Due Diligence Guidelines –
Interaction with Third Parties including Expert Advisers1
Code of Conduct Paragraphs
A. Generic Standards For Interaction With Third Parties Including Expert Advisers
1. Seeking Assistance and Reasonable Reliance
Non-expert third parties
At the time of issue of a listing document, a sponsor, after reasonable due diligence, should have reasonable grounds to believe and should believe that:… (i) the information in the non-expert sections of the listing document is true, accurate and complete in all material respects and not misleading or deceptive in any material respect; and … (ii) there are no matters or facts the omission of which would make any information in the non-expert sections of the listing document or any other part of the listing document misleading in a material respect. [Paragraph 17.5(b) of the Code of Conduct]
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, accountants to review internal controls, consultancy firms to undertake market research, agencies to perform investigative work), 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… [Paragraph 17.6(g) of the Code of Conduct]
At the time of issue of a listing document, a sponsor as a non-expert, after performing the due diligence set out in Paragraph 17.7, should have no reasonable grounds to believe and should not believe that the information in the expert reports is untrue, misleading or contains any material omissions. [Paragraph 17.5(c) of the Code of Conduct]
The performance of each of the procedures in Paragraph 17.7(a) to (d) … should be to the standard expected of a sponsor which is not itself expert in the matters dealt with in the relevant expert report. [Paragraph 17.7(e) of the Code of Conduct]
1.2.1 Whilst the sponsor is required to conduct due diligence, it should be able to seek assistance from third parties if the sponsor considers that the matters concerned are within such third party’s core competency or that the professional input from the third party is valuable to the due diligence process. The Listing Rules also require the listing applicant to procure that third parties (including experts) engaged by it in connection with the listing cooperate fully with the sponsor.2
1.2.2 In seeking the assistance of third parties, the sponsor should distinguish between matters that fall within that person’s professional competency and those that do not.
1.2.3 The sponsor should satisfy itself that it is reasonable to rely on the work of third parties. This will involve the sponsor assessing, inter alia, the qualifications, competencies, resources, independence and scope of work of the third party and critically reviewing the work product of the third party. When conducting such assessment, the sponsor should apply its own general knowledge and prior experiences, and not necessarily with any expertise in that particular area in question. It should be noted that the statement in Paragraph 17.6(g) of the Code of Conduct, “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”, means only that the sponsor cannot blindly rely on the work of a third party. The sponsor can rely on such work provided that it has performed the steps set out in Paragraph 17.6(g) of the Code of Conduct. Likewise, the sponsor can rely on an expert report provided that it has performed the steps set out in Paragraph 17.7(b) of the Code of Conduct.
If an expert who relies on information prepared by a third party (for example where a property valuer relies on lawyers’ confirmation of title to properties) takes steps equivalent to those set out in Paragraph 17.6(g) of the Code of Conduct in respect of the third party and the information prepared, the sponsor may rely on the steps taken by the expert. If the expert has not taken such steps, the sponsor will need to perform the steps set out in that paragraph in respect of the third party and the information relied on by the expert.3
1.2.4 If the sponsor cannot satisfy itself that it is reasonable to rely on the work of a third party, it should consider engaging an alternative third party as its replacement.
1. Whilst the requirements are largely similar, the Code of Conduct contains separate requirements for experts and non-expert third parties. For the purpose of this guidance, an “expert” is a third party: (1) whose profession gives authority to a statement or opinion made by him; and (2) who has consented to the reproduction and inclusion of such statement or opinion in the listing document. A “non-expert third party” is a third party who: (1) is equipped with expertise in a certain area or areas; (2) is engaged by the sponsor to undertake certain due diligence task in the listing process by applying such expertise; and (3) usually prepares a report, opinion or a work product in another form that the sponsor relies on, but such report, opinion or work product will not be reproduced or included in the listing document. Except for places where clear distinctions are drawn, “third party” means both expert and non-expert third party in this chapter.
It is possible for a third party to be involved in different aspects of the listing process, and therefore, have both an “expert” and “non-expert” role. For example, an accounting firm which is responsible for the audit of the financial statements of the listing applicant and whose affiliated consulting practice is responsible for the review of the internal control systems of the listing applicant will be an “expert” as to the former (as the auditors’ report is reproduced in the listing document) but not the latter (as the internal controls report will not be reproduced in the listing document). Accordingly, different requirements under the Code of Conduct apply.
2. Listing Rule 3A.05(2). Listing Rule 3A.05(4) further requires the terms of engagement of experts retained to perform services related to the listing application, whether or not retained in respect of an expert section, to contain clauses entitling the sponsor access to: (a) any such expert; (b) the expert’s reports, draft reports (written and oral), and terms of engagement; (c) information provided to or relied on by the expert; (d) information provided by the expert to the Exchange or the SFC; and (e) all correspondence exchanged between the listing applicant or its agents and the expert and between the expert and the Exchange or the SFC.
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.