Guidance of corporate transactions and use of valuation issued by SFC

Some listed companies acquire assets at unreasonable high prices or sell assets substantially under-valued. Shareholders’ interests might be harmed by these transactions. The Securities and Futures Commission (“SFC”) has placed increasing concern and thus issued several guidance regarding valuations in corporate transactions on 15 May 2017:

i)      Guidance note on directors’ duties in the context of valuations in corporate transactions

Directors are reminded that they are the guardians of a listed company’s assets and must act as good faith in the interests of the company. They should not accept blindly and unquestioningly any financial forecasts, assumptions or business plans provided. To make a decision on investment, directors should carry out independent and sufficient investigation and due diligence, which includes: 1) carefully considering all information that is relevant to assessing the merits of the proposed investment; 2) taking all reasonable steps to verify the accuracy and reasonableness of material information that is likely to affect the valuation of the asset.

ii)     Circular to financial advisers

The circular states that financial advisers should not rely solely on representations made by the directors, their delegates or other third parties. They should conduct their own assessment and undertake reasonableness checks as appropriate on the forecasts, assumptions, qualifications and methodologies of the valuation. In the event that a financial forecast appears unduly optimistic, financial advisers should bring this to the attention of the directors for consideration and appropriate action.

iii)    Statement on the liability of valuers for disclosure of false or misleading information

The statement draws valuers’ attention that they may be liable for any false or misleading information related to the valuation, if such valuation is connected with a corporate disclosure document of a listed company that disclose the false or misleading information.

The SFC indicates that appropriate actions will be taken against directors, companies, financial adviser or valuers who have failed to comply with the requirements of SFC.