Securities & Futures Commission of Hong Kong

Advisory Work on Valuations in Corporate Transactions

FAQ on Circular to Financial Advisers in relation to their Advisory Work on Valuations in Corporate Transactions issued on 15 May 2017 (the “Circular”)

This FAQ aims to provide guidance on the application of the Circular to financial advisers[1]

Q1:

Does the Circular apply to corporate transactions other than mergers and acquisitions or disposals of an asset, target company or business, such as capital market transactions?

A:

As outlined under the “Background” section of the Circular, the Circular is focused on advisory work of financial advisers on valuations in corporate transactions. As such, the Circular should apply to capital market transactions where there is a valuation involved.

Q2:

Does “directors” in the Circular include company management or delegates of the directors?  Does it mean that all directors should be involved in the corporate transaction?

A:

It is our intention that the term “directors” includes, as the context requires, parties with the authority to make decisions for the company, which would include senior management as well as delegates of the directors. 

Conversely, the use of “directors” should not be taken as imposing an obligation for a specific engagement with every single member of the Board individually or at the same time as a whole Board.

Q3:

For certain corporate transactions that involve valuation, some financial advisers may only play a limited or subordinated role without providing any valuation advice (for example providing strategic advice or assisting in negotiations).  How should the Circular apply to financial advisers under such circumstances? 

A:

If financial advisers are engaged in regulated activities, they should further consider if the scope of the mandate is sufficient to enable them to discharge their obligations and to comply with the requirements set out in the CFA Code, as appropriate. 

Where a financial adviser who is engaged in a limited or subordinated role becomes aware of potential issues in relation to valuation in a corporate transaction (e.g. no financial advisers seem to be providing an opinion on the valuation, even when such opinion ought to be reasonably expected or the directors, who had no prior experience of valuing a target company or asset, would be responsible for the valuation themselves), the financial adviser is expected to draw these issues to the attention of the directors to ensure paragraph 5.1 of the CFA Code (i.e. a Corporate Finance Adviser must act with due skill, care and diligence and observe proper standards of market conduct) is complied with.  It would be prudent for the financial adviser to maintain a record of any discussion or correspondence where such issues were drawn to the attention of the directors.

Q4:

Are financial advisers required to step into the shoes of the directors or to second guess the directors’ decisions? 

A:

As discussed in the Circular, financial advisers should not rely solely on representations made by the directors and should conduct their own assessment and undertake reasonableness checks as appropriate.  For example, financial advisers are expected to conduct reasonableness checks on financial projections relating to the acquisition target. Where the financial projections appear overly aggressive or unrealistic, the financial adviser should raise these issues with the directors, and where appropriate, the valuer.  It would be prudent for the financial adviser to maintain a record of any discussion or correspondence where such issues were raised.

Q5:

Are financial advisers expected to conduct their own independent verification of information or data, including in respect of information provided in the preparation of financial models, where there are causes for concern as to the reliability of a valuation or information provided, akin to obligations applicable to sponsors in an IPO context?  

A:

The SFC is not seeking in the Circular to impose due diligence obligations on financial advisers akin to those applicable to sponsors in an IPO context.  As such, the Circular does not refer to any code applicable to sponsors but only the CFA Code.  That said financial advisers should perform reasonableness checks and draw the directors’ attention to any forecasts or assumptions considered to be unrealistic and it would be prudent for the financial adviser to maintain a record of any such discussion or correspondence. 

Q6:

Are financial advisers required to cease to act for a client when they become aware of a breach of law, regulation or the Listing Rules?

A:

Circumstances in which a financial adviser may need to cease to act should be a professional judgement made by the financial adviser based on its own evaluation of the circumstances of the transaction and the applicable regulatory requirements. Financial advisers are reminded of their obligations set out in paragraph 6.3 of the CFA Code.

[1] A financial adviser is a Corporate Finance Adviser as defined under the Corporate Finance Adviser Code of Conduct (“CFA Code”).

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