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Feb 19 Legal Update

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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

Regulators

(i) HKEX published consultation conclusions on “Proposed changes to documentary requirements relating to listed issuers and other minor Rule amendments”. (Click: full report; press release). The proposed changes, effective 1 March 19, aim to simplify and streamline administrative procedures in the submission of documents, to enhance efficiency. There are no changes in policy direction.

What you should know/watch out for:

  • Company Secretaries should watch out for the proposed simplified procedures
    — For details in Listing Rules changes: Appendix I of full document
    — Revised checklists and forms
  • Declaration and undertaking by directors (for PRC companies) supervisors
    (Forms B, H, I of Appendix 5)
    — Require (by 31 March) submission of personal details by directors/supervisors (e.g. mobile telephone number); grant HKEX the power to gather information from supervisors
    — Disclosure of former names/alias of directors in appointment announcements
    — New FAQ
  • Issue of securities: simplified filings
    — (E.g.) abolish listed issuer’s declaration (Form F, Appendix 5) and submission of board resolutions
    — Instead, the issuer to make a confirmation in the relevant next day disclosure return and/or monthly return, as to proper authorization, and satisfaction of applicable conditions
  • Remove filing requirements for (i) documents that are submitted to HKEX for record only; and (ii) documents whose contents are already disclosed to the public
  • Other minor amendments (e.g. reflect updated accounting terminology) and housekeeping amendments

(ii)    HKEX updated and withdrew some FAQs, Guidance Letters, and Listing Decisions as a result of the proposed changes to documentary requirements summarized in (i) above.

It also updated FAQ in light of updates in accounting terminology.

Legislation

The Financial Reporting Council (Amendment) Ordinance 2019 was enacted by the Legislative Council, to become effective on a date to be announced. The Financial Reporting Council (“FRC”), a statutory body, will become HK’s independent regulator with powers of investigation and discipline concerning auditors of listed companies. This will replace the current system of self-regulation by the Hong Kong Institute of Certified Public Accountants.

We shall monitor further developments, including potential impact on listed companies. (Click: press release)

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