Due Diligence Guidelines –
16. Timing and “Bring-Down”
16.1.1 Listing Rule 9.03(3) stipulates that an Application Proof must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date.
16.1.2 A sponsor should take reasonable due diligence steps in respect of a listing application; before submitting a listing application a sponsor should complete all reasonable due diligence on a listing applicant except in relation to matters that by their nature can only be dealt with at a later date. [Paragraph 17.2(b) of the Code of Conduct]
16.1.3 The directors’ confirmation of no material change (and/or related disclosure) is required to be made up to and as of the date of publication of the listing document. (There is no permissible “buffer” based on latest practicable date or similar concept). [See Exchange Guidance Letter GL38-12]
16.2.1 The regulators’ policy is to require that the listing document (and related due diligence) should be substantially complete by time of filing Form A1.
16.2.2 In practice however, achievement of this objective is limited by countervailing practical considerations, and there is express allowance for matters that (by their nature) can only be dealt with at a later date.
16.2.3 Exchange Guidance Letter 56-13 sets out general guidance on (among other things) disclosure requirements for substantially complete Application Proofs. Exchange Guidance Letters 58-13 and 6-09A stipulate further specific guidance on financial information required to be included in Application Proofs, and related confirmations required from the Reporting Accountant.
16.2.4 Following filing of Form A1, the regulatory review process inevitably results in a gap before publication of the finalised listing document. Irrespective of efficiency of the regulatory review process, this gap will always exist (to a greater or lesser extent) and may become extended in cases where (i) the review process is longer than anticipated (for whatever reason) and/or (ii) launch is delayed on account of market conditions.
16.2.5 In some cases, it may be planned at time of filing Form A1 (consistent with market practice and as accepted in regulatory guidance) that the finalised listing document will contain financial information covering periods ending later than in the version filed with Form A1. In other cases, this may become a necessity resulting from delayed launch.
16.2.6 In all cases, it is essential that:
(a) All disclosure is correct and complete as at the date of publication of the listing document; and
(b) Certain key financial (and related) disclosure) must be critically re-examined for overriding fairness and accuracy, reflecting any material new developments through to (and as at) time of launch, most particularly disclosure on:
(i) Prospects: see sections 5.2.5 (“Detailed Financial Review – Discuss Prospects”) and 11 (“Changes Subsequent to Latest Balance Sheet Date”) above;
(ii) “No Material Change” Statement (and any related discussion / disclosure): see sections 5.2.4 and item 15 of the Common Categories of Discussion Topics in Appendix I (“Detailed Financial Review – Discuss developments and any changes since last audited balance sheet date”) and 11 (“Changes Subsequent to Latest Balance Sheet Date”) above;
(iii) The working capital statement (see section 14 “Forecasts and Projections” above); and
(iv) Any profit forecast (see section 14 “Forecasts and Projections” above).
16.2.7 Accordingly, some substantive updating of due diligence will normally be necessary, as well as formal “bring-down” of general due diligence.
16.3 Recommended Steps
16.3.1 In any case where core financial content of the listing document is updated subsequent to filing Form A1:
(a) General disclosure consequences should be assessed (including any update to disclosure of business trends and prospects, and inclusion where appropriate of supplementary MD&A content);
(b) To support this, supplementary management discussions on the revised content should be arranged based on the principles and procedures noted in sections 4 “Financial Review Process” and 5 “Detailed Financial Review Process” above;
(c) Supplemental interviews with the Reporting Accountant should be arranged and held as appropriate. (See section 7.3 (“Accounting Review Process – Reporting Accountant Interviews”) and 8.3 (“Audit Review Process – Recommended Steps”) above; and
(d) If any part of the new information comprises unaudited interim financial statements, sections 8.3.5 (“Audit Review Process – Recommended Steps”) and 10.2.5 (“Unaudited Financial Content – Unaudited Interim Financial Statements”) above will be relevant.
16.3.2 In all cases:
(a) The listing applicant’s combined profit forecast and cash-flow memorandum should be updated regularly as required, in order to be current at time of listing;
(b) The sponsor’s review of the combined profit forecast and cash-flow memorandum and any profit forecast should similarly be updated regularly as required, in order to be current at time of listing;
(c) In particular, the profit forecast (i) may need to be revised and (ii) should in all events continue to be assessed for specific and general liability by reference to any supplementary published financial content of the listing document and internal management information on a continuing basis (see section 14 above “Forecasts and Projections – Sponsor’s Review Process”); and
(d) Evaluation of business trends and prospects, both generally and in context of the “no material change” statement, should be updated and re-assessed at a point in time as proximate as practicable to the date of publication of the listing document. (See sections 11.3 “Steps to be Taken in Connection with the “No Material Change” Statement”, section 11.4 “Steps to be Taken in Considering any Appropriate Listing Document Disclosure”, and section 11 above “Changes Subsequent to Latest Balance Sheet Date”).
16.3.3 Supplemental interviews with the Reporting Accountant should be arranged and held as appropriate. See section 7.3 (“Accounting Review Process”), section 8.3 (“Audit Review Process”), section 10.2.5 (“Unaudited Financial Content – Unaudited Interim Financial Statements”), section 11.3 (“Changes Subsequent to Latest Balance Sheet Date – Steps to be Taken in Connection with the “No Material Change” Statement”) and Section 14.6 (“Forecasts and Projections – Reporting Accountant Input to the Review Process”) above.
16.3.4 The final versions of the Reporting Accountant’s comfort letters and all other accounting deliverables will always in all events be issued and delivered in relation to the finalised listing document.
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.