Due Diligence Guidelines –
Interviews of Major Business Stakeholders
2. Selection of Interviewees
In conducting interviews, the sponsor should: … (i) select independently those to be interviewed based on objective and proportionate criteria, e.g. those with whom the listing applicant has entered into high value transactions or entities with special or unusual characteristics; [Paragraph 17.6(f)(i) of the Code of Conduct]
2.2.1 The third parties to be interviewed by the sponsor should be selected by the sponsor and not by the listing applicant (or the listing applicant’s financial or other professional advisers) nor should the listing applicant (or the listing applicant’s financial or other professional advisers) seek to influence the basis of selection of interviewees or the format in which the interviews are conducted.
2.2.2 In selecting third parties who are to be interviewed, the objective of the sponsor should be to identify the major business stakeholders of the listing applicant. In doing so the sponsor should exercise judgement as to the number and nature of business of stakeholders to be interviewed, having regard to the relevant facts and circumstances. It will not usually be practical nor expected that all business stakeholders will be interviewed. For example, in certain situations it will be appropriate not to interview any customers (e.g., an auction house does not have individual “customers” which should be interviewed). For listing applicants with highly fragmented bases of business stakeholders, the sponsor may consider interviewing a representative sample of business stakeholders none of whom are individually significant to the listing applicant but who as a group do comprise a major business stakeholder. Also if certain business stakeholders have materially different relationships with the listing applicant than other stakeholders in the same category, even though they may not be significant in terms of contract value, the sponsor should still consider interviewing them to understand the reasons for such deviation and decide on a proper course of follow-up.
2.2.3 The third parties to be interviewed may or may not be independent of the listing applicant, its major shareholders and management. Where they are not independent, the sponsor should particularly look for whether the proximity of the relationship impacts its commerciality and the conducting of the relevant business on normal arms’ length terms. This is particularly important in situations where, for example, the listing applicant transacts with customers or suppliers who are related parties during the track record period and such historical connected transactions may distort the listing applicant’s financials or even impact its suitability for listing.
2.3 Recommended Steps
2.3.1 The sponsor should request that the listing applicant provide:
(a) the names and contact details of its business stakeholders during the track record period and up to the date of the listing document as requested by the sponsor (and for such other periods as the sponsor may request). Given the responsibilities of a sponsor it would not be appropriate for a listing applicant to withhold the identity of a business stakeholder from a sponsor. In particular, the identity should not be withheld on the basis of the purported commercial sensitivity or confidential nature of the information. For guidance relating to the sponsor’s access to all information, including confidential information, see paragraph 2.2.2 of ;
(b) a history of the listing applicant’s relationship with its major business stakeholders and such other information (e.g., transaction values, account balances, settlement history and details of any special relationship (e.g., relatives or directorship role)) in relation to its major business stakeholders as requested by the sponsor; and
(c) copies of contracts entered into with its major business stakeholders as requested by the sponsor.
2.3.2 The sponsor may also conduct searches for information relating to the listing applicant’s major business stakeholders as an independent check of the information provided by the listing applicant.
2.3.3 The sponsor should select those major business stakeholders to be interviewed based on objective and proportionate criteria, e.g.:
(a) those who are parties to:
(i) high value transactions, whether individually or cumulatively, with the listing applicant, its subsidiaries or associates;
(ii) transactions, whether individually or cumulatively, that are material to the listing applicant’s business;
(iii) long term contracts that are material to the listing applicant’s business; or
(iv) transactions with unusual or special characteristics (e.g., one-off transactions, transactions whose terms are unique to a particular stakeholder or not consistent with established market practice, transactions with parties in OFAC countries and transactions which are not adequately documented);
(b) entities with special or unusual characteristics (e.g., by virtue of geographical coverage/concentration);
(c) major customers/suppliers which have not maintained consistent transaction volumes or business relationships throughout the track record period;
(d) entities that are not independent of the listing applicant, its major shareholders and management; or
(e) whether the transactions or relations with the major customers/suppliers may materially and adversely impact the business and results of operations of the listing applicant.
2.3.4 Steps to ensure the independence of the process of selecting interviewees would include the following:
(a) the sponsor, not the listing applicant, should draw up the initial list of interviewees and decide the desired format (e.g., phone interviews, face-to-face meetings, etc.); and
(b) the listing applicant and its advisers should not remove any interviewee from the list without justification, which should be provided in writing.
2.3.5 The sponsor should take steps to establish whether third party interviewees are independent of the listing applicant, its major shareholders and management, e.g., by checking, where practicable, the names of third party interviewees, their businesses and principals against the names of the listing applicant’s directors and controlling persons (and their known family members).
2.3.6 Any reluctance or significant delay on the part of the listing applicant to provide details of specific business stakeholders and the reasons for this should be noted.
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.