[Co-author: Matthew Yeo]
The Association of Banks in Singapore (ABS) introduced its revised due diligence guidelines (Enhanced Guidelines) in respect of listings on the Singapore Exchange Securities Trading Limited (SGX-ST) on 13 May 2016. These guidelines are recommended by the ABS as guidance on the due diligence procedures and processes required of its member banks in the context of initial public offerings in Singapore.
Based on input from the SGX-ST, auditors, lawyers, local and international banks, and corporate finance firms, the revisions were introduced with the aim of raising the standards for such due diligence activities and reflect the knowledge gained by industry practitioners from their experience in dealing with companies. The Enhanced Guidelines also seeks to align with the SGX-ST’s experience with, and expectations of, listing application submissions. In particular, some of the major enhancements to the Enhanced Guidelines include matters which the SGX-ST deems important for companies to resolve at the early stage of the listing application process.
This article seeks to broadly present the key enhancements introduced.
(1) Scope of application
The Enhanced Guidelines spells out its enhanced scope of application, with appropriate modifications, in respect of (a) an offer of securities by a business trust or real estate investment trust seeking a listing on the mainboard of the SGX-ST, (b) an offer of securities by a corporation seeking a listing on the Catalist, (c) a listing by way of introduction and (d) a reverse takeover. In reflecting the enhanced scope, the Enhanced Guidelines, formerly named “ABS IPO Due Diligence Guidelines” has been renamed “ABS: Listings Due Diligence Guidelines”.
(2) Recommended procedures
The recommended procedures to be undertaken are specified to include three broad aspects, namely: (a) management, directors and controlling shareholders of the issuer, (b) the business of the issuer, and (c) expert sections of the prospectus. At the same time, clarification was made that the Enhanced Guidelines does not prescribe any form or structure of due diligence processes, in its emphasis that the issue manager should exercise its judgement appropriate to the context and circumstances in determining the investigations or steps appropriate or applicable in the case of a particular issuer.
(3) Management, directors and controlling shareholders
CFOs and resignations / cessation of management and controlling shareholders
In respect of the chief financial officer, issue managers will have to consider whether such a person is related to the chairman, the chief executive officer, the executive officers and/or the controlling shareholders. Issue managers have to also consider whether there are any indications that the management, directors and controlling shareholders who have recently resigned or ceased to be such persons (as the case may be) have done so for reasons that raise questions about the issuer, or the conduct or attitudes of the remaining management, directors and controlling shareholders.
Allegations/complaints against issuer, directors, executive officers and/or controlling shareholders
Issue managers should investigate all allegations or complaints, where there are any, against the issuer, directors, executive officers and/or controlling shareholders.
Where key management service contracts include golden parachute payments, issue managers should, in determining whether such golden parachute payments are in line with market practice and do not constitute a poison pill, obtain an opinion by an independent financial adviser where necessary.
(4) Business of the issuer
Based on reasonable due diligence, the issue manager should achieve a thorough understanding of the issuer and its business, including recent major developments relating to it, and gain an understanding of the industry the issuer operates in.
Certain specific clarified areas include the following:
Issue managers are also to include site visits to material assets, which may include inventory and biological assets such as livestock and crops. Local counsel should be engaged to verify title to assets, and that all key approvals have been obtained to operate the assets.
Whether a production facility, property or asset is material
In determining whether a production facility, property or asset is material, the issue manager may consider the following factors:
(a) whether it represents a material component in the issuer’s balance sheet;
(b) whether it contributes to a material portion of the issuer’s revenue;
(c) whether it has any encumbrances that may materially and adversely impact the issuer’s operations;
(d) whether it has any potential defects that may materially and adversely impact the issuer’s operations, or that may have a material and adverse environmental impact; and
(e) whether it has a material re-development potential.
Customers and suppliers
Where there is a material dependency on any particular supplier or customer or groups of suppliers or customers, issue managers should also assess whether the directors, executive officers, controlling shareholders and their associates have any interest and/or are involved in the management of these parties.
In the case of the issuer’s distribution and marketing network and plans, issue managers should consider interviews with key distributors.
Issue managers are also to ascertain whether there are any material agreements with clauses, such as entrenchment of controlling shareholder(s)/unitholder(s) or sponsor in the case of a trust, which may result in a material adverse impact on the issuer’s business and if so, to make an assessment of such clauses.
Non-compliance with laws and regulations
Issue managers should review any non-compliance with laws and regulations by the issuer (whether repeated or not) which may result in an adverse impact to the issuer’s financials and/or operations, as well as the issuer’s procedures to prevent a repeat. In addition, the involvement of independent advisers, investigators or experts, including legal counsels, in such review could be considered, where reasonable and appropriate to do so.
The issue manager should also review adverse findings by regulatory authorities arising from audits or inspections of the issuer by such authorities.
Pending key regulatory approvals and licences
Where key regulatory approvals and licences are pending, the involvement of independent advisers, investigators or experts, including legal counsels, in due diligence, could be considered where reasonable and appropriate to do so.
Financial health of the issuer
Issue managers should assess the issuer’s business vis-à-vis its competitors and its industry, as well as the vulnerabilities and sustainability of the issuer’s business. Where practicable, an issue manager should consider the involvement of its sector specialists in the financial health review of the issuer.
Issue managers should also consider whether disclosures made in respect of the issuer’s cash deposits and other related disclosures in the accounts or financial statements reported by reporting accountants, are consistent with their observations from their discussions with the directors and management of the issuer. In reviewing cash deposits, issue managers should enquire whether there are any restrictions on remittances of cash from the issuer’s overseas subsidiaries to the relevant holding company, and whether there are any charges or encumbrances on such cash deposits, and if so, whether these are consistent with any restrictions and charges disclosed in the audited financial statements.
Additionally, issue managers should consider whether the financial ratios of the issuer are in line with the industry norms and if not, whether there are relevant factors to explain such deviations.
Profitability and sustainability
Issue managers should consider the profitability of the issuer and the competitive advantages that will support the sustainability of the business, as well as review the prospects of the business to assess the viability of the business. The issue manager should seek to understand the revenue and cost drivers of the issuer’s business.
The issue manager should conduct routine enquiries of the issuer’s management, external auditors and tax adviser (if any), aiming to identify any material issues which may warrant further enquiries and to ascertain the following:
(a) whether all material tax liabilities have been identified and addressed by the issuer;
(b) whether taxes due have been paid;
(c) whether current and deferred tax payments have been provided for;
(d) whether the issuer’s tax position has been adequately disclosed in the prospectus; and
(e) whether the amounts of taxable income and revenue/costs declared to relevant tax authorities in the tax filings are consistent with the issuer’s audited financial statements and whether the amounts of taxation paid by the issuer as disclosed in the prospectus may indicate any irregularities,
to the extent a reasonable non-expert could carry out such enquiries.
Corporate structure and ownership
Issue managers should review non-traditional/complex structures of the issuer. This is to ensure that the proposed structure is in compliance with the relevant laws and regulations in which the issuer operates. The issue manager should assess whether the group structure is unnecessarily complex such that it could raise suspicion on the legitimacy of the issuer’s activities (for example, if there is any difficulty in determining the organisation or individual that owns and/or controls the issuer or to obtain access to them). The issue manager should also consider if there are significant subsidiaries or operations in non-home country jurisdictions that do not appear to have any clear commercial purpose.
Anti-Money Laundering (AML) and Countering Financial Terrorism (CFT)
Issue managers should conduct acceptable AML and CFT due diligence and procedures on the activities and operations of the issuer and its affiliated companies and its directors, officers and employees. This includes screening against relevant money laundering and terrorism financing information sources, as well as lists and information provided by relevant authorities in Singapore, for the purposes of determining if there are any money laundering or terrorism financing risks in relation to the issuer. The issue manager shall be able and willing to furnish, without delay, at the request of the SGX-ST, any data, documents or information arising from its conduct of such AML and CFT due diligence.
Issue managers should seek to understand if there are any operations in overseas territories and the economic and business environment of such territories. If the overseas territory involved is regarded as a high risk area (for example, where there is political instability, a weak legal framework and/or the existence of a culture of bribery), the issue manager should assess if it will impact the general reputation of the issuer group.
(5) Expert sections in the prospectus
Suitability of Experts
In elaborating on the suitability of a relevant adviser or expert, issue managers should take into consideration the track record and specific experience (including prior experience in listings) of the relevant adviser or expert. In the case of property valuers, issue managers should take into consideration whether the valuers are internationally reputable valuers who have the necessary experience and track record to provide impartial and robust valuations. In the case of foreign legal advisers, issue managers should note that where a foreign legal adviser is not ranked by Chambers & Partners, the issue manager may be required by the SGX-ST to demonstrate that it has conducted the necessary assessment to ascertain the suitability of appointment of such foreign legal adviser.
Conclusions or opinions of experts
Issue managers, when relying on conclusions or opinions of experts in the expert sections of the prospectus, should be satisfied that such reliance is reasonable in the circumstances and should have no reasonable grounds to believe that the information in the adviser’s and/or expert’s opinion/report is untrue, misleading or contains any material omission.
In this regard, the issue manager should review the expert’s report or opinion and actively raise queries on any problem areas with the expert where there are indications of inadequacy or unreliability with the expert’s opinion/report. In conducting such a review, the issue manager has to, among others, additionally look out for material discrepancy or inconsistency against the information and disclosures obtained or findings made by the issue manager in the course of its due diligence, as well as assess (to the extent a reasonable non-expert could make such an assessment) whether the assumptions, on which the expert’s report or opinion are based, are fair and reasonable.
Where the expert’s opinion or report is qualified, the issue manager should assess (if necessary, in consultation with legal advisers) whether such qualification is required to be clearly disclosed in the prospectus and, if so, ensure its proper disclosure.
The amendments made resulting in the Enhanced Guidelines reflect a greater degree of detail, comprehensiveness and thoroughness in the due diligence procedures to be undertaken by issue managers and sponsors, in recognition of their key role and responsibilities in the listing process, and specifies some of the measures that have been informally practised, one way or other, by existing issue managers and sponsors.
The Enhanced Guidelines also reflects a clearer alignment with the requirements of the SGX-ST’s listing rules, increasing the robustness of the listing process and with the aim of enhancing the quality of listings on the SGX-ST.
The Enhanced Guidelines can be obtained at the following links: