Hong Kong – Record Keeping: “Demonstrating” Compliance By IPO Sponsors.

diligence record keeping. Anyone performing a due diligence task independently of the record-keeper should immediately notify him or her of that independent task performed. Up-to-date work plans should be circulated to the team regularly so as to close information gaps without delay.

Document any significant deviation from the initial due diligence work plan

As the transaction progresses, the initial due diligence plan will need to be revised or updated to reflect new facts and circumstances. Any significant deviation (for example, a material change to the composition of the major business stakeholders subject to interview) should be documented, together with the reasons for such deviation. Sponsors are reminded to document the key reasons and bases for making material changes to the initial due diligence plan.

Record decisions or actions immediately

At times, a sponsor may have considered an issue or performed certain due diligence work, but because that decision or action was not immediately recorded in the due diligence plan, details of that decision or action were not accurately recorded after the event. We therefore recommend that the due diligence plan be revised on a regular basis (preferably weekly) to capture live and pertinent details or changes. A disciplined and consistent approach to record keeping during the due diligence process will not only save time in the long run but ensure that an accurate record is kept without having to compile a full set of records after the event.

Keep track of all outstanding or incomplete issues

Outstanding or incomplete issues may be challenged by the regulators, so great care should be taken to highlight all outstanding or incomplete issues (for example, an interview with a major customer that was interrupted or a legal opinion that was not finalised etc). The person responsible for record keeping should keep track of all such issues and followup until the outstanding items are completed or the reasons for failing to complete are satisfactorily explained.

Document details of the review, discussions and conclusions reached

In some instances, a sponsor may have reviewed a document, discussed an issue internally or with third parties and reached a conclusion after such review and discussion. However, the review, discussion and conclusion may not have been properly recorded in the due diligence plan. Generally speaking, in order to demonstrate compliance with the Code of Conduct, these reviews, discussions and decisions should be documented (for example, if there are discussions via email exchanges, the chain of emails should be included as part of the record in the due diligence records). One example is where a sponsor is required, among other things, to assess whether the scope of work of an expert is appropriate to its opinion in the expert section, and to assess if the bases and assumptions on which the expert opinion is founded are fair and reasonable. It may be insufficient to only refer to the expert's engagement letter and the notes recording the interview with the expert. Ideally, details of work done and the sponsor's assessment should also be included. This could, for example, include the date on which a team member reviewed the engagement letter and compared it to the scope of work set by a professional body (if applicable), market practice, or special circumstances of a particular case, including materiality or practical difficulties, and the conclusions reached after such review.