Chapter 29

Due Diligence Guidelines –

Communications with Regulators

4. Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the Listing Rules)

4.1 Standards

4.1.1 A sponsor, once appointed, must notify the [Exchange] in writing of its appointment as soon as practicable, regardless of whether a listing application has been submitted. As a means of notification, a sponsor must provide a copy of its engagement letter to the Exchange as soon as it is formally appointed. [Listing Rule 3A.02A(1)]

4.1.2 If a sponsor ceases to act for a new applicant at any time after its appointment (regardless of whether a listing application has been submitted), the sponsor must inform the Exchange in writing, as soon as practicable, of its reasons for ceasing to act. [Listing Rule 3A.02A(2)]

4.1.3 Each sponsor must give an undertaking and statement of independence to the Exchange as set out in Appendix 17 [of the Listing Rules] at the same time when an application on behalf of the new applicant is submitted to the Exchange … [and each] sponsor must … comply with the terms of the undertaking and statement of independence. [Listing Rules 3A.03 and 3A.11(6)]

4.1.4 [Appendix 17 requires a sponsor to:]

(b) use reasonable endeavours to ensure that all information provided to the Exchange and the [Commission] during the Company’s listing application process … is true, accurate, complete, and not misleading in all material respects and, to the extent that [the sponsor] subsequently become[s] aware of information that casts doubt on the truth, accuracy or completeness of information provided to the Exchange, [the sponsor] will promptly inform the Exchange and the Commission, as the case may be, of such information;

(c) cooperate in any investigation conducted or enquiry raised by the Listing Division, the Listing Committee of the Exchange and/or the Commission, including answering promptly and openly any questions addressed to [the sponsor], promptly producing the originals or copies of any relevant documents and attending before any meeting or hearing at which [the sponsor is] requested to appear;

(e) report to the Exchange in writing as soon as practicable when [the sponsor] become[s] aware of any material information relating to the Company or its listing application which concerns non-compliance with the Exchange Listing Rules or other legal or regulatory requirements relevant to the Company’s listing (except as otherwise disclosed), or any changes to the information relating to [the sponsor’s] independence. This obligation continues after [the sponsor] cease[s] to be the Company’s sponsor, if the material information came to [the sponsor’s] knowledge whilst [it] was acting as the sponsor. [Appendix 17 to the Listing Rules]

4.1.5 As soon as practicable after the Listing Committee’s hearing of the new applicant’s listing application but on or before the date of issue of the listing document, each sponsor must submit to the Exchange the declaration set out in Appendix 19 [of the Listing Rules]. [Listing Rule 3A.13]

4.1.6 [Appendix 19 of the Listing Rules includes a declaration of the sponsor that:]

(b)(vii) there are no other material issues bearing on the Company’s application for listing of and permission to deal in its securities which, in the sponsor’s opinion, should be disclosed to the Exchange.

4.2 Guidance

4.2.1 If a sponsor fails to notify the Exchange in writing of its appointment as soon as practicable, the Exchange may treat the date of later notification as the date of the sponsor’s formal appointment when determining whether the two month requirement under Listing Rule 3A02.B3 has been met. The Exchange normally expects notification within five business days from the date of the engagement letter. [Exchange FAQ Series 24, FAQ No. 5]

4.2.2 The Exchange amended the Listing Rules to complement the SFC’s new sponsor regulations (as set out at sections 2 and 3 above). There is, however, overlap between the Listing Rules and the Code of Conduct and some thresholds and standards in respect to communications to regulators are different.

4.2.3 The Code of Conduct states that in the event of any conflict between the Listing Rules and Paragraph 17 of the Code of Conduct, the provisions of Paragraph 17 of the Code of Conduct shall prevail. [Code of Conduct Paragraph 17.1(d)] The CFA Code states that in the event of any conflict between the CFA Code and Paragraph 17 of the Code of Conduct, the provisions of Paragraph 17 of the Code of Conduct shall prevail. [CFA Code Paragraph 1.5] The Listing Rules state that “Insofar as the Exchange Listing Rules impose a higher standard of conduct on sponsors … than that set out in the [Code of Conduct or the CFA Code] … the [Listing Rules] will prevail.” [Listing Rule 3A.28]

4.2.4 In the event that the Listing Rules impose higher standards of conduct on the sponsor than the Code of Conduct, it is recommended that the higher standards are adhered to. It is not, however, always clear whether the standard is technically “higher” under the Listing Rules or the Code of Conduct, for example, whether “reasonably satisfy itself that all information provided to the Stock Exchange and the SFC during the listing application process is accurate, and complete in all material respects and not misleading in any material respect” (the Code of Conduct) is the same standard (or a higher or lower standard) as “use reasonable endeavours to ensure that all information provided to the Exchange and the SFC during the Company’s listing process is true, accurate, complete, and not misleading in all material respects” (Listing Rules).

4.2.5 The Code of Conduct and the CFA Code do not have the force of law but they are used by the SFC in assessing whether a sponsor is fit and proper to remain licensed or registered and permitted to carry out its sponsor work. The Code of Conduct states that a failure by any person to comply with any provision of the Code of Conduct that applies to it shall not by itself render the person liable to any judicial or other proceedings, but in any proceedings under the Securities and Futures Ordinance before any court the Code of Conduct is admissible in evidence, and if any provisions set out in the Code of Conduct appears to the court to be relevant to any question arising in the proceedings it shall be taken into account in determining the question. [Code of Conduct Paragraph 1.5] The Listing Rules under Appendices 17 and 19 each include a note which states that sponsors should be aware that giving to the Exchange any record or document which is false or misleading in a material respect will render relevant persons liable for prosecution for an offence under subsection 384(3) of the Securities and Futures Ordinance (Provision of false or misleading information).

4.2.6 The Code of Conduct and the CFA Code apply to communications with both the SFC and the Exchange. However, certain sections of the Listing Rules only apply to communications with the Exchange.

Endnotes

3. Listing Rule 3A.02B(1) provides that “[a] listing application must not be submitted by or on behalf of a new applicant less than 2 months from the date of the sponsor’s formal appointment.