Feb 19 Legal Update
Latest SFC Regulatory Bulletin: “front-loaded” approach (Click: press release; full report)
Useful cases illustrate how the SFC intervenes at an early stage (“front-loaded” approach), where it has serious concerns about IPO applications or post-IPO corporate transactions.
We focus on the post-IPO cases. SFC is devoting more resources to transactions which appear to be “oppressive or unfairly prejudicial” to shareholders, or where fraud/other serious misconduct is suspected.
Directors are reminded to act in good faith in the interests of the company and exercise due and reasonable care, skill and diligence when evaluating, proposing or approving corporate transactions. Directors have a duty to exercise their own judgement and should not “over-rely” on third party opinions or advice.
SFC tools used are also noteworthy — including exercising its power to require production of books and records under specified circumstances (s.179, Securities and Futures Ordinance); issuing “letter of concern”.
What you should know:
Noteworthy post-IPO cases:
- Post-IPO cases 1 and 2 (P. 2): valuation in acquisitions
— Both cases: proposed acquisitions
— Case 1
(i) target engaged in research and development for the use of artificial intelligence; no revenue, loss making
(ii) SFC concerned whether acquisition was “fair and reasonable”; issued “s.179 enquiries”
(iii) findings: vendor related to chairman; no independent financial advice or valuation obtained
— Case 2
(i) target: loss-making; producing robotics
(ii) vendor provided a profit guarantee
(iii) SFC issued “s.179 enquiries”
(iv) findings: material issues with draft valuation report on target, cash flow forecast report
(v) company unable to give explanations for basis and assumptions used to determine target’s projected revenue, profit margin, and valuation
— In both cases, SFC issued a letter of concern requesting an explanation
— Neither company addressed the concerns; deals lapsed
- Post-IPO case 4 (P. 3): rationale of acquisition
(i) Proposed acquisition of interest in a target involved in financial leasing
(ii) Target: one-year old; only minimal revenue; only conducted business with vendor
(iii) SFC issued “s.179 enquiries”; concerned that transaction might be “unfairly prejudicial” to shareholders
(iv) Requested company to explain rationale of acquisition: low entry barrier in financial leasing industry, could have directly solicited business organically
(v) Company did not address the concerns and announced termination of deal
What you should do/watch out for:
- SFC focus on “fair and reasonable valuation” in transactions, and the otherwise adverse impact on public shareholders
- Reference to SFC Guidance Note. Higher expectations on boards’ role in valuations, including the need to obtain independent valuation reports, and exercise judgment in reviewing the underlying assumptions etc. (Click: our May 17 legal update)
Also in this issue