Due Diligence Guidelines –
3. Reliance on Legal Opinions and Advice
A sponsor cannot abrogate responsibility for due diligence. Where a sponsor engages a third party to assist it to undertake specific due diligence tasks (e.g. engaging lawyers to undertake verification of title to properties…), the sponsor remains responsible in respect of the matters to which the specific tasks relate. A third party’s work, in itself, would not be sufficient evidence that a sponsor has discharged its obligation to conduct reasonable due diligence. The degree to which a third party’s work can be relied on may depend on the professional qualifications of the third party to conduct the work. As a minimum the sponsor should:
(i) assess whether the third party is appropriately qualified and competent for the tasks assigned to it;
(ii) consider the scope and extent of the tasks to be performed by the third party;
(iii) assess the results of the work performed by the third party and arrive at its own opinion whether the work provides a sufficient basis to determine that reasonable due diligence has been conducted and whether further due diligence is required;
(iv) assess whether the results of the work are consistent with other information known to the sponsor including that derived from its other due diligence work; and
(v) assess whether the results of the work should be incorporated in the listing document and whether they should be brought to the attention of the regulators.
[Paragraph 17.6(g) of the Code of Conduct]
3.2.1 As set out under section 1 above, the sponsor’s ability to rely on any opinion, advice or other input provided by foreign lawyers will depend on:
(a) whether the tasks delegated to the foreign lawyers fall within their professional competency;17 and
(b) whether the sponsor has taken the steps set out in the Code of Conduct with respect to the foreign lawyers involved and their work product.
3.2.2 Any part of the listing document which is a copy of or extract from a report, opinion or other statement issued or made by foreign lawyers and which is included in the listing document with their consent, will be an “expert report” for the purposes of Paragraph 17 of the Code of Conduct. The lawyers which prepared such information will be regarded as “experts” for the purposes of Paragraph 17 of the Code of Conduct and the sponsor will be required to take the steps set out in Paragraph 17.7 Code of Conduct.18
3.2.3 Where non-expert sections of the listing document contain statements made within the general competence of foreign lawyers (for example where lawyers have advised on property titles), the sponsor should treat the lawyers as non-expert third parties for the purposes of the Code of Conduct and take the steps set out in Paragraph 17.6(g) of the Code of Conduct.
3.2.4 The sponsor should refer to Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers” for general guidance on conducting due diligence on third parties (including experts) and their work product.
3.3 Recommended Steps
3.3.1 The sponsor should refer to the recommended steps set out in Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers”.
3.3.2 The sponsor should, in particular:
(a) review the terms of engagement and check that the scope of work set out is appropriate to the opinion required to be given. In particular, the sponsor should consider requesting advance approval for referring to the foreign lawyers’ opinions in the listing document or at the request of the Exchange or the SFC. Except in exceptional circumstances, it will not be acceptable if the scope of work of the foreign lawyers is so narrow that their opinion is largely based on the representations of or confirmations from the management of the listing applicant, without further independent enquiries or assessment by the foreign lawyers;19
(b) review the draft legal opinion to assess whether the results of the work performed are consistent with other information known to the sponsor including that derived from its other due diligence work; and
(c) with the assistance of its principal lawyers, check:
(i) details of the documents the opinion provider has examined in giving the opinion (sufficient detail should be included to enable easy identification);
(ii) enquiries that the opinion provider has made (for example, searches of local registries);
(iii) assumptions that the opinion provider has made (these should mainly relate to facts and, where relevant, issues of foreign law (that is foreign to the opinion provider’s jurisdiction);
(iv) qualifications on matters where it is established market practice that an unqualified opinion cannot reasonably be given; and
(v) any wording required to deal with emergency situations, for example, as a result of sanctions or wars; and
(d) check that nothing in the legal opinion, in particular the assumptions and qualifications, has the effect of rendering the opinion worthless.
3.3.3 With regard to the sponsor’s review of any foreign legal opinion, it should be noted that where the opinion provider is the author of an “expert report” (see paragraph 3.2.2 above), the steps which the sponsor is required to take under Paragraph 17.7 of the Code of Conduct with respect to the opinion provider and its work product, should be to the standard expected of a sponsor which is not itself expert in the matters dealt with in the legal opinion.20
3.3.4 If the advice or opinion of foreign lawyers contain statements that are inconsistent with the other information known to the sponsor about the listing applicant’s business or business plans, the sponsor is expected not to rely solely on the opinion but to make further due diligence enquiries so as to clarify the issues.21
17. The Consultation Conclusions on the Regulation of Sponsors note that in seeking the assistance of a legal adviser or other professionals, a sponsor should carefully distinguish between matters that fall within a person’s professional competency and those that do not in order to determine whether it is appropriate to delegate the work to that party (See the Consultation Conclusions on the Regulation of Sponsors at paragraph 173).
18. The Code of Conduct differentiates between the responsibility a sponsor assumes for an “expert report” and its responsibility for the “non-expert sections” of a listing document. An “expert report” is defined as “any part of the listing document purporting to be made on the authority of an expert or purporting to be a copy of or extract from a report, opinion, statement or valuation of an expert where the expert gives consent for the inclusion in the listing document of the copy or extract and the listing document includes a statement that he has given and has not withdrawn such consent”. All parts of the listing document which are not part of an expert report are defined as “non-expert sections” of the listing document. (See Paragraph 17.15 of the Code of Conduct).
19. See SFC Report on Sponsor Theme Inspection Findings of March 2011 at paragraph 51. The SFC referred in case example 3 to a listing applicant which was engaged in a business that was subject to regulation in a jurisdiction. Certain conduct appeared to be prima facie in breach of the applicable legal requirements. Legal advice was submitted to the Exchange stating that there was likely to be no contravention by the listing applicant. Such legal advice was seemingly rendered upon reviewing limited types of transactions entered into by the listing applicant. The SFC noted that there were other types of transactions in the normal course of the listing applicant’s business, which clearly suggested that there was a contravention of the applicable legal requirements, but were not considered or discussed in the legal advice. The SFC stated that the sponsor should have questioned the basis of the legal advice, given the other information known to the sponsor was inconsistent with the facts and assumptions upon which the legal advice was based.
20. See Paragraph 17.7(e) of the Code of Conduct.
21. See SFC Report on Sponsor Theme Inspection Findings of March 2011 at paragraph 53.
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.