Chapter 26

Due Diligence Guidelines –

Sponsor Appointment, Fees, Staffing and Controls

1. Sponsor Appointment

1.1 Standards

1.1.1 [B]efore accepting any appointment as a sponsor of an assignment, taking account of other commitments, the sponsor should ensure that it has sufficient staff with appropriate levels of knowledge, skills and experience to devote to the assignment throughout the period of the assignment. [Paragraph 17.11(a) of the Code of Conduct]

1.1.2 [A] sponsor should ensure that it is appointed to act for a listing applicant sufficiently in advance of the expected date of a listing application. Taking account of the nature, scale and complexity of the assignment and any other factors that may affect the standard of work, the sponsor should ensure that it has adequate time to undertake the work necessary to meet its obligations and responsibilities under the Code [of Conduct] and the Listing Rules. [Paragraph 17.11(b) of the Code of Conduct]

1.1.3 All terms of an appointment should be agreed as early as possible and in sufficient time for the sponsor to meet its obligations and responsibilities under the Code [of Conduct] and the Listing Rules. It is for a sponsor to determine whether its appointment is made in sufficient time to meet its client’s expected timetable. If insufficient time is made available to complete the work required a sponsor should not accept appointment as a sponsor. A sponsor should not submit a listing application less than 2 months after all the terms of its appointment as a sponsor are agreed. When a sponsor is appointed, it should advise the Stock Exchange as soon as practicable. [Paragraph 17.11(b) of the Code of Conduct]

1.1.4 A new applicant must appoint a sponsor under a written engagement agreement to assist it with its initial application for listing. [Listing Rule 3A.02]

1.1.5 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. [Listing Rule 3A.02A(1)]1

1.1.6 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. [Note to Listing Rule 3A.02A(1)]

1.1.7 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)]

1.1.8 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. [Listing Rule 3A.02B(1)]

1.1.9 Where more than one sponsor is appointed in respect of a listing application, the listing application can only be submitted not less than 2 months from the date the last sponsor is formally appointed. [Listing Rule 3A.02B(2)]

1.1.10 The appointment should clearly: … specify the listing applicant’s responsibilities to facilitate the sponsor to perform its duties and to meet its obligations under the Code [of Conduct] and the Listing Rules. In particular provisions should be set out to the effect that the listing applicant should:

(A) fully assist the sponsor to perform due diligence;

(B) procure all relevant parties engaged by the listing applicant in connection with the listing application (including financial advisers, experts and other third parties) to cooperate fully with the sponsor to facilitate the sponsor’s performance of its duties;

(C) acknowledge that the sponsor is required, and should be given every assistance, to meet its obligations and responsibilities under the Code of Conduct and the Listing Rules to provide information to the regulators including without limitation, notifying the regulators of reasons when the sponsor ceases to act under paragraph 17.9(d); and

(D) enable the sponsor to gain access to all relevant records in connection with the listing application. [Paragraph 17.11(b)(i) of the Code of Conduct]

1.1.11 A new applicant and its directors must assist the sponsor to perform its role and must ensure that its substantial shareholders and associates also assist the sponsor. To facilitate the sponsor to meet its obligations and responsibilities under the Exchange Listing Rules and the Code of Conduct, the written engagement agreement referred to in rule 3A.02 must contain at least the following obligations for the applicant and its directors:

(1) to fully assist the sponsor to perform its due diligence work;

(2) to procure all relevant parties engaged by the new applicant in connection with its listing application (including financial advisers, experts and other third parties) to cooperate fully with the sponsor to facilitate the sponsor’s performance of its duties;

(3) to give each sponsor every assistance, to meet its obligations and responsibilities under the Exchange Listing Rules and the Code of Conduct to provide information to the regulators including without limitation, notifying the regulators of reasons when the sponsor ceases to act;

(4) to enable the sponsor to gain access to all relevant records in connection with the listing application. In particular, terms of engagement with experts retained to perform services related to the listing application, whether or not retained in respect of an expert section, should contain clauses entitling every sponsor appointed by the new applicant access to:

(a) any such expert;

(b) the expert’s reports, draft reports (both 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 Commission; and

(e) all correspondence exchanged (i) between the new applicant or its agents and the expert; and (ii) between the expert and the Exchange or Commission;

(5) to keep the sponsor informed of any material change to:

(a) any information previously given to the sponsor under paragraph (3) above; and

(b) any information previously accessed by the sponsor under paragraph (4) above;

(6) to provide to or procure for the sponsor all necessary consents to the provision of the information referred to in paragraphs (1) to (5) above to the sponsor; and

(7) to procure the entering into of such supplements to the engagement letters with experts referred to in rule 3A.05(4) as is necessary for such engagements of experts to comply with that rule. [Listing Rule 3A.05]

1.1.12 In the case of resignation by, or termination of, the sponsor during the processing of the initial listing application:

(1) the new applicant must immediately notify the Exchange of the resignation or termination; and the sponsor must notify the Exchange of its resignation or termination together with reasons in accordance with rule 3A.02A(2); and

(2) if the departing sponsor was the sole independent sponsor, the replacement sponsor must notify the Exchange of its appointment in accordance with rule 3A.02A(1) and re-submit, on behalf of the new applicant, a listing application not less than 2 months from the date of its formal appointment detailing a revised timetable together with a further initial listing fee in accordance with Chapter 9 and the declarations and undertaking required by [Chapter 3]. [Listing Rule 3A.17]

1.2 Guidance

1.2.1 It is the sponsor’s duty to consider whether its staff members have the relevant knowledge, skills and experience to carry out a particular assignment. Prior experience of a similar transaction or sector experience is relevant in making this determination.2

1.2.2 Standards of sponsor work depend on the resources devoted to individual assignments and the amount and quality of senior management involvement at appropriate stages during each assignment.

1.2.3 The Code of Conduct does not impose a limit on the number of assignments a sponsor firm may accept. It is the responsibility of the sponsor to ensure appropriate staff and adequate resources are deployed to manage properly each of the assignments it undertakes.3

1.2.4 Knowledge, skills and experience include sufficient knowledge of the relevant rules, regulations, codes and guidelines.

1.2.5 In determining the time of appointment the sponsor should consider all relevant circumstances including the size and complexity of the listing applicant and the time required to enable the sponsor to undertake the work necessary to meet its obligations and responsibilities, including due diligence.4

1.2.6 Whilst the actual lead-time needed depends on the specific circumstances of the listing applicant, the sponsor firm is unlikely to have sufficient time to perform the necessary due diligence work in an IPO if it is formally appointed less than two months before a listing application.5 The necessary lead-time for each assignment depends on the complexity of the assignment, the progress of the execution of the due diligence plan and other case-specific factors.

1.2.7 If the sponsor determines that it is unable to complete the work required in the time available, the sponsor should consider whether it should delay submitting the listing application or, if the applicant insists on a shorter timetable, whether it is appropriate to accept the appointment as sponsor in the first place.6

1.2.8 In the event that more than one sponsor is appointed in respect of the same IPO, each of them will be required to comply with the minimum appointment period and therefore the listing application may only be made not less than two months from the date the last sponsor is formally appointed.7

1.2.9 The sponsor will be required to notify the Stock Exchange as soon as practicable when it is formally appointed or when it ceases to act for the listing applicant at any time after its formal appointment, regardless of whether a listing application has been submitted.8 In its notification, the sponsor must inform the Stock Exchange of its reasons for ceasing to act.9 A sponsor’s engagement letter should specify the listing applicant’s acknowledgement of the sponsor’s aforesaid obligation to inform the Stock Exchange of the events noted above. Sample provisions to be included in a sponsor’s engagement letter in relation to such acknowledgement are set out in clause 1 of Appendix I.

1.2.10 A sponsor’s mandate or terms of appointment should not contain any provisions that will inhibit it in carrying out its duties or complying with all relevant regulatory requirements including the Code of Conduct.10

1.2.11 The appointment should specify the listing applicant’s obligation to facilitate the sponsor in discharging its responsibilities under the Code of Conduct, including an acknowledgment that the sponsor may be required to provide information to the regulators, in which case the applicant should extend all necessary assistance to enable the sponsor to comply.11 In addition, the sponsor should ensure that any confidentiality agreements and clauses contain carve-outs permitting the required disclosure of such information to the regulators. Sample provisions to be included in a sponsor’s engagement letter in relation to the sponsor’s duty to provide information to the regulators are set out in clause 2 of Appendix I.

1.2.12 The appointment should also specify that the listing applicant is obligated to assist, and procure all relevant parties engaged by the listing applicant in connection with its listing (including experts) to assist, the sponsor in discharging its other responsibilities.12 Sample provisions regarding the listing applicant’s responsibilities to facilitate the sponsor’s performance of its duties and the sponsor’s compliance with its obligations under the Code of Conduct and the Listing Rules to be included in a sponsor’s engagement letter are set out in clause 3 of Appendix I.

1.2.13 Even though it is not specifically required by the Code of Conduct, the sponsor may consider including in its engagement letter an acknowledgment by the listing applicant of potential conflicts of interest that may be raised by, among other matters, the duties and obligations of a sponsor under the Code of Conduct.

1.2.14 While it is recognised that the sponsor’s engagement letter may contain indemnity provisions, the sponsor may wish to consider whether the scope of the existing indemnity provisions is sufficiently broad to cover the notification requirements of the sponsor under the Code of Conduct. Sample provisions acknowledging potential conflicts of interest and sample indemnity provisions to be included in a sponsor’s engagement letter are set out in clauses 4 and 5, respectively, of Appendix I.

1.2.15 The sponsor should refer to Appendix I, as contributed by Morrison & Foerster LLP, for sample clauses for inclusion in its engagement letter.

Endnotes

1. For guidance on appointments made prior to 1 October 2013, see Frequently Asked Questions Series 24 (Released on 26 July 2013).

2. Paragraph 220 of the Consultation Conclusions on the Regulation of Sponsors.

3. Paragraph 221 of the Consultation Conclusions on the Regulation of Sponsors.

4. Paragraph 53 of the Consultation Conclusions on the Regulation of Sponsors.

5. Paragraph 54 of the Consultation Conclusions on the Regulation of Sponsors.

6. Paragraph 54 of the Consultation Conclusions on the Regulation of Sponsors.

7. Paragraph 55 of the Consultation Conclusions on the Regulation of Sponsors.

8. Paragraph 55 of the Consultation Conclusions on the Regulation of Sponsors. See also Paragraph 17.9(d) of the Code of Conduct.

9. Listing Rules 3A.02(A)(2) and 3A.17(1).

10. Paragraph 56 of the Consultation Conclusions on the Regulation of Sponsors.

11. Paragraph 56 of the Consultation Conclusions on the Regulation of Sponsors.

12. Paragraph 56 of the Consultation Conclusions on the Regulation of Sponsors.