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SFC: Directors’ duties in acquisitions/disposals

SFC published a Guidance Note on directors’ duties in the context of valuations in corporate transactions.

SFC is concerned that prices paid in some acquisitions/disposals of assets and businesses may not be fair and reasonable. Issuers have not obtained valuation, or placed excessive reliance on valuation reports.

It is an important document. Firstly, there is useful guidance on key issues the board should note regarding valuations. Similar principles also apply for engaging other advisors in these transactions (e.g. financial advisors). Importantly, SFC will consider if the Guide has been adhered to, in assessing a breach of directors’ duties. (Click here: press release, full report)

At the same time, SFC also issued a Statement on liability of valuers for false or misleading information (Click here) and a Circular to financial advisors regarding valuations (Click here).

What you should know:

SFC’s specific guidance includes:

• “Proper investigation and due diligence” (para 12):
  (i) Nature of asset/ business of target
  (ii) Carefully consider all relevant information
  (iii) Take reasonable steps to verify accuracy and reasonableness of material information – e.g. assess financial forecasts and assumptions, given target’s financial status, performance, prospects, peer comparison
  (iv) Engage valuers if appropriate
  (v) Seek further information from vendors

• Closer attention needed: examples (para 13):
  (i) Limited track record — target business is new, loss-making/little profit, minimal/negative net assets
  (ii) Aggressive assumptions used in forecasts
  (iii) Questionable sales: are projections based on non-binding or newly signed contracts?

• Engaging an independent valuer (para 15):
  (i) Should do so particularly if:
  – director have no relevant experience/expertise
  – target business is new
  – information provided needs professional advice/scrutiny
  – relative size and significance of the transaction
  – risks, complexity, nature of transaction
  – any director has actual or potential conflict of interest
  (ii) Qualifications of valuer (para 16) — independence, no conflicts of interest, suitably qualified, relevant expertise, adequate resources
  (iii) Provide all relevant information likely to affect the valuation (para 17)
  (iv) Appropriate mandate (para 18) — to ensure valuation be useful and relevant

• Engaging other advisors (para 19):
  (i) Financial advisors also engaged, as required in some situations under Listing Rules
  (ii) Scope of review and mandate — must satisfy SFC’s Corporate Finance Advisor Code of Conduct
  (iii) Noteworthy — to ensure financial advisors perform additional steps before relying on work done by other experts (para 5.3 (a) and (b) of the Code)

• Reliance must be reasonable (para 20):
  (i) Critical attitude
  (ii) Analyze valuation report
  (iii) Enquiring with valuer; get satisfied with assumptions or methodology
  (iv) Consider degree of director involvement (given risks, size, significance, etc.)

What you should watch out for/do:

• Board process in approving transactions — should seriously consider engaging a valuer
• Prepare appropriate scope of mandate — don’t overlook the “formalities”
• Same principles apply for engaging financial advisors in acquisitions/disposals
• Directors’ duties in approving transactions–more rigour expected
• Internal controls — embed the Guide’s principles in your company’s policies and procedures. It is relevant for SFC enforcement actions
• We also noted regulators’ heightened scrutiny in issuers’ disclosure of acquisitions generally — accurate; include all relevant information
• Our further observations: valuation is an important, but not the sole consideration of the board in approving transactions.  Other factors like risks, strategic fit, alternative investment options are also relevant for directors’ duties

Regulators

Legislation

This Update in PDF