Chapter 6

Due Diligence Guidelines –

Verification Practice

3. Verification and Independent Due Diligence Steps for Material Matters

3.1 Standards

A sponsor should conduct the following independent due diligence steps: …

(iv) in relation to material matters, review relevant underlying records and supporting documents of the listing applicant; and

(v) in relation to material matters, independently obtain information from sources outside the listing applicant, such as searches of public filings and databases, external confirmations, third-party data about competitors and the engagement of external agents to perform relevant checks.

[Paragraphs 17.6(e)(iv) and (v) of the Code of Conduct]

3.2 Guidance

3.2.1 Evidence supporting material statements or matters should come from independent authoritative sources. For example, in relation to claims about general or industry-specific economic conditions, market share or position, the information should come from independent third party sources and not the listing applicant. No reliance should be placed on unverified information in the listing applicant’s own marketing materials or websites. Where materials are drawn from published materials (for example the annual or interim report) of an already listed issuer that is seeking a secondary listing or which is spinning off a subsidiary, the sponsor should bear in mind that not all published materials would have been verified to the prospectus standard, but if the sponsor is able, through its due diligence, to confirm the reliability of the system and procedures of that listed issuer in verifying the information included in those published materials, then it would be reasonable to rely on the previous verification of the relevant information.

3.2.2 If evidence or confirmation is obtained from an outside source, the sponsor should consider whether that source is one upon which it is reasonable to rely for the purpose.

3.2.3 Examples of third party sources suggested in the Code of Conduct include searches of public filings and databases, external confirmations, third-party data about competitors and the engagement of external agents to perform relevant checks. Where external agents are engaged, the sponsor should be aware of what matters fall within and outside that agent’s professional competency – see Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers” for further guidance. Where searches of public filings and databases are conducted for the purposes of due diligence and verification, the sponsor should ensure that the searches are done at a time that is appropriate in the context of the statement concerned and consider whether the searches need to be repeated at a later time (e.g., on the latest practicable date of the listing document).

3.2.4 Inaccurate biographies of directors have been a focus of media attention and regulatory investigations in Hong Kong. The sponsor should request that the directors and senior management of the listing applicant provide written evidence such as graduation certificates, employment contracts and copies of passports or Hong Kong identity cards to verify their biographies. In particular, the sponsor should verify whether the academic accreditation bodies are authorised to grant accreditations – if the relevant university or college is not accredited by competent bodies, this information should be specifically disclosed.1 Where certificates or employment contracts have been misplaced or lost, the sponsor should ask the person to contact the relevant university or organisation and obtain a written confirmation. For directorships currently or previously held in other publicly listed companies (whether in Hong Kong or overseas), the sponsor should conduct public searches and use the annual reports or other public filings of those companies as supporting documents.