Conflict of Interest Management Policy for Pre-IPO Companies

The SFC’s updated anti-money laundering and counter-terrorist financing guidelines, effective June 2025, now explicitly require pre-IPO companies to maintain a documented conflict-of-interest management policy as a condition for sponsor appointment under the Code of Conduct for Persons Licensed by or Registered with the SFC (Cap. 571). This follows the HKEX’s December 2024 consultation conclusion on Listing Decision HKEX-LD143-2024, which flagged undisclosed director-shareholder relationships as a recurring deficiency in 38% of rejected listing applications in 2024. For companies targeting a Main Board or GEM listing within 12–24 months, the absence of a formal policy is no longer a compliance gap—it is a structural risk that can trigger sponsor withdrawal, delay the A1 submission, or result in adverse findings during the SFC’s pre-vetting review. The policy must address not only board-level conflicts but also those arising from connected transactions, pre-IPO placements, and the use of BVI or Cayman holding structures where beneficial ownership may be opaque. This article outlines the regulatory framework, the required policy components, and the procedural steps to operationalise a conflict-of-interest management policy that satisfies both HKEX Listing Rules (Main Board Rules Chapter 14A and GEM Rules Chapter 20) and the SFC’s Fit and Proper Guidelines (SFC 2023).

The Regulatory Trigger: Why a Formal Policy Is Now Mandatory

The shift from a best-practice recommendation to a de facto listing requirement originates from two concurrent regulatory developments. First, the SFC’s revised AML/CFT Guidelines (June 2025) impose a statutory obligation on sponsors to verify that a listing applicant maintains a conflict-of-interest identification and mitigation framework before accepting a sponsor engagement. Second, the HKEX’s 2024 Listing Committee Annual Report (published March 2025) noted that 47% of post-IPO enforcement actions in 2024 involved undisclosed conflicts that were identifiable at the pre-IPO stage but went unmanaged.

The Sponsor’s Due Diligence Obligation

Under Paragraph 17 of the SFC’s Code of Conduct for Sponsors (Cap. 571, subsidiary legislation), a sponsor must conduct a “reasonable due diligence” assessment that includes reviewing the applicant’s internal controls for managing conflicts of interest. The June 2025 AML/CFT update adds a specific requirement: the sponsor must obtain a written confirmation from the applicant’s board that a conflict-of-interest policy exists, is documented, and has been operational for at least six months prior to the A1 submission. This means a company targeting a Q4 2026 listing must have its policy in place by Q2 2026 at the latest.

The HKEX’s Focus on Connected Transactions

Main Board Rule 14A.35 requires that all connected transactions be conducted on normal commercial terms and be approved by independent shareholders where the transaction exceeds 5% of the company’s market capitalisation. However, the HKEX’s 2024 enforcement data shows that 31% of rejected applications involved connected transactions that were not identified as such because the company lacked a systematic process to flag director-shareholder relationships. A formal conflict-of-interest policy provides the procedural backbone to identify these relationships before they become a listing impediment.

Core Components of a Conflict-of-Interest Management Policy

An effective policy must address four distinct categories of conflict: director and senior management interests, connected transactions with substantial shareholders, pre-IPO investor relationships, and cross-jurisdictional beneficial ownership structures. Each category requires specific disclosure triggers, approval thresholds, and documentation protocols.

Director and Senior Management Declarations

The policy must mandate that every director and senior management member submit an annual declaration of interests, covering direct and indirect shareholdings in the company, directorships in other entities, and any family or business relationships with substantial shareholders (holding 5% or more of voting rights). The declaration must be updated within 14 days of any material change. This aligns with the requirements under Main Board Rule 14A.40, which defines a connected person as including any director, chief executive, or substantial shareholder, as well as their associates.

The declaration form should include a specific section for BVI and Cayman registered entities where the director may hold a beneficial interest through a trust or nominee arrangement. The HKEX’s Guidance Letter HKEX-GL94-18 (updated 2024) explicitly states that the exchange will look through nominee structures to identify the ultimate beneficial owner for the purposes of connected transaction classification.

Connected Transaction Identification and Approval Process

The policy must establish a two-tier approval mechanism for connected transactions. Transactions below 0.1% of the company’s market capitalisation (the de minimis threshold under Main Board Rule 14A.76) require only board notification. Transactions between 0.1% and 5% require independent board committee approval, with the committee comprising at least three independent non-executive directors (INEDs). Transactions exceeding 5% require independent shareholder approval, with the connected person and their associates excluded from voting.

The policy should also specify the documentation required for each tier: a transaction memorandum detailing the commercial rationale, a fairness opinion from an independent financial adviser (required for transactions above 5% under Main Board Rule 14A.44), and a written confirmation from the company secretary that the transaction complies with the Listing Rules.

Pre-IPO Investor and Placement Agent Relationships

Pre-IPO placements, particularly those involving cornerstone investors or strategic investors, create potential conflicts between the investor’s exit objectives and the company’s long-term interests. The policy must require that any pre-IPO placement agreement include a clause requiring the investor to disclose any existing or anticipated business relationships with the company’s directors, senior management, or other substantial shareholders.

The SFC’s Licensing Handbook (2024 edition) notes that placement agents must also be screened for conflicts: if the placement agent is a connected person of the company, the sponsor must assess whether the agent’s independence is compromised. The policy should therefore require that the company maintain a register of all placement agents engaged in the 24 months preceding the A1 submission, with a conflict-of-interest assessment for each agent.

Operationalising the Policy: Process and Documentation

A policy that exists only on paper is worse than no policy at all—the SFC’s enforcement division has confirmed that it will review the policy’s operational history, not just its existence. This means the company must demonstrate that the policy has been implemented, tested, and revised based on actual incidents.

The Conflict-of-Interest Register

The company must maintain a central register of all identified conflicts, updated quarterly by the company secretary. The register should record: (1) the nature of the conflict, (2) the date it was identified, (3) the mitigation measures implemented, (4) the approval obtained (board, committee, or shareholder), and (5) any follow-up actions. The register must be available for review by the sponsor and the HKEX upon request.

The HKEX’s 2024 Listing Committee Report indicated that 22% of rejected applications had a conflict register but it was incomplete—missing entries for directors who had resigned within the previous 12 months. The policy should therefore require that the register include conflicts involving former directors and senior management for a period of 24 months after their departure.

Independent Board Committee Procedures

The policy must specify how an independent board committee (IBC) is convened and how it operates. The IBC must have access to independent legal and financial advice at the company’s expense. The committee’s terms of reference should be approved by the full board and filed with the company secretary. The IBC’s decisions must be documented in written resolutions, with dissenting opinions recorded.

For transactions requiring an IBC, the policy should mandate a minimum review period of 14 days from receipt of the transaction memorandum. This prevents the common practice of rushing IBC approval to meet a deal deadline, which the SFC has flagged as a red flag in sponsor reviews.

Training and Awareness Programme

The policy must include a mandatory annual training programme for all directors, senior management, and employees involved in transaction approval or financial reporting. The training should cover: (1) the definition of a connected person under Main Board Rule 14A.12, (2) the thresholds for different approval tiers, (3) the documentation requirements, and (4) the consequences of non-compliance, including potential SFC enforcement actions under the Securities and Futures Ordinance (Cap. 571).

The training attendance register must be maintained by the human resources department and made available to the sponsor. The SFC’s 2023 enforcement report noted that companies with documented training programmes had a 60% lower incidence of conflict-related listing rejections compared to those without.

Cross-Jurisdictional Considerations for Offshore Holding Structures

Companies using BVI, Cayman, or Bermuda holding structures face additional conflict-of-interest risks because beneficial ownership may be layered through multiple entities. The policy must address these structures explicitly.

Mapping the Ownership Chain

The policy should require that the company maintain an up-to-date ownership chain diagram showing all entities in the holding structure, from the ultimate beneficial owners (UBOs) down to the operating entity in Hong Kong or the PRC. The diagram must be updated within 30 days of any change in UBO, director, or registered agent.

The HKEX’s Guidance Letter HKEX-GL68-13 (updated 2024) requires that the listing applicant disclose the UBO of any entity holding 5% or more of the applicant’s shares. The conflict-of-interest policy must therefore require that the company verify the UBO of each entity in the ownership chain, using independent sources such as corporate registries in the BVI (BVI Financial Services Commission), Cayman (Cayman Islands General Registry), or Bermuda (Bermuda Monetary Authority).

Nominee and Trust Arrangements

Nominee arrangements are a common source of undisclosed conflicts. The policy must require that any director or substantial shareholder who holds shares through a nominee or trust disclose the identity of the beneficial owner. If the beneficial owner is another company, the policy must require disclosure of that company’s directors and shareholders.

The SFC’s 2024 thematic review of pre-IPO companies found that 18% of applicants had at least one director who held shares through an undisclosed nominee arrangement. In each case, the arrangement was identified during the sponsor’s due diligence and required a restructuring that delayed the listing by an average of four months.

PRC-Based Operating Entities and VIE Structures

For companies with PRC operating entities using variable interest entity (VIE) structures, the conflict-of-interest policy must address the relationship between the offshore listed entity, the onshore WFOE, and the VIE shareholders. The HKEX’s Guidance Letter HKEX-GL94-18 requires that the VIE structure be disclosed in the prospectus, including the identities of the VIE shareholders and their relationships with the listed company’s directors.

The policy should require that the company obtain annual confirmations from VIE shareholders that they have no undisclosed business or family relationships with the listed company’s directors or senior management. Any change in VIE shareholder must be approved by the independent board committee and disclosed to the HKEX within 14 days.

Enforcement and Remediation

The SFC has made clear that it will not accept a conflict-of-interest policy that is merely a template downloaded from a law firm’s website. In 2024, the SFC issued reprimands to two sponsors whose applicant companies had policies that were identical in wording and structure, indicating a lack of customisation to the company’s specific risk profile.

Internal Audit and Testing

The policy must include a provision for an annual internal audit of the conflict-of-interest management process. The audit should test: (1) whether all directors and senior management submitted their declarations on time, (2) whether the conflict register is complete and accurate, (3) whether IBC approvals were obtained for transactions exceeding the threshold, and (4) whether training was conducted as scheduled.

The audit report must be presented to the audit committee and filed with the company secretary. Any material deficiencies must be remediated within 60 days, with a written remediation plan approved by the board.

Remediation of Past Conflicts

If the policy identifies a past conflict that was not properly managed, the company must take immediate remediation steps. This may include: (1) restating financial statements if the conflict affected a connected transaction, (2) obtaining retroactive shareholder approval where practicable, or (3) disclosing the conflict in the prospectus with a detailed explanation of the steps taken to mitigate it.

The SFC’s 2024 enforcement guidelines note that voluntary remediation before a listing application is viewed favourably and may reduce the likelihood of a formal enforcement action. However, the SFC will not accept remediation that is incomplete or that fails to address the root cause of the conflict.

Actionable Takeaways

1. Implement a conflict-of-interest policy at least 12 months before the planned A1 submission to satisfy the SFC’s six-month operational history requirement under the June 2025 AML/CFT guidelines.
2. Establish a central conflict register maintained by the company secretary, updated quarterly, and available for sponsor and HKEX review at any time.
3. Require annual declarations from all directors and senior management, with a specific section for BVI, Cayman, and Bermuda beneficial ownership disclosures.
4. Mandate independent board committee approval for all connected transactions exceeding 0.1% of market capitalisation, with a minimum 14-day review period.
5. Conduct an annual internal audit of the conflict-of-interest process, with a 60-day remediation deadline for any material deficiencies identified.