Update on Dual Filing

12 Sep 2007

The SFC issues the following update on the operation of the Dual Filing arrangements under the Securities and Futures Ordinance.

Cases handled

In the three months period April to June 2007, the SFC received 26 listing applications via the Stock Exchange. This compares to 23 listing applications in the previous quarter (Note 1). We issued comments on 21 of the 26 applications and achieved an average response time of seven working days. In the previous quarter, we commented on 13 of the 23 applications received.

As reported previously (Note 2), in the three months from October to December 2006 we commented on 13 out of 22 applications received. Of these, two cases have subsequently lapsed due to the expiry of the six-month application period and 11 have been listed or approved for listing.

Disclosure of key business arrangements

The SFC noted serious disclosure deficiencies in several cases where the business operations of the applicants were heavily reliant on certain key business arrangements.

In several cases reviewed, the listing applicant operates its business through operating companies incorporated in a jurisdiction where local laws and regulations prohibit foreign investment in the relevant sectors. Unable to hold any equity interest or voting power, the listing applicant obtains de facto control by entering into contractual arrangements with the legal owners of these operating companies. In all these cases, the listing applicant accounts for the operating companies as subsidiaries on the basis of its ability to control their financial and operating policies and thus obtain benefit from their activities. The contractual arrangements are complicated and not without exposure to challenge by local authorities, whether legally or administratively. The listing applicants failed to clearly explain how the contractual arrangements cover the various essential elements of control over the operating companies, such as the day-to-day operations, the composition of the board of directors and senior management, and funds flow. The applicants also failed to comprehensively disclose the implications if the parties do not perform their obligations in accordance with the contractual agreements or the legality and enforceability of the contractual arrangements are questioned. The sponsors performed further due diligence on the legality of the structures only after queries were raised by the regulators.

Reliance on regulators’ comments

Sponsors should not rely on the regulators to identify the necessary due diligence steps in preparation of a listing application. However, several cases reviewed seem to suggest that this could be the case. In one listing application, the applicant engaged a consultancy firm to survey its market share. However, the data regarding the other major industry peers, used in this survey, actually related to different stages of the business process and was clearly not comparable. This resulted in an exaggerated market share for the applicant. The sponsors only became aware of this error when the regulators pointed out the anomaly. This begs the question whether or not the sponsors gained sufficient understanding of the applicant’s business and the industry through their own due diligence process, without placing undue reliance on third party consultants, before submitting the application. In another case reviewed, the regulators’ queries prompted the sponsor to recognise that disclosures of the relationships among various connected persons were materially incorrect and that one of the persons had ceased to be connected before the listing application.

Mr Brian Ho, SFC’s Executive Director of Corporate Finance, said: “Sponsors are expected to have thorough understanding of their client’s business and ensure that investors are given full and accurate disclosures on the business and associated risks.”

The SFC issues this quarterly update as part of its efforts to ensure the transparency of the Dual Filing regime.



1. Please see SFC press release of 18 June 2007 for background statistics.

2. Please see SFC press release of 1 March 2007 for background statistics.

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