Due Diligence Guidelines –
Interaction with Third Parties including Expert Advisers1
5. Scope of Work
Non-expert third parties
…[T]he sponsor should:… consider the scope and extent of the tasks to be performed by the third party. [Paragraph 17.6(g)(ii) of the Code of Conduct]
…[T]he sponsor should:… assess whether the scope of the expert’s work:
(i) is appropriate to the opinion given by the expert; and
(ii) adequately covers the reliability of information provided to the expert, if not, the sponsor should:
(A) request that the scope of the expert’s work be expanded;
(B) seek the assistance of a third party; or
(C) extend its due diligence having regard to the procedures set out in Paragraph 17.6 of the Code of Conduct,
to cover the information provided to the expert. [Paragraph 17.7(b) of the Code of Conduct]
5.2.1 Whether the work scope is appropriately set can directly impact the subsequent work process as well as the results of the work performed by the relevant third party. Therefore, the sponsor should agree with the third party at the outset an appropriate work scope when such third party is engaged.
5.2.2 When assessing whether the work scope is appropriate, the sponsor should bear in mind the nature of the work to be performed, the purpose of engaging such third party, the standard market practice (if any) for conducting this type of work and the uniqueness of the listing applicant and/or the listing application. The sponsor must exercise its own judgement as to what steps are appropriate for a particular listing applicant and the extent of each step.8
5.2.3 The sponsor should ascertain whether the scope of work to be performed by the third party is set by a relevant professional body. If this is the case and the sponsor is satisfied as to the status of such professional body, while the sponsor will not be required to perform additional diligence on the determination of such scope, the sponsor should nevertheless review and comment on the terms of engagement based on the factors mentioned in paragraph 5.2.2 above.
5.2.4 When reviewing and commenting on the terms of engagement, the sponsor should have particular regard as to whether the scope of work is appropriate to the opinion required to be given and whether limitation on the scope of work, if any, might adversely impact on the degree of assurance given by the third party’s work product.9
5.2.5 If the scope of work to be performed by a third party is not set by any relevant professional body, the sponsor should satisfy itself that the terms of engagement covers the appropriate work scope based on the factors mentioned in paragraph 5.2.2 above, and any necessary confirmation or opinion to be given.10
5.2.6 During the course of the listing application, the sponsor should proactively assess the results of work performed by the third party, particularly when the scope of services which forms the basis on which the third party carries out its work is narrower compared to the scope of responsibilities that apply to a sponsor. This would include critically reviewing the results of work performed by such third party, making appropriate enquiries and soliciting all necessary assistance from relevant parties.11
5.2.7 If the sponsor finds the work scope cannot adequately cover the extent and reliability of information provided to the third party, the sponsor should request the third party to expand its work scope and perform additional work. Where it is not appropriate to do so, the sponsor should seek the assistance of another third party or extend its own due diligence to cover the information provided to the third party.
5.3 Recommended Steps
5.3.1 The sponsor should discuss the work scope with the third party at the outset before such third party is formally engaged.
5.3.2 If the third party states that its work scope is set by a professional body, the sponsor should request the third party to provide a written confirmation of the relevant standard.
5.3.3 When reviewing and commenting on the terms of engagement, the sponsor should apply its knowledge about the listing applicant, its business and business plans, and the profession the third party operates in as well as its experience in dealing with third parties from the same profession in previous transactions. If necessary, the sponsor may interview the third party as well as the listing applicant’s management to acquire the necessary information and knowledge.
5.3.4 During the course of the listing application, the sponsor should be alert to new developments (external regulatory changes or internal change of situations) and consider requesting the third party to include additional assessment items as appropriate.
5.3.5 Should there be the need to expand the scope of work to be performed by the third party, the relevant changes should be documented.
5.3.6 The sponsor should also assess the work scope to see whether it has adequately covered the extent and reliability of information provided to the third party, including by other third parties, and if not, perform the steps mentioned in paragraph 5.2.7.
5.3.7 In case the third party is engaged prior to the sponsor being appointed, the sponsor should perform the steps mentioned in paragraphs 5.3.2 and 5.3.4 as soon as reasonably practicable.
B. Generic Standards for Review of the Work Performed by Non-Expert Third Parties and Expert Reports
8. Paragraph 3 of to the Listing Rules: Each new applicant is unique and so will be the due diligence steps necessary for the purpose of its listing application. The scope and extent of appropriate due diligence by a sponsor may be different from (and in some cases, considerably more extensive than) the more typical examples in the Practice Note. The sponsor must exercise its judgement as to what investigations or steps are appropriate for a particular new applicant and the extent of each step.
9. Paragraph 14(a) of to the Listing Rules: Typical due diligence enquiries in relation to the expert sections of the listing document include interviewing the expert, reviewing the terms of engagement (having particular regard to the scope of work, whether the scope of work is appropriate to the opinion required to be given and any limitations on the scope of work which might adversely impact on the degree of assurance given by the expert’s report, opinion or statement).
10. : Each sponsor must submit to the Exchange the declaration set out in Appendix 19 to the Listing Rules, which includes a declaration that in relation to each expert section in the listing document, having made reasonable due diligence enquiries, the sponsor has reasonable grounds to believe and does believe (to the standard reasonably expected of a sponsor which is not itself expert in the matter dealt with in the relevant expert section) that the expert’s scope of work is appropriate to the opinion given and the opinion required to be given in the circumstances (where the scope of work is not set by a relevant professional body).
11. Paragraphs 150 and 151 of the issued by the SFC on 12 December 2012 (the “Consultation Conclusions on the Regulation of Sponsors”): Under some circumstances the scope of services which form the basis on which an expert issues its opinion may be narrower compared to the scope of responsibilities that apply to a sponsor. It will then be necessary for a sponsor to proactively assess the expert’s report. This would include critically reviewing the expert’s report, making appropriate enquiries and soliciting all necessary assistance from relevant parties.
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.