Appointments, Fees, Staffing and Controls

Appointment

A sponsor should ensure that it is appointed sufficiently in advance of the expected listing application date so that it has adequate time to undertake the work necessary to meet its obligations and responsibilities under the various Securities and Futures Commission (SFC) codes governing sponsors’ work and the Hong Kong Stock Exchange Listing Rules (HKEX Listing Rules). Under the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct), a sponsor should not submit a listing application less than two months after being appointed as sponsor. This two-month period serves only as a minimum requirement for sponsor appointments. The necessary lead-time for each assignment will depend on the complexity of the assignment, the progress of the execution of the due diligence plan and other case-specific factors. In the event that more than one sponsor is appointed in respect of the same IPO, each of them must comply with the minimum appointment period.

The appointment should clearly specify the listing applicant’s responsibilities to facilitate the sponsor to perform its duties and to meet its obligations under the SFC’s codes and the HKEX Listing Rules, including:

1. to fully assist the sponsor to perform due diligence;.
2. to procure financial advisers, experts and other third parties to cooperate fully with the sponsor to facilitate the sponsor’s performance of its duties;
3. to give each sponsor the assistance it requires to meets its obligations and responsibilities under the HKEX Listing Rules and the Code of Conduct to provide information to the regulators which includes notifying the regulators of reasons the sponsor ceases to act;
4. to enable the sponsor to gain access to all relevant records in connection with the listing application which will include terms of engagement with experts retained to perform services related to the listing application;
5. to keep the sponsor informed of any material change to (i) any information previously given to the sponsor under (c) above and (ii) any information previously accessed by the sponsor under (d) above;
6. to provide or procure for the sponsor all the necessary consents to the provision of information as required to the sponsor; and
7. to procure the entering into such supplements to the engagement letters with experts as is necessary for the such engagements for the experts to comply with the respective HKEX Listing Rules.

A sponsor is required to notify the HKEX when it is formally appointed or when it ceases to act for a listing applicant at any time after its formal appointment, regardless of whether a listing application has been submitted.

Where a replacement sponsor(s) is appointed with termination of all original sponsor(s), the HKEX ordinarily treats the application as a completely new application and requires the replacement sponsor(s) to resubmit the whole set of updated listing application documents.

Fees

The sponsor’s appointment should clearly specify the terms of the sponsor’s fees, including the basis on which the fees are determined, the payment structure and timing. So-called “no deal, no fee” arrangements are not permitted under the Code of Conduct. Staged payments should be proportional to the amount of work done up to that stage. The total amount of sponsor fees paid and payable should be disclosed in the IPO prospectus.

Sponsors should ensure that sponsor fees are clearly defined and quoted separately from other services provided by the sponsor in connection with an IPO, such as book-building, pricing and similar functions governed by underwriting and related agreements.

Staffing

Before accepting any appointment as a sponsor, a sponsor needs to ensure that it has sufficient staff with appropriate levels of knowledge, skills and experience to devote to the assignment. In practice, this means a sponsor should have a system for tracking deal staffing and consult that system when assessing a potential sponsor assignment. While the Code of Conduct does not impose a limit on the number of assignments a sponsor firm may accept, a sponsor will need to consider capacity, staffing requirements and potential timing conflicts with other commitments when determining whether it is appropriate to accept an appointment.

Under the Code of Conduct, each transaction team must include at least one “principal” who acts as the supervisor of the transaction team. A principal is a “responsible officer” with a minimum of five years of relevant corporate finance experience. A sponsor should notify the SFC in writing of any changes in its appointment of principals within seven business days after making such changes.

The principal should be involved in the making of the key decisions relating to the work carried out by the transaction team and must be aware of the key risks in such work and responsible for the measures to address them. For example, in respect of conducting due diligence review on a listing applicant, the sponsor should ensure that the principal is involved in determining the breadth and depth of the due diligence review, the amount of resources to be deployed for carrying out such work, making a critical assessment of the results of the due diligence and overall assessment of the adequacy of the due diligence review, and ensuring that steps have been taken to properly resolve all issues arising out of such review.

Members in one transaction team may work in other transaction teams provided that the sponsor can properly discharge its responsibilities in all the sponsor work that it undertakes, and each team is properly and adequately supervised. The sponsor will also have to comply with conflicts of interest rules.

A sponsor should also have clear and effective reporting lines and channels so that decisions on critical matters in respect of a particular listing application are made by management and not the transaction team. “Management” includes the sponsor firm’s board of directors, managing director, chief executive officer, responsible officers, executive officers or other senior management personnel.

Under the Code of Conduct, upon completion of a listing transaction, a sponsor will also need to submit to the SFC its team structure chart in respect of that listing transaction, showing the reporting line of each staff member within the team together with their respective names, business titles and responsibilities.

Internal controls

Under the Code of Conduct, a sponsor must carry out an annual internal and / or external audit to ensure that its systems and controls remain effective. Any material non-compliance issue should be reported to the SFC promptly.