The Securities and Futures Commission (“SFC”) has become increasingly concerned that some listed companies either do not obtain a valuation when circumstances suggest it would be appropriate or they rely on a valuation to justify a transaction when reliance on the valuation is imprudent. This sometimes results in the listed companies acquiring assets at unreasonably high prices or selling assets which are substantially undervalued, thereby causing loss to the listed companies and their shareholders.
On 15 May 2017, the SFC issued the following guidance to listed companies’ directors, financial advisers and valuers on their duties, obligations and liabilities in relation to valuations in corporate transactions:
Guidance note on directors' duties in the context of valuations in corporate transactions
The guidance note reminds listed companies’ directors that they are the guardians of a listed company’s assets and therefore, when considering, proposing or approving corporate transactions, they are expected to, among other things:
The SFC will take into account whether the directors have adhered to this guidance note in assessing a breach of directors’ duties. The SFC is more likely to investigate and seek orders against directors who do not act in accordance with this guidance note. The SFC may seek disqualification, compensation and other orders against them as a result.
Circular to Financial Advisers in relation to their Advisory Work on Valuations in Corporate Transactions
The SFC noted that the prevailing industry practice is for the scope of the financial advisers’ work in their mandates being confined only to provide the required confirmation under the Listing Rules that the financial adviser is satisfied that a profit forecast involving valuation of assets or businesses acquired by a listed company based on discounted cash flows or projections of profits, earnings or cash flows has been made by the directors after due and careful enquiry. Financial advisers typically do not provide an opinion on the reasonableness of the valuation methods or the bases and assumptions adopted, stating explicitly that the directors and the valuers (if appointed) are solely responsible for these aspects.
This circular urges that when assisting in listed companies’ transactions, financial advisers should:
Statement on the liability of valuers for disclosure of false or misleading information
This statement reminds valuers that they may have civil and criminal liabilities if they have authorised or were concerned in a listing applicant’s or listed company’s disclosure of false or misleading information and the valuers know that, or are reckless or negligent as to whether the information is false or misleading. They may be liable to compensate investors who subscribe for, sell or buy listed company shares at an undervalue or overvalue if the valuation contributed to the information in the corporate disclosure document being false or misleading.
The SFC is more likely to investigate the involvement of a valuer in the disclosure of false or misleading information by a listed company if it appears to the SFC that:
The SFC makes it clear that it will take appropriate action against those companies, directors, advisers or valuers who fail to comply with their requirements under the Securities and Futures Ordinance, and that in assessing a potential breach of duties, it will take into account whether the guidance note, the circular and the statement have been adhered to, and is more likely to investigate and take action against those who have chosen to disregard them. Listed companies’ directors and any financial advisers and valuers involved in listed companies’ corporate transactions are reminded to take note of and adhere to the SFC’s requirements and expectations as set out in these guidance materials.