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MEMBERS' HANDBOOK |
(Issued January 1998)
Introduction | ||
| 1. | This Statement applies to all members, and is issued by the Council not as a directive but to assist members to conduct themselves in a manner which the Council considers appropriate to the members of the Institute. | |
| 2. | Its objective is to provide ethical guidance that will safeguard corporate finance clients by ensuring that they can rely on the objectivity and integrity of the advice given to them by members. | |
| 3. | Failure to follow such guidance does not of itself necessarily constitute misconduct, but means that a member concerned may be at risk of having to justify his actions in answer to a complaint to the Institute. In addition, matters discussed in this Statement may have legal implications and a member who is in doubt as to his position should consider obtaining legal advice. | |
| 4. | Corporate finance activities are wide-ranging in their nature and members are frequently involved in giving corporate finance advice, to both audit and non-audit clients. The role and nature of advice expected of a member may change in character when the client becomes involved in or anticipates a particular transaction, such as a takeover bid, issue of securities or acquisition or disposal of securities, in respect of which advice or an opinion is required from a member. It is at that point that problems of independence and conflict of interest can arise. The guidance which follows is designed to assist members who find themselves advising in these and related circumstances. | |
| 5. | A definition of corporate finance activities is set out in Annex I. | |
Objectivity and integrity | ||
| 6. | Statement 1.203 "Professional Ethics: Integrity, Objectivity and Independence" and Statement 1.291 "The Ethical Responsibilities of Members in Business" paragraphs 4 to 9 include the guidance on integrity, objectivity and independence for members which is applicable to corporate finance activities. | |
| 7. | Subject to paragraph 6 above, and provided that a member maintains objectivity and integrity throughout, both in regard to the client and to other interested third parties, there can be no objection to a firm accepting an engagement which is designed primarily with a view to advancing the client's case. | |
Conflicts of interest | ||
| 8. | It may be in the best interests of a client company for corporate finance advice to be provided by its auditor and there is nothing improper in the auditor supporting a client in this way. There are however a variety of situations in which conflict can arise. | |
| 9. | It would not on the face of it be improper for the firm to continue to act as auditor to both parties in a takeover situation, even if the takeover were contested. | |
Avoiding conflicts of interest | ||
| 10. | All reasonable steps should be taken to ascertain whether a conflict of interest exists or is likely to arise in the future between a firm and its clients, both in regard to new engagements and to the changing circumstances of existing clients, and including any implications arising from the possession of confidential information. (See section below headed "Documents for client and public use/confidentiality".) | |
| 11. | A firm should not accept or continue an engagement in which there is or is likely to be a significant conflict of interest between the firm and its clients. | |
| 12. | Whether a significant conflict of interest exists will depend on all the circumstances of the case. The test is whether a reasonable observer, seized with all the facts, would consider the interest as likely to affect the objectivity of the firm. However, any material financial gain which accrues or is likely to accrue to the firm as a result of the engagement, otherwise than in the form of fees or other reward from the client for its services, or commission, etc. properly earned and declared will always amount to a significant conflict of interests. | |
| 13. | Relationships with clients and former clients need to be reviewed before accepting a new appointment and annually thereafter. A relationship which ended over two years before is unlikely to constitute a conflict. Where it is clear that a material conflict of interest exists a firm should decline to act as corporate finance adviser. | |
Conflict between interests of different clients | ||
| 14. | There is, on the face of it, nothing improper in a firm having two or more clients whose interests may be in conflict. In such a case however, the work of the firm should be so managed as to avoid the interests of one client adversely affecting those of another. Where the acceptance or continuance of an engagement would, even with safeguards, materially prejudice the interests of any client, the appointment should not be accepted or continued, or one of the appointments discontinued. | |
| 15. | It would be neither reasonable nor necessary to discontinue acting in any capacity in anticipation of every potential conflict. It could in some instances give rise to harmful rumour or speculation for a firm to disengage from a situation before a transaction had become public knowledge. | |
| 16. | Where there appears to be a conflict of interests between clients but after careful consideration the firm considers that the conflict is not material and unlikely seriously to prejudice the interests of any of those clients, the firm may accept or continue the engagement, but not without first informing the clients concerned and obtaining the consent of both in writing. | |
| 17. | A firm should not act or continue as lead adviser for two or more clients if the disclosure called for in paragraph 16 would materially prejudice the interests of a client. | |
| 18. | For the purposes of the preceding paragraph the "lead adviser" is the firm or person primarily responsible for advising on, organising and presenting an offer or the response to an offer acting in its or his capacity as a sponsor or independent financial adviser. This definition would include the "independent financial adviser" required by a defending company under Rule 2.1 of the Hong Kong Takeovers and Share Repurchase Codes (see below). | |
| 19. | Where a conflict of interests is likely to materially prejudice the interests of a client an engagement should not be accepted or continued even at the informed request of the clients concerned. | |
| 20. | Where a firm is required for any reason to disengage from an existing client it should do so as speedily as practicable having regard to the interests of the client. | |
| 21. | Wherever there is identified a significant conflict between the interests of different clients or potential clients, sufficient disclosure in writing should be made to the clients or potential clients concerned together with details of the safeguards proposed below so that they may make an informed decision as to whether to engage the firm or continue their relationship with the firm. | |
Safeguards | ||
| 22. | Where a firm acts or continues to act for two or more clients following disclosure in accordance with paragraph 16, all reasonable steps should be taken to manage the conflict which arises and thereby avoid any adverse consequences. These steps should include the following safeguards except to the extent that they are inappropriate: | |
| a. | the use of different partners and teams for different engagements; | |
| b. | standing instructions and all other necessary steps to prevent the leakage of confidential information between different teams and sections within the firm; | |
| c. | regular review of the situation by a senior partner or compliance officer not personally involved with either client; and | |
| d. | advising at least one or all the clients to seek additional independent advice. | |
| 23. | Any decision on the part of a sole practitioner should take account of the fact that the safeguards at (a) to (c) of paragraph 22 will not be available to him. Similar considerations apply to a small practice. | |
Documents for client and public use/confidentiality | ||
| 24. | Information acquired in the course of professional work should not be disclosed except where consent has been obtained from the client, employer or other proper source, or where there is a public duty to disclose or where there is a legal or professional right or duty to disclose (Statement 1.204A, paragraph 1 in the Statement section). | |
| 25. | Where in the course of corporate finance advice a firm prepares information for a client (for example a critique of the accounts of another company) it may be called upon to do so: | |
| a. | in a document which is for the consumption of the client only; | |
| b. | in order to assist the client to produce a document which will go out solely under the client's name and authority, whether including quotations from the original document or not; or | |
| c. | as part of a document which is to be published over the name of the firm. | |
| 26. | Any statements or observations in a document prepared for a client must be such as, taken individually and as a whole, are justifiable on an objective examination of the available facts. | |
| 27. | In the case of a document prepared solely for the client and its professional advisers, it should be a condition of the engagement that the document should not be disclosed to any third party without the firm's express permission. | |
| 28. | Any document whether for private or public use should be prepared in accordance with normal professional standards of integrity and objectivity and with a proper degree of care. | |
| 29. | A firm is, in the absence of any indication to the contrary, entitled to assume that the published accounts of the company on which it is commenting have been prepared properly and in accordance with all relevant Accounting Standards. Where scope for alternative accounting treatment exists, and the accuracy of the comment or observation is dependent on an assumption as to the actual accounting treatment chosen, that assumption must be stated, together with any other assumptions material to the commentary. Where the firm is not in possession of sufficient information to warrant a clear opinion this should be declared in the document. | |
| 30. | A firm must take responsibility for anything published under its name, and the published document should make clear the identity of the client for whom the firm is acting. To prevent misleading or out-of-context quotations, it should be a condition for the engagement that, if anything less than the full document is to be published, the text and its context should be expressly agreed with the firm. | |
| 31. | A firm should ensure that public documents and circulars include prominently the name of the brokers, investment bank or other advisers responsible for promoting or underwriting the share or securities described in the document or circular, where different from that firm which has accepted the roles of sponsor, in order to make abundantly clear the roles undertaken by the various advisers. | |
The Hong Kong Takeovers and Share Repurchase Codes (the Codes) | ||
| 32. | A member who provides takeover services for clients is required to comply with the Codes which are expressly applied to professional advisers as well as to those engaged in the securities market. Members' attention is particularly drawn to Annex II - Guidance note: Compliance with the Hong Kong Takeovers and Share Repurchase Codes. | |
| 33. | The Codes apply to what are described as "public companies in Hong Kong" and the persons to whom the Codes apply are stated to be as follows: | |
| a. | directors of public companies; | |
| b. | persons or groups of persons who seek to gain or consolidate control of public companies; | |
| c. | their professional advisers; and | |
| d. | those who are actively engaged in the securities market in all its aspects. | |
| 34. | There is a definition of a "private company" under section 29 of the Companies Ordinance. It is a company which has three restrictions imposed by its articles: | |
| a. | the right to transfer shares must be restricted; | |
| b. | the maximum number of members, exclusive of employees, is 50; and | |
| c. | the company may not offer its shares or debentures to the public. | |
| 35. | There is no definition in the Companies Ordinance of a "public company". However, a company which does not have the above three restrictions in its articles or which fails to comply with any of these three restrictions is regarded as a public company. Section 30 of the Companies Ordinance stipulates that a private company may alter its articles so that they no longer include the three restrictions required to constitute it as a private company; from the date of alteration the company will be regarded as a public company. | |
| Requirement for independent advice | ||
| 36. | Rule 2.1 of the Codes states the general principle that the financial adviser must be independent. Rule 2.6 of the Codes provides that: | |
| A person who has, or had, a connection, financial or otherwise, with the offeror or offeree company of a kind likely to create a conflict of interest will not be regarded as a suitable person to give independent advice. | ||
| Independence is particularly important in Hong Kong, where many companies are dominated by a single shareholder. Rule 2.7 of the Codes, which gives guidance on relationships which are inconsistent with the independence of the financial adviser, takes exception not only to a relationship between the financial adviser and the offeror or offeree company, but also to a relationship between the financial advisers with the controlling shareholder of either the offeror or offeree company. | ||
| 37. | The onus is on the financial adviser to ensure that no conflict of interest exists which might affect, or be perceived to affect, the impartiality of the advice he gives. When there is any doubt, the financial adviser should disclose the conflict to the Takovers and Mergers Executive (the Executive). The adviser should not assume that the Executive is aware of the conflict or that the independence of the adviser is accepted by the Executive merely because an announcement of the offer and appointment of the adviser is published. Consulting the Executive is always advisable to minimise the risk of any objection to the appointment after it has been publicly announced. When consulting the Executive, the financial adviser must disclose all relevant information which the Executive will require in order to render a fully informed decision. | |
| It should be noted that the Codes do not provide a strict definition of independence and the Executive will decide if the independent financial adviser is qualified to so act on a case by case basis. | ||
| Takeovers subject to the Codes | ||
| 38. | A firm may find itself acting as auditor or corporate finance adviser for two or more parties involved in a takeover subject to the Codes. For the firm to cease to act for a client within the limited period of the takeover, on the basis that conflict might arise, could damage the client's interests. | |
| Accordingly in such circumstances a firm may continue to act for more than one party as auditor, as reporting accountants on any profit forecast, and in the provision of incidental advice consistent with these roles. However the firm should not act as lead adviser for any party involved or issue a critique of a client's accounts, and should implement proper safeguards (see paragraph 22 above). | ||
| 39. | The attention of firms is also directed to those sections of the Codes dealing with conflict of interest in particular Note 1 "Conflicts of interest" to paragraph 2.9 in the Chapter headed "Rules" including the possession of "material confidential information". Members in doubt as to their position under the Codes should consult the Takeovers and Mergers Panel. | |
| Takeovers not subject to the Codes | ||
| 40. | Where a takeover is not subject to the Codes, and there is no substantial public interest involved, a firm may, subject to the implementation of appropriate safeguards (see paragraph 22 above), continue to advise both sides. However the firm should ensure that the interests of minority shareholders are protected, and in such cases should consider the desirability of one company having a wholly independent adviser. | |
The Stock Exchange of Hong Kong Limited's (Stock Exchange) Rules Governing the Listing of Securities (Listing Rules) | ||
| 41. | Members' attention is also drawn to the Listing Rules in particular when acting as a sponsor or as an independent financial adviser. | |
| When a firm accepts the responsibilities of a sponsor set out in Chapter 3 of the Listing Rules in respect of a client where it acts as auditor or reporting accountant, it should adopt steps described in paragraph 22 above and additionally set up procedures to review and to identity any potential conflicts of interest which could compromise the firm's objectivity. | ||
| Connected transactions | ||
| 42. | Whilst the Listing Rules do not provide a strict definition of independence, when a firm accepts the responsibility to act as an independent financial adviser in relation to a connected transaction under Chapter 14 of the Listing Rules, it should take care to ensure that it has not previously advised the client on a previous transaction such as advising the shareholders of a listed issuer, which, because it is in possession of material confidential information of a kind likely to create a conflict of interest, could result in the firm being regarded as not suitable to give independent advice. | |
| It will ultimately be the Stock Exchange who will decide if the independent financial adviser is qualified to so act, but the onus is on the financial adviser to ensure that no conflict of interests exists which might affect, or be perceived to affect, the impartiality of the advice he gives. | ||
Promoting an issue or sale to the public of shares or securities | ||
| 43. | A firm should not promote an issue or sale to the public of shares or securities of a company on which it has reported or is to report. Neither should the firm undertake to accept nomination as auditor or reporting accountant of the company whose shares it is promoting to the public. Involvement of this kind would endanger the independence of the firm in the audit and/or reporting function. | |
| 44. | It is not inappropriate however: | |
| a. | for an auditor or reporting accountant to assist a client in raising capital; | |
| b. | for a firm to conduct an acquisition search, which could identify another client as a target, provided the search is based solely on information which is not confidential to that client; | |
| c. | for an auditor or reporting accountant to provide independent advice to a client or its professional advisers in connection with the issue or sale of shares or securities to the public; or | |
| d. | for an auditor or reporting accountant to fulfil the responsibilities of a sponsor set out in Chapter 3 of the Listing Rules. | |
Fees | ||
| 45. | Where a member undertakes an engagement for a fee which is contingent upon the successful outcome of a transaction such as a bid, offer, purchase, sale or raising finance, the member should take particular care to ensure that the arrangements do not prejudice his independence and objectivity with regard to any other role which the member may have, notably as auditor or reporting accountant of either the bidder or the target. | |
| 46. | In some circumstances, such as advising on a management buy-out, the raising of venture capital, acquisitions search or sales mandates, fees cannot realistically be charged save on a contingency basis; to require otherwise would, in certain cases, deprive potential clients of professional assistance, for example where the capacity of the client to pay is dependent upon the success or failure of the venture. | |
| 47. | Where work is subject to a fee on a contingency, percentage or similar basis the capacity in which a member has worked and the basis of the remuneration should be made clear in any document prepared by the member in contemplation that a third party may rely on it. | |
Overseas transactions | ||
| 48. | This Statement has been drafted with regard to the situation in Hong Kong. Members should apply the spirit of the guidance, subject to local legislation and regulation, to overseas transactions of a similar nature. | |
| In this Statement, corporate finance activities shall include any of the following matters : | ||
| 1. | general corporate or general financial advice or assistance, in relation to the affairs of a company or any of its associates, to the company or officers thereof, including in particular advice or assistance as to borrowing profile, capital requirements and fund raising, investment and foreign exchange policies, dividend policies, share incentive schemes, investor relations, general meetings and proxy solicitation, board composition and management structure; | |
| 2. | a takeover, acquisition, management buy-out, management buy-in or disposal of a business or a merger, de-merger, division, reconstruction or reorganisation: | |
| a. | by or on behalf of the client; or | |
| b. | concerning any securities issued by any business carried on by or for the client; | |
| 3. | the valuation or appraisal of any investment, asset, business or security; | |
| 4. | a. | giving advice to any country or its central bank or other monetary authority or an international banking or financial institution whose members are countries (or their central banks or monetary authorities) with respect to financial matters including in particular the management, restructuring and securitisation of external debt and the promotion of inward investments; or |
| b. | any scheme for providing finance in connection with (a) above; | |
| 5. | any kind of financing, refinancing or rescheduling or reorganisation of debt or any interest rate or currency swap or comparable operation related to any financing, refinancing or rescheduling or reorganisation of debt which has previously been effected or which is in contemplation; | |
| 6. | the financing of a construction or other commercial or industrial project or the establishment of a new business or the expansion of a business; | |
| 7. | the raising of borrowed moneys, whether by the issue of securitised debt instruments or otherwise, and including the formation and management of a syndicate to provide such finance; | |
| 8. | a. | an offering or placement or other distribution of investments whether by the issuer or any other person or group of persons to the public or privately for subscription or purchase; or |
| b. | a listing of, or the admission of any securities to dealings on an investment exchange or a suspension or discontinuance of, or other matters arising from, any such listing or admission to dealings; | |
| 9. | a. | an exchange, conversion, redemption, sale, purchase, re-issue or cancellation of any securities; or |
| b. | an alteration in the terms of any securities; or | |
| c. | a reduction of capital or share premium account or a scheme of arrangement or similar operation involving or affecting any securities; | |
| 10. | the underwriting of securities whether by the client himself or by a third party on behalf of the client or making arrangements with a view to or in connection with any such underwriting; and | |
| 11. | provision of advice in relation to any transaction governed by the Listing Rules. | |
(see paragraph 32 of Statement 1.292)
| 1. | A member who provides takeover services for clients is required to comply with the Hong Kong Takeovers and Share Repurchase Codes (the Codes), and with all rulings made and guidance issued under them by the Takeovers and Mergers Panel (the Panel). | |||
| 2. | Accordingly a member proposing to provide takeover services to a client should at the outset: | |||
| a. | explain that these responsibilities will apply; and | |||
| b. | include in the terms of the engagement recognition of the member's obligation to comply with the Codes including any steps which the member may be obliged to take in performing those responsibilities. A specimen clause for the engagement letter is set out in paragraph 10 below. | |||
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| 3. | As regards contractual relationships existing at the date of publication of this Guidance Note, members should seek to amend the relevant engagement letter to include such wording. Where this does not prove possible, members should inform clients of their intention to comply with the Codes. If the client objects to this, the member should carefully consider the reasons given for such objection and then consider whether it is appropriate to continue to act for the client. In such a situation it may be necessary for the member to take separate legal advice. | |||
| 4. | In this Guidance, "takeover services" means any professional services provided by a member to a client in connection with a transaction to which the Codes apply. | |||
| 5. | In the case of accountants, the kinds of activities most commonly relevant for this purpose include: | |||
| a. | acting as financial adviser to one of the parties; | |||
| b. | reporting on profit forecasts and/or valuations for the purposes of takeover documents; | |||
| c. | conducting acquisition searches for clients, and introducing clients to other parties with a view to potential acquisitions; and | |||
| d. | advising in relation to acquisitions and disposals of securities to which the Codes may apply. | |||
| 6. | Whilst the Codes do not define precisely the range of activities and transactions within its scope, paragraph 4 "Companies to which the Codes apply" of Chapter 1 "Introduction to the Codes" describes the companies which are subject to the Codes. In practice, those engaging in providing takeover services rarely experience difficulty in determining whether the Codes are or may be relevant to the activities proposed to be undertaken for any particular client. | |||
| 7. | A member who has provided or is providing takeover services to a client should: | |||
| a. | supply to the Panel any information, books, documents or other records concerning the relevant transaction or arrangement which the Panel may properly require and which are in the possession or under the control of the member; and | |||
| b. | otherwise render all such assistance as the member is reasonably able to give to the Panel, | |||
| provided that in each case the relevant information, books, documents or other records were acquired by the member in the course of the member providing the relevant takeover services. | ||||
| 8. | Except with the consent of the Panel, a member should not provide or continue to provide takeover services for any person if the Panel has stated that it considers that the facilities of the securities markets in the Hong Kong should be withheld from that person and has not subsequently indicated a change in this view. | |||
| 9. | If members have included in the engagement letter agreed with their client a provision to the effect of that recommended in paragraph 2(b) above, they will be able to discharge their responsibilities under paragraphs 7 and/or 8 above, without any breach of confidentiality or duty to the client. While members should include such a provision, it is recognised that, on occasion, compliance with such responsibilities may still involve a breach of confidentiality to a third party or a breach of some other duty owed to the client. In such circumstances members should consider obtaining legal advice. | |||
| 10. | The client agrees and acknowledges that where the services provided by the firm relate to a transaction within the scope of the Codes, the client and the firm will comply with the provisions of the Codes and the firm will observe Professional Ethics Statement 1.292 issued by the Hong Kong Institute of Certified Public Accountants relevant to such services or transactions. In particular, the client acknowledges that: | |||
| a. | if the client or its advisers or agents fail to comply with the Codes then the firm may withdraw from acting for the client; and | |||
| b. | the firm is obliged to supply to the Panel any information, books, documents or other records concerning the services or transaction which the Panel may properly require. | |||
[End of 1.98 (Supp. 1/98)] |
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