New IPO Due Diligence Guidelines Establish Hong Kong As "Global Standard Bearer"

750+page ground breaking Due Diligence Guidelines developed by Hong Kong sponsors in response to HK's new regulatory regime effective tomorrow to promote standards of due diligence for HK IPOs, particularly relevant to Chinese companies.

Investment banks acting as sponsors to stock market equity listings in Hong Kong have collaborated with other market professionals to publish a globally-unique set of Due Diligence Guidelines on how to meet standards being set under new legal and regulatory requirements.

The 762-page document, free to download at, was completed after more than a year of extensive consultation involving leading Hong Kong law firms, two of the Big Four accounting firms and more than 40 banks and financial advisory businesses. They include most of the city’s international and mainland Chinese investment banks and over a dozen smaller local institutions.

The decision to draft the Guidelines followed a move last year by the Hong Kong Securities and Futures Commission (SFC) to introduce the most sweeping changes in sponsor regulation in a generation. The changes include criminal liability for IPO sponsors under proposed amendments to section 40A of the Companies Ordinance. In addition, tighter regulatory standards of IPO due diligence under a revised Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission are due to take effect tomorrow.

The revision to the Code of Conduct introduces a new Paragraph 17 with the objective of promoting standards of due diligence for Hong Kong equity listings. It aims to maintain the integrity of the Hong Kong market by assuring the quality of information disclosed in listing documents, and includes a requirement to publish initial application drafts of IPO prospectuses.

“While sponsors fully understand the rationale for these changes, there was real concern that the new SFC Code of Conduct, in common with Stock Exchange Listing Rules, left the very practical issue of how to meet the standards expected. The Guidelines attempt to address that issue in detail”, said Julia Charlton, Senior Partner of Charltons which acted as the coordinating law firm.

Ms Charlton added: “The level of consultation and detail put into this project over the past 13 months, which I believe has not been undertaken anywhere else, has arguably positioned Hong Kong as a global standard-bearer for IPO due diligence. It will further enhance the city’s unrivalled international expertise in bringing mainland Chinese companies to the market”.

Stephen E Clark, the current Chairman of the Panel on Takeovers and Mergers in Hong Kong said: “To my knowledge the introduction of the Hong Kong Sponsor Due Diligence Guidelines results from the largest and most complex voluntary effort from the financial and legal sector in Hong Kong’s history. I believe this publication will prove useful to those directly involved in sponsorship work on a day to day basis, those supervising that work and advising sponsors on it, and those charged with ensuring their compliance. I have no doubt it will achieve its objective of providing the means to meet what the SFC and the Stock Exchange expect of a sponsor”.

Alongside Charltons, which in addition to acting as coordinating law firm also represented 12 local sponsors, another20 or so international law firms and several other professionals were also involved in drafting the new Guidelines. Charltons is a focused corporate-finance law firm with extensive experience of China-related legal issues. Alongside its Hong Kong headquarters, the firm has representative offices in Beijing and Shanghai and an arm in Yangon, Myanmar. Charltons has been named "Boutique Firm of the Year" by Asian Legal Business 10 times – in 2002 and 2003, and every year since 2006. The firm represented the controlling shareholder in the largest IPO in Hong Kong in 2011, also advising on the subsequent US$6 billion placing, among other recent IPOs.

In the initiative to “provide a regulatory basis for defining the expected quality of sponsor work in the interests of public investors and all other stock market participants”,1 the SFC's Code of Conduct identifies the outcomes the SFC expects, but does not generally address how they are to be achieved. The Guidelines are intended to address this question, compiling industry-wide know-how. It is hoped it will become an important reference point to guide sponsors, recognising their work is ultimately to be judged “based on what a sponsor’s peers would consider objectively appropriate having regard to all relevant facts and circumstances at the time of making a listing application” (SFC's Consultation Conclusions).

Release ID: 23238