Due Diligence Guidelines –
10. Compliance with Laws
10.1.1 If relevant and material to the Mineral Company’s business operations, [the listing document must include] information on … compliance with host country laws, regulations and permits … [and] … its historical experience of dealing with host country laws and practices. [Listing Rules 18.05(6)(c), (f)]
10.1.2 Before submitting an application on behalf of a listing applicant to the Stock Exchange a sponsor should come to a reasonable opinion that : … the listing applicant has established procedures, systems and controls (including accounting and management systems) which enable the listing applicant and its directors to comply with the Listing Rules and other relevant legal and regulatory requirements on an ongoing basis. [Paragraph 17.4(c)(ii) of the Code of Conduct]
10.1.3 Regarding the preparation of a listing document, a sponsor should perform, without limitation … assess the business performance, financial condition, development, prospects and any financial projection or profit forecast. [Paragraph 17.6(d)(vi) of the Code of Conduct]
10.2.1 Host country laws and regulations will be of particular importance where the mineral concessions are at risk of being forfeited in the case of non-compliance with licence conditions or breach of law or regulations or if there is a risk of nationalisation or expropriation of the mineral assets.
10.2.2 Particularly where the mineral assets are in emerging or developing markets, the sponsor should also consider a wider review of the country risk, political risk and regional risk for the particular Mineral Company, including issues such as potential nationalisation or expropriation of mineral assets, the timing of elections, the risk of retrospective reviews of the grant of mineral rights and any political instability or security disturbances.
10.2.3 Due to the nature of the mineral/petroleum resource industry, sponsors should also pay particular attention to OFAC, anti-bribery and anti-money laundering issues, and should follow the guidance set out in Chapter 15 “Due Diligence Guidelines – Anti-Corruption, Anti-Money Laundering and Sanctions”.
10.3 Recommended Steps
10.3.1 The sponsor should make enquiries of lawyers in the host country as to which laws might impact on the Mineral Company’s business continuity and the validity of its exploration and extraction rights and request a summary of relevant laws as well as information on historical occurrences of forfeitures, nationalisation or expropriation. The sponsor should also follow the guidance set out in Chapter 17 “Due Diligence Guidelines – Legal and Regulatory Compliance and Legal Proceedings and Disputes” and Chapter 8 “Due Diligence Guidelines – Business Model”.
10.3.2 The sponsor should request that a legal due diligence exercise conducted by lawyers in any relevant jurisdiction (under the supervision of Hong Kong lawyers where appropriate) is carried out and the sponsor should review the findings to gain an understanding of the local laws and regulations which apply to the Mineral Company and the Mineral Company’s compliance with such laws and regulations. The subject matter of the legal due diligence exercise may include (but will not be limited to) a review of the minerals legislation and related codes, laws surrounding foreign ownership, taxation, exchange control and the ability to repatriate dividends and to repay loans, indigenous rights and empowerment legislation, as well as the law relating to more specifically operational matters such as labour, environmental, health & safety.
10.3.3 The sponsor should also request findings of compliance with the conditions of any exploration, extraction production and other operational licences, where possible.
10.3.4 The sponsor should request information on the Mineral Company’s internal compliance guidelines and policies.
10.3.5 Where there are any areas of non-compliance, the sponsor should discuss with management reasons for non-compliance and steps being taken to rectify such non-compliance. Lawyers in the relevant jurisdiction should also be consulted to assess the extent and materiality of any non-compliance and the potential impact on the Mineral Company’s business and operations. Where the non-compliance is material, the steps taken or to be taken to rectify such non-compliance may also need to be disclosed in the listing document. In certain circumstances, particularly where there have been a significant number of incidences of non-compliance, sponsors should also consider the listing applicant’s suitability for listing.
10.3.6 Where the Mineral Company operates in particularly high-risk jurisdictions or where “red flags” have been identified which raise potential concerns regarding political risk and/or corruption, it may be appropriate for the sponsor to request the Mineral Company to commission a specific report from risk consultants on the situation affecting the Mineral Company’s assets but this will not be necessary in more straight forward cases.
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.