The Asia Securities Industry & Financial Markets Association ("ASIFMA") recently published guidelines for a more balanced approach to the use of powers of attorney by senior institution-members of large banking syndicates in the context of initial public offerings on the Stock Exchange of Hong Kong ("SEHK").
The use of powers of attorney has evolved differently in Hong Kong than in other markets. Powers of attorney were originally devised to lessen the administrative complexity of managing the large underwriting syndicates that accompanied the territory's largest IPOs.
This typically involves junior banks, or those not involved in structuring or managing the deal, later joining an underwriting syndicate and delegating some authority to the banks leading the syndicate.
"Local compliance officers will need to perform more active due diligence on IPOs as per the mandate, rather than rely on the 'free pass' that [a] power of attorney provides in case things go wrong. The regulators are making it clear that detailed due diligence, even by minority partners, is expected and not something to be delegated for the sake of speed and time, and the excuse of not knowing what they have signed up to because a blanket [power of attorney] is not acceptable," said Neil Ramchandran, the Asia-Pacific managing partner of financial services consulting firm Capco in Hong Kong.
In Hong Kong, junior underwriting syndicate members have been required to grant broad, irrevocable powers of attorney to lead underwriters or international coordinators, early in the process for certain transactions. This is sometimes before the commercial terms of the transaction have been settled, transaction documents have been finalised and syndicate members have conducted customary due diligence.
In recent years, powers of attorney have increasingly been used in Hong Kong for more substantive purposes, and this has raised concerns about potential regulatory and governance risks for junior syndicate members.
As a result, in 2015, ASIFMA formed a working group to address members' concerns about the use of powers of attorney and developed the guidelines, which were issued earlier this week.
The new guidelines have been developed through extensive collaboration between the working group, ASIFMA members and other market participants. They establish general principles applicable to the use of powers of attorney in Hong Kong IPOs, and set out specific guidance regarding limitations on their use, timing requirements and the appropriate recipients of powers of attorney.
Indicative template forms for granting powers of attorney are annexed to the guidelines. Additionally, the guidelines expressly prescribe the type of Hong Kong IPOs for which it may be appropriate to use powers of attorney.
"We hope these guidelines will clarify best practices around [powers of attorney] in a manner that allays junior underwriters' concerns without sacrificing the efficiency that has made Hong Kong the world's largest market for IPOs," said Wayne Arnold, ASIFMA's executive director for policy and regulatory affairs.
Powers of attorney allow junior members to be bound by the senior members in a syndicate-type deal. They are frequently seen in syndicated lending, and in insurance and reinsurance deals, to establish the extent to which the juniors are bound by the seniors.
"Prospective junior members of syndicates agree to powers of attorney because they have to. Big banks may or may not need the smaller outlets' distribution, but if the smaller guys want in, they may be expected to surrender certain aspects of their discretion," said a US lawyer serving as compliance head to a funds sector firm in Hong Kong, who spoke on condition of anonymity.
"This becomes inappropriate where the small bank has not conducted appropriate due diligence or where the terms of the deal are not established," he said.
"Powers of attorney should be used solely as an administrative tool to enable global coordinators to coordinate extraordinarily large underwriting syndicates, and their use should be strictly limited to those circumstances in which they will provide a material benefit in alleviating particular logistical and practical difficulties," ASIFMA's guidelines said.
Book-runners, however, would argue that this is how powers of attorney are always used, the compliance officer said. "It is true: they alleviate the difficulty that an insignificant member of the syndicate will inconveniently deviate from the script."
It is also worth stressing that underwriters and sponsors are distinct concepts in an IPO.
"While the underwriter role does not owe regulatory duties per se, sponsors do, and it is important to market integrity that each sponsor fulfils its duties and obligations, irrespective of its size relative to other sponsors or underwriters that are involved," said Syren Johnstone, adjunct associate professor at the University of Hong Kong's Faculty of Law.
"The guidelines recognise that there are limits to the authority underwriters can justifiably delegate, and certain minimum due diligence obligations they should be permitted to fulfil, regardless of their role within the syndicate. The guidelines seek to establish these limitations while affording lead underwriters flexibility in how they are implemented," said Stuart Rubin, a partner at law firm Ashurst in Hong Kong.
Rubin assisted ASIFMA with drafting the guidelines and was a member of its working group on powers of attorney in the local IPO context.
The new ASIFMA guidelines are rather narrow in scope, in that they only relate to IPOs, and specifically, extraordinarily large underwriting syndicates to deal with logistics and practical difficulties.
Rubin said, however, that the new guidelines should enable banks to continue to compete commercially for participation in Hong Kong's premier IPOs without requiring junior underwriters and their in-house legal and compliance personnel "to continually assess and, in some cases, agree to, levels of institutional risk not present on international IPOs in other markets".
Perhaps most importantly, the guidelines serve as a reminder that powers of attorney do create significant exposures for their grantors.
"Under English and Hong Kong law, the grant of an attorney is essentially an authorisation to a third party to change the rights and, more importantly, impose obligations upon the grantor of the attorney. It is entirely appropriate that the grantor is reminded of the risk exposures and seeks appropriate limitations, along with practical suggestions that these should be granted only at [the] appropriate time. As such, this is a good initiative of ASIFMA, which compliance officers should also reflect upon," said Mohan Datwani, a local solicitor and director at the Hong KongInstitute of Chartered Secretaries (HKICS).
The analyses entailed hinged on the risk exposures involved in a deal, which would be a function of the terms of a power of attorney, along with adequate, for which there should be appropriate written or taped records to as a general proposition to prevent future disputes, he said.
Why the urgency?
Concern about the use of powers of attorney in IPOs is not new, and indeed ASIFMA published its thoughts about the use of such mechanisms last year.
"The guidelines have been under development for some time. The guidelines are being published now with the broad industry support that will be necessary to successfully reformHong Kong [powers of attorney] practices," Rubin said.
The use of blanket powers of attorney is unique to the Hong Kong market as it causes undue systemic risk, mainly due to the absence of the ability to file class action lawsuits in the city’s courts.
"Powers of attorney allow syndicate members a chance to pass responsibility on to the lead underwriter by putting the onus of due diligence on to the lead. This would then lead to lengthy and unnecessary delays in case of legal enforcement," Ramchandran said.
Given Hong Kong is the number one jurisdiction for IPO funds raised, it is important such matters are coordinated.
"The grant of powers of attorney is important. However, as pinpointed by ASIFMA, issues like scope and limitation must be clearly defined. In the long term, if 'fair play' for [powers of attorney] is understood by all parties, it will lead to further and additional efficiencies and comfort in the IPO process, which is to be welcomed by Hong Kong," Datwani said.