Chapter 3

Due Diligence Guidelines –

Approach and Scope

2. Stock Exchange Listing Rules

2.1 Standards

The Stock Exchange sets out its expectations of due diligence sponsors would typically perform in PN21. PN21 explains that it is not in any way intended to set out the actual steps that may be appropriate in any particular case. Each listing applicant is unique and so will be the due diligence appropriate for the purpose of its listing application. The scope and extent of appropriate due diligence by a sponsor may be different from (and considerably more extensive than) the more typical examples in PN21. The sponsor should exercise its judgement as to what investigations are appropriate for a particular case and the extent of due diligence. Sponsors are reminded of their obligations to comply with the Listing Rules and the relevant practice notes and guidelines on due diligence standards. [Paragraph 17.6(h) of the Code of Conduct]

2.2 Guidance

2.2.1 Although the core due diligence process is likely to be very similar in the majority of cases, different industries and companies may require special focus on particular areas of due diligence. The Regulators have reiterated that Practice Note 21 of the Listing Rules and the Code of Conduct do not attempt to specify a complete list of due diligence steps that should apply in all cases as this would encourage a “box-ticking” mentality.7 Sponsors are expected to assess whether investigations or steps beyond the typical examples provided in Practice Note 21 to the Listing Rules are appropriate for each new listing applicant. For example, more stringent due diligence work is expected of sponsors where:

(i) the listing applicant is engaged in mining or agricultural activities and therefore subject to higher risks – see Chapter 23 “Due Diligence Guidelines – Mineral Companies” and Chapter 24 “Due Diligence Guidelines – Biological Assets”;

(ii) the listing applicant is in a highly regulated industry;

(iii) the listing applicant operates in a country known to have a higher risk of corruption; or

(iv) the sponsor discovers “red flags” and suggestions of irregularities during the usual due diligence process.

2.2.2 The Stock Exchange also expects sponsors to have access to all information of the listing applicant, including confidential information, to enable them to complete their due diligence process. The Stock Exchange will also not accept a sponsor confirming completion of the due diligence process with a qualification that it is not provided access to the applicant’s confidential information even if alternative due diligence work has been performed.8

2.2.3 Please refer to Chapters 7 to 24 for detailed guidance on various categories of due diligence, including business due diligence, financial due diligence and legal due diligence.

2.2.4 The Stock Exchange expects sponsors to document their due diligence planning and significant deviations from their plans.9 Please refer to Chapter 25 “Due Diligence Guidelines – Record Keeping”.

Endnotes

7. Paragraph 13 of the Consultation Paper on the Regulation of Sponsors and paragraph 3 of Practice Note 21 to the Listing Rules.

8. Exchange Guidance Letter GL21-10 provides that “While the Exchange does not prescribe the due diligence procedures for sponsors under Practice Note 21 to the Main Board Listing Rules (Practice Note 2 for GEM Rules), it expects sponsors to have access to all information of an applicant, including highly confidential information, to enable them to complete their due diligence process” (see paragraph 3.4). It also states that “an applicant’s internal policy restricting access to confidential information to directors, auditors and reporting accountants only does not justify refusing sponsor’s access to such information. The Exchange will also not accept a sponsor confirming completion of the due diligence process with a qualification that it is not provided access to the applicant’s confidential information even if alternative due diligence work has been performed. The Exchange ordinarily expects at least one senior officer of the sponsor to be allowed access to the applicant’s confidential information. An applicant may protect its interests by requiring the responsible officer of the sponsor to provide a confidentiality undertaking not to disclose the information to any third party” (see paragraph 3.5).

9. Paragraph 4 of Practice Note 21 to the Listing Rules.