Core Focus Areas for the Sponsor in Assessing a Listing Applicant's Corporate Governance

The SFC’s thematic inspection of sponsor due diligence in Q1 2025 found that 68% of reviewed IPO applications on the Main Board contained material deficiencies in the assessment of the listing applicant’s corporate governance framework, with 42% of those deficiencies directly linked to inadequate scrutiny of connected transactions and internal controls. This finding, detailed in the SFC’s June 2025 circular on sponsor responsibilities (SFC/IS/2025/12), represents a 15 percentage point increase from the 2023 baseline study. For sponsors holding Type 6 (advising on corporate finance) and Type 6A (sponsoring) licences under the Securities and Futures Ordinance (Cap. 571), the margin for error has narrowed to zero. The Listing Committee’s decision in Re [Applicant A] (HKEX Listing Decision LD125-2025, March 2025) further clarified that a sponsor’s failure to identify a nominee director structure that circumvented HKEX Listing Rule 3.13 (independence requirements) constituted a breach of the sponsor’s duty under paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC. This article examines the four core areas where the SFC and HKEX now expect sponsors to demonstrate heightened scrutiny: board composition and independence, connected transaction frameworks, internal control systems, and disclosure of material governance risks.

Board Composition and Independence

The SFC’s 2025 circular explicitly states that a sponsor must verify the independence of each proposed independent non-executive director (INED) against the bright-line tests in HKEX Listing Rule 3.13, but also against the qualitative factors set out in guidance letter HKEX-GL86-16 (updated November 2024). The circular notes that in 23% of reviewed cases, sponsors accepted the applicant’s representation of independence without conducting independent verification of the INED’s business relationships with the controlling shareholder.

Nominee Directors and Structural Independence

HKEX Listing Decision LD125-2025 established that a director who is a former employee of the controlling shareholder’s group, even if the employment ended more than three years prior, may still lack independence if the director receives ongoing financial benefits from the shareholder, such as a consultancy fee or a rental concession on a property. The sponsor must document: (i) the exact date of cessation of employment; (ii) all forms of consideration, monetary or in-kind, received by the director from the shareholder or its associates in the preceding five years; and (iii) a written confirmation from the director that no such benefits exist. The SFC found that 31% of reviewed prospectuses omitted the disclosure of rental arrangements between INEDs and controlling shareholders, a breach of HKEX Listing Rule 2.13(2) (materiality of disclosure).

Board Diversity and Skills Matrix

HKEX’s enhancement to the Corporate Governance Code (effective 1 January 2025) requires every listed issuer to maintain a board skills matrix disclosed in the annual report. For listing applicants, the sponsor must assess whether the proposed board collectively possesses the expertise required for the applicant’s specific industry. For a biotech applicant under Chapter 18A, for example, the board should include at least one director with a PhD in a relevant life sciences field and one with prior experience in FDA or NMPA regulatory submissions. The SFC’s 2025 circular noted that 17% of applicants in the technology sector lacked any director with prior public company board experience, a factor the Listing Committee considered in rejecting one application (LD120-2025, February 2025).

Connected Transaction Frameworks

The SFC’s inspection found that 54% of reviewed applicants had connected transaction frameworks that were either incomplete or inconsistent with the de minimis thresholds in HKEX Listing Rules Chapter 14A. The sponsor must map every transaction between the applicant and its connected persons — defined under Rule 14A.07 to include directors, chief executive, substantial shareholders (holding 10% or more), and their associates — and classify each transaction into one of the three categories: fully exempt (de minimis), partially exempt (subject to reporting and announcement), or fully notifiable (requiring independent shareholders’ approval).

Identification of Connected Persons

The most common deficiency was the failure to identify associates of connected persons. Under Rule 14A.12, an associate includes any company in which the connected person holds 30% or more of the voting power, or any trust of which the connected person is a beneficiary. The sponsor must obtain a complete list of all entities controlled by each director and substantial shareholder, verified against the Companies Registry’s public records and a commercial database such as Orbis or Dun & Bradstreet. The SFC found that 28% of applicants failed to disclose a connected transaction with a company 40%-owned by the CEO’s spouse, which should have been classified as a non-exempt connected transaction under Rule 14A.24.

Pricing and Commercial Justification

For each non-exempt connected transaction, the sponsor must obtain a fairness opinion from an independent financial adviser (IFA) appointed under Rule 14A.46, but the sponsor’s own due diligence must independently verify the pricing basis. The SFC’s circular requires the sponsor to compare the transaction’s pricing to at least three comparable arm’s-length transactions in the same industry and geography. In one reviewed case, the applicant’s connected raw material supply agreement was priced at 15% above the market average, and the sponsor had accepted the IFA’s opinion without conducting its own market comparison. The SFC imposed a fine of HKD 8 million on the sponsor for this deficiency (SFC Enforcement Notice, April 2025).

Internal Control Systems

HKEX Listing Rule 3A.02 requires the sponsor to satisfy itself that the listing applicant has in place adequate internal controls, including financial, operational, and compliance controls. The SFC’s 2025 circular elevates this requirement: the sponsor must now engage an independent internal control consultant (ICC) to conduct a pre-listing review, and the ICC’s report must be submitted to the SFC as part of the listing application. The sponsor must review the ICC’s work and identify any material control weaknesses that could affect the applicant’s ability to comply with the Listing Rules post-listing.

Financial Reporting Controls

The sponsor must assess the applicant’s financial reporting systems against the requirements of HKEX Listing Rule 13.46 (annual reports) and Rule 13.48 (interim reports). The SFC found that 36% of applicants lacked a documented process for identifying and reporting material related party transactions, a critical control failure. The sponsor should test the system by tracing a sample of 20 transactions from the trial balance to the board meeting minutes, ensuring that each transaction was properly authorised and disclosed. If the applicant uses a manual journal entry process without automated controls, the sponsor must document the compensating controls, such as monthly reconciliations by the CFO.

Anti-Corruption and Compliance Controls

For applicants with operations in jurisdictions with a high Corruption Perceptions Index (CPI) score below 40 (Transparency International, 2024), the sponsor must obtain a third-party anti-corruption audit covering the applicant’s top three markets by revenue. The SFC’s circular specifically references the Prevention of Bribery Ordinance (Cap. 201) and requires the sponsor to verify that the applicant has a written anti-bribery policy, a whistleblowing channel, and a compliance officer with direct access to the board. In 19% of reviewed cases, the applicant had no whistleblowing mechanism, and the sponsor had not identified this as a material weakness.

Disclosure of Material Governance Risks

HKEX Listing Rule 11.07 requires the prospectus to disclose all material risks, including governance risks. The SFC’s 2025 circular clarifies that governance risks are not limited to existing legal proceedings but include structural risks such as a controlling shareholder holding more than 50% of voting rights, which could lead to minority shareholder oppression. The sponsor must include a dedicated “Corporate Governance” risk factor in the prospectus, addressing at least three specific scenarios: (i) the controlling shareholder’s ability to appoint all board members; (ii) the absence of a staggered board or other structural protections; and (iii) any history of related party transactions that were not conducted on arm’s-length terms.

Track Record of Governance Compliance

The sponsor must review the applicant’s compliance history for the three full financial years preceding the listing application. This includes a search of the Companies Registry for any notices of default, a review of the applicant’s tax filings for any penalties, and a check against the SFC’s public record for any enforcement actions against the applicant’s directors or substantial shareholders. The SFC found that 12% of applicants had a director who was a director of a company that had been wound up by the court, but the sponsor had not disclosed this in the prospectus, a breach of Rule 11.07.

Post-Listing Commitments

The sponsor must secure from the applicant a written commitment to adopt the Corporate Governance Code provisions within six months of listing, with a specific timeline for each provision. The SFC’s circular requires the sponsor to include this commitment in the prospectus and to monitor compliance for the first 12 months post-listing. If the applicant fails to adopt a required provision, such as the appointment of a risk committee under Code Provision D.2.1, the sponsor must report the non-compliance to the SFC within 14 days.

Actionable Takeaways for Sponsors

1. Verify each INED’s independence against both the bright-line tests in HKEX Listing Rule 3.13 and the qualitative factors in HKEX-GL86-16, including a search for any financial arrangements with the controlling shareholder that may not appear on the director’s employment record.
2. Map every connected transaction against the full definition of “associate” in HKEX Listing Rule 14A.12, using a commercial database to identify all entities controlled by each director and substantial shareholder.
3. Engage an independent internal control consultant to conduct a pre-listing review, and submit the ICC’s report to the SFC as part of the listing application per the SFC’s June 2025 circular.
4. Include a dedicated “Corporate Governance” risk factor in the prospectus that addresses the controlling shareholder’s structural power, the absence of minority protections, and any history of non-arm’s-length transactions.
5. Secure a written commitment from the applicant to adopt all Corporate Governance Code provisions within six months of listing, and establish a 12-month post-listing monitoring process with a 14-day reporting obligation to the SFC for any non-compliance.