Hong Kong SFC highlights common types of corporate misconduct in acquisitions and disposals

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.
William Hallatt
William Hallatt
Asia Head of Financial Services Regulatory, Hong Kong
+852 2101 4036
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Matthew Emsley
Matthew Emsley
Partner, Hong Kong
+852 21014101

Australia: Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Report) was released to the public on 4 February 2019. The Federal Government has agreed to take action on all 76 recommendations contained in the Hayne Report, and in a number of areas has indicated it intends to go further, including conducting an immediate review of financial counselling services.  Herbert Smith Freehills have prepared a briefing paper which identifies the following key themes and reforms contained within the Hayne Report:

  1. Governance overhaul – Boards will need to exercise greater scrutiny over their governance systems, policies and procedures;
  2. Conflicts – a number of the changes proposed are designed to alter the objective from one of ‘managing’ to one of ‘eliminating’ conflicts of interest;
  3. Individual accountability – the proposed changes to remuneration and accountability regimes are significant, with individuals to be held to account more than ever before for the adequacy of complex systems, policies and procedures;
  4. Principles not prescription – the Hayne Report observes that prescriptive laws which are vast and complex may be less effective than statements of broad matters of principle, suggesting that now may be an apt time to revisit the current approach to regulation of the provision of financial services within Australia;
  5. Enforcement revolution – above all, the Hayne Report recommends greater personal accountability coupled with stronger regulators with an incentive to investigate and hold wrongdoers to account, making for an ‘enforcement revolution’. Organisations which do not proactively seek to identify and address inadequacies in their systems will likely find themselves redirecting resources toward activities which will do little to enhance their reputations or shareholder wealth.

The briefing paper considers in detail the key changes recommended in the Hayne Report and what these changes will mean for businesses and the Australian financial services landscape.

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The Financial Stability Board (FSB) released on 23 November 2018 its recommendations on the types of data regulators should be collecting from financial institutions (FIs) regarding compensation tools, as part of its workplan to address misconduct risk in FIs. This data is intended to help regulators monitor the effectiveness of FIs’ compensation structures in addressing misconduct risk and assessing whether additional measures are required.

To read our full briefing on the matter, please click here.

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HERBERT SMITH FREEHILLS’ GUIDE TO CORPORATE INVESTIGATIONS IN CHINA

Kyle Wombolt, global head of corporate crime and investigations, and Anita Phillips, a professional support consultant, have published a guide to corporate investigations in China. This forms part of GIR’s acclaimed 2018 text, The Practitioner’s Guide to Global Investigations, available in print and online. Our chapter covers the legal and regulatory framework in China, running an internal investigation, dealing with cross-border investigations and responding and reporting to the Chinese authorities. Continue reading

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Former Chief Secretary and property tycoon lose appeal in Hong Kong’s highest profile corruption case

The convictions of former Chief Secretary of Hong Kong, Rafael Hui, former Sun Hung Kai chairman, Thomas Kwok, and two others have been upheld by Hong Kong's Court of Final Appeal. The appellants have resumed serving their sentences for conspiracy to commit misconduct in public office.

In a case that has occupied the legal, political and business community, the judgment provides important clarification on the scope of the common law offence, in particular what is required for conspiracy to commit misconduct in public office. The judgment confirms the well-established principle that benefits offered to develop or retain goodwill may fall foul of Hong Kong’s bribery laws.

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