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

Approval of UK’s fifth DPA concludes SFO investigation into Serco companies

On 4 July 2019, Mr Justice William Davis approved a Deferred Prosecution Agreement (“DPA“) agreed between the Serious Fraud Office (“SFO“) and Serco Geografix Ltd (“SGL“), a wholly-owned subsidiary of outsourcing company Serco Group plc (“Serco Group“). SGL has agreed to pay £22.9 million, comprising a financial penalty of £19.2m and the full amount of the SFO’s investigative costs of £3.7m. This is in addition to the £12.8m in compensation Serco paid to the Ministry of Justice as part of a £70m civil settlement in 2013.

Following the introduction of DPAs in the UK in 2014 and the conclusion of the first DPA with the SFO in November 2015, the Serco DPA is the fifth and latest in a growing body of DPA case-law and confirms the importance placed by the SFO on the use of DPAs in tackling financial crime.

In this briefing, we provide some background on DPAs generally, an overview of the Serco DPA and discuss some of the emerging themes relating to DPAs and the SFO’s approach to enforcement.

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High Court orders disclosure of SFO documents in s.90A FSMA shareholder class action

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Corporate Crime update – December 2018

Welcome to the December 2018 edition of our corporate crime update – our round up of developments in relation to corruption, money laundering, fraud, sanctions and related matters.

This month, we would like to wish all of our regular readers a very happy, and hopefully corporate crime free, festive season! 

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Welcome to the autumn 2018 edition of our corporate crime update – our round up of developments in relation to corruption, money laundering, fraud, sanctions and related matters. Our update now covers a number of jurisdictions.

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High Court considers extraterritorial application of compulsory powers

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COURT OF APPEAL DECISION IN ENRC: ORTHODOXY RESTORED ON LITIGATION PRIVILEGE, BUT NARROW INTERPRETATION OF “CLIENT” REMAINS FOR NOW

The Court of Appeal has today handed down its eagerly awaited decision in the ENRC appeal: The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2018] EWCA Civ 2006. At first instance, the High Court took a restrictive approach to both litigation privilege and legal advice privilege (see our summary of the decision here). The Court of Appeal has allowed the appeal on the question of litigation privilege but has, with apparent reluctance, dismissed the appeal on legal advice privilege, concluding it is a matter for the Supreme Court. Continue reading