Interaction with Competent Persons and Other Experts and Third Party Advisers

Who is an expert and what is an expert report?

The Securities and Futures Commission’s (SFC’s) Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) defines an “expert report” to mean any part of the listing document purporting to be made on the authority of an expert or purporting to be a copy of or extract from a report, opinion, statement or valuation of an expert and the expert gives consent for the inclusion in the listing document of the copy or extract and the listing document includes a statement that the expert has given and has not withdrawn such consent. An “expert” includes every accountant, engineer, or appraiser, or and any other person whose profession gives authority to a statement made by him. There are equivalent definitions set out in the Hong Kong Stock Exchange (HKEX) Listing Rules (Listing Rules).

The “expert reports” contained in the listing document for a mineral company will normally include the competent person’s report and the accountants’ report, as well as other reports by third party valuers and industry experts. The non-expert sections of a listing document refer to those sections of a listing document that are not expert reports.

Examples of third party advisers engaged to carry out specific tasks but whose work will not normally be incorporated as export reports in the listing document include lawyers undertaking verification of title to properties / mining assets / mineral rights, accountants reviewing internal controls, consultancy firms undertaking market research and agencies performing investigative work.

Why is the distinction between export reports and non-expert sections important?

The distinction between export reports and non-expert sections is important because the SFC has taken a two-pronged approach as to the disclosure standard and level of due diligence a sponsor is expected to perform with respect to expert reports and non-expert sections.

For expert sections of a listing document, after performing certain specified due diligence procedures in respect of the relevant expert reports (see below), a sponsor will be entitled to rely on expert reports unless it believes or has reasonable grounds to believe that the information in a particular expert report is untrue, misleading or contains any material omissions.

For non-expert sections of a listing document, the standard is higher. At the time of issue of a listing document, a sponsor, after conducting reasonable due diligence (see below), should have reasonable grounds to believe and should believe that: (i) the information in the non-expert sections of the listing document is true, accurate and complete in all material respects and not misleading or deceptive in any material respect and (ii) there are no matters or facts the omission of which would make any information in the non-expert sections of a listing document or any other part of the listing document misleading in a material respect.

Due diligence on expert reports

A sponsor is not expected to re-perform the work of an expert. However, the sponsor cannot rely at face value or blindly on the work of the expert. The SFC expects that a sponsor’s review of an expert and an expert report include the following:

• satisfying itself as to the expert’s qualifications, experience, competence, resources and independence
• assessing whether the scope of the expert’s work is appropriate and adequately covers the reliability of information provided to the expert
• assessing whether material bases and assumptions (in the case of financial information, critical accounting policies and estimates) on which the expert report is founded are fair, reasonable and complete
• critically reviewing the expert’s opinion and the rest of the information in the report against the totality of all other information known to the sponsor about the listing applicant (including the business model, track record, operations, forecasts, sector performance and any relevant information publicly known);
• corroborating the information in the expert report with the information disclosed in non-expert sections and the sponsor’s knowledge and experience of the listing applicant to ascertain whether the information throughout is consistent and coherent
• conducting follow up work to resolve any material discrepancies, irregularities or inconsistencies.

These due diligence steps would also be necessary to enable the sponsor to make a declaration to the HKEX in the form prescribed under the HKEX Listing Rules. For more information on the form of sponsor declaration, please click here.

Due diligence on competent person and competent person’s report

A sponsor should work closely with the listing applicant during the process of engaging a competent person for the purpose of preparing the competent person’s report. This is because it is the responsibility of the sponsor to ensure that the competent person meets the requirements set out in Chapter 18 of the HKEX Listing Rules.

Prior to the engagement of the competent person, the sponsor should work with the listing applicant in reviewing the proposals / biography of the potential competent person and review its engagement letter. The sponsor should also conduct an interview with the senior personnel of the team from the competent person involved in the preparation of the competent person’s report. The interview should cover the past relevant experience of the individuals and the firm providing the report. The sponsor should request information on previous deals for which the competent person has prepared competent person’s reports, and verify such information against publicly available documents evidencing the role of the competent person on previous deals.

The sponsor should also gain an understanding as to whether the competent person has previously prepared any technical reports, feasibility studies and / or scoping studies for the listing applicant or for any of its assets.

The sponsor should request from the competent person its credentials and details of its professional qualifications and membership(s).

The information contained in the competent person’s report will, to a large extent, be the work product of the competent person. In some cases, however, the competent person relies on data produced by other persons (for example, drilling data or transportation data) in the preparation of the competent person’s report and includes “disclaimer” language in respect of some aspects of this data. Such information may have been prepared by third party consultants although it is also quite common for certain types of information to be prepared by the mineral company itself. In such cases, the sponsor should seek to understand what procedures have been undertaken (if any) by the competent person to verify any such underlying data or to diligence the work processes of the providers of such information. If the competent person has not performed a site visit and verified information provided to it by the mineral company, the listing document must include the bases on which the reserves/resources, cost forecasts and other data relating to the assets of the mineral company as disclosed in the competent person’s report are arrived at, how the lack of a site visit would affect the reliability of the information and an appropriate risk factor. The sponsor would also be expected to submit to the HKEX the basis on which the competent person considers it unnecessary to perform any facility or on-site investigation and no verification work is required. For further information on the competent person’s report and the respective disclosures please see the HKEX’s Guidance Letter here.

Due diligence on accountant’s report

The SFC has clarified that as a reporting accountant performs audit procedures on information received from a listing applicant under applicable professional standards, a sponsor is not expected to carry out any further due diligence on this information. Nevertheless if a sponsor is aware of any matters that raise concerns relating to the information underlying the accountant’s report, the sponsor should conduct further enquiries necessary to satisfy itself that these concerns are addressed.

Due diligence on other third party advisers

Where a sponsor engages a third party to assist it to undertake specific due diligence tasks, the sponsor remains responsible in respect of the matters to which the specific tasks relate. A third party’s work, in itself, is not sufficient evidence that a sponsor has discharged its obligation to conduct reasonable due diligence. The degree to which a third party’s work can be relied on may depend on the professional qualifications of the third party to conduct the work. As a minimum the sponsor should:

• assess whether the third party is appropriately qualified and competent for the tasks assigned to it
• consider the scope and extent of the tasks to be performed by the third party
• assess the results of the work performed by the third party and arrive at its own opinion whether the work provides a sufficient basis to determine that reasonable due diligence has been conducted and whether further due diligence is required
• assess whether the results of the work are consistent with other information known to the sponsor including that derived from its other due diligence work
• assess whether the results of the work should be incorporated in the listing document and whether they should be brought to the attention of the regulators.