The SFC has recently published its Statement on the conduct and duties of directors when considering corporate acquisitions or disposals.
The statement:
- outlines the recurring types of misconduct relating to corporate acquisitions and disposals which the SFC observed over the past two or so years, since it adopted a front-loaded regulatory approach;
- reminds listed company directors and their advisers to comply with their statutory and other legal duties when evaluating or approving such corporate transactions; and
- warns listed company directors and their advisers that where the SFC has serious concerns that an announced acquisition or disposal may be structured or conducted in a manner that constitutes a breach under the Securities and Futures Ordinance (SFO) or other applicable laws, it will have no hesitation in using its powers under the SFO and the Securities and Futures (Stock Market Listing) Rules (SMLR) to protect market integrity and the investing public.
Front-loaded regulatory approach in action since 2017
Over the last two or so years, the SFC has been using its powers under the SMLR and the SFO to intervene at an early stage in serious cases of corporate misconduct, as part of its "front-loaded" or "real time" regulatory approach.
As the name suggests, the approach involves "nipping problems in the bud" through early targeted intervention (such as making inquiries or directing the stock exchange to suspend trading in the listed company's shares) to minimise damage to the market. It also involves being more direct, upfront and transparent about how it regulates as a gatekeeper (such as issuing statements, guidelines and bulletins) to prompt fast behavioural changes. This is in addition to the enforcement work which the SFC will continue to conduct at the back end.
The SFC has issued a series of bulletins – SFC Regulatory Bulletin: Listed Corporations – to provide guidance on the manner in which it performs its functions under the SMLR and the SFO. The series can be accessed here and contains numerous case examples.
Recurring types of misconduct relating to corporate acquisitions and disposals
In the present statement, the SFC focuses on the recurring types of misconduct relating to acquisition and disposal transactions. The SFC notes that more than 55% of the cases in which it issued letters of concern in 2017 and 2018 involved corporate acquisitions and disposals.
Some of the recurring types of misconduct highlighted by the SFC include:
- lack of independent professional valuation for a planned acquisition or disposal;
- lack of independent judgment in considering valuation reports by external valuers and profit forecasts from vendors;
- performing little or no independent due diligence on the forecasts, assumptions, or business plans provided by the vendors or the management of the targets;
- cherry picking companies rather than using a representative sample of comparable companies for the purpose of valuation;
- failing to assess the potential negative impact of a planned acquisition on the resources and financial position of the listed issuer;
- no verification of the vendor's ability to pay compensation or other safeguards to protect the listed issuer's interests, where the issuer has paid consideration upfront based on the vendor's profit forecast and the projected profits are not met;
- suspicious transactions that suggest undisclosed relationships or arrangements among purported independent third parties.
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