accountants’ report or the next published consolidated accounts of the listing applicant or which is otherwise material to the Group (and companies within the Group above them in the “chain of ownership”) in:

(i) the jurisdiction of incorporation of each such company; and

(ii) any jurisdiction where the Group carries on its major business(es) in which such company operates,

in order to check whether the listing applicant or any other company referred to above is subject to any litigation proceedings or outstanding judgements or insolvency proceedings. It should be noted however that litigation searches will not reveal any pre-proceedings claims or arbitration and that not all jurisdictions maintain publicly available records of litigation proceedings. It should also be noted that due to the logistics involved in carrying out searches and the time needed to be able to consider any matters raised in searches, particularly if these are in overseas jurisdictions, there will inevitably be gaps between the dates at which searches are carried out and the dates on which listing documents are filed or issued.

3.2.5 The sponsor, with the assistance of its principal lawyers and lawyers in relevant jurisdictions, should identify any legal proceedings and disputes which could have a material adverse effect on the listing applicant. Whilst in most cases, it will be sufficient to rely on lawyers’ confirmations and summaries, in exceptional circumstances, due diligence of the pleadings and other relevant documents relating to such identified proceedings and disputes should be carried out.

3.2.6 If considered necessary, meetings/conference calls should be held with lawyers and any in-house lawyers of the listing applicant who are handling the identified cases.

3.2.7 Depending on the size of the listing applicant and the number of proceedings, a materiality threshold/cut-off may be set and proceedings above such threshold can be reviewed individually, while remaining litigation proceedings which are of a similar nature, and individually will not have a material financial or operational impact on the listing applicant may be reviewed on a sample basis.

3.2.8 The litigation section of the listing document should be reviewed by officers of the listing applicant with responsibility for legal matters and any external lawyers which are dealing with any matter to which it refers. The sponsor may rely on reports produced by the listing applicant regarding litigation and insolvency; additional comfort may be derived from a confirmation, particularly one drafted specifically enough, which can show that the listing applicant and/or its directors have addressed their mind to the issue.


35. Appendix 1 to Exchange Guidance Letter GL86-16, Appendix 1, Section E (“Business”) includes in a list of key areas that are generally included in the contents of the “Business” section of listing` documents, whether a listing applicant is subject to actual or threatened material claims or litigation and their impact on the listing applicant’s operations, financials and reputation. Information should also be included as to whether the listing applicant’s directors are involved in such claims and litigation and, if this is the case, as to whether they are able to comply with Listing Rules 3.08 and 3.09. See also 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.

36. This is a recommended due diligence step under paragraph 13(i) of Practice Note 21 to the Listing Rules.

i If the internal control expert is the reporting accountant or another accounting firm, the relevant guidelines and practices of the accounting profession position an internal controls review as private advice to the directors of the applicant (and if they are party to the engagement, the sponsors). Accordingly, in such circumstances the name of the reporting accountant or other accounting firm and details of their work and findings may be prevented from being quoted or referenced in the listing document. One circumstance in which internal controls work may be referenced in the listing document is where it is practicable for the applicant and the sponsor to additionally and separately engage the reporting accountant or other accounting firm to also perform an assurance engagement in relation to internal controls. (Footnote 2 to Exchange Guidance Letter GL63-13)


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.

Legal and Regulatory Compliance of Listing Applicant

Material Legal Proceedings and Disputes

Listing Document Disclosure of Material Legal Proceedings and Disputes

Potential Financial and Operational Impact on the Listing Applicant

Sponsor Review of Material Legal Proceedings and Material Disputes

Litigation and Insolvency Search

Listing Document Litigation Search

Exchange Guidance Letter GL50-13

identify any legal proceedings and disputes

listing applicant pending or threatened legal actions or claims

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