Hong Kong's Securities And Futures Commission Issues Guidance On Corporate Transactions And The Use Of Valuations

The Securities and Futures Commission (SFC) today issued a guidance note on directors' duties and a circular to financial advisers regarding valuations in corporate transactions together with a statement on the liability of valuers for disclosure of false or misleading information.

The SFC has become increasingly concerned that some listed companies are acquiring assets at unreasonably high prices or selling assets which are substantially undervalued. As a result of possibly ill-advised transactions, shareholders' interests were harmed. The guidance note reminds directors that they are the guardians of a listed company’s assets and should ensure acquisition targets are properly considered and investigated.

"Directors do not appear to have always acted properly when assessing targets or disposals," said Mr Ashley Alder, the SFC’s Chief Executive Officer. "The SFC will seek to take action where it can be shown that such failures by the directors have resulted in loss to the shareholders."

The guidance note emphasises that directors must act in good faith in the interests of the company and exercise due and reasonable care, skill and diligence when considering, proposing or approving corporate transactions. Directors should carry out independent due diligence regarding the asset or target company. They should not accept blindly and unquestioningly financial forecasts, assumptions or business plans provided to them, typically by a vendor or the management of the target. 

The listed company and directors should take all reasonable steps to verify the accuracy and reasonableness of material information that is likely to affect any valuation. Directors must also consider whether the proposed transaction or arrangement is in the interests of the company and its shareholders as a whole.

"Directors have the duty to responsibly determine whether the terms of the transaction, including the consideration, are fair and reasonable," said Mr Alder. "Directors cannot abdicate their responsibilities by using valuers or financial advisers as a shield."

The circular also makes clear that where financial advisers are appointed by a listed company, they should comply with all applicable requirements under the Corporate Finance Adviser Code of Conduct. Financial advisers should not rely solely on representations made by the directors, their delegates or any third party. Financial advisers need to conduct their own assessment and undertake reasonableness checks on the forecasts, assumptions, qualifications and methodologies of any valuation. If any forecasts or assumptions appear to be unrealistic, financial advisers should raise such issues to the attention of the directors.

Valuers are expected to exercise the degree of skill and care ordinarily exercised by reasonably competent members of the profession. They should not knowingly or recklessly accept any assumptions that are not reasonable and fair. Valuers may be liable if the valuation report contained any materially false or misleading information. 

The SFC will take appropriate actions against those companies, directors, advisers or valuers who have failed to comply with their requirements under the Securities and Futures Ordinance (Note 1). In assessing a potential breach of duties, the SFC 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.